thefederalregister.com

Daily Rules, Proposed Rules, and Notices of the Federal Government

ENVIRONMENTAL PROTECTION AGENCY

40 CFR Part 86

[AMS-FRL-9716-5]

Nonconformance Penalties for On-Highway Heavy-Duty Diesel Engines

AGENCY: Environmental Protection Agency (EPA).
ACTION: Final rule.
SUMMARY: This Final Rule specifies certain parameters that are entered into the preexisting penalty formulas along with the emissions of the engine and the incorporation of other factors to determine the amount a manufacturer must pay. Key parameters that determine the NCP a manufacturer must pay are EPA's estimated cost of compliance for a near worst-case engine and the degree to which the engine exceeds the emission standard (as measured from production engines).

EPA proposed NCPs for medium heavy duty diesel engines. However, EPA is not taking final action with regard to NCPs for these engines at this time because EPA has not completed its review of the data and comments regarding these engines.

DATES: This rule is effective September 5, 2012.
ADDRESSES: EPA has established a docket for this action under Docket ID EPA-HQ-OAR-2011-1000. All documents in the docket are listed in thehttp://www.regulations.govindex. Although listed in the index, some information is not publicly available,e.g.,confidential business information or other information whose disclosure is restricted by statute. Certain other material, such as copyrighted material, will be publicly available only in hard copy in the docket. Publicly available docket materials are available either electronically inhttp://www.regulations.govor in hard copy at the following location: EPA: EPA Docket Center, EPA/DC, EPA West, Room 3334, 1301 Constitution Ave. NW., Washington, DC. The Public Reading Room is open from 8:30 a.m. to 4:30 p.m., Monday through Friday, excluding legal holidays. The telephone number for the Air Docket is (202) 566-1742.
FOR FURTHER INFORMATION CONTACT: Chuck Moulis, U.S. EPA, National Vehicle and Fuel Emissions Laboratory, 2000 Traverwood, Ann Arbor, MI 48105; Telephone (734) 214-4826; Emailmoulis.charles@epa.gov.
SUPPLEMENTARY INFORMATION: Regulated Entities

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

Category NAICSaCodes Examples of potentially regulated entities Industry 336112 336120 Engine and truck manufacturers. aNorth American Industry Classification System (NAICS). Table of Contents I. Executive Summary A. Purpose of This Action B. Summary of Today's Action C. Impacts of This Action II. Overview and Background A. Overview B. Statutory Authority C. Background Regarding Nonconformance Penalty Rules D. 2007 and 2010 NOXStandards III. Previous Interim Final Rule IV. NCP Eligibility A. First Criterion—Whether the MY2010 NOXStandard Is More Stringent than the Previous NOXStandard B. Second Criterion—Whether Substantial Work Will Be Required To Meet the MY2010 NOXStandard C. Third Criterion—Whether There Is Likely To Be a Technological Laggard D. Issues Raised by the D.C. Circuit Court of Appeals V. Penalty Rates A. Upper Limit B. Cost Parameter Values C. Resulting Penalties D. Consideration of Other Methodologies VI. Economic Impact VII. Environmental Impact VIII. Emission Standards for Which We Are Not Establishing NCPs in This Final Rule A. Medium Heavy Duty Diesel NOXStandards B. Light Heavy-Duty Diesel NOXStandards C. Heavy-Duty Gasoline Engine Standards D. Heavy-duty Diesel Engine NMHC, CO, and PM Standards E. Heavy-duty CO2Standards IX. Statutory and Executive Order Reviews A. Executive Order 12866: Regulatory Planning and Review and Executive Order 13563: Improving Regulation and Regulatory Review B. Paperwork Reduction Act C. Regulatory Flexibility Act D. Unfunded Mandates Reform Act E. Executive Order 13132 (Federalism) F. Executive Order 13175 (Consultation and Coordination With Indian Tribal Governments) G. Executive Order 13045: Protection of Children From Environmental Health Risks and Safety Risks H. Executive Order 13211 (Energy Effects) I. National Technology Transfer Advancement Act J. Executive Order 12898: Federal Actions To Address Environmental Justice in Minority Populations and Low-Income Populations K. Congressional Review Act X. Statutory Provisions and Legal Authority I. Executive Summary A. Purpose of This Action

Section 206(g) of the Clean Air Act (the Act), 42 U.S.C. 7525(g), directs EPA to promulgate regulations permitting manufacturers of heavy-duty engines or heavy-duty vehicles to receive a certificate of conformity for engines or vehicles that exceed an EPA emissions standard if the manufacturer pays a nonconformance penalty (NCP). This action adopts NCPs for MY2012 and later heavy heavy-duty diesel engines (HHDDE) with respect to the NOXemissions standards applicable to these engines. Engine manufacturers will be able to receive a certificate of conformity based on either demonstrating compliance with the 0.20 g/bhp-hr NOXemission standard, or paying NCPs under the penalty formula established in this rule. This provides an alternative compliance option in situations where, as here, EPA has determined that the criteria for establishing NCPs have been met.

B. Summary of Today's Action

EPA proposed that the criteria for setting NCPs had been met for the 0.20 g/bhp-hr NOXemission standard for HHDDEs, and we are setting NCPs for these diesel engines in this final action.1 The final NCPs for HHDDE are approximately twice the values proposed. This difference is primarily because of new information received during the public comment period related to fuel and diesel exhaust fluid (DEF) prices. The derivation of the final penalties is described in a support document titled “Nonconformance Penalties for 2012 and later Highway Heavy-Duty Diesel Engines: Technical Support Document” (Technical Support Document), which is available in the public docket for this rulemaking. Under the final penalty regulations, nonconforming manufacturer with engines at the upper NOXlimit of 0.50 g/bhp-hr would pay a penalty of $3,775 for each model year 2012 engine it produces. Manufacturers would pay a lesser penalty if the NOXemissions of the engine are lower. For example, the penalty for a 2012 engine with NOXemissions at 0.30 g/bhp-hr would be $1,259.

1The proposed rule was published at 77 FR 4736 (January 31, 2012).

