United States

Environmental Protection

Agency

Air and Radiation EPA420-R-02-020

August 2002

Non-Conformance

Penalties for 2004 and

Later Model Year Emission

Standards for Heavy-Duty

Diesel Engines and

Heavy-Duty Diesel Vehicles:

Response to Comments

 Printed on Recycled Paper
EPA420-R-02-020

August 2002

Non-Conformance Penalties for 2004 and

Later Model Year Emission Standards for

Heavy-Duty Diesel Engines and

Heavy-Duty Diesel Vehicles:

Response to Comments

Assessment and Standards Division

Office of Transportation and Air Quality

U.S. Environmental Protection Agency
1

RESPONSE TO COMMENTS DOCUMENT

Non-Conformance Penalties for 2004 and Later Model Year

Emission Standards for Heavy-Duty Diesel Engines and Heavy-Duty Diesel Vehicles

Table of Contents

INTRODUCTION ................................................................. 3

SECTION 1: GENERAL NCP ISSUES ............................................... 4

Issue 1.1: Shape of Penalty Curves ............................................ 4

Issue 1.2: Comparison to Rulemaking Costs ..................................... 5

Issue 1.3: NCP Implementation Timing ......................................... 6

Issue 1.4: Evaluation of NCPs After Implementation ............................... 7

Issue 1.5: “Sunsetting” of NCPs ............................................... 7

Issue 1.6: Additional Penalty Factors to Consider ................................. 8

Issue 1.7: Interaction of NCPs with Consent Decrees .............................. 9

SECTION 2: ISSUES REGARDING THE PROPOSED ANALYSIS ........................ 11

Issue 2.1: General Support for Analysis ........................................ 11

Issue 2.2: Warranty, Maintenance, and Repair .................................. 11

Issue 2.3: Fixed Costs ...................................................... 12

Issue 2.4: Other Costs ...................................................... 13

Issue 2.5: Statistical Methodology ............................................. 13

Issue 2.6: Determination of Upper Limit ........................................ 14

Issue 2.7: Sources of Data .................................................. 20

Issue 2.8: Discount Rate .................................................... 21

Issue 2.9: Estimated Market Share ............................................ 23

SECTION 3: ADDITIONAL RELEVANT ISSUES ................................. 24

Issue 3.1: Canadian Sales .................................................. 24

Issue 3.2: Alternative Use of Penalty Funds ..................................... 25

Issue 3.3: Issues Regarding Collection of Data Prior to and After Proposal ............ 25
2

List of Commenters and Abbreviations

California Air Resources Board CARB

Caterpillar Inc. CAT

Cedar Valley Freightliner CVF

Cummins Inc. Cummins

Detroit Diesel Corporation DDC

Engine Manufacturers Association EMA

National Automobile Dealers Association NADA

New York State Department of Environmental

Conservation

NYDEP

Pony Pack Inc. PPI

Puget Sound Clean Air Agency PSCAA

San Joaquin Valley Air Pollution Control District SJVAPCD

Seneca Economics and Environment, LLC SEE

Volvo Powertrain Corporation VPC
3

INTRODUCTION

The EPA proposed this regulation on January 16, 2002, at 67 FR 2159. The proposal

announced the opportunity for written public comment until March 18, 2002. The proposal also

provided notice of a public hearing which was held on February 15, 2002 in the Washington, DC

area. 

Complete transcripts of the public hearing and the full text of each comment letter may be

found in Docket No. A-2001-25. All data and information relied upon by EPA in developing the

regulation also may be found in Docket No. A-2001-25. This docket is available for public

inspection and copying between 8:00 a.m. and 5:30 p.m., Monday through Friday, excluding

government holidays, at Room M-1500, Waterside Mall, 401 M Street, S.W., Washington, D.C.

This document summarizes the written and oral comments submitted at the public hearing

on February 15, 2002, as well as any comments received during the public comment period, and

records EPA's responses to those comments. The reader should note that many of the most

significant comments are also addressed in the preamble for the final rule and the responses in this

document cross-reference the corresponding discussion in the preamble where appropriate. The

responses presented in this document are intended (1) to augment the responses to comments that

appear in the preamble to the final rule, or (2) to address comments not discussed in the preamble

to the final rule.

EPA received approximately 20 written comments. A copy of each comment letter received

is included in the rulemaking docket. A list of commenters and the EPA docket item number

assigned to their correspondence is also included in the docket. All of the comments have been

carefully considered, and where determined to be appropriate, changes have been made in the final

regulation.
4

SECTION 1: GENERAL NCP ISSUES

Issue 1.1: Shape of Penalty Curves

COMMENT: CARB commented that EPA should change the shape of the NCP curve to increase

the penalties for engines emitting near the applicable standard. Cummins did not specifically

address the shape of the curve, but commented on the use of MC50 and MC90, which both are used

to determine the shape of the curve. Specifically, they commented that MC50 should be set equal to

COC50 and that MC90 should be set equal to COC90. They argued that "the use of the single cost

component to derive MC50 is troublesome and results in inaccuracies in the NCP calculation." (The

values that they recommended for MC50 were higher than the values proposed, and would have

made the NCP penalties higher for compliance levels near the standard.) Cummins also

commented that, "by constraining the F factor to 1.1 to 1.3, the Agency is artificially lowering the

NCPs."

RESPONSE: We believe that we should generally follow the existing regulations in this rulemaking

regarding the shape of the NCP curves, unless we have reason to believe that the resulting NCPs

would not appropriately implement the requirements of the CAA. For example, we would not follow

the regulatory penalty formula if we determined that the resulting penalties would not remove the

competitive disadvantage to the complying manufacturers. However, neither CARB nor Cummins

provided a basis to believe that the proposed shape of the curves would not properly implement the

requirements of the CAA.

MC50 is intended to represent the marginal cost of fully complying with the standards for the

last increment of emission reduction for the average engine. Thus, it is appropriate to use a single

cost component to calculate MC50. This last increment should involve generally the most expensive

controls, especially the most expensive calibration adjustment. However, in our analysis of

minimum values for MC50, we effectively considered all cost components. We compared these

calculated values to the minimums to ensure that our estimates were no lower than the average. 

Cummins mistakenly commented that EPA has set MC50 equal to COC50 in past

rulemakings. MC50 was actually set equal to COC50 divided by the difference between the UL and

the applicable standard. In some cases, the difference between the UL and the applicable standard

was 1.0 g/bhp-hr so that MC50 coincidentally had the same numeric value (with different units). If we

had used that approach in this rule, we would have estimated MC50 for LHD, MHD, and Urban Bus

as COC50 divided by 2.0 g/bhp-hr (4.5 g/bhp-hr - 2.5 g/bhp-hr). Similarly, we would have estimated

MC50 for HHD as COC50 divided by 3.5 g/bhp-hr (6.0 g/bhp-hr - 2.5 g/bhp-hr). The comparison of

this approach with the approach that we are using is described in the Technical Support Document. 

Cummins did not provide a rationale why the marginal cost of compliance (MC50) should be

identical to a total cost of compliance (COC50), without regard to the magnitude of the emission

reduction associated with a total cost. We believe that such an approach would be inappropriate. 

We also believe that the approach used in previous rulemakings is a simple approximation, and

when information is available to more precisely determine the marginal cost of the last step in

compliance, it is appropriate to use such information. It is also worth pointing out that if we used the

approach from previous NCP rulemakings, the MC50 values would be significantly lower than the

values being finalized and the values recommended by Cummins. This would have the opposite

effect from the values recommended by Cummins.
1

 The product of MC50 times F is the slope of the NCP curve for compliance values less than X. 

Larger values of F would result in steeper slopes and higher penalties for compliance levels near the

standard.

5

With respect to the F factor, the 1985 rulemaking that established the first NCP regulations

determined that the use of a constrained F factor to determine the value of X would generally result

in properly shaped curves, and that the resulting NCPs would meet the requirements of the CAA.1

Cummins commented that the constraint on the F factor would result in NCPs that are too low, but

provided no information to show that the resulting NCP curves would not meet the requirements of

the CAA. We continue to believe that the final NCP curves developed using an F value of 1.3 are

sufficiently steep to remove the competitive disadvantage for the complying manufacturers and

appropriately implement the requirements of the CAA.

Issue 1.2: Comparison to Rulemaking Costs

COMMENT: Caterpillar commented that we should set the NCP using the same cost estimates

used in the standard-setting rulemaking. In their comments they compared those rulemaking costs

to similar cost categories described in the draft Technical Support Document for this rulemaking. 

They stated that we did not justify our "departure from the cost estimates used in the 2004 Final

Rule."

