-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-313 					        					        
  TITLE:     Air Pollution: EPA Could Take Additional Steps to Help
Maximize the Benefits from the 2007 Diesel Emissions Standards  
     DATE:   03/11/2004

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entitled 'Air Pollution: EPA Could Take Additional Steps to Help 
Maximize the Benefits from the 2007 Diesel Emissions Standards' which 
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Report to Congressional Requesters: 

March 2004: 

AIR POLLUTION: 

EPA Could Take Additional Steps to Help Maximize the Benefits from the 
2007 Diesel Emissions Standards: 

[Hyperlink, http: //www.gao.gov/cgi-bin/getrpt?GAO-04-313]: 

GAO Highlights: 

Highlights of GAO-04-313, a report to congressional requesters

Why GAO Did This Study: 

Diesel engine emissions pose health risks, but one major sourceï¿½heavy-
duty diesel vehiclesï¿½is critical for our economy. To reduce risks, the 
Environmental Protection Agency (EPA) has set stringent emissions 
standards for diesel engines. In 1998, EPA found that some engine 
makers were violating standards, so they agreed to build engines that 
meet 2004 standards early, by October 2002. EPA has set even more 
stringent standards for 2007. GAO was asked to (1) assess the October 
2002 deadlineï¿½s effects on industry and emissions, and (2) obtain 
stakeholdersï¿½ views on the readiness of technology for the 2007 
standards and EPAï¿½s efforts to ensure this. GAO analyzed information 
from EPA, 10 large trucking companies, the engine makers subject to the 
early deadline, and other stakeholders.

What GAO Found: 

Implementing the 2004 diesel emissions standards 15 months early 
disrupted some industriesï¿½ operations but also helped reduce pollution 
earlier. More specifically, because some manufacturers had to build new 
engines sooner than planned, most could not provide trucking companies 
with prototype engines early enough to test. Concerned that the new 
engines would be costly and unreliable, some of the companies said they 
bought more trucks with old engines than planned before October 2002. 
Our analysis of truck production and financial data also shows this 
surge. This adversely affected some companiesï¿½ operations and profits. 
To meet the increased demand for trucks with old engines, some 
manufacturers reported that they ramped up production of such engines 
before October. But when demand subsequently dropped, they had to 
decrease production and release workers, reducing profits and 
disrupting operations, at least until demand increased later in 2003. 
Manufacturers of the new engines also continued to lose market share to 
manufacturers that either did not have to meet the early date, or that 
did but chose not to, paying penalties instead. While accelerating the 
schedule for new engines affected some industries, it accelerated 
emissions benefits, although not to the extent or in the time frames 
anticipated. For example, EPA roughly estimated that its agreements 
with engine manufacturers that violated standards would reduce nitrogen 
oxide emissions by about 4 million tons over the life of the engines. 
But because companies initially bought more trucks with old engines and 
owners are now operating trucks longer, some of the expected emissions 
reductions will be delayed.

As for the 2007 standards, EPA has taken a number of steps to aid the 
transition to the new diesel engines and fuel, but some stakeholders 
would like more help. Most engine, emissions control, and fuel industry 
representatives said the needed technologies will be ready on time; but 
other engine, trucking, and fuel representatives have concerns and 
would like more help to ensure that the technology will be available. 
For example, manufacturers plan to have limited numbers of prototype 
engines ready for a few fleets to test by mid- to late-2005ï¿½trucking 
companies say they need new engines 18 to 24 months before the 2007 
deadline to test the engines in all weather conditions and to develop 
their long-term purchasing plans. Some companies, however, are 
concerned that providing test engines to only a few fleets may not 
provide the industry as a whole with sufficient information to judge 
the enginesï¿½ performance. In addition, they are still concerned that 
the new engines may be too costly and much less fuel-efficient. As a 
result, they expect companies will again buy more trucks with old 
engines before the deadline, disrupting industry operations and 
emissions benefits. The fuel industry representatives said they can 
produce the low-sulfur fuel the new engines require on time and see no 
reason to delay the standards. Nevertheless, they worry the fuel 
initially may not be available nationwide and it may be difficult not 
to contaminate it with other fuels in the distribution system. 
Environmental and health groups do not want to delay the standards or 
the expected emissions benefits. Some stakeholders would like more 
information on technological progress. In addition, they would like 
more reassuranceï¿½such as from an independent review panelï¿½that the 
technology will be ready on time and additional assistanceï¿½such as 
economic incentivesï¿½to encourage timely purchases of trucks with the 
new technologies. 

What GAO Recommends: 

GAO recommends that EPA consider ways to address concerns about 
technology costs, reliability, and availability to meet the 2007 
standardsï¿½such as better communicating with all stakeholders and using 
an independent panel to assess progress and consider industry 
incentives. EPA is concerned about some of GAOï¿½s findings and fears a 
panel could delay progress. GAO maintains its findings are well 
supported and that a panel could ultimately help improve 
communications, avoid delays, and ensure the benefits are achieved.

www.gao.gov/cgi-bin/getrpt?GAO-04-313.

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact John B. Stephenson at 
(202) 512-6225 or [email protected].

[End of section]

Contents: 

Letter: 

Results in Brief: 

Background: 

The Consent Decrees and Their Accelerated Schedule for Reducing Diesel 
Emissions Overall Negatively Affected Sales of the Largest Trucks and 
Engines but Achieved Some Air Quality Benefits: 

Remaining Technology Challenges Must Be Resolved to Meet the 2007 
Standards, and Stakeholders' Opinions Differ as to Whether They Will Be 
Addressed in Time: 

Some Stakeholders Commended EPA's Efforts to Ensure Technology Is Ready 
by 2007, but Others Would Like the Agency to Provide More Certainty: 

Conclusions: 

Recommendation for Executive Action: 

Agency Comments and Our Evaluation: 

Appendixes: 

Appendix I: Scope and Methodology: 

Appendix II: Analysis of Class 8 Truck Production Data: January 1992 
through June 2003: 

Theoretical Framework: 

Data Used in the Estimation: 

Discussion of Results of Analysis: 

Appendix III: Comments from the Environmental Protection Agency: 

GAO Comments: 

Appendix IV: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

Acknowledgments: 

Tables: 
 
Table 1: Information on the Emission Standards Violations and 
Conditions of the 1998 Consent Decrees with Diesel Engine 
Manufacturers: 

Table 2: Responses of Ten Large Trucking Companies to the Consent 
Decrees and Their Basis for These Responses: 

Table 3: Fuel Industry Representatives' Primary Concerns: 

Table 4: Ten Large Trucking Companies Involved in Freight 
Transportation in 2002: 

Table 5: Stakeholders Providing the Most Comments on EPA's Proposed 
2007 Diesel Emissions Rule and the Number of Issues Addressed by Each: 

Table 6: Descriptive Statistics of Variables Used in Our Analysis: 

Table 7: Results of Selected Specification: 

Figures: 

Figure 1: EPA's Nitrogen Oxide Emissions Standards for Heavy-Duty 
Diesel Truck Engines, 1988 to 2007: 

Figure 2: U.S. and Canadian Production of Class 8 Diesel Trucks, 
January 2000 through June 2003: 

Figure 3: Comparison of Market Shares of Producers of Class 8 Diesel 
Engines That Complied with the Decrees' Nitrogen Oxide Standard and 
Those That Did Not Comply with the Decrees' Nitrogen Oxide Standard: 
1998 to 2003: 

Abbreviations: 

ACERT: advanced combustion emissions reduction technology: 

ASTM: American Society for Testing and Materials: 

ATA: American Trucking Associations: 

BEA: Bureau of Economic Analysis: 

BLS: Bureau of Labor Statistics: 

EPA: U. S. Environmental Protection Agency: 

FHA: Federal Highway Administration: 

GAO: U. S. General Accounting Office: 

GDP: Gross Domestic Product: 

PPI: Producer Price Index: 

Letter March 11, 2004: 

Congressional Requesters: 

Exhaust from diesel engines is among the most pervasive and harmful 
sources of air pollution. Diesel exhaust contains nitrogen oxides and 
several other toxic components and chemicals that, combined, pose a 
cancer risk greater than that of any other air pollutant, according to 
the American Lung Association.[Footnote 1] Heavy-duty diesel vehicles-
-including, among others, those used to haul freight over long 
distances--are major contributors to nationwide diesel exhaust 
emissions, generating about 2.5 million tons of nitrogen oxide 
emissions annually.[Footnote 2] However, large diesel-powered trucks 
are also critical to the nation's economy.

To combat diesel-related health risks, EPA, under the Clean Air Act, 
sets standards for emissions from diesel engines. EPA may take 
enforcement action against any manufacturers selling engines that fail 
to comply with the standards. Since 1984, EPA has implemented standards 
that have progressively lowered the amount of key pollutants from 
diesel engines by more than 75 percent. In 1998, EPA found that a 
number of engine manufacturers, accounting for about 90 percent of the 
U.S. heavy-duty diesel engine market, had sold 1.3 million engines--
almost all of the largest engines they had produced since 1987--that 
under certain circumstances were emitting nitrogen oxides at levels up 
to three times higher than allowed by the standards in place at that 
time. To achieve compliance, EPA, the U.S. Department of Justice, and 
these manufacturers agreed to be bound by consent decrees, legally 
binding dispute settlements. In what is commonly referred to as the 
pull-ahead provision of the decrees, the manufacturers found to have 
violated emissions standards agreed to accelerate by 15 months the 
schedule for meeting new, more stringent engine standards to October 
2002 instead of the original mandatory date of 2004.

In 2007, all diesel engine manufacturers will be required to meet still 
more stringent standards and the technology needed to meet them will 
require significant advancements over current engine and emissions 
control equipment. In addition, the engines will need a new grade of 
diesel fuel, with significantly lower sulfur content than current 
diesel supplies, to prevent degradation of the enhanced emissions 
control devices. To meet the 2007 requirement that at least 80 percent 
of all diesel fuel be the low-sulfur grade, refiners must begin 
producing this cleaner fuel by mid-2006. Distributors may also need to 
modify the nationwide distribution system to initially accommodate both 
the current and new fuel grades. Still more stringent emissions 
requirements are scheduled to go into effect in 2010.

Ultimately, the extent to which the trucking industry purchases trucks 
with the new engines--either the engines produced for the October 2002 
deadline or the 2007 standards--helps to determine whether the expected 
air quality benefits will be achieved in the time frames anticipated. 
Uncertainties about the availability, costs, reliability, and fuel-
efficiency of these engines could negatively affect truck sales. This, 
in turn, could affect both the engine manufacturing and trucking 
industries. In this context, you asked us to (1) assess what impact, if 
any, the consent decrees' provisions had on trucking companies, engine 
manufacturers, and expected nitrogen oxide emissions reductions; (2) 
obtain stakeholders' views on whether new engine technologies and low-
sulfur fuel will be available for industries to comply with the 2007 
standards; and (3) obtain stakeholders' views on EPA's actions to 
ensure that the technologies and fuel will be ready in time.

To respond to the first objective, we performed econometric modeling 
using production data for Class 8 diesel trucks--the largest class of 
trucks, generally powered by heavy-heavy-duty diesel engines--and other 
economic data from January 1992 through June 2003 to determine how, if 
at all, the accelerated implementation of the standards affected 
purchases of these trucks.[Footnote 3] We also contacted, among others, 
officials of 10 of the nation's largest trucking companies. We selected 
these companies because, on the basis of their truck fleet size, they 
seemed more likely than smaller companies to have purchased new trucks 
in the months before and immediately after October 2002. Therefore, 
they could recount their experience with the new engines and the 
impacts of the accelerated schedule. Because these companies were not 
selected randomly, we cannot project our findings to the entire 
trucking industry. We also contacted officials of the five existing 
engine manufacturers that were subject to the consent decrees.[Footnote 
4] Three of these manufacturers are also diesel truck manufacturers, 
and as such are responsible for redesigning truck chassis to 
incorporate the new engines and emissions control devices. We asked 
representatives of all five manufacturers a uniform set of questions 
about their companies' strategies in reacting to the decrees, the 
resulting effects on their operations, and the manufacturers' 
experiences with the new engines designed to comply with the decrees. 
In addition, we reviewed financial statements that some of these 
trucking and engine manufacturing companies submitted to the Securities 
and Exchange Commission to identify effects that the companies publicly 
disclosed. While we asked the engine manufacturers for data to 
substantiate their views, they generally preferred not to release 
information about their confidential engine designs. We were unable to 
identify any other independent analyses of the impacts of the consent 
decrees.

To determine the air quality effects of the decrees, we reviewed EPA's 
estimates of the expected emissions reductions from accelerating the 
schedule for the new, cleaner engines. EPA made its estimate by using 
1998 truck production data to project the number of trucks with new 
engines it expected to be on the roads after the October 2002 deadline. 
We compared EPA's projections of the number of trucks that would have 
new engines to the actual number of trucks produced with the new 
engines and assessed the likelihood that EPA would achieve the expected 
emissions reductions. We also discussed with EPA officials and staff 
the basis for their estimates of the expected emissions reductions from 
a second provision of the consent decrees, whereby truck owners would 
have emission computer controls on their older engines adjusted during 
engine overhauls.

To identify stakeholders' views on industries' ability to comply with 
the 2007 standards and EPA's activities to ensure the technologies are 
ready on time, we contacted officials representing 16 organizations and 
companies that offered the largest number of comments on EPA's 2007 
emissions standards when proposed in 2000. These organizations 
represent the following industries: fuel, engine, and emissions control 
equipment manufacturing; trucking; and automobile manufacturers. They 
also represent environmental and health interests, as well as state and 
local governments. Finally, we discussed EPA's actions to ensure the 
new engine technologies and low-sulfur fuel will be ready in time, as 
well as the agency's plans if the standards cannot be implemented on 
schedule, with the Director of EPA's Office of Transportation and Air 
Quality, as well as program managers from the agency's Office of Air 
and Radiation (in Washington, D.C., and Ann Arbor, Michigan). (App. I 
includes a more detailed description of our methodology for conducting 
our work and selecting the stakeholders we interviewed.): 

Results in Brief: 

The consent decrees' accelerated schedule for producing cleaner diesel 
engines helped reduce emission levels earlier than originally planned 
but also had a disruptive effect on most of the trucking companies and 
engine manufacturers we contacted. Most manufacturers were able to 
produce the cleaner engines by the accelerated deadline. However, they 
were not able to deliver prototype engines to trucking companies early 
enough for them to test the engines' reliability, according to 
representatives of all 10 companies we contacted. As a result, by 
October 2002, only 2 of the 10 companies had bought a significant 
number of trucks equipped with the new, cleaner engines--which, 
according to company representatives, have operated well but have also 
increased fuel costs and may increase maintenance costs. The other 
eight companies initially postponed buying large numbers of trucks with 
the cleaner engines. For the most part, these companies instead bought 
more used trucks or new trucks with older technology than planned 
before October 2002. Truck production data suggest that other companies 
did this as well. Representatives of some of the eight companies said 
that their purchasing decisions, which allowed them to avoid the more 
expensive and potentially unreliable new engines, resulted in excess 
capacity and idle vehicles. This affected some of the larger companies' 
operations and profits, according to the representatives, at least in 
the short term, and some of the small-to mid-sized companies may have 
also experienced some difficulties.

These truck-purchasing decisions in response to the consent decrees had 
a ripple effect on engine manufacturers, according to representatives 
of the five engine manufacturers subject to the consent decrees that we 
contacted. These representatives told us that, to meet the increased 
demand for old technology trucks before October 2002, their companies 
hired new workers and increased operations, concurrently increasing 
sales. But, after the deadline, engine orders dropped--at least until 
leveling off again by the end of fiscal year 2003--and the 
manufacturers let go many new hires and suspended operations at some 
plants. Such instability resulted in increased costs and a net loss of 
revenue for some manufacturers, according to their representatives. In 
addition, four of the five engine manufacturers that had to build the 
cleaner engines earlier than planned lost a total of 23 percent of the 
market to other manufacturers between 1998--before the consent decrees 
went into effect--and September 2003. These four manufacturers lost 
market shares to one that did not have to make cleaner engines before 
2004, and to two that did but chose instead to postpone making the 
cleaner engines and either pay penalties or compensate for excess 
emissions through other actions. While other factors also contributed 
to these changing market trends, representatives of the engine 
manufacturers and trucking companies we contacted said that the new 
engines had inherent drawbacks that placed them at a competitive 
disadvantage with the older diesel engines.

The consent decrees did reduce emissions but not to the extent or in 
the time frames EPA anticipated. While EPA realized that accelerating 
the schedule for putting cleaner diesel engines on the roads by 15 
months would have some economic impact, it estimated that this action 
would accelerate emissions reductions, thereby better protecting public 
health. EPA estimated that two provisions of the consent decrees would 
achieve a reduction of roughly 4 million tons of nitrogen oxide. For 
example, EPA estimated that one provision--accelerating the schedule--
would avert about 1 million tons of nitrogen oxides that would have 
been emitted if trucks with the older engine technology had been 
operating instead during this time. EPA estimated that a second 
provision of the consent decrees--requiring that computers on older 
engines be adjusted to better control emissions when the engines were 
being overhauled--would avoid about 3 million more tons of nitrogen 
oxide emissions over the remaining life of these engines. However, at 
the time EPA made its estimates, it used 1998 truck production data, 
the most recent available, to predict future production. But overall 
production from October 2002 to December 2003--the time period of the 
accelerated schedule--was actually relatively lower. In addition, as 
discussed, trucking companies bought more trucks with the older-engine 
technology before October 2002 than expected. Furthermore, truck owners 
are now operating their trucks longer before overhauling the engines 
and adjusting the emissions computer controls. As a result, not all of 
the 4 million in reductions is likely to be achieved in the time frames 
anticipated.

While EPA and the stakeholders designing new emissions control, engine, 
and fuel technologies say they will be ready to meet the more stringent 
standards for 2007, the trucking industry has concerns. Representatives 
of the association of emissions control technology manufacturers and 
the five engine manufacturers we contacted said that the technologies 
to control diesel emissions have advanced. While they acknowledged that 
several technical problems remain, all of the engine manufacturers 
reported that they expect to have engines ready by 2007 and plan to 
have prototype engines ready for trucking companies to test by mid-to 
late-2005. Trucking companies maintain they need 18 to 24 months to 
road test an engine's reliability in all weather and operating 
conditions and to develop their future purchasing plans. 
Representatives of the fuel industry recognize that further work is 
needed to resolve such issues as whether (1) low-sulfur fuel will be 
available on time in sufficient volumes and in enough locations; and 
(2) fuel distributors will be able to avoid contaminating it with 
higher sulfur fuel that uses the same distribution systems but damages 
the emissions control equipment. Nevertheless, fuel industry 
representatives believe there is sufficient time to resolve these 
issues and that they are not a reason for delaying the 2007 standards, 
especially since the industry has made such a considerable investment 
to date. The environmental and health groups we contacted generally 
agree it is important not to delay the expected emissions reductions.

Representatives of the trucking companies we contacted, however, are 
not convinced that the new standards can be implemented smoothly and on 
time. They cite as problems the lingering questions about engine and 
fuel technology, the negative economic impact trucking companies 
experienced under the consent decrees, and the continuing doubts about 
whether they will have prototype engines early enough to fully test 
them before 2007. In addition, because the technologies needed to meet 
the 2007 standards are much more advanced than those associated with 
prior upgrades, the trucking companies are concerned that the new 
engines will cost much more and decrease fuel efficiency much more than 
EPA predicted in 2000 when it was developing the standards. 
Consequently, according to representatives of 9 of the 10 trucking 
companies we contacted, companies most likely will once again decide to 
buy trucks before the deadline, but in larger numbers than they did in 
response to the consent decrees. This could again disrupt markets and 
postpone needed emissions reductions.