C. Impacts of This Action

NCPs have a small environmental impact. We expect relatively few engine families to be certified under these provisions. Any impacts should be short-term in nature because the penalties are structured to increase over time to discourage use in later model years and because the penalty figures are high enough, such that the increase in the maximum penalty in later model years will likely limit the practical availability of NCPs in future years. In addition, Navistar, the only company that has requested certificates based on the use of NCPs, has publicly announced it will introduce new technology engines in 2013 which will meet the 0.20 g/hp-hr NOXstandard without the need for NCPs.

NCPs generally also have minimal adverse economic impacts. Their use is optional, and manufacturers have historically chosen to use NCPs only when they are otherwise unable to comply with emissions standards. Manufacturers that choose to make use of the NCPs will incur those costs, which are based on the cost of complying with the emission standards.

II. Overview and Background A. Overview

Section 206(g) of the Clean Air Act (the Act), 42 U.S.C. 7525(g), directs EPA to promulgate regulations permitting manufacturers of heavy-duty engines (HDEs) or heavy-duty vehicles (HDVs) to receive a certificate of conformity for HDEs or HDVs that exceed a Federal emissions standard if the manufacturer pays a nonconformance penalty (NCP). Congress adopted section 206(g) in the Clean Air Act Amendments of 1977 as a response to a concern about manufacturers unable to comply with technology-forcing emissions standards for heavy-duty engines in the lead-time provided for the emissions standards. NCPs were intended to remedy this concern, while ensuring that conforming manufacturers would not suffer a competitive disadvantage compared to nonconforming manufacturers.

The first NCP rule, sometimes referred to as the “generic” NCP rule, established three basic criteria for determining the emission standards for which nonconformance penalties would be established in any given model year. 50 FR 35374 (August 30, 1985). The first criterion is that the emission standard in question is a new emission standard or that the standard is an existing standard and becomes more difficult to meet. This can occur in two ways, either by the emission standard itself becoming more stringent, or due to its interaction with another emission standard that has become more stringent. Second, EPA must find that substantial work is required in order to meet the emission standard. Third, EPA must find that it is likely that a manufacturer will be unable to comply by the end of the lead time provided for technological reasons (referred to in earlier rules as a “technological laggard”). The first NCP rule also established the formula for determining the amount of an NCP. In subsequent NCP rules, EPA made determinations about which emissions standards met the criteria for establishing NCPs, and specified the values for various parameters that are used in the formula to calculate the dollar value of a manufacturer's NCP. The regulations addressing these provisions are in Subpart L of 40 CFR part 86.

EPA proposed that these criteria had been met for the 0.20 g/bhp-hr NOXemission standard for heavy heavy-duty diesel engines. 77 FR 4736 (January 31, 2012).2 Although we did not identify the technological laggard in the NPRM, we have since identified Navistar as the manufacturer that needs NCPs. We proposed to establish NCPs because Navistar was unable to achieve the 0.20 g/bhp-hr NOXstandard and did not have sufficient emission credits to cover the 2012 model year. At the time of the proposal, Navistar was attempting to meet the NOXemission standard with a technology that is different than the approach used by other engine manufacturers. However, Navistar recently announced that it would switch its approach to use the same general technology as the other enginemanufacturers—a catalytic approach called selective catalytic reduction (SCR). As described in Section IV. C., we have determined thatNavistar will be unable to apply this technology to all of its engine families sold in the U.S. to achieve 0.20 g/hp-hr NOXfor at least several months, and will need NCPs until it completes its transition to the new technology.

2EPA simultaneously published an Interim Final Rule establishing interim NCPs for heavy heavy-duty engines (77 FR 4678, January 31, 2012).

We proposed to base the calculation of the NCPs on the existing regulatory framework, revising only the upper limit and the cost parameters. We also proposed to set the upper limit at 0.50 g/bhp-hr, which means that no manufacturer paying NCPs would be allowed to certify engines with NOXemissions above this limit. The proposed penalty for HHDDEs at that limit was $1,919 for model year 2012. Consistent with the provisions of the existing regulations, this value reflected our best estimate of the near-worst case cost difference between an engine with NOXemissions at the upper limit and a compliant engine. The regulations contain provisions to increase the penalties each year for later model years.

The NCPs being finalized for HHDDE are approximately twice the values proposed. This difference is primarily because of new information received during the public comment period related to fuel and diesel exhaust fluid (DEF) prices. The derivation of the final penalties is described in a support document titled “Nonconformance Penalties for 2012 and later Highway Heavy-Duty Diesel Engines: Technical Support Document” (Technical Support Document), which is available in the public docket for this rulemaking.

It is important to note that the NCP parameters being finalized were developed using the same basic methodology described in the NPRM. As in all NCP rules, the final NCPs are based on the estimated difference in compliance costs for engines at the upper limit and engines at the standard. Thus, engines with emissions at the upper limit can be considered to be baseline engines for the analysis. These baseline engines also represent the engines against which complying engines could compete in the marketplace.

As shown in Figure 1, a nonconforming manufacturer with engines at the upper NOXlimit of 0.50 g/bhp-hr would pay a penalty of $3,775 for each model year 2012 engine it produces. For later model years, this maximum penalty will increase by several hundred dollars per year as specified in 40 CFR 86.1113-87. While the exact rate of increase will depend on the number of engines for which NCPs are used, the penalty for engines at the upper limit could be more than $5,000 by 2015. Manufacturers would pay a lesser penalty if the NOXemissions of the nonconforming engine are lower. For example, the penalty for a 2012 engine with NOXemissions at 0.30 g/bhp-hr would be $1,259.

ER05SE12.024

We received numerous comments on our proposal to establish NCPs. Our detailed analysis of these comments is contained in the Response to Comments document for this rulemaking. The major comments are summarized briefly below.

• Several commenters questioned whether the regulatory criteria for establishing NCPs had been met. These comments are addressed in Section IV.

• Several commenters addressed the level of the penalty, mostly claiming that the penalty needed to be higher to meet the statutory requirement to remove the competitive disadvantage forcomplying manufacturers. These comments are addressed in Section V.