Cummins commented that the difference in the cost numbers "estimated in 1998 for the

2004 rule emissions standards" from the cost numbers estimated in 2002 for the NCP "reflects the

engine manufacturers (and EPA's) better understanding of the actual cost of the technology based

on the actual cost to develop and to capitalize their plants to manufacture the technology."

RESPONSE: The CAA directs EPA to set NCPs that remove the competitive disadvantage to the

complying manufacturer. We believe that this is best implemented by using the latest and most

accurate information that is available. As we have done in previous NCP rulemakings, we collected

new cost information to not only determine average costs, but also 90th percentile costs. Also,

rulemaking costs generally reflect longer term costs, rather than the manufacturing and operating

costs associated with engine produced during the first model year of the standards. For these

reasons, we are calculating the final NCPs in the same manner as was proposed.

We disagree with Caterpillar that we did not justify why the analysis in this NCP rulemaking

differs from the analyses for the model year 2004 standard-setting rulemakings. These differences

were discussed in detail in Chapter 3 of the Draft Technical Support Document for the proposal for

this rulemaking. As described in that document, there are three main reasons for the differences. 

First, the goal of this analysis is to estimate manufacturer and operator costs during the first year of

the new standards rather than to project the long-term costs. While we did make some attempt to

project cost decreases with time, the only category in which we separately estimated short-term and

long-term costs in the FRM was hardware cost category. The 2000 FRM analysis did not include an

analysis of short-term fuel, warranty, or repair costs. Thus, Caterpillar's comparison of the various

estimates of costs in the different categories is not valid. Second, the baselines for calculation of

compliance costs differ significantly due to issues associated with the Consent Decrees. More

specifically, the assumed baseline engine used in the previous analyses is very different than the

upper limit engine that served as the baseline for heavy-heavy engines cost analysis. Finally, we

now have more detailed information about costs identified in the earlier analysis, as well as cost
6

categories not previously included. During the previous rulemakings, we requested cost comments

from manufacturers, but received very little input regarding our cost estimates. However, we

received a great deal of input from manufacturers for this rulemaking.

Issue 1.3: NCP Implementation Timing

COMMENT: EMA and Caterpillar commented that EPA must set NCPs in advance to allow

manufacturers adequate lead time. EMA stated that EPA should establish NCPs in the rulemaking

that establishes the emission standards. Caterpillar argued that NCPs "are not useful if they are not

set with sufficient lead time to allow manufacturers to make rational marketing decisions."

Cummins commented that the timing of this rulemaking relative to the implementation date

of the new standards is no later than past NCP rulemakings, and earlier than most of them. They

also commented that even considering the timing relative to the consent decrees, this rulemaking

was consistent with past NCP rulemakings. They stated that "as long as the NCP rule is finished

before October 2002, NCP manufacturers will have adequate time to price their products."

RESPONSE: Historically, NCPs have never been established in the rulemaking that establishes the

emission standards. Indeed, this is essentially impossible to do, given that such rulemakings often

occur many years prior to the effective date of the new emission standards, at a point in time in

which it is typically difficult, or even impossible, to clearly judge whether the necessary criteria are in

place in order to establish NCPs. For example, in the 1999 review, we assessed the NCP eligibility

criteria due to comments raised during the rulemaking process. We found at the time that two of the

three necessary criteria could be met, but that a judgement regarding the third - the determination of

the likelihood of a technological laggard - could not be made at a date so distant from the

implementation of the standards (64 FR 58472, 58513, October 29, 1999).

These NCPs are being set with lead time relative to the implementation of the new

standards that is comparable to or longer than lead time associated with past NCP rules (see table

below). The NCPs in this rule are being established almost 18 months prior to the effective date of

the new standards, a period of lead time that we believe is adequate and consistent with historical

NCP rulemakings. Cummins' comments regarding appropriate lead time relative to the Consent

Decrees is not relevant, as this rulemaking addresses the 2004 model year regulatory requirements.

Timing of Past NCP Rulemakings

Model Years for Which NCPs Were Set Date NCPs Were Established Federal Register Citation

1987 and 1988 December 31, 1985 50 FR 53466

1991 November 5, 1990 55 FR 46622

1994 December 28, 1993 58 FR 68540

1996 and 1998 February 23, 1996 61 FR 6944
7

Issue 1.4: Evaluation of NCPs After Implementation

COMMENT: The NYDEC commented that the NCP upper limit should be continuously reevaluated

and reduced as appropriate over time. 

RESPONSE: As is discussed in Issue 1.5 (below), the nature of the annual adjustment factor in the

NCP formula greatly diminishes the practical application of NCPs for many years after initial

applicability. Of course, one way to reduce the size of the NCP in the “out years” would be to move

the compliance level closer to the standard. This would have same effect as reducing the upper

limit. Thus whether the use of NCPs is partially inhibited by the increase in the NCP penalty rate

over time, or those using NCPs tighten up their compliance levels to reduce the penalty per engine,

the effect being sought by the commenter (i.e., lower emitting engines in use) will be achieved. 

Thus, EPA expects there will be no need to reduce the UL in a future rulemaking.

Issue 1.5: “Sunsetting” of NCPs

COMMENT: The SJVAPCD commented that, although they support the use of an annual

adjustment factor, they recommend making the NCPs available for only a limited amount of time in

order to provide an added incentive for manufacturers to produce complying engines in a timely

manner. They do not suggest what an appropriate time period would be, however. 

RESPONSE: This issue is broader than the scope of this NPRM, but it was in fact considered in the

NPRM and FRM which established the generic NCP rule (see 50 FR 9204 and 50 FR 35374 and

supporting material in public docket EN -85-02.) . The NCP equation which was developed in that

rulemaking incorporates an annual adjustment using two factors. The first is a straightforward

adjustment for inflation effects on the dollar value of the NCP relative to the initial year. The second

factor in the NCP formula links the annual rate of NCP increase to the rate of NCP use, and

increases the real inflation-adjusted penalty with time to the extent that the penalties are used. The

equation for calculating time and usage effects is shown below and is described in detail in the

regulations at 40 CFR 86-1113-87.

AAFi = 1+Ii -1+Ai [1/(1-fraci -1)]i

where: AAF = annual adjustment factor

i = year under consideration since NCP availability

I = percentage increase in overall CPI for previous year relative year NCPs first 

 offered for this rule

A = usage adjustment factor A = 0.10 for first year of adjustment and 0.08 thereafter

frac = fraction of engines using NCPs in this subclass for previous year 

Referring to the NCP equation, these effects are cumulative since the NCP for any given year n is

calculated using the running product of the AAF term (see 86.1113-87). These equations taken

together show that:

1) No adjustments occur in the first year.

2) If NCPs are not used in the second or subsequent years the value of the NCP increases

with the rate of inflation.

3) If NCPs are used the NCP for the subsequent year increases by a factor dependent on

the fraction of engines in a given subclass using NCPs ( see fraci-1 above). 
8

4) Since NCPs should be most valuable when new standards are first being met, and less

important in later years after the NCP is implemented, the rate of this adjustment increases with

each year (i). This affect is moderated somewhat by the factor( Ai) which is set at 0.10 for the

second year and 0.08 for subsequent years.

For example, if there were zero inflation and NCPs were used on 10 percent of the engines

sold for 5 years, the penalty rate would increase as shown below:

Year of NCP Use Penalty Rate Increase Over First Year

1 n/a

2 12.3%

3 24.6%

4 39.82%

5 58.7%

EPA believes that the construction of NCP penalty formula provides adequate means that

will practically limit their use for a large number of years after initial applicability.

 

Issue 1.6: Additional Penalty Factors to Consider 

COMMENT: Cummins commented that EPA should add "an additional amount in the range of

several thousand dollars" to the cost of the NCP to address buyer perception issues. DDC

commented that they share the concern that the cost-based NCP will not fully equalize the

purchasing decision between compliant and non-compliant engines, and that EPA should ensure

that all of the factors are considered and quantified. DDC also commented that EPA include in the

penalty a cost associated with the environmental disbenefit. 

Cummins argued that there is an "exaggerated fear of buying unproven technology" and that

"simply setting NCPs equal to the actual costs to develop, manufacture and operate compliant

technology may not provide adequate disincentives to purchase existing (higher emitting)

technology engines." They suggested that one way of measuring the additional premium that

should be added to the straight cost calculation of NCP would be to look at the margin lost to the

lost-sale manufacturer, since "the choice to purchase existing (higher emitting) engines represents a

lost sale to the engine manufacturer that was prepared to sell an environmentally-more-beneficial

engine."

