monoxide can affect mental alertness and vision. People with cardiovascular e@
disease experience chest pain and other cardiovascular symptoms.

2. Environmental Considerations

NAAQS. The Clean Air Act requires EPA to set NAAQS for pollutants considered
harmful to public health and the environment. PM, ozone, SOz2, CO, and NO, have
national standards that are set to protect public health with an adequate margin of
safety. Areas where air pollution persistently exceeds the NAAQS may be
designated nonattainment areas. states with nonattainment areas must develop
state implementation pians (SIPs) to ensure emissions are reduced to meet the
NAAQS. State and local areas that are responsible for former nonattainment areas,
known as maintenance areas, must also develop and implement plans to assure
that the areas will continue to comply with the NAAQS. This is especially important
in regions with increased population and industrial growth.

Figure tI.5. Ozone and PM Nonattainment Areas

BR
On April 15, 2004,
EPA designated
474 counties,
home to 159
million Americans,
nonattainment
with the health-
based 8-hour
ozone standard. '°
On June 29, 2004,

EPA also aa :
preliminarily found anak ao
some 244

counties ‘ea
representing 99 ° cles Areas (Vib

million Americans e@ Commies Excovding PMZS NAAGS Only

out of compliance © Counties Exceeding hour Ozone NAAQS Only
with the health- © Counties Exceeding Both NAAQS

based particulate

° www.epa.gov/ozonedesignations r
8



DRAFT ~ DO NOT CITE OR QUOTE

Many fleets, like most transit agencies, are operated by non-tax paying entities
(e.g., municipalities). Income tax-related mechanisms are not effective in motivating
these fleet operators. The Energy Bill (Pub L 109-49) is structured to address this
issue, however. The energy bill provides an income tax credit of up to $32,000 for
the purchase of alternative fuel vehicles. The Energy bill also includes tax credits for
the purchase and installation of alternative fuel fueling equipment. For non-tax
paying entities, the seller of the vehicles may take the tax credit, with some or all of
the savings passed along to the buyer. This is an excise tax credit that can be
claimed independent of the amount of excise tax paid. The SAFETEA-LU (Pub L
109-59) includes a tax credit of $0.50/gallon in the case of liquid alternative fuels
and $0.50/GGE in the case of gaseous fuels for the sale of alternative fuels used in
motor vehicles.

5. Other Recommendations for the Sector

In addition to incentives and funding, a number of other actions are recommended
to reduce emissions from diesel school buses across the nation.

EPA’s Clean School Bus USA Program should:

ta Develop an education outreach program in conjunction with the national school
bus transportation associations and other stakeholders to inform and educate
potential grant recipients on the fundamental aspects of the program, the grant
application process and the need for cleaner school bus fleets.

fa Provide vehicle emission performance goals for states to consider when creating
their state school bus specifications.

i# Strive for geographic diversity, reaching out to smaller and less affluent school
districts across the country.

ta Re-evaluate any legal impediments to maintaining the EPA’s emphasis on
directing SEP funds toward school bus retrofit and replacement programs, since
the current Clean School Bus USA Program is still a demonstration program (it
is short-lived, geographically incomplete and technologically incomplete).

‘a Give priority to replacing the oldest buses first, especially those built before April
14, 1977 (these buses do not have to meet current safety or any emission
standards), with a secondary emphasis on buses built after April 1, 1977, but
before model year 1991.

%# Focus on clean-up effectiveness, and the cost-effectiveness of retrofit and
replacement strategies, including the effects on children’s health.

& Promote strategies that achieve the lowest per-vehicle tailpipe emissions and
on-bus exposures.

29



ORAFT - DO NOT CITE OR QUOTE

accomplished through either the state or a group of school districts. A few state
governments purchase new buses for all districts within the state. Some states
have blanket purchasing arrangements for buses and/or parts (such as emissions
control devices). Boards of Cooperative Educational Support (BOCES) are groups
of school districts that collectively purchase materials, such as vehicle parts or fuel.
In other areas, this is accomplished through School District Councils.

School transportation is a local responsibility and, thus, funded by local taxpayers
as an education-related expense. Since the majority of school districts are already
cash-strapped, very few are in the position to be able to afford a clean school bus
project. To date, almost all clean school bus projects have been funded by Federal
government grant funds, SEPs, or state funds. A few projects funded exclusively by
the private sector also have been undertaken.

1. EPA’s Clean School Bus USA Program

Diesel exhaust has health implications for everyone. Children are especially
sensitive to air pollution because their respiratory systems are still developing and
they have a faster breathing rate. Recent studies suggest that children’s schoo! bus
commutes potentially expose them to significantly higher concentrations of
pollutants from various sources (e.g., tailpipe, crankcase, etc.) than what is
measured in the community's outdoor air. In addition to tailpipe emissions, some
research indicates that the crankcase may be a source of significant on-board
exposure,’® and some exhaust emission control technologies may not have a
significant impact on in-vehicle exposure. CARB is currently evaluating the
contribution of different sources to in-vehicle exposure, including tailpipe, crankcase
and other vehicles on the road. Further studies are necessary.

EPA’s Clean School Bus USA program was created in response to concerns
regarding children’s exposure to diesel emissions from school buses. The Program
has three primary goals: (1) reduce school bus idling; (2) retrofit existing buses with
devices and/or cleaner fuels that reduce pollution; and (3) replace buses built before
model year 1991 with new, cleaner buses, and target first the replacement of school
buses built before April 1, 1977. Congress allocated $5 million in both FY2003 and
FY2004, and $7.5 million in FY2005, for a cost-shared grant program to upgrade
diesel school bus fleets in public school districts. To date, EPA has awarded almost
40 grants to communities across the country for clean school bus projects. EPA
anticipates awarding 20-30 more grants in late fall of 2005.

In addition, the program has created public information materials and an informative
web site to guide school officials, transportation managers and others in their efforts
to establish reduced idling programs and to develop means for retrofitting or
replacing diesel-powered schoo! buses in their fleets.

As a direct result of EPA grants under the Clean School Bus USA Program,

approximately 10,000 school buses will have been retrofitted, replaced or switched
to a cleaner fuel at the end of the grant project period (June 2006). See Table IV.1
below for a breakdown of technology and fuel applications for these grant projects

25



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emissions. All Partners receive recognition for their efforts through press releases,
publications, the SmartWay website, etc. The Partnership therefore represents a
win-win-win for participants, the public, and the environment.

Innovative Technology Bundles That Put Money in a Truck Owner's Pocket. One of
the toughest challenges to overcome is the fact that most retrofit technologies (PM
filters, oxidation catalysts, etc.) generally provide little or no intrinsic economic
benefit to the user. Therefore, these emission reduction programs/incentives
designed for diesel powered fleets (especially those aimed at private companies)
are facing an uphill battle from the beginning. However, if a program or incentive
were developed that provided direct economic benefit, then companies and
organizations would develop interest at a much greater rate. In the freight sector,
trucks are the largest consumer of diesel fuel. With a single long-haul truck capable
of consuming over 17,000 gallons per year, a fuel economy improvement of just
10% could provide over $4,000 in savings each year (assuming a fuel price of $2.50
per gallon). Such a creative program could use these savings to pay for additional
emission control. The program would need to bundle innovative fuel saving
technologies along with traditional retrofit technologies. The program will require
innovative capitalization methods, innovative loan structures, or innovative tax
waiver processes to help companies overcome the initial capital investment of the
technology bundle.

ta Technology Bundling. For technology bundling to be effective, it is essential that
the bundle contain a combination of highly efficient, fuel saving technology and
an emission control technology. Types of innovative fuel saving technologies
that should be included in this bundle, and their associated fuel savings, are:
@ Idling Control Technologies: 6-10% fuel savings”'
@ Super single tires with aluminum wheels: 4- 10% fuel savings”?
@ Improved Aerodynamics: 5-7% fuel savings””

Along with the fuel saving technologies, a company should choose to use an
oxidation catalyst, PM filter, or other PM emission control device. The key is that
the technology should be carefully selected so that the upgraded truck will provide
the owner with a net economic benefit.

w Innovative Capitalization and Loan Programs. Most small to medium sized
trucking companies do not have the capital to invest in these technology

bundles. Therefore, innovative financial programs are needed to assist
companies upgrade their trucks. Currently, two states (Arkansas and
Minnesota) have innovative loan programs that provide capital to trucking fleets
for “SmartWay Upgrade Kits” that combine fuel saving technology with emission
reduction technology. These programs are unique because they not only

2! EPA, Draft Report for Review, Industry Options for improving Ground Freight Fuel Efficiency,
2002; Lim, H. Study of Exhaust Emissions from Idling Heavy Duty Diesel Trucks and Commercially
Available Idle-Reduction Devices, 2003, SAE Paper No. 2003-01-0288.