• The few comments we received on the upper limit supported setting it at 0.50 g/bhp-hr. These comments are addressed in Section V. A.

• Comments on the methodology used to calculate costs addressed both our proposed methodology and alternative methodologies. Comments on our proposed methodology are discussed in Section V. B. and comments on alternative methodologies are discussed in Section V. D.

NCPs have a small environmental impact. We expect relatively few engine families to be certified under these provisions. Any impacts should be short-term in nature because the increase in the maximum penalty in later model years will likely limit the practical availability of NCPs in future years. The structure of the penalties, by increasing over time, discourages use in later model years; and because the penalty figures are high enough, such that use in later model years is unlikely to be a viable option for any manufacturer.

NCPs generally also have minimal adverse economic impacts. Their use is optional, and manufacturers have historically chosen to use NCPs only when they are otherwise unable to comply with emissions standards. Manufacturers that choose to make use of the NCPs will incur those costs, which are based on the cost of complying with the emission standards.

Section 553(d) of the Administrative Procedure Act (APA), 5 U.S.C. chapter 5, generally provides that rules may not take effect earlier than 30 days after they are published in theFederal Register. APA section 553(d) excepts from this provision any action that grants or recognizes an exemption or relieves a restriction. Since today's action can be considered to relieve a restriction that would otherwise prevent a manufacturer from certifying, EPA is making this action effective immediately upon publication. This Final Rule does not set new requirements, but rather creates an optional path by which a manufacturer unable to meet the NOXstandard may obtain a certificate of conformity that they could not otherwise obtain without this Final Rule. Thus, the NCPs promulgated in this Final Rule will apply for all engines introduced into commerce on or after September 5, 2012.

B. Statutory Authority

Section 206(g) of the Act, 42 U.S.C. 7525(g), directs EPA to promulgate regulations permitting manufacturers of heavy-duty engines (HDEs) or heavy-duty vehicles (HDVs) to receive a certificate of conformity for HDEs or HDVs that exceed a Federal emissions standard, but do not exceed an upper limit associated with that standard, if the manufacturer pays a nonconformance penalty (NCP) . Congress adopted section 206(g) in the Clean Air Act Amendments of 1977 as a response to a concern with requiring technology-forcing emissions standards for heavy-duty engines. The concern was if strict technology-forcing standards were promulgated, then some manufacturers might be unable to comply in the lead-time provided for the emissions standards and would be forced out of the marketplace. NCPs were intended to remedy this concern. The nonconforming manufacturers would have a temporary alternative that would permit them to receive a certificate of conformity by payment of a penalty, allowing the engines or vehicles to be introduced into commerce and sold. At the same time, conforming manufacturers would not suffer compared to nonconforming manufacturers, because the NCPs would remove the competitive disadvantage to them. NCPs would be based, in part, on money saved by the nonconforming manufacturer. Providing this relief facilitated EPA's authority to set technology forcing standards. Without this relief, EPA may have needed to be more cautious in setting standards, given the possibility that a lagging manufacturer might not be able to meet the standards in the lead-time provided.

Under section 206(g)(1), NCPs may be offered for HDVs or HDEs. The penalty may vary by pollutant and by class or category of vehicle or engine. No NCP-based certificate may be issued if the engine or vehicle exceeds the degree of reduction determined by the Administrator to be practicable. This emission level is identified in the regulations as the upper limit. Section 206(g)(3) requires that NCPs:

• Account for the degree of emission nonconformity;

• Increase periodically to provide incentive for nonconforming manufacturers to achieve the emission standards; and

• Remove the competitive disadvantage to conforming manufacturers.

Section 206(g) authorizes EPA to require testing of production vehicles or engines in order to determine the emission level upon which the penalty is based. If the emission level of a vehicle or engine exceeds an upper limit of nonconformity established by EPA through regulation, the vehicle or engine would not qualify for an NCP under section 206(g) and no certificate of conformity could be issued to the manufacturer. If the emission level is below the upper limit but above the standard, that emission level becomes the “compliance level,” which is also the benchmark for warranty and recall liability. The manufacturer who elects to pay the NCP is liable for vehicles or engines that exceed the compliance level in use. The manufacturer does not have in-use warranty or recall liability for emissions levels above the standard but below the compliance level.

C. Background Regarding Nonconformance Penalty Rules

Since the promulgation of the first NCP rule in 1985, subsequent NCP rules generally have been described as continuing “phases” of the initial NCP rule. The first NCP rule (Phase I), sometimes referred to as the “generic” NCP rule, established three basic criteria for determining the eligibility of emission standards for nonconformance penalties in any given model year. 50 FR 35374 (August 30, 1985). When adopted in 1985, EPA intended to use the criteria of 40 CFR 86.1103-87 in determining whether to establish NCPs. They were included in the regulations to clarify that EPA's obligation under the generic rule to establish NCPs only applied where these criteria were met. As described in Section V. of this Final Rule, we have determined that these criteria have been met.3

3We note that EPA may revise the criteria at any time through notice and comment rulemaking. Thus, these criteria do not constrain EPA from adopting NCPs in other circumstances, as long as the statutory criteria of section 206(g) are met.

The first criterion is that the emission standard in question is a new emission standard or that the standard is an existing standard and becomes more difficult to meet. This can occur in two ways, either by the emission standard itself becoming more stringent, or due to its interaction with another emission standard that has become more stringent. Under the second criterion, EPA must find that substantial work is required in order to meet the emission standard. As described in § 86.1103-87(b), EPA considers “substantial work” to mean the application of technology not previously used in that vehicle or engine class/subclass, or a significant modification of existing technology, in order to bring that vehicle/engine into compliance. EPA does not consider minor modifications or calibration changes to be classified as substantial work. EPA considers that substantial work is required if such work is needed to bring emissions from the level of theprevious standard to the level of the new or revised standard, even if at the time the NCP rulemaking is taking place, some manufacturers have already completed that work. Third, EPA must find that a manufacturer is likely to be noncomplying for technological reasons (referred to in earlier rules as a “technological laggard”). Prior NCP rules have considered such a technological laggard to be a manufacturer who cannot meet a particular emission standard due to technological (not economic) difficulties and who, in the absence of NCPs, might be forced from the marketplace.