SJVAPCD strongly supported the view that the NCP should go beyond removing the

competitive disadvantage from a complying manufacturer. They suggest that the cost of an NCP

should “significantly exceed the competitive benefit gained by building a non-conforming engine.” 

RESPONSE: EPA sought comment on this issue and included a lengthy discussion on the matter in

the NPRM. However, since we believed that the proposed NCPs would be sufficient to remove the

competitive disadvantage for the complying manufacturers, no specific proposal was included for an

additional factor. The comments that we received that supported the inclusion of an additional

factor were conclusory and did not provide any information that would lead us to believe that
9

finalizing NCPs based only on the estimated costs of compliance would be insufficient to remove the

competitive disadvantage for the complying manufacturer. Therefore, since the commenters

provided factual basis to believe that effects of purchaser perception need to be accounted for

separately, we still believe that no additional factor is necessary. 

We also believe that developing an additional factor to address potential purchaser

reluctance would be problematic. Incorporating Cummins idea of including profits from lost sales is

one consideration, but since it does not directly reflect a cost of compliance, it would be difficult to

implement. Evaluating this option would require price elasticity, price, and cost information not

available to EPA at this time and even so still may not capture the relatively intangible nature of

consumer behavior in this situation where decision may not be based solely on price. DDC's idea of

incorporating a cost element related to the environmental disbenefit of higher emitting engines

reflects a cost to society but not necessarily a cost to the purchaser.

With respect to the SJVAPCD comment, we believe that the existing NCP formulas that use

"worst-case" costs as well as average costs will frequently result in there being some margin

between the penalty and the economic gain that might otherwise be obtained from selling a nonconforming engine. That is why engine manufacturers have generally not used NCPs extensively in

the past.

The points raised by the commenters present some interesting issues for future

consideration. However, we believe the NCPs being finalized will appropriately implement the

requirements of the CAA without adding an additional factor.

Issue 1.7: Interaction of NCPs with Consent Decrees

COMMENT: Cummins commented that the 1998 NCPs multiplied by a factor of 1.5 do not reflect

the cost of compliance to achieve the 2004 standards. They stated that it is imperative that the

Agency promulgate NCPs for 2004 that accurately reflect the cost of compliance to meet the 2004

standards. 

Caterpillar commented that EPA’s NPRM is not timely, given that EPA claim’s this rule will

impact the NCPs for Consent Decree companies in October, 2002. Caterpillar stated that EPA’s

proposal cannot apply to engines set to be introduced in seven months. Caterpillar commented that

the NCP final rule must clearly state that the rule does not apply to Consent Decree engines.

Caterpillar commented that it was improper to consider the Consent Decrees in this

rulemaking. They added that, assuming that it was proper to consider the Consent Decrees, then

EPA should consider the requirements that will take effect in October of 2002. They stated that

these upcoming requirements will require manufacturers comply with FTP and EURO III levels of

2.5 g/bhp-hr for NOx + NMHC.

RESPONSE: As was stated in the proposal, this rulemaking establishes NCP’s for the 2004 model

year NMHC+NOx emission standards for heavy-duty diesel engines. We agree with Cummins to

the extent that they support NCPs that accurately reflect the actual costs of compliance with the

2004 standards. However, Cummins comments regarding the penalty provisions of the Consent

Decrees are not relevant to this rulemaking. The analyses associated with this rule were performed,

and decisions were made independently from the penalty provisions of the Consent Decrees. 

Caterpillar’s comment regarding the timing between this rulemaking and the Consent
10

Decrees are not relevant to this rulemaking. This rule establishes NCPs under the regulations for

the model year 2004 NMHC+NOx standard. Caterpillar’s comments that these NCPs cannot apply

to Consent Decree engines and that EPA should state this final rule does not apply to the Consent

Decree engines are not relevant to this rulemaking. The only issue before the Agency and being

decided in this rulemaking is the applicability of NCPs, under EPA regulations, for model year 2004

and later engines. Issues of Consent Decree interpretation or implementation are not before the

Agency and are not relevant to this rulemaking. 

Caterpillar's comment that EPA should consider the requirements that will take effect in

October of 2002, instead of those already in effect is addressed in section 2.6.
11

SECTION 2: ISSUES REGARDING THE PROPOSED ANALYSIS

Issue 2.1: General Support for Analysis

We received general comments from CARB, Cummins and DDC supporting our analysis (or

the rulemaking in general). We also received more specific comments on our analysis. These

more specific comments are discussed below.

Issue 2.2: Warranty, Maintenance, and Repair

COMMENT: DDC provided detailed recommendations to modify our analysis of warranty,

maintenance and repair costs. First, they commented that their historical information suggests that

the per-mile post-warranty repair rate should be 35 percent less than the warranty repair rate, rather

than 50 percent less, as we used in our draft analysis. They also commented that our post-warranty

repair cost is too low because it does not include the engine manufacturers' markup for replacement

parts. They argued that this markup will result in a cost (dollars per repair) to the operator for postwarranty repairs that is significantly higher than the cost to the engine manufacturer for warranty

repairs.

With respect to demurrage costs, DDC agreed with our proposed approach of estimating the

costs based on rental prices. However, they suggested that we drop the cost of insurance, since

insurance for rental vehicles would likely be included in the owners normal insurance policy. They

also commented that the total downtime for each repair would normally be 1.5 to 2 days when

logistical factors such as vehicle pickup and delivery are included. Finally, they commented that

EPA could alternatively estimate the demurrage cost as two days of lost revenue plus meals and

lodging for the driver.

With respect to scheduled maintenance, DDC commented that a typical EGR engine should

experience three more oil changes than a current engine, and will require EGR maintenance at

rebuild.

In addition to these public comments on maintenance issues, we also received updated

information from several manufacturers relating to maintenance. This information was also

considered in our final analysis. 

RESPONSE: Based on the public information provided by DDC and confidential information

provided by other manufacturers, we continue to believe that the best estimate for the per-mile postwarranty repair rate is 50 percent less than the warranty repair rate. While DDC projects that permile repair rates will only drop by 35 percent after the warranty periods, at least one other

manufacturer projects that per-mile repair rates will only drop more than 50 percent. Therefore, we

are basing our final estimates of post-warranty repair rates on a 50-percent decrease. However, we

do believe that our estimated cost per repair in the draft analysis for heavy-heavy duty engines

($700 per repair) was slightly high. Based on updated information from manufacturers, we now

believe that the repair cost for heavy-heavy duty engines is more likely to be $500 per repair. As

described in our analysis, using a lower cost per repair will have the effect of increasing the number

of repairs. We agree with DDC that we should markup the cost of parts for post-warranty repairs.

We agree with DDC's comments that we should drop the insurance costs for our estimate of
12

demurrage costs. However, we do not agree that we should increase the time allotted for each

repair. We still believe that most repairs will be completed within one day. While a few repairs may

take more than one day, many others may be completed in less than one day, or even during other

scheduled maintenance. Thus, our estimated demurrage costs are equal to the approximate cost of

renting a vehicle for a single day. We continue to believe that a rental based cost estimate is more

reliable than a lost revenue estimate, which would be highly dependent on the type of freight being

hauled. 

We have included all of the updated information regarding scheduled maintenance into our

final costs estimates.

Issue 2.3: Fixed Costs

COMMENT: DDC provided detailed recommendations to modify our analysis of fixed costs. They

believe that our proposed estimates of fixed costs were amortized over too many engines. First,

they stated that manufacturers will attempt to recover the fixed costs associated with the 2004

standards before the new 2007 standards begin to be phased-in. They stated that "it is not correct

to assume that the planned EGR system for 2004 will in fact be useable in 2007 and beyond." They

argued that manufacturers will take advantage of the averaging provisions for model years 2007-

2009 to produce a single technology product rather than produce both very low NOx engines and

the 2004-era engines. They suggested that we use a three-year amortization period instead of the

proposed five-year period.

DDC also commented that we should base our cost analysis on modeled market volume

rather than current sales volumes. They argued that the compliance costs associated with the 2004

standards will affect the market and must be accounted for.

RESPONSE: We continue to believe that a five-year amortization period is appropriate for this

analysis. In our recent final rule setting new emission standards for 2007 and later heavy duty

diesel engines, we projected that manufacturers would rely on their 2004 technologies to help

achieve the more stringent 2007 standards. While it is theoretically possible, as DDC suggested,

that a manufacturer could comply on average with the 2007 phase-in requirements using a fully

optimized NOx adsorber on an engine without EGR, we do not believe that is likely to be feasible

when the standards are fully phased-in. Thus, we fully expect that manufacturers will be using their

2004 technologies in 2010. Given this, we believe that a five-year amortization period is appropriate

for this analysis.