EPA has taken a number of steps to help with and monitor the engine and 
fuel technology development, but some of the engine manufacturers and 
the trucking companies we contacted would like more help and 
reassurance that the technology will be ready on time. EPA program 
staff meet continuously with the companies producing all of the new 
technologies; issue progress reports; provide workshops; and, in 2002, 
convened the Clean Diesel Independent Review Panel to assess progress. 
Representatives of some of the engine manufacturers, the emissions 
control technology manufacturers association, the fuel industry, and 
the environmental and health groups we contacted commended EPA for its 
efforts. But some representatives of engine manufacturers and trucking 
companies would like EPA to provide them with additional help and 
reassurance that the technologies will be ready when needed. For 
example, some engine manufacturers said that economic incentives to 
manufacturers to produce engines on time and to trucking companies to 
buy the engines as scheduled would be helpful. In addition, some 
trucking company representatives believe that EPA has not included them 
in, or listened to their concerns about, implementation of the 
standards. EPA program managers disagreed, saying that in formulating 
the 2007 standards, the agency solicited the trucking industry's 
perspective and all entities had a chance to provide comments on the 
proposed rule. The EPA program managers added that the agency has gone 
out of its way to give industry much more lead-time than required to 
produce the technology and to provide assistance and monitoring. 
Consequently, they see no evidence that timely implementation of the 
standards is not achievable. We acknowledge EPA's actions to date, but 
given the remaining technological uncertainties and stakeholder 
concerns--concerns that could have economic and emissions impacts--we 
are recommending that EPA consider what additional opportunities it 
could take to address the uncertainties and concerns. This could 
include better communicating with all stakeholders on the remaining 
technological uncertainties. In addition, EPA could convene another 
independent review panel to assess and communicate the progress of 
technology development, or consider financial incentives or other 
options to promote it.

In commenting on the report, EPA's Assistant Administrator for Air and 
Radiation said EPA believes that, in many respects, our report is 
consistent with the agency's assessment of the situation leading up to 
the implementation of the 2007 standards. However, the agency has 
several concerns about the basis for certain of our findings on those 
standards. In addition, as to our recommendations, EPA agrees that 
there might be merit--but not necessarily an agency role--in using 
financial incentives to achieve the 2007 milestone, but is concerned 
that convening an independent technology review board could delay the 
schedule, and is not needed. More specifically, EPA raised concerns 
that we (1) present selected stakeholders' opinions without validating 
them and ignore evidence that the agency believes would prove or 
disprove their validity; (2) overstate the challenges to having fuel 
and engine technologies ready on time to meet the 2007 standards; and 
(3) inaccurately portray EPA's efforts to work with stakeholders in 
developing the standards.

With respect to the first concern, we consistently solicited views from 
all key stakeholders and carefully and accurately characterized them in 
the report. We assessed these views by reviewing all available and 
relevant reports and studies issued on the technologies being addressed 
and that EPA identified or provided. We could not verify stakeholder 
opinions with actual data because manufacturers of the new technologies 
said that it would be detrimental to reveal information on their 
individual designs because it might harm their competitive positions 
relative to other companies. We did take great care to include the most 
current information and views possible in the report by, for example, 
re-contacting certain stakeholders in February 2004. With respect to 
EPA's concern about the report's tone, we devote considerable narrative 
to the views of the agency and all stakeholders who maintain the 
technology is on track. We do, however, have a professional 
responsibility to acknowledge that some stakeholders expressed concerns 
about the remaining technological risks and questions and to fully and 
accurately describe the basis of these concerns. Finally, with respect 
to EPA's efforts to work with stakeholders, we agree that EPA deserves 
credit for taking a number of voluntary actions to outreach to 
stakeholders, and we describe these activities in depth. We are also 
very careful to present a balanced view of stakeholders' opinions about 
these activities, and as such, were obligated to acknowledge that some 
stakeholders raised issues about EPA's openness to concerns and 
willingness to address them.

Finally, as to our recommendations, EPA sees merit in using financial 
incentives to achieve the 2007 milestone, but does not see an agency 
role in this regard. Neither does the agency see a need to convene an 
independent technology review board. In this regard, we want to 
emphasize that we are recommending that EPA consider additional action 
to address stakeholders' remaining concerns, and thereby enhance the 
likelihood of achieving emissions reductions, but we did not intend to 
limit the agency to the alternatives we suggested, especially if it 
could design more effective solutions. As to financial incentives, we 
understand that this would require congressional authorization and 
funding but believe the agency also has a role to play. For example, 
the Congress might look to the agency to make an initial proposal for 
incentives, or help to weigh their costs and benefits. As to using an 
independent panel to review EPA's data and validate its conclusions on 
technology readiness, we do not believe that convening a panel would 
unduly disrupt the implementation schedule for the standards. If EPA 
has the necessary evidence available to demonstrate that technologies 
are ready as it contends it does, it should not be difficult or take 
considerable time for an independent body to review the data and 
validate this conclusion for all affected stakeholders. Furthermore, by 
addressing stakeholders' concerns, EPA may help to avoid the negative 
impacts that were associated with the 2002 consent decrees and would 
ultimately help to ensure that the critical reductions and health 
benefits from the 2007 standards are achieved in a more timely manner.

Background: 

Trucks handled more than two-thirds of all freight commodities shipped 
in 2002, according to a recent report for the American Trucking 
Associations (ATA), an organization representing the majority of 
freight-hauling companies. Trucking companies that shipped freight 
earned revenues of about $585 billion, or 87 percent, of the total 
transportation revenues that year. The total volume of goods shipped by 
trucks is expected to rise to 10 billion tons by 2008, with trucking 
companies' revenues increasing to about $745 billion, according to the 
ATA report. The majority of trucks transporting freight are powered by 
diesel engines, primarily because they are 25 percent to 35 percent 
more energy efficient and more durable and reliable than gasoline-
powered engines. Furthermore, diesel fuels generally are less volatile 
and, therefore, safer to store and handle than gasoline.

On the other hand, diesel engines also have an adverse impact on air 
quality through their harmful exhaust emissions. Diesel exhaust is 
composed of several toxic components, including nitrogen oxides, fine 
particles (particulate matter), and numerous other known harmful 
chemicals. EPA estimates that exhaust from heavy-duty trucks and buses 
accounts for about one-third of the nitrogen oxide emissions and one-
quarter of the particulate emissions from all mobile sources. EPA's 
2002 comprehensive review of the potential health effects from exposure 
to diesel engine exhaust found that short-term exposure to diesel 
emissions can cause respiratory irritation and inflammation and 
exacerbate existing allergies and asthma symptoms. Long-term exposure 
may cause lung damage and pose a cancer hazard to humans. The harmful 
components of diesel exhaust can also damage crops, forests, building 
materials, and statues. The exhaust also impairs visibility in many 
parts of the country.

Although diesel exhaust is harmful, both EPA and engine manufacturers 
have successfully reduced the level of emissions from highway diesel 
engines over the past two decades. Since 1984, EPA has progressively 
implemented more and more stringent diesel emissions standards, for 
example, reducing the level of allowable nitrogen oxide emissions from 
diesel engines from 10.7 grams per unit of work in 1988 to 2.5 grams in 
2004 (see fig. 1).[Footnote 5]

Figure 1: EPA's Nitrogen Oxide Emissions Standards for Heavy-Duty 
Diesel Truck Engines, 1988 to 2007: 

[See PDF for image]

[End of figure]

To meet these standards, engine manufacturers should have made 
increasingly cleaner engines so that their nitrogen oxide emissions 
gradually declined to mandated levels. However, EPA determined that, 
from 1987 to 1998, seven of the nation's largest diesel engine 
manufacturers sold 1.3 million heavy-duty diesel engines with computer 
software that altered the engines' pollution control equipment under 
highway driving conditions.[Footnote 6] The Clean Air Act prohibits 
manufacturers from selling or installing motor vehicle engines or 
components equipped with devices that bypass, defeat, or render 
inoperative the engine's emission control system. These devices altered 
the engines' fuel injection timing and, while this improved fuel 
economy, it also increased nitrogen oxide emissions by two to three 
times the existing regulatory limits. In response, EPA undertook what 
it called "the largest Clean Air Act enforcement action in history" 
against the manufacturers. To settle these cases, in 1998, EPA, the 
U.S. Department of Justice, and the engine manufacturers agreed to be 
bound by consent decrees. In the decrees, the manufacturers agreed to, 
among other things, (1) pay civil penalties of about $83 million, the 
largest civil penalty for an environmental violation as of that date; 
and (2) collectively invest $109.5 million towards research and 
development and other projects to lower nitrogen oxide emissions.

Table 1 includes information on: 

* the number of engines that each manufacturer subject to the decrees 
produced that violated the emissions standards,

* the amount of nitrogen oxide emissions these engines produced in 
excess of the amounts allowed by the standards in effect at the time,

* the amount of penalties each company paid, and: 

* the amount of funds each company committed to invest in environmental 
projects.

Table 1: Information on the Emission Standards Violations and 
Conditions of the 1998 Consent Decrees with Diesel Engine 
Manufacturers: 

Company: Caterpillar Incorporated; 
Number of engines with defeat devices: 320,000; 
Excess nitrogen oxide emissions: (tons): 2,100,000; 
Civil penalties: $25 million; 
Investment in environmental projects: $35 million.

Company: Cummins Engine Company; 
Number of engines with defeat devices: 400,000; 
Excess nitrogen oxide emissions: (tons): 3,600,000; 
Civil penalties: $25 million; 
Investment in environmental projects: $35 million.

Company: Detroit Diesel Corporation; 
Number of engines with defeat devices: 430,000; 
Excess nitrogen oxide emissions: (tons): 9,000,000; 
Civil penalties: $12.5 million; 
Investment in environmental projects: $12 million.

Company: Mack Trucks, Incorporated/Renault Vehicules Industriels, s.a; 
Number of engines with defeat devices: 90,000; 
Excess nitrogen oxide emissions: (tons): 860,000; 
Civil penalties: $13 million; 
Investment in environmental projects: $18 million.

Company: Navistar International Transportation Company; 
Number of engines with defeat devices: 78,000; 
Excess nitrogen oxide emissions: (tons): 40,000; 
Civil penalties: $2.9 million; 
Investment in environmental projects: N/A.

Company: Volvo Truck Corporation; 
Number of engines with defeat devices: 10,000; 
Excess nitrogen oxide emissions: (tons): 148,000; 
Civil penalties: $5 million; 
Investment in environmental projects: $9 million.

Total; 
Number of engines with defeat devices: 1,328,000; 
Excess nitrogen oxide emissions: (tons): 15,748,000; 
Civil penalties: $83.4 million; 
Investment in environmental projects: $109 million. 

Source: GAO analysis of EPA data.

[End of table]

The manufacturers also agreed to collectively spend $850 million or 
more to produce significantly cleaner engines by October 1, 2002. The 
nitrogen oxide emissions from the new engines were not to exceed 2.5 
grams. Without the decrees, the engines would not have been required to 
meet this standard until January 1, 2004, 15 months later.

The excess emissions caused by the defeat devices were of concern, 
especially for states and localities with areas that already had air 
quality problems (meaning that the areas did not meet at least one of 
the health-based air quality standards). Every state must devise a 
plan, called a state implementation plan, that indicates what actions 
they will take to maintain or come into compliance with the standards. 
In devising these plans, states and localities estimate future 
emissions and design actions to reduce them as necessary. If the states 
and localities do not comply, they face certain sanctions, including 
the loss of access to federal transportation funds. But the use of the 
pollution control defeat devices that increased engine emissions 
jeopardized state air quality improvement plans and posed public health 
risks.

To ease compliance with the accelerated schedule, manufacturers could 
continue to sell their old engines until October 2002. If manufacturers 
were not able to, or chose not to, meet the deadline, they could 
continue to sell engines that did not meet the standards through three 
actions (1) paying nonconformance penalties, equal to the cost of 
engines that met the standards, to maintain a "level playing field" 
between the noncomplying companies and those manufacturers who met the 
deadline; (2) using a provision that allowed manufacturers to sell 
noncomplying engines after October 2002 if they sold an equal number of 
the cleaner engines before that date; and (3) using emissions 
averaging, banking, and trading to generate emissions credits towards 
compliance by reducing emissions in other areas.[Footnote 7]

As the next step in its efforts to address diesel emissions, EPA, in 
January 2001, finalized a rule--herein referred to as the 2007 rule--
establishing new emissions standards that heavy-duty engines and 
vehicles must generally meet beginning in 2007. These standards, unlike 
the consent decrees established as the result of an enforcement action, 
were developed through a public rulemaking process that gave 
stakeholders from across the industry sectors the opportunity to 
provide input to EPA for consideration. Also in contrast to the consent 
decrees, the 2007 standards gave industry 6 to 10 years to develop 
technologies to meet the rule's requirements. The 2007 rule limits fine 
particle and nitrogen oxide emissions from heavy-duty diesel engines to 
0.01 grams and 0.20 grams, respectively, a significant decrease 
compared to the consent decrees and 2004 standards. While the fine 
particle standard is effective in 2007, the nitrogen oxide standard 
will be phased in based on engine production: 50 percent of the engines 
sold between 2007 and 2009 and 100 percent of those sold beginning in 
2010 must meet the nitrogen oxide emissions standard. EPA estimates 
that the new standards will reduce emissions of fine particles and 
nitrogen oxides by 90 percent and 95 percent, respectively, from 2000 
levels.

Also in the 2007 rule, EPA regulates both heavy-duty vehicles and their 
fuel as a single system. To meet the standards, engines must include 
advanced emission control devices. Because these devices are damaged by 
sulfur, the rule establishes a mid-2006 deadline for reducing the 
sulfur allowed in highway diesel fuel. Under the rule, refiners are 
required to start producing diesel fuel with a sulfur content of no 
more than 15 parts per million (compared to current diesel fuel, which 
can contain up to 500 parts per million--a 97 percent reduction) 
beginning June 1, 2006. All diesel-powered highway vehicles produced in 
2007 or later must use the low-sulfur fuel. Under certain conditions, 
and generally only until 2010, the rule allows refiners to continue 
producing and selling some diesel fuel with a sulfur content greater 
than 15 parts per million, but not exceeding 500 parts per million. 
However, the two fuels must be segregated in the distribution system so 
that the low-sulfur fuel is not contaminated. The fuel with the higher 
sulfur content may only be used in heavy-duty vehicles built before 
2007 because it will damage emissions control devices on newer engines.

When developing the 2007 rule, EPA had to give appropriate 
consideration to the rule's costs. The agency projected that the rule's 
benefits would exceed its costs by a factor of 16 to 1. According to 
EPA, the new standards will result in significant annual reductions in 
harmful emissions, with total benefits as of 2030 estimated at about 
$70 billion. In addition, by 2030, the reduced emissions will prevent 
8,300 premature deaths, more than 9,500 hospitalizations, and 1.5 
million workdays lost, according to EPA. The agency estimated that 
these benefits will come at an average cost increase of about $2,000 to 
$3,200 per new vehicle in the near term and about $1,200 to $1,900 per 
new vehicle in the long term, depending on the vehicle size. This is 
relatively small compared to new vehicles whose base cost is about 
$96,000 for a new heavy heavy-duty truck to $250,000 for a new bus. 
Furthermore, EPA estimated that, when fully implemented, the sulfur 
reduction requirement would increase the cost of producing and 
distributing diesel fuel by about 4.5 to 5 cents per gallon, an 
increase of about 3 percent over average U.S. diesel fuel prices as of 
late November 2003.

The Consent Decrees and Their Accelerated Schedule for Reducing Diesel 
Emissions Overall Negatively Affected Sales of the Largest Trucks and 
Engines but Achieved Some Air Quality Benefits: 

In part because trucking companies did not have what they considered to 
be sufficient time to adequately road test 2002 prototype engines, they 
had concerns about the price and reliability of the new engines. 
Representatives of four of the ten trucking companies we contacted said 
their companies, among other things, bought more new heavy-duty trucks 
equipped with older engine technology than planned before October 2002. 
This adversely affected their operations, at least in the short term, 
according to company officials. Our analysis of Class 8 truck 
production data also indicates that trucking companies may have pre-
bought these trucks in 2002. To meet the increased demand for trucks 
with older engines, the major engine manufacturers increased production 
of new trucks with older engines before October, but had to decrease 
production when demand subsequently dropped until about early 2003, 
with detrimental effects, according to representatives of the engine 
manufacturers we contacted. These manufacturers also said that they 
lost market share to others that were not subject to the consent 
decrees or that decided to pay penalties rather than make a new engine 
on time.

EPA estimated that accelerating the schedule for cleaner engines would 
accelerate emissions reductions, thereby better protecting public 
health. EPA roughly estimated that two provisions of the consent 
decrees would reduce nitrogen oxide emissions by roughly 4 million 
tons. However, as discussed, trucking companies bought more trucks with 
the older engine technology than planned, and truck owners are now 
operating trucks longer than expected, thereby reducing the number of 
trucks with cleaner engines on the road below anticipated levels. As a 
result, while emissions levels were reduced, the consent decrees will 
not achieve the full emissions reductions in the time frames EPA 
anticipated.

Some Trucking Companies Purchased Large Numbers of Older Trucks Rather 
Than Trucks with the New, but Unproven Engines, Adversely Affecting 
Their Short-term Operations: 

The consent decrees had an adverse effect on some trucking companies 
even though the trucking industry was not a direct party to the 
decrees. They affected the industry because trucking companies are the 
ultimate purchasers of trucks equipped with new diesel engines designed 
to meet the consent decrees' emissions standards requirements. 
Manufacturers did not provide trucks with prototype engines to the 
companies in time to sufficiently road test them, according to many of 
the trucking company officials we contacted. Several officials noted 
that their companies did not take delivery of trucks with the new 
engines for testing until the first half of 2002--too late for their 
companies to perform what they considered to be adequate road testing. 
Consequently, many trucking companies decided not to risk the 
uncertainties associated with the new engines, instead opting for the 
older, familiar diesel technologies. As table 2 indicates, eight of the 
ten trucking companies we contacted bought trucks with the older 
engines prior to October 2002, postponed buying new trucks, or bought 
only a relatively small number of trucks with new engines, usually for 
testing purposes.

Table 2: Responses of Ten Large Trucking Companies to the Consent 
Decrees and Their Basis for These Responses: 

Number of companies adopting response: 4; 
Trucking companies' responses to consent decrees: Pre-bought trucks 
with older engines. Companies reported purchasing an excess capacity of 
between 840 and 5,000 trucks with older engines prior to October 2002; 
Basis for responses: 
* Higher acquisition and operating costs of new engines; 
* Significant uncertainties about new engines' performance and 
durability.

Number of companies adopting response: 1; 
Trucking companies' responses to consent decrees: Purchased new trucks 
with engines from a manufacturer who did not have to meet the new 
standards; 
Basis for responses: 
* Somewhat concerned about new engines' dependability.

Number of companies adopting response: 1; 
Trucking companies' responses to consent decrees: Purchased new trucks 
with engines from a manufacturer who was required to meet the standards 
but chose not to and instead paid penalties; 
Basis for responses: 
* Higher acquisition and operating costs of new engines; 
* Desire to stay with known, established engine technology; 
uncertainty about new engines' dependability.

Number of companies adopting response: 2; 
Trucking companies' responses to consent decrees: Extended their leases 
on trucks with older engines, but did not lease new trucks; 
Basis for responses: 
* Higher acquisition and operating costs of new engines; 
* Significant uncertainties about new engines' performance and 
durability.

Number of companies adopting response: 2; 
Trucking companies' responses to consent decrees: Bought significant 
numbers of trucks with new engines; 
Basis for responses: 
* Desire to maintain consistent relationship with engine suppliers; 
* Desire to avoid deviating from their established long-term business 
plan, which would disrupt their operations. 

Source: GAO analysis of information from 10 trucking companies.