The criteria and methodologies established in the 1985 NCP rule have since been used to determine eligibility and to establish NCPs for a number of heavy-duty emission standards. Phases II, III, IV, V, and VI published in the period from 1985 to 2002, established NCPs that, in combination, cover the full range of heavy-duty; from heavy light-duty trucks (6,000-8,500 pounds gross vehicle weight) to the largest diesel truck and urban bus engines. NCPs have been established for hydrocarbons (HC), carbon monoxide (CO), nitrogen oxides (NOX), and particulate matter (PM). The most recent NCP rule (67 FR 51464, August 8, 2002) established NCPs for the 2004 and later model year NOXstandard for heavy-duty diesel engines (HDDEs). The NCP rulemaking phases are summarized in greater detail in the Technical Support Document for this rulemaking.

D. 2007 and 2010 NOXStandards

The 0.20 g/bhp-hr NOXstandard that applies for current and future heavy-duty engines was adopted January 18, 2001 (66 FR 5001), and first applied in the 2007 model year. However, because of phase-in provisions adopted in that rule and use of emission credits generated by manufacturers for early compliance, manufacturers have been able to continue to produce engines with NOXemissions greater than 0.20 g/bhp-hr. Most engines during the phase-in had NOXemissions near 1.2 g/bhp-hr. The phase-in provisions ended after model year 2009 so that the 0.20 g/bhp-hr NOXstandard was fully phased-in for model year 2010. Equally important, the cap applicable to Family Emission Limits (FELs)4 for credit-using engine families was lowered to 0.50 g/bhp-hr beginning in model year 2010. Because of these changes that occurred in model year 2010, the 0.20 g/bhp-hr NOXemission standard is often referred to as the 2010 NOXemission standard, even though it applied to engines as early as model year 2007.

4FELs are emission levels specified by the manufacturer that serve as the applicable emission standard for engines participating in the emission averaging program. The FEL cap is the highest FEL to which a manufacturer may certify an engine using emission credits.

III. Previous Interim Final Rule

On January 31, 2012, EPA simultaneously published an Interim Final Rule establishing interim NCPs for heavy heavy-duty engines and a parallel Notice of Proposed Rulemaking (NPRM). The NCPs in this Final Rule will supersede the NCPs that were promulgated in the Interim Final Rule as of September 5, 2012.

Several engine manufacturers petitioned EPA to rescind that Interim Final Rule. These petitions and EPA's responses denying them have been placed into the Docket for this rule.

These engine manufacturers also filed judicial challenges to the Interim Final Rule.Mack Trucks, et al.v.EPA,No. 12-1077 (DC Cir). They challenged EPA's decision to establish NCPs in an interim final rule without going through notice and comment. They also challenged our finding that the regulatory criteria had been met to promulgate NCPs for the 2010 NOXstandard, as well as our conclusion that the interim NCP levels removed the competitive disadvantage for complying manufacturers. On June 12, 2012, the Court of Appeals for the DC Circuit issued an opinion holding that EPA violated the procedural requirements for rulemaking because EPA did not have good cause to issue the rule without providing notice and opportunity for comment.Id.,2012 U.S. App. LEXIS 11851 (June 12, 2012). The Court did not rule on the merits of EPA's findings about the regulatory criteria or the level of the NCP. Nevertheless, it stated in dicta its concerns about these issues, which are discussed below in Sections IV. (NCP Eligibility) and V. (Penalty Rates).

IV. NCP Eligibility

Section II. C. of this Final Rule notes that EPA regulations provide for three criteria to be met in order to determine that an NCP should be established in any given model year. As is described below, these three criteria address different aspects of the appropriateness of NCPs, and it is important to consider each criterion separately in its own proper context. In general, the first two criteria address whether the standard in question created the possibility that a technological laggards could develop, while the third criterion addresses the likelihood that there will be a technological laggard. For the 2010 NOXstandard, we find that these criteria have been met for heavy heavy-duty diesel engines, and it is therefore appropriate to establish NCPs for this standard for the current model year and later.

A. First Criterion—Whether the MY2010 and Later NOXStandard Is More Stringent Than the Previous NOXStandard

The first criterion requires that the emission standard in question must be more stringent than the previous standard. This is the case with the 2010 NOXstandard. The previous emission standard for this category is a combined NMHC + NOXstandard of 2.4 g/bhp-hr, or optionally a 2.5 g/bhp-hr NMHC + NOXwith a limit of 0.5 g/bhp-hr NMHC.5 The 2010 (i.e.,current) standards are 0.20 g/bhp-hr for NOXand 0.14 g/bhp-hr for NMHC.

5NMHC stands for non-methane hydrocarbons, which is a measure of total hydrocarbons with the methane emissions subtracted out. For typical on-highway diesel fueled heavy-duty engines, methane emissions are on the order of 10 percent of the total hydrocarbon emissions.

Some commenters argued that this standard should no longer be considered a new standard because it went into full effect two model years ago. We did not promulgate NCPs for the 2010 and 2011 model years because we had no basis for concluding it was likely that any manufacturer would qualify as a technological laggard, as all manufacturers met the standard either directly or through application of credits. However, the fact that we did not promulgate NCPs for the first year a standard went into effect does not preclude us from promulgating NCPs for such standard at a later time, when it is determined the regulatory criteria have been met. While it is not a path we have generally taken, nothing in the statute or in our regulations, which refer to new or revised standards, precludes EPA from promulgating NCPs after the first year a new or revised standard goes into effect. See 50 FR 35374, 35376 (August 30, 1985), and 50 FR 9204, 9206 (March 6, 1985).

The first criterion, as with the other two criteria, reflects the key concepts underlying the NCP program—NCPs are designed to address situations where technological laggards are likely to develop in response to the adoption of technology forcing emission standards for this sector under CAA section 202(a)(3)(A). One purpose of section 206(g) is to avoid, at least temporarily, the problem of technological laggards being driven out of the market because of their inability to meet technology forcing emission standards in the lead-time provided. 50 FR 9204, 9205 (March6, 1985), 50 FR 35375 (August 30, 1985) (“The possibility of a technological laggard is a key concept in the NCP availability scheme.”). The first criterion is directly linked to this—“This condition creates the possibility for a technological laggard to exist.” 50 FR 9204, 9206 (March 6,1985).