With respect to the annual sales volumes, we believe that the 2000 sales volumes represent

a good estimate of what sales will be in 2004. There are reasons to believe that sales in 2004 may

be higher, but there are also reasons to believe that sales in 2004 may be lower. As shown in figure

2.3-1, since 1990, there has been a long-term trend of increasing annual sales volumes. However,

much of this increase was the result of the high economic growth rates observed in the 1990s. At

this point, we cannot necessarily project that growth rates between now and 2004 will be that high. 

Moreover, some manufacturers have expressed concerns that purchaser perceptions may slow

sales as the new technology is introduced into the market.
13

1988 1990 1992 1994 1996 1998 2000 2002

50

100

150

200

250

300

350

Total Sales

Thousands

U.S./Canada Factory Sales of HH Trucks

Figure 2.3-1

Issue 2.4: Other Costs

COMMENT: Several manufacturers provided updated cost data in their CBI comments. DDC also

commented in support of the use of a multi-year fuel cost for heavy-heavy duty engines, given their

expected lifetimes.

RESPONSE: We incorporated the updated manufacturer information into our analysis. In general,

this updated information did not substantially change our analysis. The specific cases where we

received updated information are identified in Chapter 3 of the Technical Support Document.

We agree with DDC that a multi-year average fuel price is appropriate for this analysis. 

Therefore, we are using a five-year average fuel price in the final analysis. We believe that a

five-year average best approximates how purchasers will make purchase decisions, considering the

economic significance of changes in fuel consumption rates. This issue is discussed in more detail

in Chapter 3 of the Technical Support Document.

Issue 2.5: Statistical Methodology

COMMENT: Caterpillar commented that we incorrectly combined average costs for each category. 

They implied that our method only worked if the costs occur in "fixed proportions", and argued that

we should have summed total costs for each manufacturer and then sales-weighted these total

costs, rather than summing the sales-weighted cost in each cost category. Cummins supported our

use of the sales-weighted mean of the costs for COC50 instead of using median costs.

RESPONSE: It is not possible to estimate average costs in the manner suggested by Caterpillar

because not all manufacturers provided cost data for each subcategory. Some of these

manufacturers acknowledged that, while they were not able to estimate the cost for a category such

as oil changes, they did believe that there would be some additional cost. More importantly,

Caterpillar is incorrect in claiming that the two methods would produce different results. It is

mathematically equivalent to sales-weight total costs for engine and to sum sales-weighted

averages of subcategories of costs. This is true without regard to whether the costs occur in "fixed
14

proportions." An example of this is shown in the following table. Both methods result in an

estimated average cost of $982.53.

Sales Cost Category 1 Cost Category 2 Cost Category 3 Total

Manufacturer 1 1000 $100 $400 $500 $1000

Manufacturer 2 2000 $150 $300 $500 $950

Manufacturer 3 1500 $200 $300 $800 $1300

Sales

Weighted

Avg.

 $136.50 $331.75 $514.28

$982.53

Issue 2.6: Determination of Upper Limit

COMMENT: DDC and Cummins supported our proposed upper limits. Caterpillar commented that

EPA should not base the NCPs for heavy-heavy duty engines on an upper limit of 6.0 g/bhp-hr. 

NYDEC also opposed the 6.0 g/bhp-hr upper limit for heavy-heavy duty engines, because of their

concerns about "excess emissions in the field". They supported setting the upper limit at 5.3 g/bhphr. We did not receive comments opposing the upper limits for the other service classes.

Caterpillar stated that it was improper for EPA to consider the Consent Decrees in setting

the upper limits. Caterpillar stated that EPA cited no technical analysis which justifies the use of a

6.0 g/bhp-hr NMHC+NOx Upper Limit. They also argued that the UL should be based on the

capabilities of the technological laggards in 2004. They argued that this approach effectively counts

the combined costs of complying with the 1998 NOx standard and the 2004 NMHC+NOx standard. 

Caterpillar states there is “no statutory or regulatory justification for an approach that utilizes the

costs of bringing an engine that does not comply with the present emission standards into

compliance with the next emission standards.” Caterpillar also argues an Upper Limit of 6.0 g/bhphr is not appropriate because it counts the costs of "eliminating purported defeat devices even

though the defeat device prohibition is not new." They further argued that the compliance costs of

the Consent Decrees were "intended as punishment" and should not be considered to be costs of

compliance with the 2004 emission standards. 

Caterpillar stated that basing the upper limit on Consent Decree engines would put nonConsent Decree companies and new entrants to the market place at a disadvantage. They also

argued that it will create a disincentive to investment in emission reduction because it would allow "

a manufacturer to stay in the market where that manufacturer's engines would not have complied

with the previous emission standard or UL (not just the current emission standard and UL)." 

Caterpillar stated that even if the Consent Decree emission levels were relevant to this rulemaking,

EPA selected the wrong levels. Caterpillar stated that the Consent Decrees specify the 2004 FTP

standards must be met by October 1, 2002, as well as a Euro-3 emission limit equal to the 2004

FTP standards, all of which must be met without the use of defeat devices.

Caterpillar stated that EPA attempted to justify an UL of 6.0 because the Agency did not

collect cost data for HHDDE’s other than from a 6.0 g/bhp-hr NMHC+NOx baseline, but Caterpillar

suggests that a “flaw” in EPA’s approach “is not a basis for arbitrarily choosing a 6.0 g/bhp-hr UL”. 
15

Finally, Caterpillar stated that EPA improperly used non-existent off-cycle emissions requirements to

set a UL. Caterpillar states that the NPRM implicitly concludes that a compliant engine would

comply with Euro-III emission level, but such emission requirements do not apply until 2007, and

therefore EPA has included costs of compliance for 2004 which are really costs of compliance for

2007.

RESPONSE: We have decided to promulgate, as proposed, Upper Limit values of 4.5/bhp-hr

NMHC+NOx for light-heavy, medium-heavy, and urban bus engines, and an Upper Limit value of

6.0 g/bhp-hr NMHC+NOx for heavy-heavy duty diesel engines. These upper limit values will

generally allow technologically lagging manufacturers to continue producing their current products

until they can complete the development of their new engine models.

We understand the concerns raised by the NYDEC regarding the potential for in-use

emissions that are above the standard. However, NCPs by their very nature allow production of

engines which do not meet the otherwise applicable emission standards. We do not agree with

NYDEC that the emissions allowed by this UL would be "excess emissions" in the sense of

emissions attributable to defeat devices. This action does not weaken in any way the existing

prohibition of defeat devices. A manufacturer whose engine has high emissions on, for example,

the EURO III would need to certify to a comparable FTP level. Thus, the manufacturer would be

required to pay an appropriate penalty that is consistent with the engines actual performance. The

issue is whether the emissions that would be allowed to occur by the establishment of an UL for

heavy-heavy duty engine of 6.0 g/bhp-hr is allowed and appropriate under the CAA. We believe

that the CAA allows us to set an upper limit that allows continued production of current engines, and

thus allows us to set the UL at 6.0 g/bhp-hr. Moreover, we believe that the penalties that would

apply for compliance levels between 4.5 g/bhp-hr and 6.0 g/bhp-hr are large enough to provide a

strong disincentive to produce engines that have emissions any higher than technologically

necessary. 

We disagree with Caterpillar’s general comments that it was improper for EPA to consider

the Consent Decrees in setting the upper limit. As discussed in the preamble to the proposal and

for this final rule, the selection of an UL of 6.0 g/bhp-hr reasonably should allow existing HHDDE’s in

the marketplace which are manufactured by technological laggards to continue to be sold while the

manufacturer works on the technologies necessary to bring such engines into compliance with the

model year 2004 standards, without also requiring a concurrent design change to produce engines

to a UL below the existing levels. The consent decrees have created a unique situation under which

engines which would not otherwise be certified by EPA are currently allowed to be manufactured

and sold. The vast majority of new HHDDEs do not comply with the existing emission requirements,

and emit at NOx levels well in excess of the current emission standard. The selection of an UL of

6.0g/bhp-hr reflects that reality, in order to meet the goal described above. Caterpillar’s comments

suggest that EPA should ignore the existence of the consent decrees in considering the

establishment of the Upper Limit. We disagree with this comment. Ignoring the Consent Decree

would likely lead to setting an UL of 4.5 g/bhp-hr as with the other service classes. This would

interfere with meeting the goal noted above, and be inconsistent with the other reasons noted below. 

Caterpillar states that EPA cited no technical data nor any statements from engine

manufacturers that suggests a technical laggard could not comply with an UL of 4.5g/bhp-hr

NMHC+NOx for HHDDEs. We disagree with the assumption inherent in this statement. 