[End of table]

Werner Enterprises and Swift Transportation publicly reported in their 
financial statements to shareholders that they pre-bought trucks with 
older engines and postponed buying new trucks, respectively, because of 
uncertainties surrounding the new engines. The two trucking companies 
in table 2 that bought large numbers of trucks with the new engines did 
so because they wanted to maintain consistent business relationships 
with their established engine suppliers and follow the fleet 
acquisition plans that they had developed based on their assessment of 
long-term business needs, according to company officials.

The four companies that pre-bought large numbers of trucks before the 
October 2002 deadline did so primarily because they were concerned 
about the higher price and unproven reliability of the new engines, 
according to company officials. They said that the new engines would 
have added from $1,500 to $6,000 to the purchase price of a new heavy-
duty truck--whose base cost is about $96,000--and would have reduced 
fuel economy by 2 to 10 percent. For 2002, these additional costs could 
have ranged from about $4 million to $27 million per company in 
purchase price and about $3 million to $90 million per company in fuel 
costs. These trucking officials said that these additional costs would 
have been problematic for some companies because, according to one 
representative, the industry only returns 3 or 4 cents per dollar 
invested. Compounding these additional costs, according to trucking 
officials, is that they come without any clear offsetting economic or 
business advantages. According to several of the officials, recent 
engine modifications made to meet increasingly more stringent emissions 
standards also had positive economic benefits for the trucking 
companies, such as increased fuel efficiency. EPA officials noted, 
however, that some of these benefits, including better fuel economy, 
were achieved as a result of engine manufacturers using the defeat 
devices to avoid meeting emission standards. The agency acknowledged 
that trucking companies were not party to the engine manufacturers' 
tactic but did benefit from it.

Companies that pre-bought trucks found this strategy adversely affected 
their operations, at least in the short term, according to company 
officials. Companies had more trucks than they needed and lost money as 
excess trucks sat idle. For example, one trucking company reported in 
its financial statement to shareholders that such excess capacity cost 
the company $16.3 million in revenues--29 percent--in the first quarter 
of 2003. Despite effects such as these, some trucking officials told us 
that they would have pre-bought even more trucks with the older engines 
had they been available. These officials noted that while larger 
companies may have been able to weather these operational disruptions, 
smaller companies with narrower profit margins might have found it more 
difficult.

Our analysis of data on the production of trucks with the new engines 
suggests that pre-buying in response to the consent decrees was a 
widely used strategy. As figure 2 shows, truck production began to 
increase from January through September 2002, despite a generally 
decreasing trend since April 2000.[Footnote 8]

Figure 2: U.S. and Canadian Production of Class 8 Diesel Trucks, 
January 2000 through June 2003: 

[See PDF for image]

[End of figure]

More specifically, from April through September 2002, manufacturers 
produced about 93,000 Class 8 trucks. Our analysis shows that this 
production volume cannot be fully explained by changes in the economy's 
growth rate or diesel fuel prices, but this increase, and the 
subsequent decrease, in production may be linked to the consent 
decrees. We recognize that a number of factors other than the consent 
decrees are also likely to have contributed to these trends. For 
example, trucking companies' business decisions are driven by factors 
that affect their profitability, such as economic growth and activity, 
their expectations about future profits, their current inventory of 
trucks, and fuel and operating costs. In addition, other factors such 
as regulations, taxes, or subsidies affect companies' profitability and 
truck purchasing decisions. After considering the information trucking 
companies provided us on their responses to the decrees and controlling 
for economic growth and fuel costs in our analysis, we estimate that 
19,000 to 24,000 (20 percent to 26 percent) of the 93,000 Class 8 
trucks produced during this period may have been in response to the 
consent decrees. Subsequent to this increase, the data also show that 
production sharply decreased after October 2002 until recovering in 
2003.

Those companies that bought trucks with the new engines reported 
experiencing few serious problems with them, although they generally 
believe that it is too soon to be certain of the new trucks' 
maintenance costs. Some stated that preliminary indications may not be 
encouraging. For example, one company reported that roughly one-half of 
its 140 new heavy-duty engines experienced an engine valve failure 
prior to 50,000 miles. In addition, these officials noted that roughly 
20 percent of their heavy-duty vehicles with the new engines are out of 
service at any given time due to maintenance concerns, compared to 5 
percent for the remainder of their fleet. Several of these officials 
expressed a concern that some companies may have difficulty absorbing 
increased costs from such maintenance problems.

Engine Manufacturers Experienced Temporary Fluctuations in Sales and 
Shifts in Market Shares as a Result of the Decrees: 

Initially, trucking companies' increasing demand to pre-buy trucks with 
older engines in the 6 months before the October 2002 deadline 
increased the major diesel engine manufacturers' production and sales. 
In particular, demand was so great, according to some engine 
manufacturers, they could not keep up with it, despite hiring hundreds 
of temporary employees and running production lines 24 hours a day, 7 
days a week. According to all five of the engine manufacturers we 
contacted, the pre-buy could have been much larger, but the engine 
manufacturing industry did not have the capacity to fill the demand. 
However, once the October 2002 deadline passed, demand for these 
engines fell dramatically. These dramatic swings in demand had a net 
adverse impact on engine manufacturers, at least for the short-term, 
according to those manufacturers we contacted. For example, at least 
one engine manufacturer laid off all of the temporary employees it had 
recently hired to meet the rising demand before October, as well as 
some more established workers. Another manufacturer said that such 
instability also hindered its ability to make business decisions, 
acquire capital, and meet customers' demands. However, figure 2 shows 
that truck sales generally increased again starting in 2003.

In addition to these general trends, many of the manufacturers of the 
new, cleaner engines told us that they lost customers to those 
companies that continued to produce engines that did not meet the new 
emissions standards. In 1998, the seven manufacturers subject to the 
consent decrees dominated the U.S. heavy-duty diesel engine market, 
accounting for about 90 percent of engine sales. In response to the 
decrees, four of the seven engine manufacturers began to produce 
cleaner engines. Another of the seven manufacturers, Renault, decided 
to leave the U.S. heavy-duty diesel truck market in 2002, according to 
company officials. Furthermore, according to EPA, Navistar 
International chose to take other actions to compensate for its excess 
emissions rather than meet the new emissions standards early, as 
permitted under its consent decree. Caterpillar, until November 2003, 
continued to sell heavy-duty engines that did not fully comply with the 
new nitrogen oxide standards, but paid a nonconformance penalty for 
each engine sold. Therefore, by mid-2003, the U.S. heavy-duty diesel 
engine market was dominated by (1) the four manufacturers subject to 
the decrees that were selling engines that met the new emissions 
standards--Cummins, Detroit Diesel, Mack Trucks, and Volvo; (2) two 
manufacturers subject to the decrees that were selling engines that did 
not meet the standards--Navistar International and Caterpillar; and (3) 
Mercedes, that entered the U.S. market in 1999 but that did not have to 
meet the standards until 2004.

In 1998, the year in which EPA and the engine manufacturers entered 
into the consent decree settlements, the four manufacturers selling 
engines that met the new standards had a combined share of the U.S. 
Class 8 truck market of about 73 percent, while the two manufacturers 
that were not selling such engines had roughly a 27 percent market 
share.[Footnote 9] Since then, the market shares of the two groups of 
engine manufacturers have moved in almost directly opposite directions 
(see fig. 3).

Figure 3: Comparison of Market Shares of Producers of Class 8 Diesel 
Engines That Complied with the Decrees' Nitrogen Oxide Standard and 
Those That Did Not Comply with the Decrees' Nitrogen Oxide Standard: 
1998 to 2003: 

[See PDF for image]

[End of figure]

By September 2003, the market share of the four manufacturers selling 
cleaner engines had shrunk to 50 percent and the share of the two 
companies--plus Mercedes--that continued to sell engines that did not 
meet the new standards increased to 50 percent.

While factors other than the consent decrees contributed to this shift 
in market shares over the years, according to many engine manufacturer 
and trucking company officials we contacted, the manufacturers that 
sold trucks with the cleaner engines also lost business because, as 
previously noted, these engines had inherent disadvantages relative to 
the existing engines that made them difficult to sell. Consequently, 
manufacturers that continued to market trucks with the older engines 
captured business from those companies selling trucks with the new 
engines. For example, Caterpillar's share of the Class 8 truck market 
climbed from 24 percent in 1998 to 35 percent in 2003, while Detroit 
Diesel's share dropped from 27 percent to 15 percent during the same 
period. Similarly, Mercedes' market share rose from zero in 1998 to 10 
percent in 2003, while Cummins' share fell from 31 percent to 21 
percent.

We were unable to verify all of the claims made by trucking companies 
and engine manufacturers regarding financial impacts and truck purchase 
decisions resulting from the consent decrees because much of this 
information is confidential. To a limited extent, we were able to use 
financial statements some of these companies submitted to the 
Securities and Exchange Commission to verify some impacts for some 
companies. In addition, we conducted econometric analysis to shed light 
on the possible magnitude of the pre-buy.

The Consent Decrees Accelerated Emissions Reductions but Not to the 
Full Extent That EPA Had Estimated: 

Although EPA was not required to conduct a cost-benefit analysis of the 
provisions of the consent decrees, it did a rough estimate of the 
potential emissions reductions that could be achieved. At the time it 
made the estimate, EPA used truck production data from 1998, the most 
recent available at the time, to estimate that over the 15-month pull-
ahead period--from October 2002 to January 2004--some 233,000 more 
trucks with cleaner engines would be on the road than without the pull-
ahead. EPA multiplied this number by the amount of emissions reductions 
a single cleaner engine could achieve to estimate that the total 
emissions reductions expected by accelerating the schedule was roughly 
1 million tons of nitrogen oxide emissions.

As previously discussed, because trucking companies postponed 
purchases, bought new trucks with the old engine technology, or bought 
used trucks rather than the cleaner engines, initially fewer trucks 
with cleaner engines will be on the road than EPA had estimated. 
Therefore, the consent decrees are not going to produce the total 1 
million reduction, at least not during the time frames EPA predicted. 
For example, Class 8 truck production data through October 2003, or 13 
of the 15 months of the pull ahead, show that about 148,000 fully or 
partially compliant heavy-heavy-duty diesel engines are on the road, 
compared to EPA's estimate of 233,000 such compliant engines for the 
entire 15-month time frame. However, some factors came into play that 
EPA did not anticipate. For example, EPA did not expect Mercedes to 
enter the U.S. diesel truck market and claim about a 10 percent share, 
increasing the number of older-technology engines sold. Furthermore, 
EPA did not expect Caterpillar, with the largest engine sales when EPA 
developed its emissions estimates, to produce engines that, although 
cleaner than previous models, did not fully meet the new standards. 
Finally, the overall rate of engine production during the 15-month 
period covered by EPA's emissions estimates is going to be relatively 
lower than the rate in 1998, the year on which EPA based its estimates. 
Therefore, not as many cleaner engines were produced as EPA predicted.

EPA also estimated that a second provision of the consent decrees--a 
requirement that computers on older engines be adjusted to better 
control emissions when these engines undergo regularly scheduled 
rebuilding--would reduce nitrogen oxide emissions by about 3 million 
tons over the life of the engines. Under these "low-nitrogen oxide 
rebuild" provisions of the decrees, when operators brought their trucks 
in to have their engines rebuilt, engine manufacturers were required to 
supply kits to adjust computer controls to lower excess emissions. This 
adjustment is called "reflashing." While reflashing can be performed 
without rebuilding the engine, EPA saw this as a convenient time for 
performing both operations at once. EPA estimated that this provision 
of the decrees would eventually apply to roughly 856,000 trucks. In 
addition, a number of engine manufacturing companies initiated 
incentive programs to encourage truck companies to voluntarily bring 
their trucks in to have them reflashed. Under the voluntary program, 
these trucks would be reflashed earlier than if they waited until the 
engines needed to be rebuilt under EPA's program, thereby reducing 
emissions sooner.

As of September 2003, almost 60,000 trucks had been reflashed under the 
consent decrees' mandatory program and another 43,000 under the 
voluntary incentive programs, about 12 percent of EPA's projected 
total. Fewer engines were rebuilt than EPA expected because trucking 
companies are running their engines longer than in previous years 
before rebuilding or replacing them. As a result, only a small portion 
of the emissions reductions predicted by EPA from reflashing may be 
achieved, depending on how many additional engines are adjusted and the 
rate at which this occurs. Estimating how many of the remaining 740,000 
or more trucks will be reflashed under the consent decree provisions is 
difficult and must take into account the age and likely future mileage 
of the trucks. Many of these trucks no longer have enough useful life 
remaining to make rebuilding their engines cost-effective. 
Nevertheless, the California Air Resources Board and environmental 
departments in several other states are considering making reflashing 
of heavy-duty diesel engines compulsory, to try to reduce diesel 
emissions as much as possible.

Remaining Technology Challenges Must Be Resolved to Meet the 2007 
Standards, and Stakeholders' Opinions Differ as to Whether They Will Be 
Addressed in Time: 

A number of engine technology and fuel supply and distribution issues 
must still be resolved to implement the 2007 standards. Most 
stakeholders who have made significant investments in developing the 
engine and fuel technology to meet the standards maintained that the 
issues can be resolved in time. Engine manufacturers we contacted 
expect to have new engines ready for 2007 and to be able to meet the 
trucking companies' time frames for delivering trucks with prototype 
engines for testing. However, representatives of the fuel industry 
recognize that there is still work to do to resolve issues about 
whether (1) low-sulfur fuel will be available in sufficient volumes 
nationwide and (2) fuel distributors can keep from contaminating it 
with higher sulfur fuel that damages the emissions control equipment. 
However, they believe that there is sufficient time to resolve these 
issues and do not want the 2007 standards delayed. Furthermore, the 
environmental and health groups we contacted are encouraged by 
industries' progress in developing the technologies needed to implement 
the standards. Given these lingering technology questions, the 
uncertainty about having sufficient time to test new engines, and the 
negative economic impact they experienced under the consent decrees, 
representatives of some of the trucking companies we contacted remain 
concerned that the new standards can be implemented smoothly. Because 
the technology to meet the 2007 standard is more advanced than prior 
upgrades, some trucking companies are concerned that the new engines 
will cost more and decrease fuel efficiency more than EPA has 
predicted. Consequently, according to representatives of nine of the 
ten trucking companies we contacted, companies will likely once again 
pre-buy trucks, potentially disrupting markets and postponing needed 
emissions reductions.

Engine Manufacturers Believe They Can Resolve Challenges and Produce an 
Engine in Time for 2007: 

Representatives of all five engine manufacturers we contacted, as well 
as the association of emissions control technology manufacturers, noted 
that control technologies for nitrogen oxide emissions--one of the 
pollutants addressed by the 2007 standards--have continued to advance. 
For 2007, manufacturers have evaluated five different engine technology 
options to control nitrogen oxide emissions--nitrogen oxide adsorbers, 
selective catalytic reduction, advanced exhaust gas recirculation, a 
lean nitrogen oxide catalyst, and advanced combustion emissions 
reduction technology (ACERT--a system developed by Caterpillar for its 
own engines). Generally, exhaust gas recirculation and ACERT limit the 
formation of nitrogen oxides, while the catalyst-based approaches 
promote nitrogen oxides reduction into nitrogen and oxygen. In December 
2003, three of the five engine manufacturers we contacted announced the 
technologies they plan to use to meet the 2007 emission standards: 
Caterpillar chose its ACERT technology and Cummins and Volvo selected 
exhaust gas recirculation. In addition, in January 2004, while not 
specifically saying that it would use exhaust gas recirculation 
technology, International announced that it plans to meet the 2007 
requirements without using either nitrogen oxide adsorbers or selective 
catalytic reduction. The company currently uses exhaust gas recycling 
technology in many of its existing engines. The remaining engine 
manufacturer is considering selective catalytic reduction.

Caterpillar, Cummins, International, and Volvo chose their respective 
approaches because each company is already using a basic form of the 
technology it selected to meet the 2004 standards and believes it can 
be modified to meet the 2007 standards as well. Several engine 
manufacturers, however, believe that they may not be able to advance 
the exhaust gas recirculation technology far enough to comply with the 
2010 requirements, so, in planning ahead, they are pursuing this as 
well as other options. The firm that is considering selective catalytic 
reduction noted that this technology could meet both the 2007 and 2010 
requirements. It has been in use in the United States for several years 
to control nitrogen oxide emissions from stationary sources, such as 
power plants or industrial facilities. It has also been used in 
European demonstration fleets to control pollution in diesel truck 
emissions. While the engine manufacturer that is considering selective 
catalytic reduction believes that remaining technological issues are 
relatively minor and should be resolved by 2007, it is less clear that 
several implementation issues will be resolved by that time. For 
example, selective catalytic reduction requires a continuing supply of 
a chemical compound--such as urea--to function properly. However, some 
engine manufacturers and other stakeholders, as well as EPA, are 
concerned because urea is not widely available and the industry would 
have to build its own distribution infrastructure, such as separate 
tanks at refueling stations. There are concerns that this may not be 
possible by 2007, that truck operators will not have sufficient 
supplies of the chemical when and where they need it, or that the 
operators will accidentally or intentionally fail to keep the urea tank 
on their trucks filled, thereby defeating the emissions control 
equipment. According to EPA officials, the engine manufacturer 
considering selective catalytic reduction is expected to submit a plan 
for a urea infrastructure in early 2004. EPA will evaluate the plan at 
that time.

As for nitrogen oxide adsorbers, EPA has helped to support and develop 
this technology and believes it remains a viable option for 2007, 
although none of the manufacturers has chosen this technology for the 
earlier deadline. In June 2002, the agency issued a report on, among 
other things, the progress being made to develop this technology. EPA 
concluded that, given the rapid progress and the relatively long lead-
time before it would be used, adsorbers could be available to meet the 
2007 standards. In October 2002, the Clean Diesel Independent Review 
Panel EPA convened to assess technology development progress reached a 
similar conclusion, stating that although technological challenges 
remain, none are insurmountable. The panel further noted that engine, 
vehicle, and emission control manufacturers were making large 
investments to ensure the successful development and implementation of 
the adsorber technology for the 2007 standards. In contrast, the engine 
manufacturers we contacted generally concurred that adsorbers might be 
a viable option for meeting the next phase of nitrogen oxide reductions 
in 2010, but they think the technology faces too many significant 
technical barriers to be a viable option for 2007.

Engine manufacturers believe they will have nitrogen oxide control 
technology ready for 2007 model year heavy-duty trucks and that they 
can make prototype trucks available to trucking companies for testing 
by mid-to late-2005.[Footnote 10]

We were unable to independently verify the claims of the engine 
manufacturers about the progress being made in developing engines and 
emissions control equipment and when these technologies are likely to 
be available. This is primarily because companies were concerned about 
not making information about their unique engine designs and progress 
readily available so that they can remain competitive.

Representatives of the Fuel Industry Have Concerns about Adequate Fuel 
Supplies and Distribution, but Believe They Have Time to Resolve the 
Concerns and Do Not Want the 2007 Deadline Delayed: 

The representatives of the diesel fuel industry we contacted--including 
officials of nine organizations collectively representing refiners, 
pipeline operators, terminal operators, and retail marketers--still 
have a number of concerns about implementing the new emissions 
standards on schedule. But, they believe they can resolve these issues 
before 2007. Regardless of their concerns, the representatives agreed 
that EPA should make no changes to the 2007 rule's implementation dates 
and low-sulfur diesel fuel requirements because changing or delaying 
the rule would negatively affect the plans and investments already 
being made. Rather, these representatives believe the certainty the 
2007 deadline provides, such as knowing what is required, is key to 
successfully implementing the standards in a timely and cost-effective 
manner.

The representatives of the fuel industry organizations we contacted 
said that most of their members' efforts to meet the low-sulfur diesel 
fuel requirements are still in the planning phase. While the industry 
has the technical ability to produce fuel to meet the requirements--
low-sulfur fuel is already being produced in limited quantities today-
-the fuel industry remains concerned about supply and distribution 
issues that could directly hinder implementing the requirements (see 
table 3).