Given this purpose, the appropriate way to consider whether the new or revised standard is more stringent is to consider it from the point of adoption of the standard, by comparing it to the prior standard. It is at the point that EPA has adopted a standard that may force technology changes, and it is the difference in stringency between the old and the new or revised standard, that raises the possibility of a technological laggard. The passage of time after adoption of the standard does not change the analysis of whether the new or revised standard is or is not more stringent than the previous standard. 50 FR 9204, 9206 (March 6, 1985). Even if EPA considers NCPs some model years after adoption of the standard the comparison under the first criterion is still between the new or revised standard and the prior standard, and their relative stringency.

The first criterion establishes one circumstance that must occur to establish NCPs under the generic rule: a new or revised standard must be more stringent than the previous standard for the pollutant, or an existing standard must become more difficult to achieve. The passage of time by itself, from MY2010 to MY2012, does not change the fact that the MY2010 NOXstandard was and continues to be more stringent than the standard applicable to model years before 2010, and this increase in stringency created the possibility for a technological laggard to exist. The first criterion is thus more in the nature of a static or historic fact, a threshold determination typically made based on the facts in existence at the time of adoption of the new or revised standard, a comparison of the stringency of the previous and the new or revised standard.

Based on this, EPA rejects commenters' arguments. Even though the determination on the first criterion is not being made until some model years after adoption of the 2010 standard, the 2010 NOXstandard has always been a new or revised standard compared to the prior standard, and the 2010 standard was and continues to be more stringent than the preexisting NOXstandard. The passage of time does not change the fact that adoption of a more stringent standard for MY2010 created the possibility for a technological laggard to exist. The 2010 standard is certainly a new or revised standard and certainly is more stringent than the previous standard for NOX. The fact that we are now in MY2012 does not change this conclusion.

B. Second Criterion—Whether Substantial Work Will Be Required To Meet the MY2010 NOXStandard

Under the second criterion, substantial work must be required to meet the standard. When we first established the 2010 NOXstandard, we considered it to be a technology-forcing standard and subsequent history has shown that substantial work has been required to meet this emission standard. More importantly, all heavy heavy-duty diesel engines currently certified to the 0.20 g/bhp-hr standard without using credits are using new aftertreatment systems (that were generally not used in 2009) to meet this standard.6 Indeed, even Navistar substantially redesigned its emission control system in its attempt to achieve lower emissions without NOXaftertreatment. This work clearly meets the definition of substantial work, as it involves the use of either: New catalytic controls and related technology not previously used in these engines, or the significant modification of existing EGR and related technology. None of the complying manufacturers dispute that they have done substantial work to achieve the 0.20 g/bhp-hr NOXstandard. In fact, they emphasized in their comments how much work they have done to meet the standard.

6For this Final Rule, EPA describes those manufacturers that have achieved the 0.20 g/hp-hr emission standard as “conforming”, “compliant” or “complying” manufacturers, and those that have not as the “nonconforming”, “noncompliant” or “noncomplying” manufacturers. However, it is important to clarify that manufacturers certifying above the 0.20 g/hp-hr NOXemission standard using emission credits are in compliance with regulations as long as they have enough emission credits to offset their total NOXemissions above the standard.

The second criterion builds on the first criterion, as it involves an evaluation of the nature and degree of the technological challenge of the new or revised standard. If the new or revised standard increases the stringency to such a degree that it cannot be met by simple modifications to existing technology (i.e.,that substantial work will be required to comply), then this criterion is satisfied. Like the first criterion, the second criterion reflects the key concern with the issue of a technological laggard—“When manufacturers must perform substantial work, it is possible that at least one will be unsuccessful and will become a laggard.” 50 FR 9204, 9206 (March 6,1985). Like the first criterion, it is a determination of circumstances that establish a threshold or baseline for setting NCPs under the generic rule. It identifies circumstances that mean there isa possibilitythat a laggard may exist.

Given this purpose, the appropriate way to consider the second criterion is to evaluate all of the work that must be accomplished to move from compliance with the previous standard to compliance with the new or revised standard. The possibility of a technological laggard is created by this entire amount of work that must be done, not any one subset or increment of the work. Thus, if EPA evaluates this criterion at some point after adoption of the new or revised standard, EPA still considers all of the work to go from the previous to the new or revised standard, and not just the work remaining as of the date the determinations are made about compliance with the criteria under the generic NCP rule.

While commenters did not dispute that substantial work was required to meet the 2010 standard, some commenters claimit is no longer truethat substantial work is required because some manufacturers have met the standard. Some commented that these determinations must be based on the factual circumstances at the time of the NCP rulemaking and not the time the revised standard was issued. We disagree with these claims for two reasons.

First, this criterion is to be evaluated based on the total amount of work needed to go from meeting the previous standard to meeting the current standard, regardless of the timing of such changes. Indeed, the commenters' approach would seem to be directly contrary to the purpose of the statute. The NCP program is designed to allow technological laggards to be able to certify engines even if other manufacturers have met the standard. There is a clear expectation that some manufacturers might be technological laggards. 50 FR 9204, 9206 (March 6,1985) (“When manufacturers must perform substantial work, it is possible that at least one will be unsuccessful and will become a laggard.”) Where there is a technological laggard, it is the typical situation that other manufacturers have already complied or will comply on time. The fact that some manufacturers have surpassed the technological hurdles and achieved compliance with the new or revised standard does not in any way show that there is or cannot be a technological laggard who at least temporarily has not surpassed the technological hurdles. Refusing to establish NCPs solelybecause some manufacturers comply at the time NCPs are established would frustrate Congress' purpose by preventing establishment of NCPs when there is a technological laggard who temporarily can not comply with the standards and cannot certify engines without the NCP program.