Caterpillar’s statement implies that EPA must perform a technical analysis which demonstrates that

the level below the emission performance of existing engines could be achieved by technological

laggards. Neither the CAA nor EPA’s regulations require that EPA demonstrate that the Upper Limit
2

 See April 5, 2002 press release from Detroit Diesel Corp. in which they state “As

previously announced, DDC will initially make approximately 95% of its current ratings available in

October 2002.” EPA believes it reasonable to project this company may need NCPs for model year

2004 in order to offer a full product range. See also EPA Memorandum “Summary of Meeting

between US EPA and Cummins Inc. on April 17, 2002 regarding 2004 On-highway Heavy-duty

Diesel Engine Nonconformance Penalty Rule”, in which this company suggests some part of their

product line of heavy-heavy engines may not be ready by model year 2004. A copy of both of these

documents is available in the docket for this rule.

3 EPA Memorandum “Summary of Model Year 2001 Heavy-duty Diesel Engine HC and NOx

Certification Data”, copy available in the docket for this rulemaking.

16

value is the lowest emission level achievable by the technological laggards in the given time frame. 

CAA Section 206(g)(2) requires that no certificates of conformity will be granted “ if the degree by

which the manufacturer fails to meet any standard promulgated under section 202(a) with respect to

such class or category exceeds the percentage determined under regulations promulgated by the

Administrator to be practicable.” The statute requires that the Upper Limit value be the value

“determined ... to be practicable”. In past rulemakings EPA has interpreted its obligation to

determine a “practicable” emission level to not require that the most stringent level achievable by

technological laggards. For example, our regulations call for the UL to be set at the prior emission

standard (where one is applicable), and do not call for EPA to determine whether the prior emission

standard is the lowest level achievable by the technological laggards. That regulatory provision was

based on setting the UL at the level of existing control, to ensure all heavy duty engines could meet

it, to avoid the need for a separate design phase, and because of concerns over the ability to readily

determine a level below the prior standard that would be practicable for all manufacturers. See 50

FR 35376-35377 (August 30, 1985) and 67 FR 2164-2165 (January 16, 2002).

With respect to the likelihood of technological laggards developing, we have placed into the

docket for this rulemaking information from two heavy-heavy duty diesel engine manufacturers

which leads EPA to conclude there is likely to be at least one technological laggard in model year

2004.2 As specified in EPA’s existing regulations, one of the criteria for establishing an NCP is EPA

must find “that there is likely to be a technological laggard” (see 40 CFR 86.1103-87(a)(2)).

In addition, EPA did provide data at the time of the proposal which indicates an Upper Limit

of 6.0 g/bhp-hr NMHC+NOX would likely be achievable by all manufacturers in model year 2004. 

We included a memorandum to the docket for this rule which summarizes the certification data from

model year 2001 heavy-duty diesel engines, and this memorandum was discussed in the proposal

(See 67 FR 2165). This data shows that for the heavy-heavy service class, all engine families for

Model Year 2001 had Euro-3 emission performance at or below 6.0 g/bhp-hr NMHC+NOx.3 This

data shows there are a number of engine families with emission levels greater than 4.5 g/bhp-hr

NMHC+NOx. If EPA were to establish an Upper Limit of 4.5 g/bhp-hr NMHC+NOx, or even 5.3

g/bhp-hr NMHC+NOx (a level for which we also requested comment), many of these engine families

would not meet this value and would require additional development and perhaps the application of

new technologies. It is reasonable to establish the UL so as to avoid requiring such a separate

design cycle. 

Caterpillar suggested that EPA’s selection of a 6.0g/bhp-hr UL effectively combines the

costs of complying with the 1998 NOx standard and the 2004 NMHC+NOx standard, and that this

implicitly combines the costs of removing alleged defeat devices. Caterpillar states there is “no
17

statutory or regulatory justification for an approach that utilizes the costs of bringing an engine that

does not comply with the present emission standards into compliance with the next emission

standards.” They also argued that our costs included the compliance costs of the Consent

Decrees. We disagree with Caterpillar’s comments. We did not combine the costs of separately

complying with the 1998 and 2004 standards, nor did we calculate Consent Decree costs. Rather,

we have estimated the cost of compliance for model year 2004 relative to the UL of 6.0 g/bhp-hr. 

We recognize that our estimate of these compliance costs will be similar to the costs of separately

complying with the 1998 and 2004 standards. However, the purpose of our calculation is separate

and distinct - to assess as accurately as possible the cost of compliance for model year 2004

compared to an engine at the UL. EPA believes setting an UL at 6.0 g/bhp-hr is most appropriate

for the reasons noted above and in the preamble. An UL of 6.0 g/bhp-hr best implements the

policies behind an UL. EPA believes it is more appropriate to address issues of enforcement of past

noncompliance with the defeat device prohibition through an enforcement mechanism. In selecting

an UL in this NCP rulemaking, we intend to do no more than pick a level that best implements the

policy behind setting an UL, as expressed in prior NCP rulemaking. 

We disagree with Caterpillar’s comments that what EPA has done in this rule is not justified

under the statute or EPA’s regulations. To the contrary, CAA Section 206(g)(2) directs EPA to

establish an Upper Limit through a rulemaking which is “determined ... to be practicable”. The

statute provides a large degree of discretion to EPA in determining a practicable UL. Nothing in the

statute prohibit EPA from selecting the UL values promulgated in this final rule. As noted earlier,

we believe that the UL values being established are appropriate under this provision of the CAA. 

Caterpillar also argues an Upper Limit of 6.0 g/bhp-hr is not appropriate because it counts

the costs of "eliminating purported defeat devices even though the defeat device prohibition is not

new." EPA agrees that the defeat device prohibition is not new. However, this does not negate the

reality that model year 2001 engines currently being produced by HHDDE manufacturers have high

off-cycle emissions, and these same engines are the engines which are the basis for the UL of

6.0g/bhp-hr for the reasons noted above. The 2004 model year standards, including the defeat

device prohibition, are clearly a new more stringent standard. This is true whether compared to the

1998 standard with the defeat device prohibition, or to the Consent Decree limits. The existence of

such a new standard meets one of the regulatory criteria that must be met before NCPs are allowed. 

However, this new standard does not dictate the level of the UL, which is chosen for other reasons

We disagree with Caterpillar’s comments that a 6.0 g/bhp-hr UL would disadvantage nonConsent Decree companies and new entrants to the market place. In fact, an Upper Limit set at 6.0

provides non-Consent Decree companies and new entrants to the market the option of producing

engines that emit up to 6.0 g/bhp-hr NOx rather than 4.5 g/bhp-hr, provided that they pay the

appropriate penalties. . Therefore, a non-Consent Decree company or new entrant to the market

who is a technological laggard and whose engines currently emits in the 4.5-6.0 range will benefit by

the selection of a 6.0 Upper Limit, since the UL at 6.0 would allow the company to continue to sell

today’s product while they invest the resources to comply with the new standard. Implicit in

Caterpillar’s comments is the assumption that the NCPs are higher because of the choice of 6.0

g/bhp-hr for the UL. However, for values below 3.4 g/bhp-hr (the X value for HHDE), the penalties

are defined by the marginal cost parameters F and MC50. Since F and MC50 are independent of the

UL, the penalties would be identical in this range for any UL value considered. As described below,

we did not estimate the cost of compliance for an UL of 4.5 g/bhp-hr. However, depending on what

techniques the manufacturers would otherwise have used to meet a 4.5 g/bhp-hr level, it is also not

clear that the penalties between 3.4 g/bhp-hr and 4.5 g/bhp-hr would have been significantly lower if

the UL had been set at 4.5 g/bhp-hr and, in fact, there are technical scenarios in which it could have
4

 See E-mail message from William Charmley, US EPA to “Interested Parties”, including Mr.

Jim Chen (jcchen@hhlaw.com), attorney for Mercedes Benz. Copy available in the docket for this

rule.

18

been higher. However, Caterpillar has provided no data which suggests that non-Consent Decree

companies or new entrants intend to employ NCPs instead of complying with the standards. In fact,

we received no comments from non-Consent Decree companies or new entrants which would

indicate they are concerned that an UL of 6.0 puts them at a disadvantage. At least one such

company who competes in the heavy-heavy service class, DaimlerChrysler (manufacturer of

Mercedes-Benz), was directly notified by EPA of the publication of the proposal, and we received no

comments from this company.4 In addition, the statute requires the EPA establish NCPs which

“shall remove any competitive disadvantage to manufacturers whose engines or vehicles achieve

the required degree of emission reduction” (see CAA Section 206(g)(3)(E)). The statute requires we

remove any disadvantage which the complying manufacturer may encounter. While we do not

believe that NCPs place any non-Consent Decree company or new entrant at a competitive

disadvantage, the statute does not require that we establish an NCP which removes any

disadvantage to the non-complying manufacturer. As articulated in the preamble for this final rule

and in previous NCP rules (see for example 50 FR 35374), NCPs provide an alternative to a

manufacturer who is already in the market so that a manufacturer need not exit the market if they

are unable to comply with a new emission standard. New entrants to the market are by definition

not already in the market, and NCPs have not previously been promulgated to provide a mechanism

by which an engine or vehicle manufacturer could gain entry to the U.S. market by selling noncomplying products. 