Table 3: Fuel Industry Representatives' Primary Concerns: 

Refiners: American Petroleum Institute; 
Contamination: Yes; 
Supply availability: Yes; 
Reliable field testing: Yes.

Refiners: Marathon Ashland Petroleum, LLC[A]; 
Contamination: Yes; 
Supply availability: Yes; 
Reliable field testing: Yes.

Refiners: National Petrochemical and Refiners Association; 
Contamination: Yes; 
Supply availability: Yes; 
Reliable field testing: Yes.

Refiners: Western Independent Refiners Association; 
Contamination: Yes; 
Supply availability: Yes; 
Reliable field testing: No.

Pipeline Operators: Association of Oil Pipe Lines; 
Contamination: Yes; 
Supply availability: Yes; 
Reliable field testing: Yes.

Terminal Operators[B]: Independent Fuel Terminal Operators of America; 
Contamination: Yes; 
Supply availability: Yes; 
Reliable field testing: Yes.

Terminal Operators[B]: Independent Liquid Terminals Association; 
Contamination: Yes; 
Supply availability: Yes; 
Reliable field testing: Yes.

Marketers: Petroleum Marketers Association of America; 
Contamination: Yes; 
Supply availability: Yes; 
Reliable field testing: Yes.

Marketers: Society of Independent Gasoline Marketers of America; 
Contamination: Yes; 
Supply availability: Yes; 
Reliable field testing: Yes. 

Source: GAO.

[A] Marathon Ashland also operates downstream businesses including 
terminals, retail markets, and a truck fleet.

[B] Terminals exist at fuel source locations, such as refineries, and 
serve as distribution points near market areas to temporarily store 
products. Terminals consist of fields of tanks holding different types 
and grades of petroleum products.

[End of table]

As table 3 shows, the fuel industry's primary concerns include the high 
probability that low-sulfur fuel supplies will be contaminated before 
they reach the market or retail level and the potential for shortages 
of the low-sulfur fuel. The concern over possible contamination of the 
fuel arises from the limited experience with these products. If such 
fuel is contaminated, it will damage emissions controls. Although the 
2007 rule requires fuel refiners to produce diesel fuel containing no 
more than 15 parts per million of sulfur, delivering such fuel to the 
end user may require refiners to produce fuel with an even lower sulfur 
content. Sulfur from other fuel products may unintentionally be added 
to low-sulfur supplies through contamination in the distribution 
system. For example, a pipeline carries many different fuel types, 
grades, and compositions to accommodate product demands that vary both 
regionally and seasonally. As a result, there is always a certain 
amount of intermixing between the first product and the second at the 
point in the pipeline where the two meet. If these products have 
different sulfur contents, the mixture where the two fuels meet may 
contain much more sulfur than the lower graded of the two products. 
Furthermore, products containing large amounts of sulfur may leave 
residual amounts in the system that could become blended into other 
products, raising their sulfur content. Therefore, according to fuel 
industry representatives, fuel leaving the refinery must have a much 
lower sulfur content than 15 parts per million to allow for an increase 
through contamination.

Because the extent of the contamination cannot be precisely predicted 
in advance, the exact sulfur level of the fuel that refineries would 
have to produce is uncertain. Pipeline operators expect that refiners 
will have to provide diesel fuel with sulfur levels as low as 7 parts 
per million in order to compensate for possible contamination from 
higher sulfur products in the system. However, even at these lower 
levels, the nine fuel industry representatives said that the likelihood 
of contamination during the delivery of the fuel through the 
distribution system is extremely high. Even if the low-sulfur fuel that 
pipeline operators receive meets their specifications, pipeline 
operators are unsure how they will sequence the new fuel with other 
products in the pipeline to prevent its contamination.[Footnote 11] 
Once contamination occurs, the product could no longer be sold or used 
as low-sulfur highway fuel, thereby leaving less of the low-sulfur fuel 
available for sale. Fuel distributors also said that the potential for 
contamination increases when a fuel additive such as kerosene is 
blended with diesel fuel. Kerosene is commonly added to highway diesel 
fuel in the northern United States to prevent fuel from thickening in 
the cold weather. Although the 2007 rule requires that additives must 
meet the same low-sulfur standard, refiners are not currently producing 
low-sulfur kerosene.

Fuel industry representatives also are concerned about the adequacy of 
testing to detect and avoid widespread contamination of low-sulfur fuel 
supplies. According to these officials, testing is crucial in 
determining whether the low-sulfur fuel is meeting the standards at 
every point in the distribution system. Product testing is performed to 
control contamination and to define "cut points," locations in a stream 
of products through a pipeline where one type of product, such as high 
sulfur diesel, ends and another product, such as low sulfur diesel, 
begins. Early detection of contamination gives pipeline and terminal 
operators flexibility in correcting problems before large portions of a 
product batch become ruined. However, eight of the fuel industry 
representatives we contacted expressed concern that a reliable and 
accurate test or testing device for measuring sulfur content is 
currently not available.

Because of these contamination issues, nine fuel industry 
representatives expressed concern about whether there would be an 
adequate supply of the low-sulfur fuel nationwide during the phase-in 
period from 2007 to 2010. For example, because adding separate storage 
tanks for low-sulfur fuel to prevent contamination would be expensive, 
terminal operators and retail marketers said they may be less likely to 
make the investment to carry this fuel. Furthermore, according to fuel 
industry representatives, trucking companies that deliver low-sulfur 
fuel may need to dedicate trucks exclusively for this purpose to ensure 
product integrity during delivery. This may lead to fuel shortages, 
which could be especially severe in the northern United States where 
fuel distribution is generally limited to delivery by truck.

In contrast to several of the fuel industry's concerns, an EPA report 
summarizing data on refiners' plans to produce low-sulfur diesel fuel 
before 2010 stated that (1) the fuel industry is on target for 
complying with the low-sulfur fuel standard and (2) low-sulfur diesel 
fuel production will be sufficient to meet demand and the fuel will be 
available nationwide.[Footnote 12] Although EPA acknowledges in its 
report that the information is preliminary, the agency believes that it 
provided the clearest snapshot of the highway diesel fuel market 
available at the time. According to EPA, the agency will update this 
report in 2004 and 2005 based on the most current data from the 
refiners.

Despite their differing views on the progress towards meeting the 2007 
rule's requirements, fuel industry representatives agree there is still 
sufficient time to resolve their concerns. One of the representatives 
stated that, even without knowing how much the fuel is likely to be 
degraded through contamination, refineries are designing their plans 
and getting their budgets approved to make the needed modifications to 
their facilities.

Environmental and Health Groups Have No Major Concerns about 
Implementing the Standards on Time and Want to Avoid Delays in 
Achieving Emissions Reductions: 

The representatives of the five environmental and health groups we 
contacted are generally encouraged by industries' progress in 
developing the technologies needed to implement the 2007 rule.[Footnote 
13] While all five groups commented on the 2007 rule when it was 
proposed in 2000, three of the groups' representatives also were 
members of EPA's Clean Diesel Independent Review Panel and assessed the 
industry's progress in developing the needed technologies. In its 2002 
report, the panel concluded that significant progress had been made 
and, although some challenges may remain, none were considered to be 
insurmountable.[Footnote 14] The fourth group's representatives have 
been involved in a number of pilot projects with states, local 
governments, and the private sector involving the use of innovative 
emissions control technologies. Those experiences, in conjunction with 
their involvement in commenting on the proposed 2007 rule, have led the 
group to believe that the technology is viable. Finally, based on 
information gathered from emissions control equipment manufacturers, 
the fifth group's representative believes that the technology is 
progressing well.

All of the representatives said that they are highly supportive of the 
2007 standards. Although two of the five groups initially wanted the 
standards to be implemented fully in 2007 rather than phasing them in 
through 2010, none of the groups wanted any changes made to the rule 
now. In fact, the only concern the representatives we contacted 
expressed was that there would be a delay in the rule's implementation, 
resulting in a reduction of the anticipated environmental and health 
benefits. For example, the representative of the State and Territorial 
Air Pollution Program Administrators/Association of Local Air Pollution 
Control Officials stated that the diesel emissions reductions expected 
from timely implementation of the 2007 standards are critical to state 
and local air pollution control agencies' efforts to meet air quality 
standards. According to this representative, achieving these emissions 
reductions is especially important for states and localities with areas 
that already have air quality problems. Many of these areas are relying 
on the 2007 standards to achieve their expected emissions reductions on 
time.

Trucking Companies Are Concerned about the New Engines' High Costs and 
Insufficient Time for Testing and May Pre-Buy Trucks with Old Engines 
before 2007, Disrupting Markets and Postponing Air Quality Benefits: 

Trucking officials we contacted expect that the costs of purchasing and 
operating trucks meeting the 2007 standards will be significantly 
higher than comparable earlier models, despite EPA's estimates to the 
contrary. These officials said they do not consider EPA's analysis 
credible, primarily because they believe the agency previously had 
seriously underestimated the industry's costs to comply with the 
consent decrees. For example, EPA's regulatory impact analysis for the 
2004 emissions standards concluded that the industrywide cost to reduce 
nitrogen oxides would be about $224 per ton. Subsequently, in 2000, EPA 
estimated that to comply with the pull-ahead provisions of the consent 
decrees, these costs could increase to $272 per ton. However, an 
industry analysis stated that the actual cost could range between 
$8,000 and $13,000 per ton. EPA officials, in commenting on the cost 
variance of its estimates pointed out that the estimates it developed 
for the 2004 standards and its estimates of engine costs to meet the 
accelerated deadline for development are not comparable. Accelerating 
the schedule would generate additional costs that would not have been 
components of the 2004 estimate. For example, EPA officials noted that 
when the agency derived its estimates of costs to comply with the 2004 
nitrogen oxide standards, it did not know that heavy-duty engine 
manufacturers had installed defeat devices on existing engines. Thus 
the actual cost to comply with 2004 standards will include the cost to 
"catch up" with the previous standard. We did not assess the accuracy 
of EPA's cost estimates. Nevertheless, the difference in EPA's 
estimates has raised concerns among trucking company officials about 
the accuracy of EPA's 2001 estimate of engine costs to comply with the 
2007 standards.

One reason many industry officials that we contacted expect the 
compliance costs of the 2007 standards to be higher than EPA's 
prediction is because the new trucks will incorporate significant 
technological advancements over current equipment to control nitrogen 
oxide emissions. Many of these officials believe this technology will 
add thousands of dollars to the purchase price of new trucks rather 
than the long-term $3,200 estimated by EPA. In addition, these 
officials are concerned that the 2007 trucks will experience another 3 
to 5 percent loss in fuel economy--added to the 3 to 5 percent loss 
resulting from the consent decrees--that could increase their 
companies' fuel costs by millions of dollars per year. Even minor 
increases in business costs can have adverse effects in the trucking 
industry, according to trucking industry officials we contacted, 
because these companies' profit margins are very narrow--sometimes only 
2 cents per dollar earned. The officials claim that the highly 
competitive nature of the trucking business precludes companies from 
passing such significant cost increases to their customers. For 
example, the two trucking companies we contacted that bought only 
trucks with the new engines prior to October 2002--and in so doing 
incurred millions of dollars in additional expenses, according to 
company representatives--said they had to compete against companies 
that pre-bought trucks with the older engines and avoided the 
additional expenses. These two companies felt they could not increase 
the fees they charged without risking the loss of customers to their 
competitors. According to officials of these two companies, even large, 
profitable companies can afford to absorb these losses for only a short 
time, and small-and mid-sized companies are likely to have also 
experienced difficulties. None of the engine manufacturers could 
estimate with precision the amount that acquisition or operating costs 
are likely to increase. However, all of the engine manufacturers we 
contacted agreed that the engines and emissions control equipment for 
2007 trucks will be more expensive to buy and to operate than 
comparable previous models.

By February 2004, four of the five engine manufacturers had announced 
the technologies they planned to pursue for 2007 and all five had 
stated their plans to have limited numbers of prototype engines 
available for road testing by mid-to late-2005. However, some trucking 
companies still had doubts as to whether engine manufacturers would 
actually deliver prototypes for road testing in the promised 
timeframes. For example, one trucking company told us that the original 
timetable, which would allow engine manufacturers to stay on schedule 
to deliver prototypes no later than mid-2005, was for the manufacturers 
to select their technologies during the summer of 2003. The 6-month 
delay added to his concern about the availability of prototypes to 
enable valid field evaluations by mid-2005. According to 7 of the 10 
trucking firms we contacted, they need 18 to 24 months to put a 
sufficient number of miles on heavy-duty trucks--under a variety of 
driving conditions through all four seasons of the year--to fully 
evaluate the vehicles' operating costs, performance, reliability, and 
durability. Officials at all ten trucking companies said that they were 
reluctant to take the risks associated with the new technologies unless 
they have enough time to fully assess the new trucks. For example, 
officials at one company noted that it has only 12 maintenance 
facilities nationwide and when a truck breaks down on the highway, it 
is very expensive to repair. Consequently, these officials are not 
willing to take a chance on equipment that has not been adequately 
tested.

Without adequate testing time, the trucking company officials we 
contacted believe that they and other trucking companies will likely 
pre-buy trucks with older engines before 2007, with more companies 
purchasing more trucks than they did before the consent decrees' 
October 2002 deadline. Even officials from one of the trucking 
companies that bought only trucks with new engines in 2002 said that 
they would consider pre-buying if the new equipment is not fully 
tested. According to most of the trucking industry officials we 
contacted, the adverse impacts of a pre-buy on trucking companies and 
engine manufacturers could be worse in 2007 than in 2002. Many of the 
trucking companies we contacted agreed that the industry needs to have 
the cost, reliability, and other uncertainties associated with the 2007 
trucks resolved in order to achieve greater stability within the 
industry.

In late February 2004, we again contacted all ten trucking companies to 
determine the extent to which the engine manufacturers' announcements 
that test vehicles would likely be available in 2005 may have eased 
their concerns regarding the introduction of new engine and emissions 
control technologies in 2007. Of the five companies that responded to 
our inquiries, one stated unequivocally that the engine manufacturers' 
announcements had not at all reduced its concerns. Representatives of 
the remaining four companies stated that their levels of concern had 
been somewhat reduced by the announcements, but they continue to be 
concerned about a number of unresolved issues. For example, despite 
engine manufacturers' assurances, companies continue to be concerned 
about the durability of the new engines as well as the cost of 
purchasing and operating them. In addition, representatives of some of 
these companies questioned whether the availability of a relatively 
small number of test vehicles in a limited number of fleets could 
provide sufficient information to allay the concerns of the trucking 
industry as a whole. Finally, some trucking companies highlighted 
lingering concerns regarding potential shortages and higher costs of 
low-sulfur diesel fuel.

Some Stakeholders Commended EPA's Efforts to Ensure Technology Is Ready 
by 2007, but Others Would Like the Agency to Provide More Certainty: 

EPA has taken a number of steps to help with and monitor the engine and 
fuel technology development. For example, EPA staff continue to meet 
with representatives of the key industries, issue reports on technology 
progress, and conduct stakeholder workshops. Representatives of some of 
the engine manufacturers, the emissions control technology 
manufacturers association, the fuel industry, and the environmental and 
health groups we contacted commended EPA's efforts for helping to 
advance the needed technologies. However, some of the engine 
manufacturers and the trucking companies we contacted would like more 
help and reassurance that the technology will be ready when needed, 
including economic incentives to manufacturers to produce engines on 
time and trucking companies to buy them as scheduled. Furthermore, some 
trucking representatives believe that EPA has not included them in, or 
listened to their concerns about, implementation of the standards. EPA 
program managers maintain that the agency has given the industries more 
lead-time than required to produce the technology and provided 
extensive assistance and monitoring. They stated that the agency could 
take a number of additional actions if the standards cannot be 
implemented on time, such as granting individual companies temporary 
relief from the standards or postponing active enforcement. But EPA 
sees no evidence that timely implementation of the standards is not 
achievable.

EPA Has Undertaken a Number of Efforts to Monitor and Facilitate the 
Standards' Timely Implementation: 

According to EPA, the agency is not required to ensure that the engine 
and emissions control technologies or low-sulfur fuel supplies will be 
available on time or that the industries comply in a timely manner. 
However, the Clean Air Act requires that EPA establish standards taking 
into consideration the availability and costs of technology, lead-time, 
and other factors. In responding to the act's requirements, EPA 
concluded that all of the evidence indicates that industries can and 
will implement the engine and fuel requirements of the 2007 rule 
successfully and in a timely manner. According to EPA, the technologies 
for meeting the standards are well known and some are already in use. 
For example, refineries are now using technology to reduce sulfur in 
diesel fuel and engine manufacturers are installing filters that reduce 
fine particle emissions from engines. In addition, the technologies for 
meeting the nitrogen oxide standard in the 2007 rule are being 
developed at a rate faster than anticipated, according to EPA, and the 
remaining engineering issues are being addressed.

EPA's confidence is based, in part, on provisions that the agency built 
into the 2007 rule to ease compliance. For example, in developing the 
rule, EPA gave the industries 6 to 10 years to plan, develop, and 
produce fuel and engines that meet the requirements. By comparison, the 
Clean Air Act only requires EPA to allow no less than 4 years of lead-
time for regulated entities to develop any new technologies required to 
comply with a rule. EPA also included hardship and other provisions to 
address problems that certain small businesses may have in complying 
with the rule.

In addition to specific rule provisions, EPA continues to take steps to 
monitor the development of needed technologies and fuel supplies and to 
ensure that the standards will be successfully implemented. These 
efforts include: 

* Technology Progress Review Meetings - According to EPA, agency 
representatives have continuously met with diesel engine manufacturers, 
emissions control equipment producers, oil refiners, refinery 
technology companies, and fuel distributors; visited technical research 
centers; and met with leading engineers and scientists from more than 
30 companies for briefings on the progress being made to comply with 
the 2007 standards.

* Progress Review Reports - In the preamble to the 2007 rule, EPA 
committed to issuing a progress report every 2 years on the status of 
nitrogen oxide adsorber technology, the emissions control technology, 
which the agency believes to be the most promising for meeting the 
standards. The first report, issued in June 2002, concluded that the 
engine manufacturers and the emissions control equipment industry's 
efforts to develop this technology were progressing rapidly and on 
schedule. The report also included an update on the status of filters 
to control particulates and the refining industry's progress towards 
meeting the low sulfur diesel fuel requirements for 2006. The report 
did not include supporting technical evidence from each company to 
validate EPA's conclusions. EPA plans to release its second engine 
progress review report in early 2004.

* Refiners Pre-Compliance Reports - The 2007 rule requires fuel 
refiners and importers to submit annual reports from 2003 through 2005, 
which must contain information on, among other things: (1) an estimate 
of the volumes of low-sulfur and higher-sulfur diesel fuel that each 
refinery plans to produce or import; and (2) engineering plans, the 
status of efforts to obtain any necessary permits and financial 
commitments for making the necessary refinery modifications to produce 
low-sulfur fuel, and construction progress. EPA summarized these data 
and issued its first annual report in October 2003, stating that the 
industry is on target for complying with the low-sulfur fuel 
requirements on time, fuel production will be sufficient to meet 
demand, and low-sulfur fuel will be widely available nationwide. EPA 
plans to issue additional precompliance reports in 2004 and 2005.

* Implementation Workshops - EPA has held public workshops on the 2007 
standards and plans to hold additional ones in the future as 
appropriate. In November 2002, EPA sponsored a clean diesel fuel 
implementation workshop, which focused on issues such as record keeping 
and reporting requirements for the fuel industry and diesel fuel 
refining, distribution, storage, and marketing challenges. In addition, 
in August 2003, EPA, the trucking industry, and engine manufacturers 
co-sponsored another implementation workshop to facilitate the exchange 
of information among EPA, engine manufacturers, and other parties 
including truck manufacturers and truck operators, and to give EPA a 
forum to provide additional guidance on implementation issues.