Thus, EPA bases the determination of substantial work on the total amount of work to go from compliance with the prior standard to compliance with the new standard, even if at the time of the NCP rulemaking some manufacturers have already completed some or all of such work. Under this criterion, the important question is whether manufacturers who were using technology that met the previous standard would need to conduct significant work to develop new technology or to build upon/change the old technology to meet the revised standard. Questions about work that still needs to be doneat the point EPA begins an NCP rulemakingare relevant only in the context of the third criterion, whether there is likely to be a technological laggard. To avoid this confusion for future NCPs, we are clarifying in the regulatory text that this criterion is to be evaluated based on the need for new or modified technology or design to meet the new or revised standard regardless of the timing for such changes.

Second, even under the current circumstances, we find that Navistar has needed to do substantial work to meet the standard. This is the case whether one considers the total amount of work to go from the previous standard to the MY2010 NOXstandard, or whether one only considers the amount of work to go from the current status of its technology to compliance with the MY2010 standard. See the discussion below concerning the work conducted by Navistar to date and expected in the future.

We informed engine manufacturers in 2010 that we believed the first two criteria had been met.7 We note that the commenters now questioning whether these criteria have been met did not dispute our earlier view that we could have set NCPs at that time had we determined that a technological laggard was likely to develop. At that point, EPA was clear that the reason we were not establishing NCPs at that time was because we had not determined that a technological laggard was likely to develop.

7“Nonconformance Penalties for Heavy-Duty Diesel Engines in 2010 Model Year”, Letter from Karl J. Simon, Director, EPA Compliance and Innovative Strategies Division, February 22, 2010.

C. Third Criterion—Whether There Is Likely To Be a Technological Laggard

Under the third criterion, EPA considers all of the circumstances to determine whether there is likely to be a technological laggard. In the 1985 generic rule EPA indicated that:

Third, EPA must find that there is likely to be a technological laggard. Even when a standard becomes more stringent (or there is an adverse effect on a previously attainable standard), and even when manufacturers must perform substantial work, all manufacturers may still be able to meet the more stringent standard. For instance, compliance with a standard may involve merely the transference of technology from a similar application. Thus, EPA must make a determination whether the circumstances will likely give rise to a laggard.50 FR 9204, 9206 (March 6, 1985).

One of the concepts underlying a technological laggard is that a manufacturer faced with a new or revised standard, especially one that is technology forcing, will direct substantial resources and effort to develop and employ technology aimed at achieving compliance with the more stringent standard. Whether the manufacturer develops and employs the same or different technology than other manufacturers, there is a possibility that such a manufacturer will be temporarily unable to achieve the emissions standard in the lead time provided based on technological reasons. Instead of refusing to certify the manufacturer's engines, and driving them out of the market, the NCP program is specifically designed to provide a temporary path for certification until the remaining technological issues are resolved and the manufacturer achieves the standard. 50 FR 9204 (March 6,1985). The third criterion is designed to implement this concept, based on EPA's evaluation of all of the circumstances.

In this case, all of the circumstances indicate that there is more than a likelihood that there is an engine manufacturer that has not yet achieved the MY2010 NOXstandard for technological reasons—we have determined that Navistar is in fact such a manufacturer. Unlike the rest of the industry, Navistar attempted to comply without SCR to reduce NOXemissions.8 However, to date Navistar has not succeeded in reaching the 0.20 g/bhp-hr emission level. At this time, the only engine families Navistar has certified since the MY2010 standard took effect have used advanced EGR technology, and have been certified based on either banked emission credits or on Navistar's payment of the interim NCPs. Navistar does not have sufficient credits to cover its entire model year 2012 production without NCPs. Navistar has acknowledged in its public comments on this rule that it is effectively a technological laggard. On July 6, 2012, Navistar announced that it has begun the process of redesigning its trucks to use SCR engines in addition to their in-cylinder emission control technology. Navistar expects the SCR engines to be available beginning in early 2013. We have determined that Navistar will need access to NCPs to lawfully produce engines during this multi-month transition process.

8This technology is based on internal engine controls and advanced exhaust gas recirculation technology.

Several commenters noted that Navistar cannot be a technological laggard as it has applied for certification of an engine family using this technology, seeking a certificate for a 0.20 g/bhp-hr engine that complies without the use of credits. However, Navistar has withdrawn that application based on EPA concerns that the engine design (with its current hardware) does not meet the 0.20 g/bhp-hr NOXstandard.

While Navistar has announced that it will switch to SCR-based emission controls, we have determined that the work needed for Navistar to redesign all of its U.S. engines and vehicles for its announced alternate compliance path based on SCR cannot be completed immediately. Thus, Navistar will need NCPs during this transition period. These limitations are technological rather than economic in nature. Among the steps Navistar must complete, it must:

• Select an SCR system design • Make arrangements with component suppliers • Validate components • Recalibrate its engine to work with the SCR system • Redesign it trucks to fit the SCR hardware • Complete its emission testing and durability testing for certification • Obtain EPA approval for the new engine-SCR system We do not have a precise estimate of how long this will take for Navistar's entire U.S. production of heavy heavy-duty diesel engines and associated vehicles. However, based on our experience and knowledge of this industry, this type of technology introduction is not finished in a one or two month period. Navistar has acknowledged as much in their July 6, 2012 announcement, which stated they will begin making the new technology products available in early 2013.

Several commenters argued Navistar voluntarily chose a different technology path than other manufacturers, and could have complied in the lead time provided if it had developed and employed SCR technology from the beginning. Since Navistar chose what the commenters consider to be the wrong technology path, they argue it is a laggard based on its own business decision and not technological limitations. They stated that NCPs should not be established under these circumstances. We generally would agree with commenters' assertions that Navistar presumably could have chosen the same SCR technology path as other manufacturers some time ago, and presumably could have already achieved compliance with the MY2010 standard in the same timeframe they did. If that had occurred, there would be no basis for establishing NCPs. However, we disagree with commenters' conclusions that NCPs should not be established based on this difference in choice of technology pathway.