We disagree with Caterpillar’s comment that a 6.0 UL for HHDDE’s create’s a disincentive to

invest in emission reductions. First, NCP’s are specifically designed to encourage compliance with

the applicable emission standard, in particular for engines near the upper limit value. The per

engine penalty can be much greater than the average cost of compliance, and for engines at the UL,

the per engine penalty is intended to represent the 90th percentile costs. Nevertheless, even if the

UL of 6.0 g/bhp-hr resulted in lower penalties than a 4.5 g/bhp-hr value, there would still be

significant incentive to reduce emissions. Selling products in a competitive market where your costs

(including penalties) are at the high end of the range provides a strong incentive to apply

technologies to reduce the penalty being paid, and thus lower emissions.

We disagree with Caterpillar’s comments that EPA selected the wrong emission level from

the Consent Decrees. Caterpillar’s comments suggest that EPA should set the Upper Limit for the

heavy-heavy engines at the October 1, 2002 limits set in the Consent Decrees. However, the

October 1, 2002 levels from the Consent Decrees are the 2004 model year emission standards (2.5

g/bhp-hr NMHC+NOx). Setting the UL for the 2004 standards at 2.5 g/bhp-hr NMHC+NOx would be

inconsistent with the intent of §206(g) of the CAA. With the UL equal to the standard, there would

be no way for a manufacturer to employ the NCP. Such an approach would be inconsistent with the

policy behind setting an UL at a prior, higher level, to provide time for technological laggards to

come into compliance. 

We disagree with Caterpillar’s comments that EPA’s selection of the UL was arbitrary

because of limitations in the data collected. While it is true that for the HHDDE’s, all of the

confidential cost data we received included the cost of compliance for model year 2001 engines to

comply with the 2004 FTP standards, and all of the MY2001 engines were in fact operating at

emission levels on the order of 6.0 g/bhp-hr NOx+NMHC, that is not the primary reason why EPA
19

selected an UL of 6.0. As discussed in the proposal, we considered and requested comment on

alternative UL values of 4.5 g/bhp-hr and 5.3 g/bhp-hr NMHC+NOx (see 67 FR 2165). The primary

reason for the selection of an UL value of 6.0 is this value will allow technological laggards to

continue to produce existing engines (through the payment of a penalty), and allow such laggards to

focus their research and development efforts on complying with the 2004 emission standards. We

have concluded that this UL value is most consistent with the objective of the CAA's NCP provision,

as well as our previous NCP rulemakings. The reality of the existing market-place is that the vast

majority of HHDDE’s are emitting at emission levels on the order of 6.0 g/bhp-hr NMHC+NOx. 

Since the role of an NCP is to address the problems associated with a transition from a prior

emission requirement to a new more stringent requirement, it is appropriate to consider the effects

of the defacto HHDDE emission limits established by the Consent Decrees in establishing the UL for

the 2004 model year NMHC+NOx standard. The existence of the Consent Decrees October 1,

2002 emission requirements does not remove the technical issues laggards face, and we have in

fact received information which leads us to conclude a technological laggard is likely to exist for the

model year 2004 heavy-heavy service class, and such engines are currently operating at emission

levels on the order of 6.0 g/bhp-hr NMHC+NOx.

It is correct that we were not able to collect from engine manufacturers true cost data for a

complying heavy-heavy engine which operates at a 4.5 g/bhp-hr level to comply with the 2.5 g/bhphr standard. All of the companies who provided data to us currently make products which emit at

off-cycle emission rates on the order of 6.0 g/bhp-hr. Those companies do not know what the costs

of compliance to go from a level of 4.5 to 2.5 would be, since they do not make such products. EPA

did request cost data from heavy-heavy companies who do make engines without high-off cycle

emissions, but those companies declined to provide EPA with cost estimates. However, even if we

had accurate estimates of the compliance costs associated with an UL of 4.5 for heavy-heavy duty

engines, an UL of 6.0 would still be more appropriate, for the reasons noted above.

We disagree with Caterpillar’s comments that we have improperly included costs of

compliance with model year 2007 supplemental emission standards in establishing NCPs for the

model year 2004 standards. In 2004, engine manufacturers must comply with the FTP emission

standards, as well as the prohibition of defeat devices. In 2007, manufacturers must comply with

the FTP emission standards, which will include supplemental standards referred to as the

supplemental steady state standard and the not-to-exceed standard, as well as the prohibition of

defeat devices (See 40 CFR 86.004-11 and 40 CFR 86.007-11). Caterpillar states that the

proposal “implicitly concludes” that engines must comply with the 2007 supplemental standards in

2004. There is nothing in the record which supports this statement. In fact, this NCP is based on

compliance with the 2004 standards and the defeat device prohibition, not the 2007 standards. In

our request for cost data from engine manufacturers, EPA was clear that we were requesting cost

information for engines which companies are designing to comply with the 2004 standards. Our

request for information contained the following statements (See EPA Memorandum “Collection of

Compliance Cost Estimates for the Purpose of Establishing NCPs for the 2004 Heavy-Duty Diesel

NMHC+NOx Emission Standard”, copy available in the docket for this rule, docket item II-B-02):

 “.. we are collecting information in preparation for a notice of proposed rulemaking

regarding the establishment of non-conformance penalties (NCPs) for the model

year 2004 heavy-duty diesel engine NMHC+NOx standards.”

 “.. we would like to gather company specific cost information regarding your cost of

compliance with the 2004 standards.”
20

 “For the 2004 compliant engines, this should include a description of the

technological and calibration changes necessary to meet the emission standards.”

 “The 2004 engine fixed costs should only include those costs attributable to meeting

the 2004 emission standards.”

There is no evidence which supports Caterpillar’s comments on this issue. We did not

modify the manufacturer costs (which were requested for compliance with the model year 2004

standards) in anyway to reflect compliance with the 2007 standards. We expect that manufacturers

would include in their estimates for MY 2004 compliant engines that such engines would not include

defeat devices, since an engine equipped with a defeat device would not comply with the 2004

requirements. Manufacturers at their option may have considered EPA’s recent guidance regarding

defeat devices (such as Advisory Circular 24-3) . Any such consideration would not be inconsistent

with our request that manufacturers cost estimates should be based on compliance with the model

year 2004 standards, as this guidance discusses defeat device prohibition. The technological

approaches to comply with the defeat device prohibition in model year 2004 would in any case be

similar to those used to comply with the model year 2007 supplemental standards for 2.5 g/bhp-hr

NOx+NMHC engines. This overlap in technology, however, does not invalidate the information

received from manufacturers concerning the model year 2004 standards. No adjustment was made

to the manufacturer data, nor was any adjustment necessary to address this overlap. Therefore, we

continue to believe that it is appropriate to rely on this manufacturer information. 

Issue 2.7: Sources of Data

COMMENT: Caterpillar commented that EPA based the proposed NCP on incomplete information. 

They stated that EPA’s request for cost data from a number of engine manufacturers prior to the

proposal did not address all of the relevant issues. Specifically, Caterpillar commented that EPA’s

request for information did not define critical terms like the term Upper Limit, and did not ask the

manufacturers to state the assumptions they used as to the regulatory status of the baseline engine.

Thus, they argue that the data collected would not be comparable. They also comment that it is

unclear whether the data collected by EPA reflects the costs of compliance with accelerated 2004

emission standards. Caterpillar also commented that EPA’s request for cost data prior to the

proposal did not include all of the information EPA needed to complete the rule. Specifically,

Caterpillar points to EPA’s statement in the proposal regarding the proposed Upper Limit value of

6.0 g/bhp-hr NMHC+NOx for the heavy-heavy service class for which EPA noted it “does not believe

it could readily develop the cost figures for such a development phase.”

RESPONSE: We disagree with Caterpillar’s comments that EPA’s request for cost data prior to the

proposal did not address all of the relevant issues. First, it was not necessary for the collection of

the cost data prior to the proposal to define the term Upper Limit, or to inform manufacturers at that

time what Upper Limit values EPA was considering for the proposal, since EPA was not requesting

comments at that time, but rather we were requesting data. EPA’s data request did specify both the

“baseline” engine and the “control” engine, for the purposes of estimating the costs of compliance. 