”? Estimates based on OEM data, fleet data, and EPA preliminary testing. EPA is currently
conducting additional fuel economy and emissions testing on these products.

34



these sectors have the greatest need and potential on a national basis for achieving
emission reductions, based on the number and types of engines as well as exposed
populations and predicted sector growth. On a more local or regional scale, other
sectors, such as the agricultural sector may be very important. The fact that this
report does not deal with all sectors does not diminish the importance of controlling
emissions from these other sectors and it is hoped that strategies and incentives
outlined here will further that end.

Each of the selected sectors differs in terms of economic and business practices,
which are keys to understanding how to motivate retrofit and other clean diesel
strategies within each. The ports and construction sectors, in particular, will
experience unprecedented growth over the next decade, and it is especially
important to manage the emissions from these sectors to protect public health in
adjacent communities.

The four sector groups were co-lead by an EPA staff member and an external party.

These Sector Groups engaged additional experts in the process, widening
participation in these discussions to well over 100 individuals.

This report is the culmination of the work of the Clean Diesel and Retrofit Work
Group since April 2004. It provides consensus-based recommendations as well as
other recommendations. Some recommendations are sector-specific; others apply
more broadly. Itis our hope that this report will substantially further our Nation's
efforts to achieve healthy air for its citizens.



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especially those serving common markets,-could implement some provisions
collaboratively to minimize these problems.

Technological. Because ports and terminal operators feel they cannot risk an
interruption in their business operation, they are hesitant to adopt new technologies
that are not verified or certified or do not have a reliable track record. While new
technologies are being developed and tested, manufacturers offer only a limited
number of verified/certified technological options with established track records for
ports, especially for nonroad applications and NO, controls. Technology
demonstrations and more widely available cleaner fuels are needed. The
incremental cost of cleaner technologies when not offset by fuel savings or
maintenance improvements or other business case reasons to adopt the strategy is
a barrier. Also, technologies (engines or retrofit devices) in high demand may not
be available without substantial lead time.

Educational. Challenges also include keeping busy port administrators, terminal
operators and fleet managers current on air quality issues, public health concerns
telated to air quality and the complex range of emissions reducing options.
Educational needs include sharing best practices and lessons learned among port
enterprises. Ports face complex jurisdictional issues, with a myriad of federal, state,
and local agencies. Coordinating with these agencies, with companies who do
business at ports, and NGOs takes time and an educational process of all parties.
Therefore providing ports with the tools and technologies to employ effective
emissions reducing projects and to build collaborative relationships is also needed.

Programmatic. Ports across the country are diverse—each with different needs,
management structure, air quality issues and business operations. To
accommodate the diversity in ports and enterprises at ports, flexibility and a suite of
incentives will be needed.

2. Incentives

Since no single incentive will be able to eliminate all barriers to reducing diesel
emissions, a suite of solutions is the best strategy to address each of the barriers
above.

A number of incentives exist to encourage public port authorities and other
companies that own or operate equipment in and around U.S. seaports, to
voluntarily reduce air emissions through one of the technological or operational
methods identified. However, the operating structures of public port authorities vary
widely, and a number of different companies or organizations may own or operate
diesel equipment at a given commercial port.

Different incentives offer different levels of appeal to different fleet owners.
Because of the frequently-cited cost barrier, many incentives identified are
monetary. In evaluating incentives, this work group has sought to identify solutions
that are feasible, functional, and flexible:



will select the port with the greatest efficiencies and lowest cost that best meets
their business requirements. Furthermore, the different regions where seaports are
located have very diverse air quality challenges. Each port needs to work closely
with their local and state air agencies in setting pollutant priorities to assure their

voluntary air quality investments are aligned with local needs.

Figure IV.4
NOx Emission by Equipment*
22%
4T%
20%
“Based on a study at the Port of Los
aetes 11%

(MCargo Handing M@ Heavy-Duty Trucks ORail (Marine Vessels |

Figure IV.5

PM Emission by Equipment*

59%

5%

“Based on a study at the Port of Los.
Angeles

[@Cargo Handling @ Heavy-Duty Trucks 0 Rait CiMarine Vessels

While ports are successfully demonstrating a wide array of diesel emission
reduction strategies, a need exists to continue to develop new techniques and to
share best practices among ports. Given the diversity of operations at ports,
different entities, each with a unique business model, will likely take different

42



D. Construction Sector Report

The construction industry operates in every state and employs more than seven
million workers, accounting for more than 6% of the private non-farm workforce.”

In 2004, the value of construction put in place totaled $1.03 trillion,” or nearly 9% of
gross domestic product.2” While they therefore play an important role in the U.S.
economy, most construction contractors are small, low-margin businesses.

The industry uses more than 2 million pieces of diesel-powered nonroad equipment,
which vary considerably more than highway vehicles their in size, configuration, and
applications. Much of this equipment has a long operational life, often lasting more
than 25-30 years. Given the magnitude of the industry, the types of vehicles
employed and the proximity of construction work to population centers in many
cases, construction vehicles impact air quality. According to EPA models, in 2005
construction equipment generates roughly 32% of atl land-based nonroad NOx
emissions and more than 37% of land-based PM19. Compared with heavy duty
highway vehicles and automobiles, nonroad equipment emits more polfution and
has less stringent emissions standards for comparable model years. For example,
a bulldozer engine can emit as much particulate matter as more than 500 cars.

Dividing the value of all construction projects among property owners, and then
listing these groups of projects in descending amounts of equipment used, yields
the following:

tm Public projects (roads, other public works, and public buildings) accounted

for $229 billion (22%) in 2004;

tm Private nonresidential projects accounted for $235 billion (23%);

@ Private multi-family accounted for $38 billion (4%);

@ Private single-family accounted for $378 billion (37%); and

TM Private residential improvements accounted for $147 billion (14%).

Private construction companies perform most public construction using equipment
that they own or lease, or rent for a short term. Private companies own roughly
93% of all new diesel-powered construction equipment, equal to 90% of the value of
all such equipment. 7° Many contractors, especially small businesses, rent or lease
equipment, so incentives are needed for leasing companies as well.

Although the industry's total employment and output are large, the typical
construction company is very small. Of the roughly 700,000 construction firms with

?5 Bureau of Labor Statistics, U.S. Department of Labor, Employment Situation,

yww.bls.gov/ces/nome htm.

Census Bureau, U.S. Department of Commerce, Value of Construction Put in Place,
ywww.census. gov/constructionspending.

B

jureau of Economic Analysis, U.S. Department of Commerce, Gross Domestic Product,
www.bea.gov.
Manfredi Associates, from government and private sources.