* Clean Diesel Independent Review Panel - As previously discussed, at 
EPA's request, the Clean Air Act Advisory Committee's Clean Diesel 
Independent Review Panel[Footnote 15]--an expert panel composed of 
representatives of engine and emissions control equipment 
manufacturers, trucking companies, fuel refiners and distributors, and 
environmental and health organizations--independently assessed 
industries' progress towards complying with the 2007 rule. In its 
October 2002 final report, the panel found that both the engine and 
fuel industries were developing the technologies needed to comply with 
the 2007 standards at an appropriate rate, but that these industries 
needed to address a number of technical issues for implementation to be 
successful. The panel agreed that none of these issues was 
insurmountable and that, for a number of these issues, EPA's planned 
implementation workshops were an appropriate means to move forward.

* Guidance Documents - In November 2002, EPA issued guidance on engine 
manufacturers' testing procedures to determine whether their engines 
comply with the new standards, and the agency also issued a draft 
document responding to questions raised by the fuel refining and 
distribution industries during the workshop held earlier that month. 
EPA plans to issue additional guidance on implementing the 2007 
standards, if needed.

* Other Technology-Related Activities - According to EPA, the agency 
has taken an active role in a number of areas regarding technology 
development and information-sharing with the diesel engine industry and 
other stakeholders, including: 

* an on-going testing program at EPA's National Vehicle and Fuel 
Emissions Laboratory in Ann Arbor, Michigan, in which EPA has evaluated 
the status of engine and emissions control technology, including 
particulate filters and nitrogen oxide adsorber catalyst technologies. 
EPA believes that this program helps to inform the agency of the 
current state of these technologies and allows EPA to make general 
information on technology progress publicly available.

* two government/industry technology demonstration programs sponsored 
by the Department of Energy: the Diesel Emission Control-Sulfur Effects 
Project, completed in 2001, which primarily focused on the impacts of 
diesel fuel sulfur on emission control technologies; and the Advanced 
Petroleum-Based Fuels-Diesel Emissions Control Project, which focuses 
on developing and demonstrating engine and emissions control systems 
that can comply with the 2007 standards.

* a number of industry-sponsored task groups, including (1) the Diesel 
Engine Oil Advisory Panel, made up of the American Petroleum Institute, 
the American Chemistry Council, the American Society for Testing and 
Materials (ASTM), and a number of individual oil, engine, and additive 
companies, which is developing voluntary standards for engine oil 
formulations for the 2007 engines; and (2) the Diesel Fuel Lubricity 
Task Force, sponsored by ASTM, which is working to develop fuel test 
methods and specifications. EPA participates in these groups to provide 
input on technical issues and clarification on the 2007 rule, and to 
track the industry's progress.

* Other Outreach Activities - EPA has participated in numerous 
conferences and meetings sponsored by a wide range of stakeholders at 
which agency officials have made presentations discussing the 2007 
rule. EPA believes that these conferences are useful (1) for 
stakeholders to get the latest information on the status of the 2007 
rule implementation and (2) for EPA to answer questions about the rule 
and hear first-hand input from the regulated industry and other 
stakeholders.

Based on all of these activities, EPA maintains that industries will 
successfully implement the requirements of the 2007 rule on time and 
that, beyond the agency's planned workshops and other monitoring and 
outreach activities, it needs to take no additional actions to ensure 
timely compliance.[Footnote 16]

Some Stakeholders Believe EPA Has Done Enough to Promote the 
Technology, While Others Would Like More Help and Outreach: 

In general, a number of stakeholders we contacted--the association of 
emissions control equipment manufacturers, a number of the fuel 
industry representatives, the environmental and public health groups, 
and two of the engine manufacturers--either commended EPA for its 
efforts to ensure the needed technology is ready on time, or believe 
the agency is already doing enough to provide such assurances. Two of 
the remaining engine manufacturers and some fuel industry 
representatives, as well as all of the trucking companies, would like 
more help in developing the technology or proof that it is on track.

The association of emissions control equipment manufacturers praised 
EPA for its efforts to assist in the development of the needed 
technology. In addition, many of the fuel industry representatives we 
contacted commended EPA's efforts to reach out to them and actively 
involve them in preparing for the implementation of the 2007 standards. 
In particular, the representatives found EPA's implementation workshops 
and its draft question-and-answer document to be the most helpful.

Representatives of the five environmental and public health groups 
commended EPA's efforts to implement the 2007 standards and to include 
them and other stakeholders in the implementation process. 
Specifically, the groups said that EPA's outreach efforts were 
comprehensive and inclusive. Not only did EPA solicit comments from as 
many stakeholders as possible during the rulemaking process, but it 
also has continued to encourage discussions between the stakeholders at 
its implementation workshops. Generally, the groups agreed that EPA 
does not need to go beyond its current and planned activities to ensure 
timely implementation of the standards.

As for the five engine manufacturers, representatives from one found 
EPA's efforts to be particularly supportive and representatives from 
two others said the efforts were "somewhat" effective in easing 
development of the needed technologies. Officials from one of these 
manufacturers said that EPA has been responsive to the manufacturers' 
questions, all of which should help them meet the 2007 standards. 
Representatives from another manufacturer stated that EPA has been 
diligent in monitoring the progress of engine development, visiting 
suppliers as well as the engine makers' facilities, which has helped 
speed the development of the engines. The agency's work in its Ann 
Arbor, Michigan, research laboratory has also helped in this regard. In 
contrast, officials from a fourth company noted that EPA had not been 
particularly responsive to the industry or its concerns. (The remaining 
manufacturer's representatives did not express an opinion in this 
regard.): 

On the other hand, two engine manufacturers described workshops 
sponsored by EPA that focused on complying with the 2007 rule as only 
marginally effective. For example, one engine manufacturer's officials 
commented that the workshops appear to be "staged" and convened only to 
confirm the agency's preconceived ideas, although EPA noted that 
members of the trucking and engine manufacturing industries co-
sponsored these workshops, and that would make it difficult for the 
agency to preordain their outcomes. These companies' officials further 
stated that they did not need EPA's help in developing new diesel 
technologies, but did need the agency's assistance in convincing 
customers to buy the trucks with the 2007 engines, however. Four of the 
five manufacturers also asserted that economic incentives for trucking 
companies could assist them and facilitate the implementation of the 
2007 rule. In general, officials from both of these industry groups 
favored tax breaks or subsidies for trucking companies to purchase the 
new technologies on time. According to these officials, investing 
millions of dollars in developing or buying new, relatively unproven 
equipment carries an inherent business risk and provides companies with 
a powerful incentive to stay with older, familiar--and dirtier--
equipment. EPA officials told us that the agency would have to request 
authority from the Congress to provide industries with economic 
incentives.

As for other stakeholders, representatives of the terminal and 
marketing segment of the distribution industry, in particular, were 
disappointed that the Clean Diesel Independent Review Panel addressed 
only technology issues and not distribution issues, such as 
contamination. Furthermore, all of the trucking companies we contacted 
agreed that EPA could do more to address the uncertainties facing their 
industry, and thereby help minimize any pre-buy that might occur. In 
particular, while EPA actively involved them in developing the 2007 
rule, they believe that the agency has not addressed their concerns in 
implementing the standards. For example, according to ATA officials, 
EPA did not initially include representatives of the trucking industry 
in the agency's Clean Diesel Independent Review Panel, and invited ATA 
to participate only after the organization complained about being 
excluded. EPA acknowledged that, in retrospect, they should have 
included trucking industry representatives on the panel from the outset 
and responded by adding an ATA representative to the panel. 
Furthermore, ATA officials told us that the panel's review did not 
include several important technical issues, such as consideration of 
alternative emissions control technologies, and that panel members were 
discouraged from raising such issues. Finally, the ATA officials said 
that several panel members published reports dissenting with the 
panel's main conclusion that technology development was on schedule, 
but that EPA has not made these reports generally available. As a 
result of these factors, ATA officials said they do not have great 
confidence in the panel's findings and they remain largely unconvinced 
that trucking companies' interests have been well represented in EPA's 
panel process. According to EPA officials, however, panel membership 
was comprised overwhelmingly of experts on engine and vehicle 
technology development.

Some trucking companies are also skeptical of the effectiveness of 
EPA's other efforts to monitor and assist the development of technology 
for the 2007 rule. For example, several trucking company officials we 
contacted believe EPA has already made important implementation 
decisions--largely without input from trucking companies--and the 
workshops' main function is merely to validate those decisions. Several 
trucking companies and ATA officials expressed the belief that EPA's 
overall approach to implementing the 2007 rule is too inflexible. For 
example, the ATA officials maintain that EPA's analysis supporting the 
2007 rule dramatically understates trucking companies' costs to comply 
with the rule and ignores the possible severe effects of these costs on 
the companies. ATA representatives have recommended that EPA update its 
analysis to take into account better information that is now available. 
However, EPA officials continue to believe that the regulatory impact 
analysis it prepared in support of the rule is sufficient, and pointed 
out that the agency is not required to, and does not routinely, update 
its analysis supporting such rulemakings. They also maintain that 
engine manufacturers, not trucking companies, are the entities being 
regulated under the 2007 rule. As a result, following the rulemaking, 
most of the EPA's direct dealings were with engine makers, not trucking 
companies, according to these officials. However, they said that, more 
recently, EPA has actively consulted trucking companies. The trucking 
companies would like EPA to work more directly and closely with them, 
hear and address their concerns, and provide more reassurance that the 
technologies will be ready by 2007.

EPA Could Take a Number of Actions If the Standards Cannot Be 
Implemented on Time: 

According to EPA, the agency is not required to take action in the 
event that the engine and emissions control technologies and low-sulfur 
fuel are not available in time to implement the 2007 standards as 
scheduled. However, according to EPA, if circumstances arise that would 
require additional action, the agency will address them at that time.

EPA believes that timely implementation of the 2007 standards is 
achievable and to plan for failure to meet the deadline would undermine 
the rule. EPA maintains that the collective efforts of the industries 
to develop plans and technologies needed to meet the standards, 
combined with the agency's monitoring of their progress, is the proper 
course of action at this time and is showing significant positive 
progress towards timely and successful implementation. According to 
EPA, entities that are being regulated have for decades developed 
technologies and implemented requirements based on the certainty that 
the regulations would not be changed in a way that would disrupt their 
planning and investment. With this in mind, EPA maintains that it would 
not be prudent or good government to change the regulations or delay 
their implementation. According to EPA, the agency's efforts to provide 
the industries significant lead-time for developing the needed 
technologies, ensure that all stakeholders are actively developing 
them, and monitor their progress are the most prudent actions the 
agency can take.

According to EPA, if it appears that industries cannot comply with the 
2007 standards on time, the agency would not readily make substantive 
changes to the rule--such as modifying the implementation dates or 
changing the allowable emissions levels of the standards--because 
industries have invested large amounts to comply with the standards in 
the specified timeframe. Nevertheless, EPA officials point out that, if 
there was convincing evidence that modifying some aspect of the 
requirements was justified and necessary, the agency could take a 
number of actions: 

* EPA could revise the rule in response to a specific petition. Under 
the Clean Air Act,[Footnote 17] any person can petition the EPA 
Administrator to change a rule. The petition must demonstrate that it 
was impracticable to raise the objection during the public comment 
period when the rule was composed and that the objection is of central 
relevance to the outcome of the rule. EPA believes that the appropriate 
mechanism for substantively changing the 2007 requirements would be to 
undertake a standard rulemaking process in response to a petition, in 
which the agency would post a notice of rulemaking in the Federal 
Register and request, review, and address public comments on the 
proposed revisions to the rule.

* EPA could also develop nonconformance penalties in the event that one 
or more engine manufacturers was unable to produce compliant engines, 
as it did for the 2004 standards and consent decrees. EPA establishes 
nonconformance penalties when: (1) the emission standard is more 
stringent than the previous standard or an existing standard becomes 
more difficult to achieve because of a new standard, and if EPA finds 
that it will require substantial work to comply; and (2) it is likely 
that one or more manufacturers will be a "technological laggard," 
unable to produce compliant engines by the required date.[Footnote 18] 
Typically, EPA decides whether to establish penalties 1 or 2 years 
before the compliance dates, primarily because information on 
manufacturers' ability to comply is not available until then. 
Therefore, EPA believes that it is not appropriate to consider 
penalties before late 2004.

* In the event that an individual refiner is unable to comply with the 
2007 rule, EPA could grant the company relief from meeting its low-
sulfur requirement in response to a request under the rule's hardship 
application process. The refiner would then develop an alternative 
compliance plan.

* EPA may, in certain circumstances, determine in advance that it will 
not actively enforce an environmental regulation, including the 2007 
rule. However, according to EPA, the agency would take this action only 
if it is clearly needed to serve the public interest. Typically, EPA 
grants requests for selective enforcement of a regulation when a 
weather emergency, fire, explosion, or similar circumstance outside a 
requester's control makes compliance impracticable, or when compliance 
with the original rule would cause the regulated entities significant 
hardship.

Conclusions: 

The consent decrees and 2007 standards are critical pieces of EPA's 
strategy to control harmful diesel emissions and protect public health. 
While the accelerated schedule in the consent decrees had an impact on 
both the engine and trucking industries, it helped to further the 
agency's emissions reduction goals by putting cleaner diesel engines on 
the road earlier than otherwise planned. The agency has also made a 
significant investment in developing, and ensuring the implementation 
of, the 2007 standards. Nevertheless, stakeholders from two critical 
industry groups--engine manufacturers and trucking companies--would 
like more help. In particular, engine manufacturers would like 
assurances from EPA that, once the cleaner engines are available, the 
trucking industry will purchase them. Furthermore, the trucking 
industry, as a result of its experience with the consent decrees, 
believes it has not been a key player with EPA in responding to the 
consent decrees or implementing the 2007 standards. Because the 
trucking industry is a major source of the emissions EPA is trying to 
combat, if trucking companies delay purchase of the cleaner engines, 
the economic effect could be more severe than what occurred as a result 
of the decrees and could postpone the emissions reductions. The 
trucking industry is also a key player in the nation's transportation 
system needed to keep a healthy economy. Therefore, it is important to 
achieve emissions reductions while minimizing the negative economic 
effects on trucking and its related industries.

For these reasons, EPA may want to consider what additional efforts it 
could take to help engine manufacturers produce clean engines in time 
for road testing, to reassure trucking companies that they will be able 
to buy tested engines on time, and to address major concerns of other 
key stakeholders. Careful consideration should be given to these 
efforts so that they will not unduly delay progress towards the 
standards, however. For example, EPA could consider if it has time to 
establish an independent expert panel, similar to its 2002 panel, to 
review industry's progress in developing the necessary technologies. 
The panel should consist of representatives of all of the key 
stakeholders who would identify and address their major concerns to the 
extent practicable. The panel could review the data EPA has already 
collected or new data from the engine and fuel industries to measure 
the progress of technology development, communicate this to all 
stakeholders, and determine what, if any, additional actions, such as 
incentives, are needed to ensure that standards are met. The agency 
would have to establish the panel as soon as possible in 2004, however, 
if it is to have enough time to be effective and not unduly delay 
progress. Making more of an investment in working with all of the 
stakeholders critical to meeting the 2007 standards would help EPA 
ensure that it will achieve its goals of reduced emissions and 
increased public health protection.

Recommendation for Executive Action: 

To maximize public health and air quality benefits, and minimize 
adverse impacts on affected industries, we recommend that the 
Administrator, EPA, consider additional opportunities to allay engine, 
fuel, and trucking industry concerns about the costs and likelihood of 
meeting the 2007 standards with reliable engine and fuel technology. 
Opportunities could include better communicating with all stakeholders 
on the remaining technological uncertainties. EPA could also convene 
another independent review panel to (a) address stakeholders' remaining 
concerns; (b) assess and communicate the progress of technology 
development; and (c) determine what, if any, additional actions are 
needed to meet the 2007 standards such as considering the costs and 
benefits of incentives for developing and purchasing the technology on 
time, and other alternatives.

Agency Comments and Our Evaluation: 

We provided EPA with a draft of this report for review. The Assistant 
Administrator for Air and Radiation said EPA believes that, in many 
respects, our report is consistent with the agency's assessment of the 
situation leading up to the implementation of the 2007 standards. 
However, the agency has concerns about the basis for certain of our 
findings on the standards. More specifically, EPA asserted that we (1) 
present selected stakeholders' opinions without validating them and 
ignore evidence that the agency believes would prove or disprove their 
validity, (2) overstate the challenges to having fuel and engine 
technologies ready on time to meet the 2007 standards, and (3) 
inaccurately portray EPA's efforts to work with stakeholders in 
developing the rule. As to our recommendations, EPA sees merit in using 
financial incentives to achieve the 2007 milestone, but does not see an 
agency role in this regard. Neither does the agency see a need to 
convene an independent technology review board.

We disagree with EPA's assertions. In our view, EPA needs to work with 
stakeholders to better address any remaining concerns they have about 
the availability of the new engines and fuel required to meet the 2007 
standards. We fully appreciate that the anticipated emissions 
reductions are critical for many states whose air quality is in 
trouble, that the 2007 standards are vital to protecting public health, 
and that the agency and the engine, emissions control, and fuel 
industries have made extensive efforts to successfully implement the 
2007 rule. We also recognize that to achieve the rule's objectives, the 
trucking industry must purchase trucks with the new engines beginning 
in 2007. Otherwise, we are concerned that the nation may relive the 
negative effects that resulted from the 2002 consent decrees. In 2002, 
trucking companies pre-bought older engines before the deadline, 
delaying emissions and health benefits, because they believed they did 
not have enough time to test new engines or enough information on 
costs. To ensure that this does not happen with the 2007 standards, we 
believe EPA should strengthen its process for working with stakeholders 
to allay any remaining concerns about whether fuel will be available in 
sufficient quantities and locations, whether enough new engines will be 
ready in time to thoroughly test them, and how much the engines will 
cost to buy and operate.

With respect to EPA's specific assertions, we disagree with EPA's 
opinion that we present certain stakeholders' views without regard to 
their validity. We carefully and consistently collected the views of 
engine and emissions control manufacturers, trucking companies, fuel 
industry representatives, and environmental and health groups, and were 
equally careful to accurately present their opinions, consistent with 
our methodology and quality assurance standards. Furthermore, the 
report acknowledges that we were unable to verify opinions about the 
technologies' readiness with hard data on their design and performance 
because the industries manufacturing the technologies were not 
comfortable in releasing information about their individual designs. 
Nevertheless, we did not simply accept stakeholders' views at face 
value, but where possible, assessed the basis for their opinions, such 
as reviewing available studies and reports on the technologies. We also 
disagree with EPA's assertion that we did not consider additional 
information and evidence that agency program managers provided to us 
late in the course of our work after reviewing a draft summary of the 
facts to be used in the report. At that time, EPA provided extensive 
written comments on the summary, along with a number of press releases 
from engine manufacturers and trade press articles. In response, we 
spent considerable time carefully assessing all of this information and 
made a number of changes to the report where appropriate. However, the 
agency did not provide any additional quantitative data or other 
information that would allow us to better evaluate the stakeholders' 
positions.

We also disagree with several EPA assertions that the report overstated 
the technological challenges to successfully delivering the necessary 
fuel and engines on time. In this regard, we devote considerable 
narrative to the views of the agency and all the stakeholders who share 
these views that both technologies are on track. However, we were 
obligated to acknowledge some stakeholders' concerns over the remaining 
technological risks and questions. In addition, we include the most 
current information possible on technological developments in our 
report. For example, after several manufacturers announced by February 
2004 their plans to have a limited number of prototype engines ready 
for testing in 2005, we re-contacted the trucking company 
representatives to determine the extent to which these announcements 
addressed their concerns.