Navistar made a decision to attempt to meet the emission standard using a different technology path, without SCR. As with most of EPA's mobile source emissions standards, the MY2010 emission standard is a performance standard, and does not specify what technology must be used or require that all manufacturers use the same technology. Commenters' approach would penalize a manufacturer who attempts to innovate and develop a technology pathway different from its competitors. This would effectively discourage technological innovation by requiring all manufacturers to use the same technology once one manufacturer has met the standard using that technology. Otherwise they would risk being driven from the market as no NCPs would be established. Such an interpretation would undercut the purpose of technology forcing standards—to adopt standards where manufacturers may have to develop advanced technology or technology that is at the cutting edge of emissions control. This interpretation would suppress technological innovation out of fear that a wrong technological choice will lead to having to leave a market without the temporary benefit of NCPs. This approach would also ignore the premise of promulgating NCPs, which is that they are appropriate when one or more manufacturers have not met the standard, while one or more others have. Whether the laggard is not able to achieve compliance because of a technological hurdle in developing the same or different technology as their competitors, the result is the same—they risk being removed from the market based on technological issues, if NCPs are not established. EPA does not see a valid basis for drawing such a distinction between technology pathways in deciding whether there is likely to be a technological laggard.

As discussed later, in Section V. on the penalty rate, the provision of NCPs is only a temporary solution for the noncomplying technological laggard. The first-year penalty rate is designed to remove the economic disadvantage for the complying manufacturers, preventing harm to the competitors. The NCP rate also increases over time, such that in a short period of time the noncomplying manufacturer needs to achieve compliance or the increasing penalty rate will in effect drive it from the market. Since the NCP protects a complying manufacturer from a competitive disadvantage irrespective of the technology path chosen by its competitor, it is appropriate that EPA not draw a distinction based on whether the technological laggard chose the same or a different technology path than the complying manufacturers. This helps to preserve the nature of EPA's standards as technology forcing performance standards that promote technological innovation across this sector of industry.

Having made its decision to pursue a non-SCR technology to meet the standards, Navistar has not been able to produce engines that have been certified to meet the 0.020 standard without credits. The evidence is clear that Navistar chose to develop a different technological solution than other manufacturers, and that technological issues concerning this solution have delayed Navistar's ability to meet the standard. It is for this technological reason that Navistar cannot meet the standard, not for economic reasons.

D. Issues Raised by the DC Circuit Court of Appeals

As noted above, inMack Trucks, et al.v.EPA,No. 12-1077 (DC Cir), the court included comments in its opinion,in dicta,concerning the appropriateness of NCPs under the circumstances presented in the Interim Final Rule. The court stated that:

We do recognize the pending final rule means our vacatur of the IFR on these procedural grounds will be of limited practical impact. Before the ink is dry on that final rule, we offer two observations about the parameters of this rulemaking. First, NCPs are meant to be a temporary bridge to compliance for manufacturers that have “made every effort to comply.” United States v. Caterpillar, Inc., 227 F. Supp. 2d 73, 88 (D.D.C. 2002). As EPA itself has explained, NCPs are not designed to bail out manufacturers that voluntarily choose, for whatever reason, not to adopt an existing, compliant technology. See 77 Fed. Reg. 4,736, 4,739 (Jan. 31, 2012) (“NCPs have always been intended for manufacturers that cannot meet an emission standard for technological reasons rather than manufacturers choosing not to comply.”); 50 Fed. Reg. 35,402, 35,403 (Aug. 30, 1985) (stating that NCPs are inappropriate “if many manufacturers' vehicles/engines were already meeting the revised standard or could do so with relatively minor calibration changes or modifications”). Based solely on what EPA has offered in the IFR, it at least appears to us that NCPs are likely inappropriate in this case.9

9 Id.,slip op. at 15.

The court noted that NCPs are intended to be a temporary bridge to compliance for manufacturers who have “made every effort to comply” and are not designed for manufacturers that voluntarily choose, for whatever reason, not to adopt an existing, compliant technology. EPA agrees with these general concepts, but they do not apply in this case. The court's comments concern the issue of whether substantial work is needed to achieve compliance with the MY2010 NOXstandard, and whether Navistar is properly considered likely to be a technological laggard in achieving compliance with this standard in light of the technology pathway it chose. Based on all of the circumstances before EPA, it is reasonable to determine that Navistar has made every effort to comply, for the technology pathway it chose. The need for NCPs is based on the failure to achieve the emissions standards using this technology. This failure is based on technological reasons, and not other reasons.

The court's statement that NCPs were intended for manufacturers that “made every effort to comply” (United Statesv.Caterpillar, Inc.,227 F. Supp. 2d 73, 88 (D.D.C. 2002)) was made in a different context and does not apply here. This comment was in response to a suggestion from Caterpillar in that earlier case that the consent decree at issue should have been interpreted in a certain way (or modified) as EPA failed to issue an NCP rule with enough lead time. Caterpillar argued that it was harmed by this delay because the purpose of the NCPs was to allow a manufacturer to weigh the costs of compliance against the costs of paying NCPs. The court rejected this view, as it would allow “engine manufacturers * * * to calibrate the intensity of their compliance efforts to the NCP for each new standard, allowing them to opt fornoncompliance when compliance becomes more expensive than the NCP. This kind of second-guessing, however, was clearly not Congress' intent in providing for NCPs.” 227 F.Supp. at 88. The court noted that “[i]nstead, NCPs were intended to give a manufacturer that has made every effort to comply, but has been unable to achieve compliance, a chance to continue to participate in the market. Thus, NCPs serve their purpose even if promulgated after a company has made its engine design decisions, since those decisions should be based on whether compliance can be achieved, not on whether compliance is less expensive than paying NCPs.”Id.at 88-89.

In that context, it is clear that the court's prior statement addressed the claim that a manufacturer should be able to base their engine design decisions on the availability of NCPs, weighing which costs more and deciding based on this whether to pursue a technology pathway to compliance or pay NCPs. The court made clear that providing this kind of economic choice on compliance is not the purpose of an NCP. The court specifically noted that NCPs are appropriate in a case where the failure to achieve compliance is based on technological concerns encountered along the path to achieving compliance—that is, in circumstances like those in this current rulemaking.