48



incentive. The Internal Revenue Service has figures showing that only 60% of all
corporations in the construction industry in reported net profits in 2001.°

Low Interest Loan Programs. These loan programs provide short-term funding for a
long-term payoff in diesel emissions reductions. However, loans are effective only
to the extent that equipment owners expect that reducing their equipments’ diesel
emissions will benefit their companies, and therefore, justify the cost of purchasing
Tetrofit technology plus the loan interest. It is questionable whether low interest
loans are enough of a financial benefit to motivate equipment owners to voluntarily
reduce emissions or whether such loans would be appropriate for emissions
reduction activities that do not pay for themselves. However, low interest loan
programs could be combined with other incentives.

Contractual Incentives and Allowances. Contractual incentives or allowances are
different from contract specifications, which are discussed next. Contract
modifications can encourage clean diesel construction projects by providing
financial rewards for cleaner practices; however, participation in contract
modifications is not guaranteed. Contract modifications can be paired with grants or
loans, especially to smaller businesses, to help create a level playing field. Contract
modifications do provide the ability to target emission reductions where needed, but
must be carefully constructed.

Contract Specifications and/or Requirements. Contract specifications refer to the
practice of including provisions related to the use of low emissions equipment
and/or fuels in public or private contracts for construction services. Contractual
requirements are legally enforceable contract terms and conditions related to the
use of low emissions equipment and/or fuels. Such programs have been adopted in
Massachusetts, New York and other locations.

Construction companies express concern that contract requirements and
regulations could provide a competitive advantage to large, private sector
equipment owners with sufficient capital to meet cleaner requirements and would
discriminate against smaller businesses that could not afford to retrofit equipment.

Regulatory Requirements. Regulatory requirements provide the opportunity to
achieve targeted emissions reductions over a broad geographic area. Some
members of the group maintain that regulatory requirements are necessary to
achieve maximum health benefits from the construction sector; others maintain that
they raise complex legal questions. In addition, other members believe it is unfair to
ask the owner of engines and equipment which met emissions standards at the time
of purchase bear the cost of further reducing emissions of a compliant engine.
While the regulatory process would allow the comparison of costs of compliance
with the public health benefits, a concern among construction companies is that
regulatory requirements would provide a competitive advantage to larger equipment
owners with sufficient capital to finance emission reductions strategies entirely on

* internal Revenue Service, U.S. Department of the Treasury, Table 1: 2001, Corporation Income
Tax Retums, www.irs.gov/pub/irs-soi/01co01as.xis.

52



Seaports nationwide invest substantial resources in infrastructure, technology, and
operational procedures that increase efficiency and decrease emissions per
passenger or unit of freight transported. Major development projects include
substantial investments in environmental projects, including air quality projects that
would not otherwise be fiscally possible. Major seaports are actively engaged in
developing and implementing air pollution prevention projects.

Diesel engines are in frequent use in almost all port activities. They power the
ocean-going vessels that carry cargo as well as passengers on cruise lines from
port to port, and smaller harbor craft such as tugboats and ferries. They power the
cargo-handling equipment used to load and unload containers from ship to shore
(cranes) and within the terminal itself (such as rubber-tired gantry cranes and yard
hostlers). Diesel engines also power the trains and trucks that move containers into
and out of the marine terminals.

Many different entities own and operate the diese! equipment that is present at
ports. Port authority operations can be categorized as follows:

@ Operating ports directly own and operate cargo-handling equipment (the Port
of Boston is an example of an operating port);

m@ Landlord ports, the most prevalent in the U.S., lease property and/or
equipment to termina! operation companies that own and operate the
dockside equipment and are responsible for all operations such as loading
and unloading of vessels (major port authorities such as Los Angeles, Long
Beach, Seattle, and New York/New Jersey are examples); and

@ Hybrid ports are an amalgam of the operating and landlord/tenant ports in
that they both operate their own on-dock equipment as well as lease land to
terminal operators (the Port of Baltimore is an example).

With the rapid growth of containerized cargo and passenger traffic over the past few
decades, most major ports now have a significant portion of their properties
dedicated to container terminals and cruise lines. Containerized freight operations
by far use diesel powered equipment more intensively than other types of freight.
Because of the nature of container terminal operations and the growth in volume of
waterborne cargoes, ship calls are more frequent (and larger), truck visits are more
frequent, and cargo-handling equipment usage is increased; thereby, typically
generating more diesel fuel emissions than at other kinds of terminals. While the
following discussion focuses on container operations as examples and quantitative
data from the Port of Los Angeles which recently completed a comprehensive
emission inventory, it is important that incentives and voluntary reduction programs
be designed for all ports across the country.

The terminal operator industry has undergone significant consolidation over the past
few decades. Today probably a little more than a couple of dozen terminal
operating companies are still operating in the U.S. Furthermore, many of today's
terminal operators are subsidiaries of shipping companies and provide this service
to their affiliated companies as well as to other shipping companies. These terminai
operations companies typically operate at arms length from their affiliated shipping
and trucking companies. There remain a handful of independent terminal operators

40



maintenance associated with some of these systems. One CCV system has been
verified by the EPA and CARB verification program in combination with a DOC.

CCV are especially important on older school buses, even those retrofitted with
DOCs or DPFs. The University of Washington particulate research center found
higher levels of engine emissions inside school buses, especially when the windows
were open.'®

2. Fuels

ULSD contains less than 15 parts per million (ppm, by weight) sulfur. It enables
catalyst-based and other emission reduction technologies to operate at maximum
effectiveness. Even without the use of an aftertreatment technology, ULSD can
reduce PM emissions by 5-10% compared to standard on- or nonroad diesel fuel.
Beginning late in the summer of 2006, all on-road diesel fuel will be phasing down
to ULSD from the current 500 ppm, or low sulfur, diesel (LSD). Nonroad diesel fuel
standards will be gradually phased in to lower the sulfur content until 2010, at which
time most diesel fuel will be ULSD.

Biodiesel is a domestic renewable distillate fuel derived from a number of vegetable
oils, animal fats, or used frying oils. Biodiesel is typically blended with petroleum-
based diesel fuel, usually with blends ranging up to 20% biodiesel, referred to as
B20. Since the biodiesel base stock can vary, the specific fuel properties vary
depending on the biodiesel source and the degree of processing refinement.
Typically, B20 provides about a 10-15% reduction in PM and a 0-10% reduction for
CO and HC. However, in testing emissions from heavy-duty engines using
biodiesel fuel, EPA found that NOx emissions can increase depending on the type
of base stock and portion of biodiesel. Some more recent studies have indicated
that using biodiesel fuel can either show an increase or no effect in NOx emissions,
but the factors affecting NOx emissions levels have not been clearly determined.
Biodiesel was generally verified by EPA and the level of PM, HC, and CO reduction
is related to the portion of biodiesel used.

One of the current issues regarding biodiesel and other alternative fuels is
uncertainty of their effects on engines and emissions for the new advanced engine
and aftertreatment systems required by EPA regulations starting in 2007. The
impact of using biodiesel blends in ULSD burned by these new engine systems
needs further investigation.

Emulsified diese! fuel is a blended mixture of diesel fuel, water and other additives.
It can be used in most diesel engine applications, but some reduction in power and
fuel economy is expected due to the fact that the addition of water reduces the
energy content of the fuel. Emulsified diesel can reduce NOx and PM emissions by
about 20- 50%, especially when used synergistically with aftertreatment. Engine

*® Hill LB, Zimmerman NJ, and Cooch J. A Multi-City Investigation of the Effectiveness of Retrofit
Emissions Controls in Reducing Exposures to Particulate Matter in School Buses. Clean Air Task
Force report, January 2005. Jackson, NH.

12



g Work to make sure that private contractors who own and operate schooi buses e
have equal access to program benefits, such as grants, instructional materials,
technical assistance, etc.

The Clean School Bus sub-group strongly supports more funding for the Clean
School Bus USA program.