As documented in an EPA memorandum to the docket, EPA’s request for cost data clearly stated

that the baseline engine was “a model year 2002 engine”, and the control engine was a “2004
5

 See EPA Memorandum “Collection of Compliance Cost Estimates for the Purpose of

Establishing NCPs for the 2004 Heavy-Duty Diesel NMHC+NOx Emission Standard.”, copy available in

the docket for this rule, Docket Item II-B-02.

21

compliant engine”.5 Before the proposal, we discussed with each manufacturer their submissions

to confirm that we properly understood them. This included discussions of the baseline engines.

We did, in fact, receive cost information from some manufacturers in response to our request for a

control engine that we determined were costs of compliance with the consent decree’s October 1,

2002 requirements. We rejected and did not use these data in our analysis, and in every case we

requested and received from the engine manufacturer costs of compliance for the model year 2004

standards.

We disagree with Caterpillar's assertions that our data request prior to the proposal did not

request all of the data EPA needed for our proposal, and that our request was flawed. EPA’s data

request prior to the proposal was not intended to request comment on all aspects an NCP rule. 

That is the purpose of the public notice and comment process. Caterpillar’s specific comment is in

reference to EPA’s statement in the proposal that “EPA does not believe it could readily develop the

cost figures for such a development phase” (67 FR 2165). This statement was regarding the costs

of a development phase from an UL level of 6.0 g/bhp-hr NMHC+NOx to an UL level of 4.5 g/bhp-hr

NMHC+NOx for the heavy-heavy service class. This statement does not reflect a flaw in the data

EPA requested from engine manufacturers. Our request for data from manufacturers was not for

them to speculate on costs for a development program which they did not undertake. Rather, our

request from manufactures was for them to provide us with data that reflected the actual

development programs they were performing (i.e., making a model year 2001 engine comply with

the 2004 emission standards). For most heavy-heavy service class engine manufacturers, they

have not needed to undertake the development of a HHDDE which complies with an emission level

of 4.5 starting with an engine that complied with an emission level of approximately 6.0. That is, the

HHDDE manufacturers who are subject to the Consent Decrees manufacturer products which have

high off-cycle emissions, and these products are not required to comply with EPA’s existing

regulations (i.e., the 1998 requirements). Most CD manufacturers will go directly from today’s

product to a product which complies with the 2004 standard, by-passing engines which comply with

the 1998 regulations.

Again, EPA’s request prior to the proposal was for the cost estimate for the development

programs that the manufacturer was actually undertaking keyed to costs for the 2004 model year,

not for a theoretical development program, or a prior model year. In addition, EPA took comment on

all of these issues, and received no additional or different data other than the data discussed above

and in the Technical Support Document. We also received no indications that manufacturers

misinterpreted our request for data.

Issue 2.8: Discount Rate

COMMENT: Two of the manufacturers commented that EPA should finalize the NCPs based on a

seven percent discount rate. One of the manufacturers commented that EPA should use a three

percent discount rate. Caterpillar cited a study by Ibbotson Associates to support using a real

discount rate of seven percent or higher. DDC stated that they use seven percent for their internal

analyses. Cummins cited EPA's Science Advisory Board and current interest rates for U.S.

Treasury Bills as support for using a three percent discount rate. Seneca Economics and
22

Environment (SEE) submitted comments critical of EPA’s use of a seven percent rate for both

compounding and discounting and suggested that EPA should use different rates for past and future

cash flows relative to the base year. 

RESPONSE: The purpose of a discount rate in the context of an NCP analysis is to reflect the

impact of manufacturer and user business decision making criteria with regard to meeting the CAA

principle that NCPs remove the competitive disadvantage for the complying manufacturer. The

rates used in the NCP should reflect the time value of money used by manufacturers and users in

business decisions and transactions. EPA has historically used a seven percent rate in rulemakings

in a societal costs context. The commenters supported the seven percent value as well as values

above and below it. Unfortunately, no user such as truck or bus fleet or owner commented on this

issue. The comments from SEE on the basic principles which should be followed in establishing

compounding and discount rates address the basic reason why EPA raised the issue in the NPRM. 

That reason was that we anticipated that manufacturer costs and user costs may need to be

handled differently. However, SEE provided no data to assist in the analysis. The manufacturers

generally supported EPA’s value, but it is in fact higher than the after-tax Treasury bill rate

suggested by SEE and is perhaps more in line with the time value of money/market risk premium for

future costs suggested by SEE.

For purposes of this rule, EPA is using of a seven percent rate. Based on present

information, it appears to be adequately representative of industry practice. However, EPA will likely

continue to include in future analyses sensitivity on other rates and to examine whether the rates for

future rules should be assessed in a manner similar to that suggested by SEE. 

To put this issue into context, the effect of using different discount rates is shown in the tables

below. If a smaller discount rate had been used for both pre-production and operating costs, the NPV of

the fixed costs would have been lower, but the NPV of the operating costs would have been higher. The

net effect of a smaller discount rate would generally be penalties that are higher. While there are

differences, the differences are not large.

NCP Calculation Parameters with 7% Discount Rate

Light-Heavy Medium-Heavy Heavy-Heavy Urban Bus

COC50 $1,240 $2,740 $6,810 $3,930

COC90 $2,710 $4,930 $12,210 $6,660

MC50 $2,000 

per g/bhp-hr

$1,400

per g/bhp-hr

$5,600

per g/bhp-hr

$3,800

per g/bhp-hr

F 1.3 1.3 1.3 1.3

UL 4.5 4.5 6.0 4.5

X 3.0 4.0 3.4 3.3
6

 "Data Received from Heavy Duty Diesel Engine Companies regarding 2001 Medium-Heavy and

Heavy-Heavy Diesel Engine Sales", William Charmley, EPA Memorandum, copy available in the docket

for this rulemaking.

23

NCP Calculation Parameters with 3% Discount Rate

Parameter Light Heavy-Duty

Diesel Engines

Medium HeavyDuty Diesel

Engines

Heavy Heavy-Duty

Diesel Engines

Urban Bus

Engines

COC50 $1,200 $2,830 $7,290 $4,090

COC90 $2,770 $5,340 $13,720 $7,230

MC50 $2,000 

per g/bhp-hr

$1,630 

per g/bhp-hr

$6,510 

per g/bhp-hr

$4,420 

per g/bhp-hr

F 1.3 1.3 1.3 1.3

UL 4.5 4.5 6.0 4.5

Issue 2.9: Estimated Market Share

COMMENT: Caterpillar stated that we should use the market share from the 2001 Ward's

Communication, Factory Sales to sales-weight our costs. Caterpillar provided this market share

data for 1999 and 2001 in their written comments. 

RESPONSE: We agree that we should use the most recent sales data, and have updated our

analysis. Since the proposal we have received several estimates of sales for 2001, and have

updated the sales figures in final analysis for each service class for which we received new data.6
24

SECTION 3: ADDITIONAL RELEVANT ISSUES

Issue 3.1: Canadian Sales

COMMENT: Volvo and DDC commented that EPA should address the potential for operators to

circumvent U.S. requirements by purchasing their vehicles in Canada. DDC also recommended that

EPA "clarify the meaning of 40CFR86.1113-87(g)(1)(i) which, in relevant part, states that

non-conformance penalties must be paid “for all nonconforming engines or vehicles produced by a

manufacturer.... and distributed into commerce”." They stated that it is unclear whether the phrase

“distributed into commerce” is intended to mean only U.S. directed production or whether it includes

other engines that receive the NCP certification label, such as products delivered to Canada and

Mexico.

RESPONSE: The EPA Administrator issues a certificate of conformity for those vehicles or engines

determined to be in compliance with the Act and its implementing regulations. For those engines

covered by certificate of conformity, 40 CFR §86.095-35 (a) states:

The manufacturer of any motor vehicle (or motor vehicle engine) subject to the applicable

emission standards ( and family emission limits, as appropriate) of this subpart , shall, at the

time of manufacture, affix a permanent legible label, of the type and in the manner described

below, containing the information hereinafter provided, to all production models of such

vehicles (or engines) available for sale to the public and covered by a Certificate of

Conformity under §86.091-30(a).

The emissions label identifies the engine and provides additional specific information relative to

emission levels, date of manufacturer, model year, engine family, power, etc., and includes a

prominent statement that the engine conforms to U.S. EPA regulations for the applicable model

year.