Additionally, we acknowledge that EPA deserves credit for its 
activities to work with various stakeholders to help ensure that the 
technologies will be ready in time and we devote considerable narrative 
to describing these activities in the report. We are also very careful 
to give a balanced presentation of the stakeholders' opinions about 
EPA's activities and therefore were obligated to acknowledge that some 
stakeholders questioned the agency's openness to their concerns and 
willingness to address them. For example, we note in the report that 
EPA officials acknowledged the agency initially did not invite anyone 
from the trucking industry to participate on the 2002 Clean Diesel 
Independent Review Panel and only did so after the industry lobbied the 
agency.

Finally, with regard to EPA's comments on our recommendations, we want 
to emphasize that we are recommending that the agency consider 
additional steps to alleviate the remaining concerns raised by 
stakeholders, avoid a significant pre-buy of older engines, and better 
guarantee that the emissions and health benefits are achieved. We 
suggest actions for the agency to consider, but do not intend to limit 
the agency to the alternatives we suggested, especially if it could 
design more effective solutions. In this light, with regard to 
financial incentives, we recognize that the Congress must provide the 
agency direction and funding for such an approach, but expect that it 
would also look to the agency to play a role, such as making the 
initial proposal for incentives or helping to determine their merits 
and costs. As to convening an independent review panel, we do not 
believe that this would unduly delay the schedule for implementing the 
standards. In addition, we believe a panel could help address 
stakeholders' remaining concerns, thereby helping to prevent a repeat 
of the negative impacts from the 2002 consent decrees and instead 
ultimately ensure that the critical emissions and health benefits 
anticipated from the 2007 standards are achieved in a timely manner.

Appendix III contains the text of EPA's letter along with our detailed 
responses to the issues raised. EPA also provided some technical 
comments, which we have incorporated as appropriate.

We are sending copies of this report to the Chairman and Ranking 
Minority Member of the Senate Appropriations Committee and its 
Subcommittee on VA, HUD, and Independent Agencies; the Senate Committee 
on Environment and Public Works; the Senate Committee on Commerce, 
Science, and Transportation; the House Appropriations Committee and its 
Subcommittee on VA, HUD, and Independent Agencies; the House Committee 
on Energy and Commerce; the House Committee on Transportation and 
Infrastructure; the House Committee on Government Reform and its 
Subcommittee on Energy Policy, Natural Resources, and Regulatory 
Affairs; other interested members of Congress; the Administrator, EPA; 
the Director of the Office of Management and Budget; and other 
interested parties. We will also make copies available to others upon 
request. In addition, the report will be available at no charge on 
GAO's Web site at [Hyperlink, http: //www.gao.gov]. If you have any 
questions about this report, please contact me at (202) 512-3841. Key 
contributors to this report are listed in appendix IV.

Signed by: 

John B. Stephenson: 
Director, Natural Resources and Environment: 

List of Congressional Requesters: 

The Honorable Roscoe Bartlett; 
The Honorable John Boozman; 
The Honorable Mac Collins; 
The Honorable Barbara Cubin; 
The Honorable Sam Graves; 
The Honorable Mark Green; 
The Honorable Melissa A. Hart; 
The Honorable Ernest Istook; 
The Honorable Walter B. Jones; 
The Honorable Ray LaHood; 
The Honorable Jim McCrery; 
The Honorable C. L. "Butch" Otter; 
The Honorable Mike Rogers; 
The Honorable Jim Ryun; 
The Honorable John Shadegg; 
The Honorable John Shimkus; 
The Honorable Bill Shuster; 
The Honorable Mark Souder; 
The Honorable Lee Terry: 
 
House of Representatives: 

[End of section]

Appendixes: 

Appendix I: Scope and Methodology: 

Our objectives in this review were to determine (1) the effects, if 
any, of EPA's 1998 consent decrees with diesel engine manufacturers on 
trucking companies, engine manufacturers, and expected emissions 
reductions; (2) stakeholders' views on industries' ability to comply 
with the 2007 standards and EPA's actions to ensure that the new engine 
technologies and low-sulfur fuel will be ready in time; and (3) if not, 
EPA's options and plans for mitigating any potential negative effects 
on key industry sectors.

To address the first objective, we performed econometric modeling using 
data on new Class 8 diesel truck production, GDP, and diesel fuel 
prices from January 1992 through June 2003 to determine the extent to 
which Class 8 truck purchases may have been associated with the consent 
decrees. We assessed the reliability of these data by reviewing 
existing information about the data as well as some testing of the 
truck data for obvious errors. In addition, we had discussions with the 
vendor concerning the reliability of the truck data. We determined that 
the data were sufficiently reliable for purposes of this review. 
Details of our methodology for this specific analysis are included in 
appendix II.

In addition, we contacted, among others, officials of ten of the 
nation's largest trucking companies as defined by the number of trucks 
in their fleets (see table 4).

Table 4: Ten Large Trucking Companies Involved in Freight 
Transportation in 2002: 

Truck company: Ryder Systems, Incorporated; 
Number of trucks in fleet: 52,400.

Truck company: US Freightways Corporation; 
Number of trucks in fleet: 21,200.

Truck company: Penske Truck Leasing Corporation; 
Number of trucks in fleet: 19,562.

Truck company: Schneider National, Incorporated; 
Number of trucks in fleet: 14,000.

Truck company: Swift Transportation Company, Incorporated; 
Number of trucks in fleet: 12,748.

Truck company: Roadway Corporation; 
Number of trucks in fleet: 12,300.

Truck company: Yellow Corporation; 
Number of trucks in fleet: 11,657.

Truck company: FedEx Corporation; 
Number of trucks in fleet: 11,203.

Truck company: J.B. Hunt Transport Services, Incorporated; 
Number of trucks in fleet: 10,770.

Truck company: United Parcel Service, Incorporated; 
Number of trucks: in fleet: 10,300.

Total; Number of trucks in fleet: 176,140.

Source: American Trucking Associations.

[End of table]

We identified these companies from data provided by the American 
Trucking Associations (ATA), an organization representing the majority 
of the trucking companies involved in freight transportation. Because 
ATA could not identify which of its member companies had purchased 
engines in the months before and immediately after October 2002, GAO 
and ATA agreed that the largest trucking companies, as determined by 
the total number of trucks in their fleets, were more likely than 
smaller companies to have purchased trucks during that period and, 
therefore, would be in the best position to recount their experience 
with both the new engines and the impacts of the accelerated schedule. 
ATA provided us with a list of 48 of their member companies with truck 
fleets ranging from a high of over 52,000 trucks to a low of 60 trucks. 
From this list, we selected those ten companies that each had fleets of 
over 10,000 trucks in 2002. (This 10,000-truck level provided a natural 
breaking point in the data, since the next largest company owned about 
8,400 trucks.) These 10 companies accounted for a total of 176,000 
trucks, 3 percent of the total truck inventory in 2002. Because these 
companies were not selected randomly, we cannot project our findings to 
the entire trucking industry. We asked the representatives of these 
companies a uniform set of questions about the companies' strategies in 
reacting to the decrees, the effects of the decrees on their 
operations, and their experiences with the new engines designed to 
comply with the decrees. We also reviewed financial statements some of 
these companies submitted to the Securities and Exchange Commission to 
identify effects that the companies publicly disclosed.

In addition, to determine the effects of accelerating implementation of 
the 2004 standards on the engine manufacturing industry, we contacted 
officials of the seven engine manufacturers that were subject to the 
consent decrees. These companies included Caterpillar Incorporated, 
Cummins Engine Company, Detroit Diesel Corporation, Mack Trucks 
Incorporated, Navistar International Transportation Corporation, 
Renault Vehicules Industriels, s.a., and Volvo Truck Corporation.

As with the trucking companies, we asked the representatives of these 
engine manufacturers questions about their companies' strategies with 
regard to the decrees, the decrees' effects on their operations, and 
the performance of the new engines. We also reviewed some of these 
manufacturers' Securities and Exchange Commission submissions. While we 
asked these companies for data to support their statements about the 
effects of the decrees, generally they said that it would be 
detrimental to reveal information about their business operations or 
technology designs because it might harm their competitive positions 
relative to other companies. We also did not identify any other 
independent analyses of the impacts of the consent decrees.

To determine the air quality effects of the decrees, we reviewed EPA's 
1998 projections of the emissions reductions expected from accelerating 
the schedule, based on its estimate of the number of trucks that would 
have the new engines. We compared this to data on the actual number of 
trucks with new engines to assess the likelihood that EPA would achieve 
the expected emissions reductions. We also discussed with EPA officials 
and staff the basis for their estimates of the expected emissions 
reductions from a second provision of the consent decrees, whereby 
truck owners would have emission computer controls on their older 
engines adjusted during engine overhauls.

To respond to the second objective, we contacted officials representing 
16 organizations and companies from among those that offered the 
largest number of comments on EPA's 2007 emissions standards when 
proposed in 2000 (see table 5).

Table 5: Stakeholders Providing the Most Comments on EPA's Proposed 
2007 Diesel Emissions Rule and the Number of Issues Addressed by Each: 

Organizations/companies commenting on 2007 rule: Alliance of Automobile 
Manufacturers; 
Industry/affiliation: Automobile industry; 
Number of issues addressed: 40.

Organizations/companies commenting on 2007 rule: American Lung 
Association; 
Industry/affiliation: Environmental/health; 
Number of issues addressed: 103.

Organizations/companies commenting on 2007 rule: American Petroleum 
Institute; 
Industry/affiliation: Fuel industry; 
Number of issues addressed: 128.

Organizations/companies commenting on 2007 rule: American Trucking 
Associations; 
Industry/affiliation: Trucking/carrier; 
Number of issues addressed: 24.

Organizations/companies commenting on 2007 rule: Cummins Engine 
Company; 
Industry/affiliation: Engine manufacturing; 
Number of issues addressed: 78.

Organizations/companies commenting on 2007 rule: Detroit Diesel 
Corporation; 
Industry/affiliation: Engine manufacturing; 
Number of issues addressed: 39.

Organizations/companies commenting on 2007 rule: Engine Manufacturers 
Association; 
Industry/affiliation: Engine manufacturing; 
Number of issues addressed: 125.

Organizations/companies commenting on 2007 rule: Environmental 
Defense; 
Industry/affiliation: Environmental/health; 
Number of issues addressed: 31.

Organizations/companies commenting on 2007 rule: Navistar International 
Transportation Corporation; 
Industry/affiliation: Engine manufacturing; 
Number of issues addressed: 51.

Organizations/companies commenting on 2007 rule: Manufacturers of 
Emissions Controls Association; 
Industry/affiliation: Emissions control equipment manufacturing; 
Number of issues addressed: 34.

Organizations/companies commenting on 2007 rule: Marathon Ashland 
Petroleum; 
Industry/affiliation: Fuel industry; 
Number of issues addressed: 105.

Organizations/companies commenting on 2007 rule: National Petrochemical 
and Refiners Association; 
Industry/affiliation: Fuel industry; 
Number of issues addressed: 58.

Organizations/companies commenting on 2007 rule: Natural Resources 
Defense Council; 
Industry/affiliation: Environmental/health; 
Number of issues addressed: 44.

Organizations/companies commenting on 2007 rule: Northeast States for 
Coordinated Air Use Management; 
Industry/affiliation: State/local government; 
Number of issues addressed: 35.

Organizations/companies commenting on 2007 rule: State and Territorial 
Air Pollution Program Administrators/ Association of Local Air 
Pollution Control Officials; 
Industry/affiliation: State/local government; 
Number of issues addressed: 48.

Organizations/companies commenting on 2007 rule: Western Independent 
Refiners Association; 
Industry/affiliation: Fuel industry; 
Number of issues addressed: 27. 

Source: GAO analysis of EPA data.

[End of table]

We identified these stakeholders by first reviewing the list of 
organizations/persons commenting on EPA's proposed 2007 rule during the 
public comment period in 2000. EPA recorded over 700 separate comments 
on various issues relating to the rule. We used the number of issues on 
which individual organizations commented, as determined by EPA, as a 
proxy for the level of interest or concern by these organizations 
regarding EPA's 2007 rule. From EPA's response document, we identified 
over 500 separate commenters, ranging from individual citizens, local 
interest groups, and companies to national organizations representing 
major industries and environmental, health, and other interests. Using 
this information, we placed commenters in general categories reflecting 
the interests they represented, for example, the fuel industry or 
environmental and health interests. Within each category, we ranked the 
commenters based on the total number of issues on which each commented. 
From each category, we generally selected those commenters who 
addressed more than 25. This approach eliminated all but 21 of the more 
than 500 commenters.

We then made several modifications to this list. First, we made an 
exception to retain the ATA, which commented on 24 issues, but which 
represents a large segment of the trucking industry, a key stakeholder 
affected by the 2007 rule. We also eliminated two commenters who 
represented agriculture interests, but addressed more than 25 issues 
because agricultural issues were not relevant to our review. Finally, 
we eliminated from our list most individual companies whose interests 
are represented by national organizations that were also on the list of 
contacts. We made this decision on the assumption that the national 
organization would reflect the concerns of the individual member 
companies that also commented. However, we included in our list 
Marathon Ashland Petroleum because of the large number of issues on 
which this company commented, although an organization representing its 
interests was also included. We also included Cummins, Incorporated; 
Detroit Diesel Corporation; and Navistar International Truck and Engine 
Corporation, three of the original seven engine manufacturers who were 
subject to the consent decrees, primarily because we wanted to discuss 
the effects of the decrees on their industry and took the opportunity 
to discuss issues relating to the 2007 standards as well.

In addition to the 16 organizations and companies identified through 
this process, we also contacted representatives of the refining and 
distribution sectors of the fuel industry to ensure that we had a broad 
range of views. These sectors did not appear to be represented among 
the commenting stakeholders, despite their key role in implementing the 
2007 rule. These organizations included the Association of Oil Pipe 
Lines, the Independent Fuel Terminal Operators of America, the 
Independent Liquid Terminals Association, the Petroleum Marketers 
Association of America, and the Society of Independent Gasoline 
Marketers of America.

We asked all of these stakeholders to provide their views on whether 
the technologies needed to meet the 2007 standards would be available 
on time. We took a number of steps to try to assess the basis of 
support for stakeholders' views about the readiness of technology to 
meet the 2007 standards. First, we asked each engine manufacturer that 
we contacted if the company could provide us with data to demonstrate 
the status of technology development. However, the representatives said 
that it would be detrimental to reveal information about their 
technology designs or business operations because it might harm their 
competitive positions relative to other companies. Alternatively, we 
evaluated the stakeholders' positions by considering publicly available 
information, including studies and reports issued on the technologies 
and on the development of the standards.

Because the representatives of the trucking companies we contacted had 
views about the availability, readiness, and costs of the engines for 
2007 that differed from the other stakeholders, we took some additional 
steps to assess the basis of their views. For example, we asked the 
engine manufacturers and EPA officials to respond to the concerns 
raised by the trucking representatives, and where the manufacturers' 
and agency's views differed, we reflected them and the basis of their 
comments in the report for balance. We also considered the information 
we collected and the analyses we conducted in regard to the impacts of 
the 2002 consent decrees to determine if they offered any perspectives 
on the trucking industry's concerns about meeting the 2007 standards. 
For example, we used the information showing that: (1) the industry 
pre-bought older engines prior to October 2002 because companies did 
not have engines in time to test their reliability and possible costs; 
(2) companies that had bought the new engines determined both the 
purchase price, and operations and maintenance costs, were higher than 
estimated and anticipated; and (3) EPA developed its estimate of what 
it would cost to buy and operate new engines for 2007 in 2000, before 
technology designs were completed and selected to assess the trucking 
representatives' concerns about meeting the 2007 standards. We also 
used the information obtained from the engine manufacturers to assess 
the trucking industry's concerns about how soon test engines would be 
available, such as the fact that manufacturers were 6 months behind 
schedule in selecting the technology they would use to meet the 
standards.

We also asked all of the stakeholders we contacted to provide their 
views on EPA's efforts to ensure that the needed engine and fuel 
technologies will be available by 2007. We obtained information from 
EPA on their activities in this regard and provided a summary of these 
activities to the stakeholders we contacted and asked them for their 
views on the effectiveness of these efforts. We also discussed with the 
Director of EPA's Office of Transportation and Air Quality as well as 
program managers from the agency's Office of Air and Radiation (in 
Washington, D.C., and Ann Arbor, Michigan), their activities to ensure 
timely compliance with the standards, as well as their plans if the 
standards cannot be implemented on schedule.

We conducted our work between January 2003 and February 2004 in 
accordance with generally accepted government auditing standards.

[End of section]

Appendix II: Analysis of Class 8 Truck Production Data: January 1992 
through June 2003: 

This appendix describes the econometric models we used to analyze the 
relationship between EPA's 1998 consent decrees with diesel engine 
manufacturers and subsequent demand for Class 8 trucks. We used 
quarterly data on U.S. and Canadian production of heavy-heavy-duty 
diesel trucks (classified by the industry as Class 8 trucks) for the 
years 1992 through 2003.[Footnote 19] We also accounted for the 
possible effects of gross domestic product (GDP), diesel fuel prices, 
and seasonal factors on truck demand in our analysis.

After applying standard econometric techniques to control for possible 
biases in our analysis, we found that there was a significant increase 
in Class 8 truck production, ranging from about 19,000 to 24,000 
trucks, in the 6 months before October 2002, which may be associated 
with EPA's consent decrees. These amounts represent 20 percent to 26 
percent of the total 93,000 Class 8 diesel trucks produced in U.S. and 
Canadian plants during that 6-month period.

Theoretical Framework: 

To describe how EPA's consent decrees may have affected truck demand, 
we defined a binary variable, CD. CD takes the value of one for the 6-
month period prior to October 2002 and the value of zero otherwise. In 
addition, since truck demand is likely to be seasonal, related to the 
strength of the economy, and related to diesel fuel prices, we included 
these three factors in our basic model.[Footnote 20]

[See PDF for formula]

[End of figure]

where b0, b1, b2,b3,g1,g2, and g3 are coefficients to be 
estimated. Qt, DGDPt, and DPt denote quarterly truck 
production,[Footnote 21] annualized growth rate of real GDP, and real 
diesel fuel prices, respectively. T1, T2, and T3 are binary 
variables, which, like CD, take values of one for specified quarters 
but the value of zero otherwise. The three binary variables, T1, T2, 
and T3, are used to account for likely recurrent quarterly 
fluctuations in truck production. et is a random error, to which all 
standard assumptions apply; t is the index for time period.

The GDP is an important indicator of the strength of the economy, which 
can be used by truck operators to gauge the strength of future demand 
for their services. We expect truck operators to purchase more trucks 
in response to a strong economy and vice versa, which implies a 
positive b1 in equation (1). On the other hand, we expect truck 
operators to delay truck purchases if diesel fuel prices are 
increasing, because of the importance of fuel in operating trucks. As a 
result, we expect b2 in equation (1) to be negative. Following the same 
reasoning, if companies pre-bought so that truck production increased 
in the 6 months prior to EPA's consent decrees, the coefficient of CD, 
b3, will be positive in equation (1).

The basic model, as depicted by equation (1), may yield a biased 
estimate of the coefficient of CD, b3, because it does not account for 
effects that may arise when the different factors interact with each 
other over time. To account for these possible effects, we revised the 
basic model (1) by assuming an autoregressive process of degree one, 
AR(1),[Footnote 22] and by including in the basic model (1) several 
lagged variables as below: 

[See PDF for formula]

[End of figure]

Including AR(1) in models (2) through (4) allows us to account for the 
possible temporal correlation or autocorrelation of factors that we did 
not consider--for example, truck insurance premiums and used truck 
prices, among other factors--with GDP or fuel prices. We included Qt-1, 
as in model (3), because truck production in the current period is 
closely associated with production in previous periods. In model (4), 
we included the lagged GDP growth rate, DGDPt-1, and fuel prices, DPt-
1, in the previous period because truck operators may purchase more 
trucks in response to strong growth rates in GDP in previous periods, 
and they may delay truck purchases when diesel fuel prices have been 
increasing in previous periods.