Appendix B. Emission Control Technology (ECT) Overview
for Ports and Construction Sectors

A. Refuel

Refueling involves substituting existing diesel fuel with cleaner fuels that have been
tested and verified by EPA and/or ARB for emissions performance. EPA and ARB
currently have verified cleaner fuels for on-road applications but not for nonroad.
The following table lists the different types of cleaner fuels that are viable for diesel
reduction as well as the benefits and feasibility of their implementation.

Switching to cleaner fuels is one of the most promising of the diesel reduction
strategies for the ports and construction sectors because it is a drop-in substitute
and ULSD will be widely available when it is required by October 2006 for on-
highway applications. Even today, nonroad equipment could be fueled with ULSD
on a voluntary basis, reducing prevailing sulfur levels of approximately 3,000 ppm to
15 ppm. ULSD is easily adaptable and does not require equipment changes, or
engine replacement or modification. It also reduces SO2 and PM emissions and
enhances retrofit technology, enabling the use of DPFs. ULSD is currently being
used by ports across the U.S., as well as for other applications including school and
transit buses, and trucks. EPA will require that nonroad diesel fuel sulfur content be
limited to 500 ppm in mid 2007 and then to 15 ppm (ULSD) in 2010 for nonroad
equipment and for locomotive and marine fuel in 2012.

Table B-1 presents refueling strategies.



EXECUTIVE SUMMARY

A. Overview

Diesel engines play a vital role in key industry sectors such as goods movement,
public transportation, construction, and agriculture. A unique combination of
efficiency, power, reliability, and durability make diesel the technology of choice for
these sectors. However, the durability of the technology does not lend itself to rapid
fleet turnover and investment in new equipment that meets more stringent
environmental standards.

Because of this, the full air quality benefits of the very stringent new engine
emission standards in the US2007 Diesel Rule ("Heavy-Duty Engine and Vehicle
Standards and Highway Diesel Fuel Sulfur Control Requirements.")' and the
Nonroad Diesel Rule ("Clean Air Nonroad Diesel Rule.")* will likely take decades to
achieve. Further, the regulatory authority of EPA and states to address the existing
fleet of over 11 million diesel engines is rather limited. In response, EPA began the
Voluntary Diesel Retrofit Program in 2000 to discuss broad initiatives to modernize
and upgrade (i.e., retrofit) current engines with modern emission control equipment
or to accelerate the replacement of these engines with newer ones.

Given the diversity of applications and engines, as well as significant technical and
funding issues, the Clean Diesel Retrofit Work Group was formed in 2004 under the
auspices of the EPA Clean Air Act Advisory Committee (CAAAC) to advise EPA on
how best to expand the initiative. The Work Group consists of over forty members
representing diverse stakeholders. It is organized under four main sectors by
application: school buses, ports, freight, and construction. EPA determined these
sectors to have the greatest need and potential for achieving emission reductions,
based on the number and types of engines as well as exposed populations and
predicted sector growth.

Although no complete analysis is available quantifying the benefits and costs, the
positive return on retrofitting the current diesel fleet with the best available
technology is likely significant. For example, when fully implemented, EPA
estimates the EPA 2007 Diesel Rule impacting new engines and requiring cleaner
diesel fuel will have returned $17 to society in health benefits for every dollar spent.
The Nonroad Diesel Rule that was finalized in 2004 will deliver $40.

Although the overall benefit of reducing diesel emissions is significant, the
investment needed to clean up the existing fleet is also quite large, perhaps in the
range of $50 to $100 billion. The Work Group believes that this is not an

* Regulatory Impact Analysis: Control of Emissions of Air Pollution from Highway Heavy-Duty
Engines. EPA420-R-00-010. July 2000. Available online at: http:/Avww.epa.gov/otaq/hd-

hwy. htmiregs.

? Final Regulatory Analysis: Control of Emissions from Nonroad Diese! Engines. EPA420-R-04-007,
May 2004



B. Retrofit

Retrofitting is a term used to describe the installation of emission control
technologies on in-use equipment and vehicles to reduce PM, NOx, and other
pollutants. These technologies have been rigorously verified by EPA and ARB to
reduce diesel emissions. DOCs and DPFs are widely used across the country in

many different applications.

Table B-2 lists and describes the available retrofit technology.



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wi Tax Incentives were identified as having broad appeal to private fleet owners
and operators. Tax incentives can bolster the business case for retrofits and
replacement, and reduce the inherent risks for cleaning up equipment. They are
appropriate to pursue at the Federal level as well as other levels of government.

i Outreach and Education was identified by all sectors as key to getting emission
teduction strategies in place. Regardless of whether it is a grant, loan, rebate or
tax credit, people need to know the benefits of reducing diesel emissions, how to
access available resources, and what technology best applies to engines and
vehicles in their situations.

% All sectors identified a National Recognition Program as having the potential to
promote diesel reductions, especially if that program was designed to ensure
positive publicity and prestige.

ai Enhanced Technology Verification. To ensure that the best technologies are
made available as quickly as possible, the national technology verification
process can be streamlined to move new technologies into the market. Work
Group members are willing to assist EPA in verification process improvements,
including working to assess the resource needs to carryout the process.

23



DRAFT - DO NOT CITE OR QUOTE

matter standard (see Figure 11.5). * For the states and local communities that are
struggling to eliminate tons of pollution to meet Federal health-based air quality
standards, reducing pollution from existing diesel vehicles and equipment is very
important. Strategies to voluntarily reduce diesel pollution are a cost-effective way
to ensure healthy air.

NATA. Air toxic information (including diesel PM) has been estimated through a
national scale assessment known as the National Air Toxics Assessment (NATA).
Information is available at www.epa.govittn/atw/nata/.

AQI. EPA calculates an “Air Quality Index” (AQI), which provides information about
pollution and public health for five pollutants at the community level. The AQI
values can range from 0 to 500—the higher the value, the greater the concentration
of air pollution and the greater the health concern. The EPA has developed a
website (AlRNow: www.epa.gov/airnow) to provide the public with easy access to
national air quality information, both real-time measured conditions and forecasted
conditions, which includes AQI information for the current and next day.

" Ipmdesignations The PM nonattainment areas became final in December 2004.

9



DRAFT — DO NOT CITE OR QUOTE

1. Primarily Government Funded Incentives

Income Tax-related Incentives. Tax incentives help offset the cost of reducing
diesel emissions by reducing the amount of taxes a taxable entity would pay. Tax
incentives can take the form of tax exemptions, tax deductions (including
accelerated depreciation), or tax credits. Tax exemptions exclude certain items or
activities from being taxed, while tax deductions and accelerated depreciation
reduce the taxable income for certain expenses. Tax credits directly reduce tax
liability based on the amount of expense.

Typically such measures set no deadlines and require no applications, providing
time for manufacturers to respond and flexibility for the interested owners of
equipment. Tax incentives offer relative ease of use to profitable or taxable entities
that qualify for the incentives.

Significant government functions are needed to establish and maintain tax
incentives. In addition, tax incentives can be more difficult than other measures to
target to specific applications or geographic areas where they may be most needed.
The incentive must also be large enough to motivate qualifying entities to take
advantage of it... Since efficiency gains are generally not realized from the retrofit
of diesel equipment or use of alternative fuels and, therefore, no return on
investment, companies might not be motivated by a tax incentive of less than 100%.
However, a tax incentive of less than 100% could be successful if applied for a fleet
modernization strategy Tax incentives at the state level (e.g., Oregon and Georgia)
have been largely unable to garner participation due the small amount of financial
incentive.