The court's statement was not related to whether,evaluating in retrospect at the point an NCP is established,a manufacturer had made every effort to comply prior to adoption of the NCPs. Navistar chose to pursue an engine emissions control design that is non-SCR based several years before NCPs were proposed. NCPs would be used by Navistar while it addresses the technology-based hurdles it now faces in switching to SCR controls. It faces these technology hurdles now as a result of the technology pathway it chose years before the NCP was adopted. The NCPs would not be used, as Caterpillar asked the court to allow in the earlier case, to decide what technology path to follow and how hard to pursue it based on the economics of the cost of NCPs. In this case, Navistar made considerable efforts to develop and employ the non-SCR technology. Its choice of technological pathway to compliance was not based on weighing the costs of compliance with the cost of NCPs. The court's concerns inCaterpillarare not applicable to the facts in this NCP rulemaking.

The court also quoted from the generic 1985 rulemaking, noting that NCPs would not be appropriate if “many manufacturers were already meeting the standard, or could do so with relatively minor calibration changes or modifications.” This language from the 1985 rulemaking refers to the second criterion, whether substantial work is required to achieve compliance with the more stringent new or revised standard. As discussed above, this is based on all of the work that must be done to move from the previous standard to the more stringent new or revised standard. This criterion is to be evaluated based on actual work needed to go from meeting the previous standard to meeting the current standard, regardless of the timing of such changes. Based on this, the amount of work remaining to be done when the NCP rulemaking occurs is not relevant to the second criterion. Likewise, whether some manufacturers have already achieved compliance at the time of the NCP rulemaking is also not relevant to determining whether the second criterion has been met. As noted above, it is not unexpected that at the time of this NCP rulemaking that “many manufacturers' vehicles/engines were already meeting the revised standard or could do so with relatively minor calibration changes or modifications.” However, rejecting NCPs solely because some manufacturers have achieved or are on a path to achieve compliance, while one or more other manufacturers are not in the same position, would prevent lagging manufacturers from certifying in exactly those circumstances Congress contemplated providing for NCPs—some manufacturers are able to achieve compliance in the lead time provided, but for technological reasons others are not. NCPs are designed to address just this situation, to temporarily avoid driving these manufactories out of the market. 50 FR 35374 (August 30,1985).

Clearly, in this case, substantial work was required to meet the 0.20 g/bhp-hr standard. Every manufacturer has included (or will soon include) for the first time NOXaftertreatment (selective catalytic reduction), on their engines to meet the standard. Prior to deciding to change its technology approach, Navistar also greatly modified its exhaust gas recirculation (EGR) system to reduce NOXemissions and would likely have needed to do significantly more work to further reduce its NOXemissions to meet the standard. These are substantial changes to the emission control systems of these engines. While several manufacturers are currently using SCR systems, they were not doing so until they were required to meet the 2010 NOXstandard. Therefore, it is clear that substantial work was needed to go from the previous standard to achieve compliance with the 2010 NOXstandard, and the second criterion is satisfied.

The court also noted that NCPs are not intended in a situation where the failure to achieve compliance is not related to technological reasons, but to a manufacturer's choosing to not employ an available complying technology. As discussed above, EPA agrees that the basis for establishing NCPs must be a technological based laggard. The reasons for not achieving the emissions standard in the lead time provided must be based on a technological failure in developing and employing the chosen technology pathway. The court refers to a statement made by EPA when discussing the relationship between NCPs for the 2010 NOXstandard and credits for the CO2emissions standards adopted for heavy-duty engines and trucks.10 77 FR 4739 (January 31, 2012). EPA stated it was not providing NCPs for the new CO2emissions standard as it was not in a position to determine that a technological laggard was likely to develop for that CO2standard. In that context, EPA also determined that an engine that was certified to the 2010 NOXstandard using NCPs should not be able to generate credits at the same time under the CO2emissions standards. EPA recognized that there was an interplay between NOXcontrol and CO2control, such that higher levels of NOXcould lead to lower levels of CO2emissions. Under those circumstances, providing credits for the CO2program could provide an incentive for a manufacturer to increase NOXemissions but still certify an engine using NCPs, where they could otherwise achieve the NOXstandard without NCPs. That manufacturer could then generate credits under the CO2program for the decrease in CO2emissions resulting from the increase in NOXemissions. Thus, the manufacturer would be choosing to not comply with a standard for which it was technologically capable of complying, and would be doing so to generate emission credits that would provide it some advantage in the future. This would not be consistent with either the purpose of the CO2credit program (to provide an incentive for manufacturers to take technological and other efforts to over comply with the CO2standard) or the purpose of the NCP program (to provide relief tomanufacturers that fail to achieve the standard on time for technological reasons, not for other reasons such as the economic benefit of generating CO2credits by voluntarily increasing emissions of NOX).

10EPA stated “NCPs have always been intended for manufacturers that cannot meet an emission standard for technological reasons rather than manufacturers choosing not to comply.”

EPA's observation in the proposal confirmed that the basic purpose of NCPs is to provide relief where there is a laggard for technological reasons, not other reasons. The concerns raised regarding CO2credits and NOXNCPs are not related to our finding that Navistar is a technological laggard. No one argues that Navistar has failed to achieve a technological solution because of a decision to generate credits or reap economic benefits elsewhere. Instead Navistar's failure to achieve the standard as of this date is based on technological and not other reasons.

This is similar to the circumstances in 2002 when Caterpillar developed its “ACERT” technology rather than use cooled EGR technology, which it had been developing until 2001. It needed to use NCPs because of delays in developing ACERT. In that case, Caterpillar did not dispute that cooled-EGR would achieve the necessary emission reductions; rather it chose to attempt to meet the standard using what it believed to be a superior technology.

The court also noted its concern with the level of the penalty in the Interim Final Rule, and whether it adequately removed the economic disadvantage to conforming manufacturers. That issue is addressed in Section V. below.

V. Penalty Rates

This rulemaking is the most recent in a series of NCP rulemakings. These are referred to as Phases and are referenced below.11 The discussions of penalty rates and related reports and analyses in those rulemakings are incorporated by reference. This section briefly reviews the penalty rate formula originally promulgated in the