Data Used in the Estimation: 

Data on Class-8 Truck Production in U.S. and Canadian Factories: 

Although EPA's consent decrees directly affected the cost and 
engineering of diesel engines, data on diesel engine prices were not 
available. Therefore, we used data on quarterly Class-8 truck 
production in the United States and Canada from 1992 through June 
2003.[Footnote 23] Most of these Class-8 trucks--vehicles weighing more 
than 33,001 pounds--are powered by diesel engines that are subject to 
EPA's consent decrees. These data were obtained from a commercial 
company, Ward's Communications.

GDP and Diesel Fuel Prices: 

We obtained data on GDP from the Bureau of Economic Analysis (BEA) 
within the Department of Commerce. We computed retail diesel fuel 
prices using data on wholesale diesel fuel prices from the U.S. Energy 
Information Administration within the Department of Energy, and the 
weighted state tax and federal tax on diesel from the Federal Highway 
Administration (FHA) within the Department of Transportation. In 
addition, we adjusted diesel fuel prices to 1996 price levels to 
account for inflation within the study periods using GDP chain-price 
levels.[Footnote 24]

Other Data We Used: 

According to truck manufacturers we contacted, EPA's consent decrees 
have resulted in higher prices for new trucks equipped with compliant 
diesel engines. The higher prices may increase demand for substitutes, 
such as trucks with noncompliant engines or used trucks. In order to 
account for pricing effects on truck demand, we used the Class-8 truck 
PPI from BLS because actual truck prices data were not available.

In addition to using GDP in our analysis, we used the American Trucking 
Association's (ATA) truck tonnage index and the GDP less expenditures 
on services as alternative measures for GDP. These two indicators are 
more closely related to truck production than GDP.

Table 6 shows descriptive statistics of the three key variables used in 
the estimation.

Table 6: Descriptive Statistics of Variables Used in Our Analysis: 

Mean; 
Quarterly truck production in the United States and Canada: 51,918; 
Annualized GDP growth rate at 1996 price levels: 3.13; 
Retail diesel price at 1996 price levels: 118.55.

Median; 
Quarterly truck production in the United States and Canada: 51,280; 
Annualized GDP growth rate at 1996 price levels: 3.09; 
Retail diesel price at 1996 price levels: 116.31.

Maximum; 
Quarterly truck production in the United States and Canada: 78,530; 
Annualized GDP growth rate at 1996 price levels: 6.89; 
Retail diesel price at 1996 price levels: 146.67.

Minimum; 
Quarterly truck production in the United States and Canada: 32,154; 
Annualized GDP growth rate at 1996 price levels: -1.60; 
Retail diesel price at 1996 price levels: 92.99.

Standard deviation; 
Quarterly truck production in the United States and Canada: 13,480; 
Annualized GDP growth rate at 1996 price levels: 2.06; 
Retail diesel price at 1996 price levels: 11.59.

Number of observations; 
Quarterly truck production in the United States and Canada: 45; 
Annualized GDP growth rate at 1996 price levels: 45; 
Retail diesel price at 1996 price levels: 45. 

[End of table]

Discussion of Results of Analysis: 

Table 7 presents the results of our analysis using total quarterly 
class-8 truck production in the United States and Canada as the 
dependent variable.

Table 7: Results of Selected Specification (t-statistics in 
parentheses): 

Model: Constant; 
(1): 98201.29[Statistical significance at the 1% level]; (4.45); 
(2): 75056.79[Statistical significance at the 1% level]; (4.42); 
(3): 33086.15[Statistical significance at the 1% level]; (2.88); 
(4): 82488.69[Statistical significance at the 1% level]; (3.6).

Model: T(sub)1; (2nd quarter); 
(1): 1563.85; (0.30); 
(2): 2193.17; (1.62); 
(3): 2004.48[Statistical significance at the 10% level]; (1.78); 
(4): 2314.14; (1.54).

Model: T(sub)2; (3rd quarter); 
(1): 71.51; (0.013); 
(2): -832.04; (-0.54); 
(3): -3279.56[Statistical significance at the 5% level]; (-2.44); 
(4): -800.93; (-0.48).

Model: T(sub)3; (4th quarter); 
(1): -1646.69; (-0.30); 
(2): -2.56; (- 0.0018); 
(3): -160.96; (-0.14); 
(4): -230.52; (-0.15).

Model: Q(sub)t-1; 
(1): No results; 
(2): No results; 
(3): 0.77[Statistical significance at the 1% level]; (5.77); 
(4): No results.

Model: DeltaGDP(sub)t; 
(1): 1607.96; (1.57); 
(2): 309.53; (0.99); 
(3): 455.49[Statistical significance at the 10% level]; (1.76); 
(4): 482.32; (1.23).

Model: DeltaGDP(sub)t-1; 
(1): No results; 
(2): No results; 
(3): No results; 
(4): 231.26; (0.58).

Model: DP(sub)t; 
(1): -431.08[Statistical significance at the 5% level]; (-2.47); 
(2): -186.19; (No results1.63); 
(3): - 186.67[Statistical significance at the 5% level]; (-2.37); 
(4): -148.48; (-1.19).

Model: DP(sub)t-1; 
(1): No results; 
(2): No results; 
(3): No results; 
(4): -112.06; (-0.92).

Model: CD; 
(1): -5529.72; (-0.60); 
(2): 10099.04[Statistical significance at the 5% level]; (2.7); 
(3): 12015.87[Statistical significance at the 1% level]; (4.02); 
(4): 9397.99[Statistical significance at the 5% level]; (2.42).

Model: AR(1); 
(1): No results; 
(2): 0.92[Statistical significance at the 1% level]; (15.46); 
(3): 0.62[Statistical significance at the 1% level]; (2.74); 
(4): 0.91[Statistical significance at the 1% level]; (13.56).

Model: Adj. R[squared]; 
(1): 0.153; 
(2): 0.871; 
(3): 0.933; 
(4): 0.862.

Model: DW statistic; 
(1): 0.352; 
(2): 0.839; 
(3): 1.945; 
(4): 0.945.

Model: Number of; observations; 
(1): 45; 
(2): 44; 
(3): 44; 
(4): 43. 

Source: GAO analysis.

[End of table]

In addition, we performed various analyses using alternative 
combinations and definitions of variables to test if our analysis 
results are sensitive to the choices of variables.[Footnote 25] The 
range of estimates produced using model specifications (2) through (4) 
also do not vary much with respect to what choices of variables we 
considered in the analysis.

Results of Model (1): 

In the basic model (1), only the diesel price in the current period, 
DPt, and the constant term, C, are statistically significant. The low 
value of the adjusted R-squared statistic, (0.153), suggests that much 
of the variation of Qt is not explained by the included variables. In 
addition, the Durbin-Watson (DW) statistic of 0.352, which is less than 
the critical value of 1.019 for a sample size of 45 with 7 explanatory 
variables at the 1 percent significance level, suggests a strong 
positive autocorrelation of residuals between the current and previous 
periods.

Results of Model (2): 

We controlled for the possible autocorrelation, suggested by the low DW 
statistic in model (1), by modeling the error term as a first-order 
autoregressive process, AR(1), in model (2). As shown in table 7, the 
adjusted R2 statistic improves significantly to 0.87, explaining more 
of the variation in truck production. The DW statistic also improves 
significantly to suggest the effectiveness of AR(1) correction for the 
error terms and indicates a positive autocorrelation of residuals 
between the current and previous periods.[Footnote 26] More 
importantly, only the coefficient of CD and the constant term are 
statistically significant, suggesting an increase of 20,198 (the 
coefficient 10,099 multiplied by 2) Class-8 trucks in the 6 months 
prior to EPA's consent decrees. This increase in truck production may 
be associated with the decrees.

Results of Model (3): 

For model (3), we added truck production in the previous period, Qt-1, 
to model (2) to account for the effects of truck inventories. As a 
result, CD's coefficient increases. The coefficient of DGDPt increased 
appreciably and becomes statistically significant. The coefficient of 
DPt changes little and also becomes statistically significant. The 
coefficient of Qt-1 is positive and statistically significant, 
suggesting that an increase in truck production in the previous period 
is likely to be followed by an increase in production in the current 
period. The high-adjusted R2 statistic of 0.933 also suggests that much 
of the variation of Qt is explained by the included variables. The DW 
statistic of 1.945 unambiguously suggests that including truck 
production in the previous period can adequately account for the 
autocorrelation in the error terms.[Footnote 27]

Results of Model (4): 

In model (4), we added DGDPt, and DPt of previous periods to model (2) 
because they also may be good indicators of truck production in the 
current period. Compared to model (3), including the additional lagged 
variables to model (2) does not enable us to explain more of the 
variation in truck production as suggested by a decreasing adjusted R2 
statistic. Like model (2), the DW statistic of model (4) indicates that 
autocorrelation is still present.

The results of models (2) through (4) suggest that the coefficient of 
CD is fairly robust to the choice of variables used in the estimation. 
They also suggest that EPA's consent decrees may be associated with a 
significant increase in truck production from March through September 
2002, the 6 months prior to implementation of the pull-ahead provision 
of the consent decrees.

Limitation: 

Our analysis considers only the truck operators' strategy of 
accelerating their purchases, or pre-buy, in the 6 months leading up to 
EPA's consent decrees. Truck operators could also comply with EPA's 
consent decree by buying used trucks, having existing engines 
remanufactured, or extending the life of the existing fleet. Any of 
these responses would have resulted in lower truck production. However, 
in the absence of data on these other strategies, our analysis does not 
assess the full extent of the effects of EPA's consent decrees on truck 
operators' business operations.

[End of section]

Appendix III: Comments from the Environmental Protection Agency: 

UNITED STATES ENVIRONMENTAL PROTECTION AGENCY: 
WASHINGTON, D.C. 20460:

February 24, 2004:

OFFICE OF AIR AND RADIATION: 

Mr. John B. Stephenson:

Director, Natural Resources and Environment: 
United States General Accounting Office: 
Washington, DC 20548:

Dear Mr. Stephenson:

Thank you for your letter of February 3, 2004, to Administrator Leavitt 
providing a draft copy of the report, "EPA Could Maximize the Benefits 
from the 2007 Diesel Emissions Standards By Better Addressing Industry 
Concerns." The 2007 Clean Diesel Program for fuel and engines 
is among the top environmental priorities for this Administration. The 
health and economic benefits from the program far outweigh the costs. 
In recent weeks, Administrator Leavitt and I have been working to 
highlight this program and to reiterate the Administration's commitment 
to its successful implementation. We appreciate the opportunity to 
comment on the draft report.

In many key respects, the report is consistent with our assessment of 
the situation leading up to the implementation of the 2007 standards. 
For example, the draft report accurately states that "Stakeholders 
designing new emissions control, engine, and fuel technologies say they 
will be ready. " "All of the engine manufacturers reported that they 
expect to have engines ready by 2007. " "The [fuel] representatives 
agreed that EPA should make no changes to the 2007 rules implementation 
dates and low sulfur diesel fuel requirements. "	These statements - 
which reflect the views of the companies that must comply with the 2007 
program - are consistent with our own analysis of the progress that 
these industries have made in complying with the new standards.

When we heard that GAO was undertaking its own study of the 2007 
program, we hoped that GAO would carefully analyze the concerns being 
expressed by some trucking companies. We have worked with GAO over the 
last year providing detailed information on the program because we 
recognized the value that this report could have in providing 
additional reassurance to the trucking industry.

I must say, however, that we were disappointed to see that, instead of 
analyzing the validity of trucking industry concerns, the draft report 
is much more limited. For the most part, it simply repeats those 
concerns, and then explains why EPA, engine makers, and the fuel 
suppliers believe that those concerns are not valid. In many instances, 
the report goes on at great length about the truckers concerns and then 
only briefly summarizes all the work that has been done to address 
those concerns. As a result, the report will leave some readers with 
the incorrect impression that there is substantial uncertainty about 
the readiness of engine makers and fuel 
suppliers to meet the 2007 standards. This is not supported by the 
statements and actions of the regulated industries as they prepare for 
2007 implementation.

Your staff provided an early draft of a statement of facts to the 
Agency for review in December 2003. In response, we provided extensive 
comments to GAO including detailed information and evidence regarding a 
number of the issues raised in the statements of some stakeholders. We 
hoped that GAO would use this information, and other information it had 
gathered, to test the validity of claims made by some in the trucking 
industry. We appreciate the fact that GAO removed the most blatantly 
erroneous statements, but we are disappointed that the draft report 
still leaves other statements unquestioned and unverified. This 
relegates EPA's extensive rulemaking record and subsequent studies and 
analyses to mere opinions and then juxtaposes them to the opinions of 
others, well founded or not. A few examples are highlighted in this 
letter, but we believe that the whole report would be much more useful 
if it actually evaluated the merits of the various stakeholder 
opinions, rather than simply restating them.

GAO's Description of Engine Manufacturer Readiness for 2007:

The Agency has invested considerable effort to be fully engaged with 
the engine industry and to understand well the state of technology 
progress for 2007. It is clear from our work, and further evidenced by 
the public statements from the major engine manufacturers, that the 
heavy duty trucking industry is well positioned to meet the standards 
on time in 2007. Given these very clear statements from the industry, 
the overall negative tone of the report in describing readiness for 
2007 is surprising and potentially misleading.

The report makes a number of characterizations regarding engine 
manufacturer plans for early fleet testing in 2005, but it should also 
clearly state that all major engine makers have committed to having 
test engines ready for customers by certain dates. We think it would 
be better to be clear. Volvo has said it will have early test vehicles 
in fleets by spring 2005.[NOTE 1] Mack has said by mid-2005.[NOTE 2] 
Cummins has said by mid-2005.[NOTE 3] Caterpillar has said by mid-
2005.[NOTE 4] Detroit Diesel has said by mid-2005.[NOTE 5] Within the 
last few days, we have called each of these manufacturers, and they all 
assure us that they plan to meet these commitments. We do not see how 
clear statements regarding readiness from the regulated industry can be 
construed in any 
way other than to conclude the engine manufacturers will be providing 
the trucking industry with test vehicles well in advance of the 2007 
deadline. This is our conclusion based on our understanding of the 
technical details and the clear statements of the engine manufacturers.

The draft report also accepts without analysis or question the premise 
that trucking companies must have test vehicles no later than June 30, 
2005 for evaluation. The report further creates the impression that 
failure to deliver against this date is somehow indicative of an engine 
industry that is behind in its preparations for 2007. We do not 
understand why GAO believes that June 30 is a critical deadline. In 
this regard, the report simply appears to accept the views of one set 
of stakeholders without any analysis or discussion of standard 
practices within the industry.

We (and more importantly, the engine makers) understand that trucking 
companies would like to have as much time as possible to evaluate the 
new engines for reliability and fuel efficiency under all conditions. 
We are working with all stakeholders (including engine manufacturers, 
which already have a strong incentive to satisfy their customers) on 
the introduction of test engines and sufficient amounts of 15 ppm fuel 
by mid-2005. EPA, engine makers, and fuel suppliers are all highly 
confident that this goal will be met.

GAO's Description of Oil Industry Issues:

Here, as with engine readiness, the strongly negative tone of the 
report is surprising given the clear indications from the regulated 
industry. We agree that there are a number of technical challenges 
related to the production and distribution of 15 ppm sulfur fuel 
throughout the country. In fact, we detailed these challenges in the 
2007 rulemaking and clearly stated how we believed they would be 
addressed in the coming years. Further, we have continued to work 
closely with the industry to address implementation issues (e.g., 
sulfur measurement methods). Thus, when refining industry 
representative plainly say that their industry will be ready in 2007 
and that they do not desire any changes to the program, they are making 
these statements based on complete knowledge of the issues they face. 
They know the challenges and are confident that they will successfully 
overcome them on time. Yet the report leaves the reader with the 
incorrect impression that the challenges are overly daunting and that 
the industry is unable to address them. This impression is simply 
wrong.

We provided to GAO a copy of our summary pre-compliance report 
detailing the industry's own refiner by refiner estimates of production 
volumes for 2007. The report aggregates each refiner's own estimates 
for 2007 and finds that overall diesel fuel volumes will match the 
projected demand for 2007 and that more than 95% of diesel fuel volume 
will be 15 ppm sulfur diesel fuel. These conclusions reflect the 
industry's own best estimate of what will happen in 2007. As currently 
drafted, the report implies that EPA's summary pre-compliance report is 
merely EPA's opinion, rather than the industry's own predictions for 
2007.

Intentionally or otherwise, the GAO report in repeating the 
implementation challenges creates the impression that these are 
predictions by industry of likely outcomes. There is a very important 
difference between a concern that industry will work to address and a 
prediction that these concerns will come to pass. Industry's 
projection, clearly stated in its own pre-compliance data submissions, 
are that these challenges will be addressed and the program can and 
should be implemented on time.

GAO Draws an Inappropriate Comparison Between the Consent Decrees and 
2007:

The report suggests that the 2002 heavy-duty engine consent decree 
experiences are in some way representative of GAO's expectations for 
2007. Whether this is GAO's opinion or simply the result of GAO's 
attempts to characterize the opinions of some in the trucking industry 
opinions, it is simply wrong. The consent decree process was 
significantly different from a rulemaking process and was substantially 
distorted by the long term use of defeat devices that masked the cost 
of compliance with emission regulations since 1988.	These differences 
are clear and important to understanding what can be learned from the 
2002 experience. The 2007 program, as contrasted to the consent 
decrees, was developed through a public rulemaking process, contains 
substantial lead-time, and includes a number of flexibilities for the 
regulated industries designed to facilitate implementation. We believe 
GAO should not simply accept the opinions of some that the 2002 
experience is telling for 2007. Instead, it should critically analyze 
this proposition in light of the substantial differences between the 
2002 consent decrees and the 2007 rulemaking.

The Draft Report Incorrectly Suggests that the Agency.Has Not Engaged 
Industry:

Especially troubling are the suggestions in the report that the Agency 
failed to engage the trucking industry in the 2007 rulemaking process, 
and further that the Agency did not appropriately consider the issues 
raised by the industry in developing the HD 2007 rule. EPA takes 
particular pride in its outreach efforts to all stakeholders and is 
diligent in its work to address the concerns of stakeholders in 
developing regulatory programs. I personally take the Agency's 
responsibility to engage stakeholders very seriously. To suggest that 
stakeholders were unrepresented in the 2007 rulemaking process is 
simply inaccurate.

GAO's Recommendations for EPA:

Based on the stakeholder opinions summarized in the report, GAO 
suggests that the Agency consider two possible actions: 1) to consider 
creating another independent panel to address the trucking industries 
concerns regarding the readiness for 2007; and 2) to consider the cost 
effectiveness of economic incentives.

As the report acknowledges, the Agency is conducting a comprehensive 
implementation program designed to ensure that 2007 is implemented as 
smoothly as possible. We intend to continue this extensive work and 
will continue to seek input from all stakeholders regarding actions the 
Agency can take to make sure the 2007 program is a success.

We understand that there is concern in the trucking industry regarding 
this program. We take those concerns seriously, and we are continuing 
to work with that community of stakeholders. However, we believe it 
would be a mistake to create a second independent review panel as a 
mechanism to reduce uncertainty. Such an independent review panel would 
be far more likely to create uncertainty where none need exist now. As 
the report indicates, the regulated industries "believe the certainty 
the 2007 deadline provides, such as knowing what is required, is key to 
successfully implementing the standards in a timely and cost effective 
manner". Even GAO recognizes that an independent review panel could 
"unduly delay progress". In the end this is a result that no one wants. 
We believe that our ongoing progress reviews, the second of which will 
be released soon, are a better method for the Agency to monitor 
industry progress, to report out on industry status and to be prepared 
to address any implementation issues that could arise in the coming 
years.