Excise Tax-related Incentives. Governments impose other taxes that can be
reduced or eliminated to encourage the use of less polluting technologies or fuels.
For example, the recently passed Federal transportation legislation, referred to as
SAFETEA-LU (Pub L 109-59), includes a 50 cent-per-gallon (or gasoline gallon
equivalents (GGE) in the case of compressed natural gas (CNG)) excise tax credit
for every gallon or GGE of non-petroleum alternative fuel used. This excise tax
credit is taken by the fuel seller. However, in those cases where the seller and user
are the same (such as when a school district owns and operates its own fueling
station) the excise tax credit goes to the user. The legislation also provides that the
amount of the credit shall be paid to the entity entitled to the credit; it is remitted to
the seller as a quarterly check.

Government Grants and Rebates. Grant programs provide funding directly to
equipment owners to allow them to reduce diese! emissions in their fleet. Rebates
are a type of grant in which a governmental or nonprofit entity establishes
reimbursement specifications for projects that could reduce emissions. Typically,
the government or nonprofit entity announces the availability of a predetermined
number of rebates at a set funding amount. Operating and maintenance costs have
not typically been covered by grants or rebates.

15



DRAFT — DO NOT CITE OR QUOTE

heating to heat the collected soot to combustion temperatures. The range of some
systems has been extended to include both older and newer vehicles.

Partial filters are devices in between a DOC and DPF in terms of PM control, in that
they are capable of achieving PM reductions of about 30 to 70%. Filtering is
achieved with sintered metal sheets, wire meshes, or in some cases, metallic or
ceramic foams. It is recommended that cleaner burning fuels, such as ULSD or
lower sulfur fuel be used with DPF’s to avoid premature plugging. Although they do
not have the same level of PM control as “closed end” DPFs, partial filters have a
lower risk of plugging and lower back pressure. Filter regeneration is the same as
for high-efficiency DPFs. Similar to DPFs, monitors are required to tract exhaust
back pressure and exhaust temperature.

Lean NOx Catalysts (LNC) systems typically inject diesel fuel (the reductant) into
the exhaust stream. The mixture reacts over a catalyst to reduce NOx emissions.
LNCs are designed to function effectively at the lean operating conditions found in
diesel engines. A LNC combined with a DPF has been verified by CARB. LNC is a
relatively new technology and experience is limited. They are reported to have
demonstrated NOx reduction from 10% to over 25% depending on the vehicle
operation. If utilized with a DPF, monitors are required to tract exhaust back
pressure and exhaust temperature.

Exhaust gas recirculation (EGR) is a technology that can reduce NOx emissions by
up to 50%. An EGR system recirculates an engine’s exhaust back to the engine
cylinders, which lowers peak combustion temperatures, thereby limiting the
production of NOx. Retrofit EGR systems are typically used in conjunction with a
DPF to control the resultant higher PM emissions. One low pressure EGR system
that incorporates a DPF is currently verified by CARB. Maintenance on an EGR
system may be minimal, but DPF-equipped systems still require regular
maintenance.

Selective catalytic reduction (SCR) is another technology designed to reduce NOx
emissions. SCR systems inject a reductant (typically urea or ammonia) into the
exhaust to facilitate a catalytic reaction with the NOx on an SCR catalyst. SCR can
reduce NOx emissions by 80%, but appropriate exhaust temperatures and engine
operating modes are critical for optimal NOx reductions. SCR may also be used in
conjunction with a DPF to reduce PM. An SCR system has been verified under
CARB's program for a select number of engines. A monitor/controller will be
Ttequired to control injection of the reductant and monitor back pressure and
temperature.

Crankcase emission control technologies can be retrofitted on engines to eliminate
crankcase vent (CCV) emissions. Historically, turbocharged diesel engines have
vented crankcase emissions to the engine compartment and below the vehicle.
Crankcase emission control technologies may filter exhaust from the crankcase and
re-route the filtered air back to the intake, thereby reducing crankcase PM. In fact,
total (i.e., exhaust and crankcase) PM emissions may be reduced by 5-10% or
more. Both open and closed systems are available on the market. There may be

1



IV. Sector Analysis and Strategies

A. Clean School Bus Sector Report

The first public school transportation for children began in the late 1800’s when local
farmers loaned horse-drawn wagons for that purpose. From that humble beginning,
the school transportation sector has grown to encompass over 480,000 buses
transporting 25 million public school students each day.'® The first national
conference to consider the safety of public school buses was in 1939, when
representatives from 48 states gathered to recommend standards. Since that time,
the school transportation community, along with the Federal Motor Vehicle Safety
Standards that apply to school buses, has made school buses the safest way to get
children to and from school and school-related activities.

Of the 480,000 school buses in the nation, approximately 400,000 are large school
buses (over 10,000 pound gross vehicle weight rating) that generally are diesel-
powered, mostly with regular diesel fuel. About 4,000 of these large school buses
are powered by alternative fuels, such as compressed natural gas and propane.
Some older, large school buses are powered by gasoline. The others (about
80,000) are smail school buses (10,000 pounds GVWR or less), most of which are
diesel-powered, but some are gasoline-powered.

As a result of the Clean School Bus USA Program, SEPs, and other diese! retrofit
programs; EPA estimates that about 30,000 of the 400,000 diesel-powered large
school buses have been involved in a clean school bus project. These buses may
be running on a cleaner fuel such as ULSD or biodiesel, may have been retrofitted
with emissions control devices, or may have been replaced by an alternative fuel-
powered bus.

About one-third of the nation’s school buses were built before model year 1991.
These buses emit at least six times more PM and twice the NOx compared to a
model year 2005 diesel-powered bus.'® About 2,000 school buses on the road
were built before 1977. These are the Nation's oldest and highest-polluting school
buses.

School transportation is provided by the more than 14,000 local school districts in
the U.S. Approximately 70% of the school buses in the U.S. are owned, operated
and maintained by the school district.!2 The other 30% of the school buses are
owned, operated and maintained by private contractors to the school districts.

While individual school districts are responsible for transportation of children to
school, in some areas of the country the purchase of parts and/or buses is

‘8 The number of school buses in operation, the number of pre-1977 school buses in use, and the
split between school buses owned and operated by public school districts versus private contractors
are taken from data published in the 2005 issue of Schoo/ Bus Fleet Magazine’s Fact Book.

24



Figure 1.4,
2004 NOx Emissions by Mobile Diese! Sector

non-port marne*
12%

‘other nonroaa’*

4%

other hignway'**
3%

port sector
4%

agriculture sector
8%

‘ nan-port marine includes recreational vessels and a

other highway refers to smaller trucks and vehicles

{LO through Class 5)

1. Health Considerations

The health effects of diesel emissions are well studied, but complex. The level and
duration of exposure that causes harm varies from one substance to the next.
Precise comments on health effects require careful consideration and the reader is
encouraged to read more on this complex issue."

EPA has designated diesel exhaust as a likely carcinogen to humans by inhalation
at environmentally adequate exposures. A number of other agencies (National
Institute for Occupational Safety and Health, the International Agency for Research
on Cancer, the World Health Organization, California EPA, and US Department of
Health and Human Services) have made similar classifications. EPA believes its
conclusions apply generally to engines manufactured prior to the mid-1990s. As
cleaner diesel engines replace a substantial number of the existing engines, the
general! applicability of the conclusions in EPA's health assessment documents will
need to be re-examined. These assessments are periodically reviewed as new
scientific studies become available.

*2 US EPA Diesel Hazard Assessment Document for Diesel Engine Exhaust. 2002. EPA600-9-90-
057F Office of Research and Development, Washington< DC. This document is available
electronically at http://cfpub.epa. gov/ncea/cfm/recordisplay.cfm?deid=29060

6



Appendix C. Description of Verification Programs

The objective of the Voluntary Diesel Retrofit Verification Program is to introduce
verified technologies to the market as cost effectively as possible, while providing
customers with confidence that verified technologies will provide emission
reductions as advertised. EPA and CARB's verification process evaluates the
emission reduction performance of retrofit technologies, including their durability,
and identifies engine operating criteria and conditions that must exist for these
technologies to achieve those reductions.