Nonconformance penalties allow a manufacturer to introduce into commerce heavy-duty

engines(HDE) or heavy-duty vehicles (HDV), including light-duty trucks(LDT), which fail to conform

with applicable emission standards upon payment of a penalty. Accordingly, there are additional

regulatory requirements that apply to these engines and vehicles. Specific labeling requirements at

40 CFR §86.095-35 (h) (1) state:

Light-duty trucks and heavy-duty vehicles and engines for which nonconformance penalties

are to be paid in accordance with § 86.1113-87(b) shall have the following information

printed on the label required in paragraph (a) of this section, ...”The manufacturer of this

engine/vehicle will pay a nonconformance penalty to be allowed to introduce it into

commerce at an emission level higher than the applicable emission standard. The

compliance level ( or new emission standard) for this engine /vehicle is XXX.” 

When labeling an engine as specified in 40 CFR §86.095-35(a) and (h), a manufacturer clearly

states that the engine conforms to U.S. EPA regulations and that the nonconformance penalty will

be paid for any engine on which the NCP label is applied. Labeling an engine as such without

payment of the penalty would be inappropriate and would misrepresent the status of that vehicle or

engine. The NCP payment is the basis for allowing the higher than applicable emission standard for

specific engine/vehicle. Without the NCP payment, the emission standard for such an engine is the

stated applicable emission standard and not the compliance level that would be applicable to an
25

engine/vehicle under the NCP provisions.

In regard to the question of whether the phrase “distributed into commerce” is intended to

mean only U.S. directed production or whether it includes other engines that receive the NCP

certification label, such as products delivered to Canada and Mexico, it is clear that any engine

which bears the U.S. EPA certification label is available for introduction into commerce. It will

assumed to be distributed into commerce and should pay the appropriate penalty to the U.S.

Environmental Protection Agency in accordance with the NCP requirements. For those engines that

do not meet U.S. EPA emission requirements or that are intended solely for export, the engine

manufacturer must label the engines as such in accordance with the requirements for an export

exemption as stated in 40 CFR § 85.1709. The export label on these engines /vehicles would not

state that the engine conforms to U.S. EPA regulations and also would not state that a penalty had

been paid in order to allow its introduction into commerce. Provided engines/vehicles are properly

labeled, there will be little or no potential for operators to circumvent U.S. requirements by

purchasing their vehicles in Canada or Mexico. Vehicle purchased in Canada or Mexico for use in

the U.S. are subject to EPA regulations on imported vehicles.

Issue 3.2: Alternative Use of Penalty Funds

COMMENT: The SJVAPCD commented that revenues generated by the NCPs should be allocated

to ozone non-attainment areas to be used for projects that would compensate for the emission

reductions lost as a result of the use of NCPs. The PSCAA comments that the penalty money

should be made available for regional PM and toxics reduction projects. Similarly, the NYDEC

suggested that the NCP revenues should be directed “to the extent permitted by law” to diesel

retrofit projects to reduce NOx from on- or off-road heavy-duty engines. 

Pony Pack Inc. (PPI) suggested that in lieu of paying NCPs manufacturers should be

provided the option of installing an auxiliary power unit (APU), in which case, PPI argues, “the

penalties assessed would actually go toward solving the problem.” (PPI is a manufacturer of APUs). 

PPI states that their proposal would “reduce emissions, which was supposed to be EPA’s original

intent.”

RESPONSE: Section 206(g) of the Clean Air Act, 42 U.S.C. §7525(g), authorizes EPA to establish

nonconformance penalties, but it does not authorize EPA to retain and use any penalty monies paid

by a manufacturer. Absent such authority to retain and use penalty monies received, the

Miscellaneous Receipts Acts, 31 U.S.C. §3302(b), requires that such monies be deposited in the

General Revenue Fund of the U.S. Treasury. Funds deposited in the General Revenue Fund may

then be appropriated by Congress. 

Issue 3.3: Issues Regarding Collection of Data Prior to and After Proposal

COMMENT: Caterpillar commented that for the collection of cost data prior to the proposal EPA

“did not hold any industry workshops or meetings with the industry to discus its survey or the data

that would be used in the NCP rule.” Caterpillar also commented that “EPA gave manufacturers

only two weeks to complete surveys. Given the significant potential effect of the NPRM .... this

plainly was not sufficient to gather the information necessary to promulgate NCPs.” 

In comments submitted by Caterpillar on April 8, 2002 and again on April 30, 2002
26

Caterpillar commented that they were concerned that EPA requested updated information from

engine manufacturers after the close of the comment period. Caterpillar commented that if there

were limitations in the data used for the rule, EPA should have extended the comment period and

publically requested the necessary data. Caterpillar commented that they are concerned that the

final NCP rule will be based upon information from Caterpillar’s competitors for which EPA has

provided no opportunity for comment. Caterpillar also commented that they are concerned with the

time frame for the request of additional information. Caterpillar commented that EPA provided less

than 20 days (April 8, 2002 letter from Caterpillar) or less than 10 days (April 30, 2002 letter from

Caterpillar) to respond on a matter that will have “a profound impact on the industry, the economy,

and air quality.”

RESPONSE: We do not agree with Caterpillar’s comment that it was necessary for EPA to hold an

industry workshop prior to the proposal for this rulemaking. Prior to the proposal EPA collected cost

data from a number of engine manufacturers to help in preparing the proposal for this rule. This

data collection request was provided in writing to a number of engine manufacturers, including

Caterpillar, as detailed in an EPA memorandum to this docket (“Collection of Compliance Cost

Estimates for the Purpose of Establishing NCPs for the 2004 Heavy-Duty Diesel NMHC+NOx

Emission Standard.”, docket item II-B-02). This data collection request was provided in a consistent

format to all manufacturers from whom EPA requested the information. We believe this collection

format was sufficient to provide EPA with adequate cost information to provide the basis of a

proposal. Caterpillar has provided no reason to explain how holding a workshop would result in

more or different data, especially given the confidential nature of the data submitted.

Caterpillar commented that EPA only provided two-weeks to respond to our pre-proposal

request for cost information from engine manufacturers. We believe this amount of time was

sufficient for the collection of cost information which was already in the manufacturers possession. 

EPA was not requesting detailed analysis or comment on aspects of a proposal, we were simply

requesting information which manufacturers already had. To the extent a manufacturer needed

additional time they could have requested more time from EPA. In fact, a number of manufacturers

did request additional time, and EPA still made use of their data. Caterpillar provided no indication

to EPA that their cost data was not accurate, so we did not ask them if they needed additional time.

We disagree with Caterpillar’s comment that EPA should have extended the comment

period because we requested updated information from some manufacturers after the close of the

comment period. After the close of the comment period, EPA contacted all of the engine

manufacturers who had previously supplied EPA with confidential cost information who had not

indicated in their public comments whether or not the data they previously supplied continued to be

accurate. We contacted Caterpillar (and other engine manufacturers) in order to confirm whether or

not the cost data they had provided in the late summer/early fall of 2001 continued to be an accurate

representation of their cost estimates for compliance with the model year 2004 standards. As

indicated in Caterpillar’s letter to EPA of April 30, 2002, EPA also requested confidential internal

company documents from a number of engine manufacturers who had submitted confidential cost

data. The purpose of this request was to provide an additional verification that the data

manufacturers supplied to EPA was consistent with internal company documents which companies

use for briefings to senior management. Caterpillar’s comments imply that EPA may not verify and

confirm the accuracy of cost data relevant to the rule after the close of the public comment period. 

relevant to the rule. EPA believes it is appropriate to verify and confirm the accuracy of the cost

data to ensure that NCPs accurately reflect the competitive disadvantage to complying

manufacturers. 
27

Caterpillar commented they are concerned they do not have an opportunity to comment on

any updated information EPA receives from their competitors in response to EPA’s request for

information after the close of the comment period. However, the purpose of EPA’s request to

certain manufacturers was to confirm the validity and accuracy of the confidential cost data used for

the proposal. Caterpillar already had an opportunity to comment on this data during the public

comment period, and to provide its own data or information.

We also disagree with Caterpillar’s comment that we did not provide them sufficient time to

respond to EPA’s request for information. Caterpillar’s comments state that EPA did not provide

enough time for Caterpillar “to respond on a matter that will have profound impact on the industry,

the economy, and air quality.” However, we did provide a 60 day public comment period which

allowed Caterpillar and other interested parties an opportunity to comment on this rulemaking. In

EPA’s requests for updated data and documents, we were not asking Caterpillar to respond on

specific issues, we were simply requesting Caterpillar to either provide data or to provide internal

company documents already in Caterpillar’s possession. In response to each of EPA’s request for

information, Caterpillar was able to provide the data, and they did not indicate that the information

they provide was inaccurate or limited by the time frame of the request.