We also note GAO's suggestion that EPA "consider the cost-effectiveness 
of economic incentives". We do not dispute that there might be merit in 
introducing additional economic incentives beyond those already 
incorporated in the rule. As you know, however, the Agency has no 
authority to set tax policy and will have to look to Congress for 
direction and funding should such a program be worthwhile.

Finally, I want to reassure you that we take very seriously the input 
of our stakeholders and the suggestions of GAO. We intend to continue 
our progress reviews to address the concerns expressed by some in the 
trucking industry, and we would be happy to work with Congress to 
consider the advantages that financial incentives could provide.

Sincerely,

Signed by: 

Jeffrey R. Holmstead:
Assistant Administrator:

NOTES: 

[1] Press Release: "Volvo Trucks Selects EGR for 2007 Emission 
Reduction Technology," January 28, 2004.

[2] "Mack Plans to Redesign Vocational Truck Engines," Transport Topics 
February 9, 2004 page 41.

[3] "Cummins Says `07 Units Will Get Early Testing," Transport Topics, 
January 12, 2004 pages 3, 28.

[4] Caterpillar, June 10, 2003 ATA/TMC Diesel Engine Emission Summit 
Presentation, slide 5.

[5] Detroit Diesel Corporation, June 10, 2003 ATA/TMC Diesel Engine 
Emission Summit Presentation slides 31 and 32.

The following are GAO's comments on the Environmental Protection 
Agency's letter dated February 24, 2004.

GAO Comments: 

As a preface to addressing EPA's specific comments on this report 
below, GAO wants to reiterate that it recognizes how critical the 
anticipated emissions reductions are for many states whose air quality 
is in trouble, how critical it is for the 2007 standards to succeed in 
order to significantly reduce emissions and protect public health, and 
all of the work and investment the agency and the engine, emissions 
control, and fuel industries have made. These critically important 
objectives, however, depend to a large extent on trucking companies' 
decisions to buy and run the improved engines. In our view, EPA has an 
important window of opportunity to make some improvements in the 
process it is using to work with stakeholders to both ensure technology 
is ready and allay any remaining stakeholder concerns about the new 
engines and fuel. Addressing concerns about whether fuel will be 
available in sufficient quantities and locations and the new engines 
will be ready in time to test should not be overly burdensome and will 
help to prevent a significant pre-buy of older engines before 2007 that 
would delay emissions and health benefits as occurred in 2002.

1. EPA agrees that, in many respects, GAO's report is consistent with 
the agency's assessment of the situation leading up to the 
implementation of the 2007 standards. However, we do not agree with 
EPA's assertion that we gave disproportionate weight and consideration 
to the views of the trucking industry which conflict with the agency's 
assessment for the following reasons. First, we carefully and 
consistently collected the views of all stakeholders--engine and 
emissions control manufacturers, trucking companies, fuel industry 
representatives, and environmental and health groups--and were equally 
careful to accurately present and assess their views. Consistent with 
our methodology and quality assurance standards, we also did not simply 
accept stakeholders' views at face value, but did where possible assess 
the basis for their views. For example, we determined that the trucking 
company representatives' concerns about the reliability and costs of 
the new engines were based on the technological leap required to meet 
the 2007 standards; that EPA's estimates of the new engines' costs were 
developed in 2000 before engine designs were developed; and that some 
of the engine manufacturers and fuel industry representatives designing 
the technologies acknowledged that there were remaining technological 
risks and questions. We also carefully point out that we were unable to 
fully confirm some of the views and opinions of stakeholders because 
the industries designing new engine and fuel technology were not 
comfortable in releasing information about their individual designs. In 
addition, we reviewed reports EPA issued on the progress towards the 
standards, but the reports primarily represented EPA's conclusions and 
did not present the specific data on which these were based.

2. We also disagree with EPA's assertion that we did not consider 
additional information and evidence that agency program managers 
provided to GAO late in the course of our work after reviewing a draft 
summary of the facts to be used in the report. Throughout our review, 
we worked closely with the EPA program managers responsible for the 
2007 standards to ensure that we clearly understood the issues and 
EPA's positions, and had the most current information. In addition, to 
ensure the accuracy of the information in our report, at the conclusion 
of our work, we provided EPA program managers a summary of the factual 
information supporting our findings for their review. At that time, EPA 
provided extensive written comments on the summary, along with a number 
of press releases from engine manufacturers and trade press articles. 
However, the agency did not provide any additional quantitative data or 
other information that would allow us to better assess the 
stakeholders' positions. We spent considerable time carefully assessing 
EPA's comments and the additional information and made a number of 
changes to the report where appropriate. Furthermore, we extended our 
report time frame by 6 weeks to give EPA extra time to provide its 
comments and supporting information and for us to carefully assess it 
and respond accordingly.

3. We also disagree with several EPA assertions that the report has an 
overall negative tone and overstates the technological challenges to 
successfully deliver the necessary fuel and engines, does not clearly 
state engine manufacturers' commitments to have test engines ready in 
time, and accepts at face value the trucking representatives' position 
that having test vehicles by mid-2005 is a critical deadline. We devote 
considerable narrative to the views of the agency and all the 
stakeholders who share these views that the technologies--for both 
cleaner engines and low-sulfur fuel--are on track. In addition, though, 
we have a professional responsibility to acknowledge that some 
stakeholders--including some engine manufacturers and fuel 
distribution and trucking industry representatives--expressed concerns 
over the remaining technological risks and questions. As such, we 
accurately describe these challenges and the concerns they create. For 
example, EPA asserts that the report projects a negative tone with 
regard to the progress of the oil industry in preparing to supply low-
sulfur fuel for 2007. However, we report that the fuel industry 
stakeholders we contacted identified a number of remaining issues that 
need to be resolved, none of which they considered to be 
insurmountable. We reviewed EPA's summary of pre-compliance reports 
detailing refiners' plans to produce low-sulfur fuel and agree that the 
refiners' ability to produce the fuel does not appear to be an area of 
concern. However, these reports do not address the primary concerns 
that industry representatives raised, which relate to distribution 
challenges. As we make clear in the report, without trying to further 
alleviate these and other stakeholder concerns, the agency may not 
achieve its emissions and public health goals with the 2007 standards.

We also took great care to include the most current information 
possible in our report. For example, in January 2004, we updated our 
report to reflect that engine companies had finally publicly announced 
the technologies they would use to meet the 2007 standards, although 6 
months later than planned. In addition, after several of the 
manufacturers subsequently issued press releases in January and 
February 2004, stating that they expected to have at least a limited 
number of prototype engines ready for testing by mid-2005, we re-
contacted the trucking company representatives to determine the extent 
to which these announcements addressed their concerns, and updated the 
report accordingly.

Additionally, GAO does report the trucking representatives' position 
that they need to have prototypes by about mid-2005, as well as the 
basis for their position, which is to (a) determine engine reliability 
in all seasons and weather conditions and for long enough periods to 
determine the resulting operating and maintenance impacts, and (b) 
subsequently develop their acquisition strategies based on this 
information. These arguments seem plausible. However, more importantly, 
we report their position because some of the representatives said that 
without enough testing time, companies were already considering whether 
to pre-buy older engines before 2007, in larger quantities than they 
did for 2002, further jeopardizing emissions and health benefits. We 
believe that this is the important concern EPA needed to be aware of 
and try to mitigate. We did not attempt to confirm the validity of the 
18-24 month testing time frame representatives said they needed for the 
2007 standards with the industry's historical time frames to test 
upgraded engines. In part, we did not because the engine designs for 
2007 are a technological leap over current equipment and may require 
longer lead times to develop. Similarly, they may need longer lead 
times for testing.

4. We agree with EPA's concern about clearly distinguishing the 2002 
consent decrees and 2007 standards, and made changes to the report as a 
result. The engine requirements established in the consent decrees were 
done as part of a legal settlement in response to an enforcement 
action, not through a public rulemaking process where all stakeholders 
had input into establishing the requirements. In addition, the engine 
companies had a relatively small amount of lead time to design the new 
engines because as part of the settlement, manufacturers agreed to 
accelerate the schedule for new engines by 15 months. In contrast, the 
2007 standards were developed through a more extensive public 
rulemaking process with wide participation from all stakeholders, and 
manufacturers and fuel refiners had about 6 years lead time to develop 
the needed emissions control, engine, and fuel technologies. We 
disagree with EPA, however, that these two actions are not comparable 
in any respect. Whether new engines are being designed in response to 
an enforcement action or rulemaking, the industry's market reaction to 
the consent decrees may offer some lessons learned that EPA could 
incorporate into its process for implementing the 2007 standards.

5. We agree that EPA deserves credit for the large number of voluntary 
activities it has undertaken to work with various stakeholders to help 
ensure that the technology will be ready in time and devote 
considerable narrative to describing these activities in the report. We 
were also very careful to present a balanced view of the stakeholders' 
opinions about the agency's activities. For this reason, we were 
obligated to acknowledge that some of the engine manufacturers and 
trucking representatives raised questions about the agency's openness 
to their concerns and willingness to address them. EPA maintains that 
the agency had extensive involvement with stakeholders--including the 
trucking industry--in developing the 2007 rule. This is true. However, 
the trucking industry's concerns are not with the 2000 rulemaking 
process, but with the process EPA has used since then to involve 
stakeholders in implementing the standards. For example, as we note in 
the report, EPA officials acknowledged that the agency initially did 
not invite anyone from the trucking industry to participate on the 2002 
Clean Diesel Independent Review Panel and only did so after the 
industry lobbied the agency.

6. As to GAO's recommendations, EPA agrees with the merits of providing 
financial incentives--although the agency does not see a role for 
itself in this action--and disagrees with the merits of convening an 
independent panel. We want to clarify that GAO is recommending that the 
agency consider additional steps to alleviate existing concerns, avoid 
a significant pre-buy of older engines, and better guarantee that the 
emissions and health benefits are achieved. We thereby offer several 
alternative actions for the agency to consider, but do not intend to 
limit the agency in any way to these alternatives or suggest that they 
are the only effective means to resolve concerns. That said, with 
regard to the suggestion of using financial incentives, we recognize 
that the Congress must provide the agency direction and funding for 
such an approach, but expect that it would also look to the agency to 
play a role, such as submitting a proposal for incentives or at least 
helping to determine their merits and costs. As to convening an 
independent review panel, we appreciate EPA's concerns that this could 
unnecessarily delay the schedule for implementing the standards, and 
the agency is in the best position to determine this. But, if EPA has 
the necessary evidence available to demonstrate technologies are ready 
as it contends it does, it should not be difficult or take considerable 
time for an independent body to review the data and validate this 
conclusion for all affected stakeholders. Otherwise, if the trucking 
industry remains concerned and pre-buys older engines prior to 2007, 
this will in effect delay implementation of the standards and their 
anticipated benefits.

[End of section]

Appendix IV: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

John B. Stephenson (202) 512-3841 Eileen R. Larence (202) 512-6510 
Vincent P. Price (202) 512-6529: 

Acknowledgments: 

In addition to the individuals named above, Charles W. Bausell, Jr., 
Tyra DiPalma-Vigil, Richard Frankel, Terence Lam, and Eugene Wisnoski 
made key contributions to this report. Important contributions were 
also made by Nancy Crothers and Amy Webbink.



(360301): 



FOOTNOTES

[1] While diesel exhaust includes numerous toxic components, this 
report focuses primarily on nitrogen oxides, commonly referred to as 
NOx.

[2] This report focuses only on heavy-duty highway diesel engines, 
defined by EPA as engines used in heavy-duty vehicles with a gross 
vehicle weight of 8,500 pounds or more. EPA certifies heavy-duty diesel 
engines in three categories: light heavy-duty (typically used in Class 
2b through Class 5 vehicles weighing 8,500 to 19,500 pounds); medium 
heavy-duty (in Class 6 and 7 vehicles weighing 19,501 to 33,000 
pounds); and heavy heavy-duty (in Class 8 vehicles weighing more than 
33,000 pounds).

[3] Our analysis of the consent decrees' effects focuses on class 8 
trucks because (1) these trucks comprise the largest class of trucks in 
service in the United States and, according to EPA data, account for 
about 90 percent of the emissions reductions expected from the pull-
ahead provisions of the decrees, and (2) the manufacturers subject to 
the decrees account for about 95 percent of the U.S. market for these 
trucks. For our analysis, we used data starting in January 1992 because 
this was the earliest date for which detailed monthly truck production 
data were available, and ending in June 2003 because this was the 
latest date for which such data were available when we completed this 
segment of our analysis.

[4] Seven manufacturers were originally subject to the consent decrees. 
Three of the manufacturers merged into one company, leaving five 
manufacturers subject to the decrees at the time of our review.

[5] The emission limits are stated in terms of grams of emissions per 
brake horsepower-hour.

[6] The engine manufacturers involved in this enforcement action were 
Caterpillar Incorporated, Detroit Diesel Corporation, Cummins Engine 
Company, Volvo Trucks Corporation, Mack Trucks Incorporated, Renault 
Vehicules Industriels, s.a., and Navistar International Transportation 
Company. Volvo subsequently purchased Mack Trucks and Renault in 2001, 
forming "the Volvo Group."

[7] Under this approach, manufacturers can certify their engine 
families at emissions levels above or below the standard, as long as 
they comply with the standards when averaged across their engine 
families. Manufacturers generate emissions credits by producing engine 
families that are certified below the standard, which can then be used 
to offset production of engine families that are certified to have 
emissions in excess of the standards. 

[8] As noted, our analysis focuses on class 8 trucks because (1) these 
trucks comprise the largest class of trucks in service in the United 
States and, according to EPA data, account for about 90 percent of the 
emissions reductions expected from the pull-ahead provisions of the 
decrees, and (2) the manufacturers subject to the decrees account for 
about 95 percent of the U.S. market for these trucks. 

[9] We adopted 1998 as the base year for this comparison because, 
shortly after the consent decrees were finalized, the manufacturers 
began making business decisions regarding how they would respond. 

[10] Seven of the 10 trucking companies we contacted consistently 
maintained that they need a minimum of 18 months to perform what they 
consider to be adequate road testing.

[11] Pipeline operators distribute "batches" of different petroleum 
products or grades of the same product in succession through a 
pipeline. A batch is a quantity of one product or grade that will be 
moved before the injection of a second product. Sequencing batches of 
petroleum products for pipeline transport has become more complex with 
the proliferation of product types, such as regular grade, mid-grade, 
and premium grade gasoline and diesel fuel. 

[12] Summary and Analysis of the Highway Diesel Fuel 2003 Pre-
compliance Reports, U.S. Environmental Protection Agency, EPA420-R-03-
013, October 2003.

[13] These groups include the American Lung Association, Environmental 
Defense, the Natural Resources Defense Council, Northeast States for 
Coordinated Air Use Management, and the State and Territorial Air 
Pollution Program Administrators/Association of Local Air Pollution 
Control Officials.

[14] Meeting Technology Challenges for the 2007 Heavy-Duty Highway 
Diesel Rule, Report of the Clean Diesel Independent Review 
Subcommittee, Clean Air Act Advisory Committee, Oct. 30, 2002.

[15] The Clean Diesel Independent Review Panel was created by a charter 
issued under the Clean Air Act Advisory Committee. Generally, the 
purpose of the Committee is to provide independent advice and counsel 
to EPA on policy and technical issues associated with implementation of 
the Clean Air Act Amendments of 1990. The purpose of the panel was to 
review industries' progress toward developing the technologies 
necessary to implement the 2007 diesel rules.

[16] Engine manufacturers and others challenged the 2007 rule on 
various grounds, including the feasibility of developing emissions 
control systems that would satisfy the new nitrogen oxide and 
particulate matter standards. The court not only found no basis for 
reversing EPA's prediction of the future development of adequate 
nitrogen oxide adsorbers, but also denied the other petitions. National 
Petrochemical and Refiners Association v. EPA, 287 F.3d 1130 (D.C. Cir. 
2002).

[17] Clean Air Act, Section 307(d)(7)(B) (codified at 42 U.S.C. 
7607(d)(7)(B)).

[18] Previous nonconformance rules have considered a technological 
laggard to be a manufacturer who cannot meet a particular emission 
standard due to technological, rather than economic, difficulties and 
who, in the absence of the penalties, might be forced from the 
marketplace, including the elimination of one or more engine families 
or configurations from production.

[19] This information is from Ward's Communications (http: //
wardsauto.com/reference_sample/index.htm). 

[20] We tried to incorporate truck prices in our analysis to account 
for the price effects on truck demand. Because we did not have data on 
actual truck prices, we used the class-8 truck Producer Price Index 
(PPI) from the Bureau of Labor Statistics (BLS). To avoid biases that 
may arise when estimating truck price and demand simultaneously in one 
equation, we applied a 2SLS estimation technique. 2SLS is a technique 
that allows us to first estimate the influence of EPA's consent decrees 
on truck prices, and then to estimate truck prices' effects on truck 
demand. However, the consent decrees' effect on the truck production 
price index is not statistically significant. In addition, the 
subsequent effects of the truck production price index on truck demand 
vary widely in different specifications. For this reason, we decided to 
model EPA's consent decrees' effect on truck demand as in models (1) 
through (4). 

[21] Industry sources indicated that timing of truck production is 
closely tied to timing of truck purchases. As a result, we will 
characterize effects on truck production as also affecting truck 
purchases/demand hereafter.

[22] An autoregressive process (AR) is one of the most commonly used 
econometric techniques to account for temporal correlation across 
different time periods. In models (2) through (4), AR(1) assumes that 
the error term, et, is defined as et =ret-1+ m t. The numbers for 
AR(1), as shown in table 7 for the analysis results represent the 
coefficient r7.

[23] Truck production is closely tied to diesel engine production with 
a slight lag. In addition, for the best measurement, we intended to 
include only trucks produced, domestically or abroad, for U.S. domestic 
consumption and exclude those produced for overseas markets. However, 
this approach would not allow us to include in our analysis data from 
1992 through 1997, because Ward's included separate domestic and export 
data for Class-8 truck production in the United States and Canada only 
after 1997. Prior to 1998, truck production data were aggregated for 
both the United States and Canada. The aggregate U.S. and Canadian 
truck production should reflect closely the number of trucks produced, 
domestically or abroad, for operation in the United States because the 
total Canadian truck production was about one-sixth the size of total 
U.S. and Canada production, about three-quarters of the total Canadian 
production were exported to the United States, and about 86 percent of 
the Class-8 trucks produced in the United States are for domestic 
consumption (calculations based on Ward's data on U.S. and Canadian 
production from 1998 through the first half of 2003).

[24] We made this adjustment in order to be consistent with BEA's 
inflation adjustment for GDP at 1996 price levels. 

[25] For example, we substituted GDP with two other measures: GDP less 
consumption expenditures on services, and ATA's tonnage index. In some 
analyses, we used annualized percentage change in diesel prices instead 
of diesel fuel prices at 1996 dollars. In addition, we experimented 
with different time lags. The results produced using model 
specifications (2) through (4) with these alternative estimates 
consistently showed a signifcant increase in truck production 
associated with EPA's consent decrees. For example, when we re-
estimated models (1) through (4) using GDP less expenditures on 
services, the coefficients of CD in models (1) through (4) are -
5926.10, 10080.32, 11954.69, and 9381.81, respectively. The above 
coefficients for models (2) through (4) are statistically significant 
at the 5 percent level.

[26] The DW statistic of 0.839 is still less than the critical value of 
0.974 for a sample size of 45 with 8 explanatory variables at the 1 
percent significance level.

[27] The DW statistic of 1.945 is greater than the critical value of 
1.834 for a sample of 45 with 9 explanatory variables (Source: Greene, 
William H., Econometric Analysis, Prentice-Hall, Inc., 1993, pp.738-
739). 

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