EPA and ARB signed a Memorandum of Agreement (MOA) for the coordination and
reciprocity in Diesel Retrofit Device Verification. The MOA establishes reciprocity in
verifications of hardware or device-based retrofits, and further reinforces EPA's and
ARB's commitment to cooperate on the evaluation of retrofit technologies. This
agreement commits EPA and ARB to work toward accepting particulate matter (PM)
and oxides of nitrogen (NOx) verification levels assigned by the other's verification
programs. Additionally, as retrofit manufacturers initiate and conduct in-use testing,
EPA and ARB agreed to coordinate this testing so data generated may satisfy the
requirements of each program. This MOA is intended to expedite the verification
and introduction of innovative emission reduction technologies. Additionally, this
MOA should reduce the effort needed for retrofit technology manufacturers to
complete verification.

Information about CARB's Verification Program and its list of verified technologies
can be found at the ARB verification page at
http:/Awww.arb.ca.gov/diesel/verdev/verdev.htm. Information about EPA's
Verification program and its list of verified technologies can be found on EPA's

verification page at http:/Avww.epa.gov/otag/retrofit/retroverifiedlist.htm

Table C-1 presents all the diesel retrofit products that have been approved for use
in off-road engine retrofit programs.

22



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is expected to lag behind the systems intended for highway vehicles by several
years.

2. Considerations for Designing Incentives

Effectively encouraging construction companies to voluntarily reduce emissions
from existing diesel-powered construction equipment requires striking a balance
among a mix of business, economic, technical, commercial, and factors including
health, air quality, outreach and education. These factors are discussed below. No
attempt has been made to prioritize them.

Health and Air Quality. Construction equipment varies greatly in the frequency and
intensity of its use and therefore in the amount and type of pollution it emits. Public
and occupational exposure to emissions from such equipment is dependent upon a
variety of factors, including the location, working hours, and equipment mix used for
any particular project.

Incentive programs should be designed to maximize environmental benefits. To
ensure this, incentive programs should target areas of high ambient pollution,
personal exposure to diesel pollutants, equipment that is most likely to contribute to
high pollution levels or exposures, and the categories of equipment that are most
likely to benefit from retrofit strategies or technologies.

Business and Economic. To many construction companies retrofit technologies
have little intrinsic economic benefit and instead may the increase the cost/risk of
doing business. Costs associated with cleaner equipment include not only the
purchase price but also installation costs; the cost of owner’s/managers’ time in
becoming familiar with alternative retrofit technologies and the terms under which
they can avail themselves of incentives; the cost of overtime, substitute equipment
rental, or foregone revenue from idling the equipment to install a retrofit technology;
and the risk that further costs will be incurred for maintenance and training relating
to a new technology. For these reasons, financial assistance needs to be great
enough to cover at least the majority of the costs of the use of a retrofit technology
when no economic benefit exists to the equipment owner. Even if an incentive does
compensate equipment owners for most or all of these costs, policy makers need to
recognize that equipment owners are likely to consider the total costs before
deciding whether to adopt a retrofit technology.

The income and property tax implications of incentives also have a bearing on their
effectiveness of the incentive on construction equipment business owners. For
example, if not handled carefully, providing “free” retrofit technology (for example,
through a grant payment covering the cost of the technology) may actually create a
tax liability for the equipment owner accepting the “free” technology.

Different businesses will weigh these considerations differently. The conditions
placed on an incentive will affect the likelihood that it alters the competitive situation
between large and small owners, or established and new firms. For instance, large
firms may be in a better position to absorb the costs of learning about and applying

50



Congestion Mitigation and Air Quality (CMAQ) funding to help reduce emissions
from existing vehicles.

One recommendation on which consensus was not reached was that EPA should
consider mobile-to-stationary source emissions trading for shippers.

3. Marine Ports

The United States is served by 185 deep-draft ports, and 30 of the largest ports are
in ozone and/or PM nonattainment areas. Many other ports are located in
maintenance areas that are former nonattainment areas. Some areas have air
quality values that approach the standards on a regular basis. Many of these 30
ports are close to commercial and residential districts, which have become
increasingly concerned about port-related emissions. This concern will grow as
ports become more active to handle significant projected increases in freight and
cruise ship volumes.

Sources of diesel emissions at ports include ocean-going vessels, harbor craft, local
cargo-handling equipment (cranes, yard hostlers, etc.), and trucks and rail that carry
goods in and out of them. Ports either operate their own equipment or lease their
land on a long-term basis to private marine terminal operators, who own and
operate their own cargo-handling equipment.

Based on the Port of Los Angeles emissions inventory,’ port activities contribute the
following NOx and PM emissions:

& Cargo handling equipment constitutes approximately 10% of the regional
NOx and 12% of the regional direct PM2.5 emissions.

fi Heavy-duty trucks currently calling on major container ports emit about 23%
of the regional NOx and about 9% of the regional directly emitted PM25.

@ Rail contributes approximately 13% of the regional NOx emissions and 6% of
the regional directly emitted PM25

@ Marine vessels, including harbor craft (e.g., tugboats, towboats, and ferries)
and large ocean-going vessels (e.g., container ships, tankers, and cruise
ships), emit about 54% of the regional NOx and 72% of the regional directly
emitted PM2 5.

While many port authorities and terminal operators have been pro-active in
teducing emissions, many opportunities remain. At the same time, unique barriers
also need to be considered. Grant funding is limited, and application deadlines
might be out of sync with business cycles (i.e., port enhancement projects).

” Port of Los Angeles Baseline Air Emissions inventory - 2001. July 2005. Available online:
https eles.or LA |_BAE! ExecS:

vi



DRAFT ~ DO NOT CITE OR QUOTE

buses in transit fleets. Waste collection haulers are given a choice of severat
options for meeting the “best available control technology” standards. School buses
are subject to idling restrictions for new and used engines. CARB continues to
expand these mandates to include more applications.

CARB is currently in the planning and development stages for devising rules and
regulations on several in-use diesel sources, including nonroad and cargo handling
equipment, on-road trucks, and some marine applications. In-use requirements for
cargo handling equipment and heavy duty vehicle idling restrictions are expected to
be adopted in late 2006 and implemented in early 2007. Clean fuel requirements
for ocean-going vessel! auxiliary engines are also expected to be approved late
2005 or early 2006 and implemented in late 2006 or early 2007. For in-use nonroad
equipment measures, CARB is currently conducting surveys of equipment,
performing field research, and discussing regulatory concepts with the regulated
community.

6. Other Strategies

Contracting Requirements. Both state and Federal governments have stipulated
required diesel emission reduction activities as a part of a contract's terms and
conditions. Contract preferences establish bid evaluation criteria that favor cleaner
contractors. While these contractual performance requirements would help
guarantee emissions reductions, business groups are often concerned that these
tequirements hamper the ability of small businesses to compete because many do
not have the necessary resources to meet the requirements. This concern can be
at least partially mitigated if adequate funding is made available to the small
business. Similarly, contract or lease requirements between a landiord port and
their tenants could require emission-reducing activities as part of the business
agreement. Seaport terminal leases are often established for as long as 30 years,
and offer limited and inequitable opportunities as tools to reduce emissions.

The Clean Diesel and Retrofit Work Group discussed but did not reach consensus
on regulatory and mandatory contractual requirements for emissions reduction
activities. Some members expressed the opinion that incentives cannot, standing
alone, achieve the desired reductions in pollution from the legacy fleet. Other
members took the position that it would be premature to reach that conclusion and
that the boundaries of EPA regulatory authority should limit consideration of Federal
regulatory strategies in this report.

Other Tax and Fee Strategies. Governments can influence decisions on purchasing
clean vehicles as well as cleaning up existing engines through a combination of
fees and similar strategies. For example, in Europe, a road tax is higher for older
vehicles. in California, as well as other countries, registration fees are higher for
higher-polluting vehicles. Fuel taxes can also be used and rebated to generate a
revenue stream for cleaning up existing engines.

21



Appendix A. Work Group Members and Organizations

Retrofit Work Group Co-chairs

Corning, Inc. Tim Johnson

U.S. Environmental Protection Agency Gay MacGregor
Ports Sector Co-chairs

Emisstar Michael Block

U.S. Environmental Protection Agency Trish Koman
Construction Sector Co-chairs

Associated General Contractors of America Leah Wood Pilconis

U.S. Environmental Protection Agency Steve Albrink
Freight Sector Co-chairs

Diesel Technology Forum Allen Schaeffer

U.S. Environmental Protection Agency Mitch Greenberg
School Bus Sector Co-Chairs

National Association of State Directors of Pupil Charlie Gauthier

Transportation Services
U.S. Environmental Protection Agency
Voting Members (Each organization has one vote)

Jennifer Keller

American Association of Port Authorities
American Trucking Association

Associated General Contractors of America
BP Global Fuels & Technology/Amoco
California Air Resources Board

Caterpillar

Clean Air Action

Cummins

Diesel Technology Forum
Emissions Advantage

Engine Manufacturers Association
Environmental Defense

Federal Highway Administration
Federal Railroad

Fleetguard Emissions Solutions

Georgia Institute of Technology
Infineum

Meredith Martino
Glen Kedzie

Ken Simonson
Bob Schaefer
Annette Herbert
Scott Rowland
Terry Goff
Patrick Mohrman
Ben Henneke
Robert Jorgensen

Bruce Bertelsen
Tom Timbario
Jed Mandel
Kevin Kokrda
Mark MacLeod
Janea Scott
Diane Turchetta
Steve Ditmeyer
Steve Grimm
Jennifer Kain
Loretta Evans
James Pearson
Kevin Poindexter
Randy Evans


DRAFT - DO NOT CITE OR QUOTE

Nett Technologies
New Jersey Department of Environmental Protection
NexGen Fueling
Port of Long Beach
Port Authority of New York & New Jersey
Port of Corpus Christi
Port of Houston Authority
Port of Los Angeles
Virginia Intemational Terminals, tnc.
Propane Education & Research Council
The Accord Group
USCAR
Van Ness Feldman
Volvo/Mack
West Coast Coalition
Williams Brothers Construction
Special Thanks:

Dr. Ralph Appy, Port of Los Angeles

Rick Bayles, Infineum

Dana Blume, Port of Houston Authority

Chuck Carroll, National Association of Waterfront Employers
Dan Demers, Virginia International Terminals, Inc.
Thomas Jelenic, Port of Long Beach

Bob Kanter, Port of Long Beach

Mike Kennedy, AGC.

Sarah Kowalski, Port of Corpus Christi

Marty Lassen, Johnson Matthey

Urszula Mierzio, Johnson Matthey

Dr. Shokoufe Marashi, Port of Los Angeles

Bob Marcolina, NJ DEP
Joseph Monaco, PANYNJ

Gabe Rozsa, NSTA

Wayne Pighin, APM Terminals

Chuck Salter, Volvo

Tom Timbario, Emissions Advantage

Tod Wickersham, Emisstar

Tay Yoshitani, National Association of Waterfront Employers
Kathleen Bailey, EPA

Monica Beard-Raymond, EPA

Jim Blubaugh, EPA

Cassie Flynn, EPA

Sally Newstead, EPA

Rosa Shim, EPA

Peter Truitt, EPA

Kuang Wei, EPA

Jennifer Went, EPA

A-3



The workgroup would like to thank EPA's staff for its support as well as EPA's Office @
of Transportation and Air Quality's Margo Oge and Merrylin Zaw-Mon for helping
this process go forward.



Loan programs may not be an attractive incentive for retrofit projects that do not
have a direct or indirect positive economic impact on the borrower unless another
motivating factor is provided for reducing emissions (such as contract modifications,
mandatory requirements, etc.). However, a loan program may be appropriate for
emission-reducing activities that have an economic benefit such as fuel savings.
Low interest loan programs could also be particularly useful for small businesses in
providing capital. Low-interest loans have the greatest impact if coupled with other
incentives like grant programs

3. Primarily Private Sector Funded Incentives

Regulatory Credits. Regulatory credits provide some kind of regulatory relief or
flexibility in exchange for reducing emissions, and require cooperation between
private and public sector entities. Regulatory credits include State Implementation
Plan (SIP) credits, conformity credits, Mobile Source Emissions Reduction Credits
(MERCs), and Supplemental Environmental Projects (SEPs). SIP credits are
emissions reductions that are counted toward a state or locality's required
emissions reductions for meeting Federal air quality standards, and conformity
credits are emissions reductions required for projects that would otherwise result in
an overall increase in emissions.

Governmental entities and public port authorities can be motivated by SIP and
conformity credits to reduce emissions. Interest exists among public entities to get
credit for early voluntary action. Private entities, on the other hand, would be more
likely to utilize the tradable permit system of MERCs or conduct a SEP in lieu of
paying the full cost of an environmental enforcement action.

The challenge for utilizing MERC, SIP, and conformity credit is the requirement that
the emissions reductions be quantifiable. In this regard, public port authorities and
others have requested guidance and recognition for claiming credits. However,
credit trading programs raise concerns regarding the inability to ensure emissions
reductions in a particular location, as well as accountability issues related to the use
and mobility of equipment.

Public Recognition, Environmental Stewardship and Non-Monetary Incentives.
Non-monetary incentives like public recognition can also be attractive to some fleet
owners/operators for a host of reasons. Government agencies often encourage
non-monetary incentives by providing public recognition as well as educational
information and technical assistance.

Positive emission-reducing actions, however, do not need to simply be altruistic.
Operational efficiencies that reduce emissions often make good business sense.
Examples include adopting an Environmental Management System (EMS) that
provides a framework to integrate environmental decision making into an
organization's operations. In addition to taking a multi-media approach to mitigating
environmental! effects, an EMS can often result in long-term cost savings.

18



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DRAFT — DO NOT CITE OR QUOTE

tecalibrations, the use of clean fuels, installation of exhaust aftertreatment devices,
and anti-idling and other changes in operating strategies that reduce emissions.
Each strategy has its own strengths and weaknesses. Engine replacements and
recalibration can be effective and may result in enhanced fuel economy and lower
maintenance costs, but can be expensive. Switching to cleaner fuels might be
easy, as in the case of switching to lower sulfur fuel or biodiesel blends, but has air
quality benefit on its own. Switching to alternative fuels, like natural gas, can be
very effective, but one has to establish a new fueling and maintenance
infrastructure in addition to engine and fuel system modifications. Retrofit
technologies are effective in reducing PM, HC, CO and sometimes NOx, but care
must be taken to appropriately match a specific retrofit technology with an in-use
application. Anti-idling strategies are a winner across almost all applications and
save fuel and money. Some idle-reduction strategies require infrastructure
investments at truck stops, and the air quality benefits are lower compared to other
strategies. For the purposes of establishing retrofit technology credibility and state
air pollution credits, the California Air Resources Board and the EPA have
developed retrofit technology verification procedures with reciprocity.

B. General Cross-Sector Recommendations

fe The potential for cleaning up the existing fleet is significant and worth the
investment.

% The goal of these programs is the deployment of the most feasible technology
for a specific application and positive recognition.

a Given the diversity of applications, it is important to offer a range of funding
options and incentives for maximum impact. Grants, loans, rebates, and tax
incentives are common funding mechanisms across all sectors.

ta Education and outreach is essential to spread the word and maximize impact.

s

The EPA technology verification process should be streamlined to get more
technology options into the market and increase competitiveness.

ta The 2005 Energy Bill (Pub L 109-49)* and 2005 SAFETEA-LU (Pub L 109-59°
included significant provisions pertaining to retrofits and funding. Full funding
and implementation of these measures will result in the greatest emissions
reductions from the legacy fleets.

* Official Title: Domenici-Barton Energy Policy Act of 2005.
5 Official Title: To authorize funds for Federal-aid highways, highway safety programs, and transit
programs, and for other purposes.

E-iii



insurmountable barrier and represents a small fraction, possibly as little as 5%, of
the total cost of operating and maintaining the tegacy fleet over a 10 year period.>

1. Incentives

A variety of incentives are available for reducing diesel emissions. In some cases,
these can be combined and tailored for specific sectors. Income tax incentives can
take the form of exemptions, deductions, and credits. Tax incentives are easy to
use, but have the challenge of targeting cost-effective reductions. They are also not
applicable to publicly-owned fieets and might not address users in low tax brackets.
Reducing excise taxes, such as has been done with alternative fuels, might also be
effective.

Grant programs are the most popular current funding program for retrofits. Grants
provide funds directly to owners and operators to pay for new engines or vehicles,
or equip existing fleets with retrofit equipment. They allow direct funding of
equipment to the fleet owners. Examples are the Carl Moyer Program in California,
the Texas Emissions Reduction Plan (TERP), and the EPA Clean School Bus USA
grant program. Funding for such programs can also come from Supplemental
Environmental Projects, wherein funding negotiated as part of a legal settlement
might be targeted to retrofits. Grant money can also be used to set up low-interest
loan programs. Grant programs can be very effective, but require more effort to
implement on both the government and private sides than tax incentives.

Contract terms on public projects can also be used to provide incentives for retrofits.
Contract terms can be used in multiple sectors and by any entity that pays fora
service that is provided in part by a piece of diesel equipment.

2. Mandates

Government mandates are another and, potentially, very effective tool for forcing
fleets to upgrade their equipment. California’s Diesel Risk Reduction Plan is an
example of such a state law. Although EPA has very limited authority to mandate
retrofits, states can adopt provisions related to retrofits for on-road vehicles used
within its borders, but will have to follow California’s lead and obtain EPA waivers
for nonroad engines. The Work Group cannot reach consensus on who pays for
retrofits in mandatory programs (e.g., the end user or society) and decided to leave
this discussion out of this report and these recommendations.

3. Technologies

Many established and emerging technologies are available to help modernize and
upgrade the existing fleet and reduce emissions. !n this report, “retrofit” is intended
to broadly refer to a variety of approaches including engine replacement and

3 Calculation based on: 45 billion gallons of diesel fuel consumed per year for highway and
non-road (Transportation and Energy Databook, cta.ornl.gov/data) at a price of $2.50 per
gallon. Five percent of this gross fuel consumption over 10 years is $56B.



DRAFT ~ DO NOT CITE OR QUOTE

The following sections further describe the potential impacts of diesel exhaust
components, specifically particulate matter (PM), ozone, air toxics, and carbon
monoxide.

Particulate Matter. PMis another name for particles found in the air, including soot
and liquid droplets. Some PM can be large enough to be seen, while others are so
small that individually, they can only be detected with sophisticated analytical tools.
Particles can be emitted directly from diesel engines (i.e., primary PM) or formed in
the atmosphere from gases such as sulfur dioxide (SO2) or NOx emitted from diesel
equipment (i.e., secondary PM).

Scientific studies have linked certain exposures to PM to various health problems,
including aggravated asthma, decreased lung function, increased respiratory
problems like chronic bronchitis, and even premature death. Diesel exhaust PM is
of specific concern because it has been judged to pose a potential lung cancer
hazard for humans as well as a hazard from respiratory effects such as pulmonary
inflammation. ?

Ozone. Ground level ozone (smog) is typically not emitted directly into the air but
formed by a chemical reaction between NO, and volatile organic compounds
(VOCs) in the presence of heat and sunlight. NO, and VOCs are both precursors to
smog. Nitrogen oxides are also significant contributors to acid deposition,
eutrophication of coastal bodies of water, fine particulate emissions, and haze.

EPA's assessment of scientific studies indicates that ozone can irritate lung airways
and cause inflammation, wheezing, coughing, or breathing difficulties during
outdoor activities. Repeated exposure to ozone over time may cause permanent
lung damage. Even at very low levels, ground-level ozone triggers a variety of
health problems including aggravated asthma, reduced lung capacity, and
increased susceptibility to respiratory illness. Ozone exposures have been linked to
increased hospitalizations and emergency room visits for asthma attacks and
mortality.

Air Toxics. The Clean Air Act has no requirements for National Ambient Air Quality
Standards (NAAQS) for air toxics (see discussion in following section), but toxic air
pollutants can be emitted from diesel engines, as well as alternatively-fueled
engines, and are known or suspected to cause cancer or other serious health
effects. Examples of air toxics include diesel PM, benzene, 1,3-butadiene,
acetaldehyde, POM, and trace metals such as cadmium and chromium.

Studies show that people exposed to toxic air pollutants at sufficient concentrations
and durations may have an increased chance of experiencing serious health
effects, including cancer. Other health effects can include damage to the immune,
neurological, reproductive, developmental, and respiratory systems.

Carbon Monoxide. Once inhaled, carbon monoxide binds to hemoglobin, the
substance in blood that carries oxygen to cells. It reduces the amount of oxygen
reaching the body's organs and tissues. Exposure to high levels of carbon

7



DRAFT — DO NOT CITE OR QUOTE

incentives. SmartWay recognizes the unique relationship between shippers and
freight carriers, and seeks to take advantage of that relationship through preferential
contracting for trucking companies that are SmartWay partners. Carriers can get
certified as such by employing state-of-the-art fuel efficiency technologies bundled
with emission reduction technologies. In addition to the resulting economic benefits,
wherein fuel savings provide a good return, shippers and carriers are also
recognized through publicity, which has been shown to be of value. Examples of
fuel saving technologies are idling controls, improved tires and wheels, and
improved vehicle aerodynamics to reduce rolling resistance and drag, and hence
energy consumption and emissions. Financial incentives to make these
investments come from grant and loan programs.

Other incentives that should be considered include those that offer operational
benefits such as privileged parking, lane access for loading and unloading, reduced
or eliminated tolls, and expedited access to points of entry. Some technologies
(e.g., auxiliary power units for idling reduction and urea storage tanks for SCR
systems) are subject to the excise tax and add weight to the vehicle. Efforts to
provide waivers for the excess weight of these technologies should be pursued, as
these are barriers to innovation that should be removed.

A key factor in the freight sector is determining how to apportion SIP credits and/or
air quality benefits derived from trucks traveling across multiple states and regions.
States and localities should be able to claim emission reductions from implementing
the above incentives in their SIPs. This involves developing formal air quality
guidelines and procedures to claim credits. Also, clarity is needed in the tax
treatment of grant funding such that companies are not discouraged from seeking
grants for fear of tax implications.

In addition to the above, EPA should:

a Adopt programs to encourage the replacement of older, higher emitting vehicles
with new, cleaner 2007 vehicles.

% Explore implementing loan programs, tax incentives, and tabeling programs for
hybrids.

fa Further evaluate the benefits from the Smartway technology bundles and
publicize the results. Create fuel efficiency and emission reduction thresholds
for program participation.

ta Work to expand the Smartway loan programs beyond Arkansas and Minnesota,
and create a national capitalization/loan program.

&i Encourage aggressive coordinated leadership between states, NGOs, and trade
associations in order to implement programs that will require high levels of
funding.

‘@ Further work with the Department of Energy (DOE) on exploring new fuel
economy and emissions reduction technologies for the legacy fleet, and with the
Department of Transportation (DOT) to educate localities on how to better use

E-v



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manufacturers may have requirements for usage of this fuel, and should be
consulted prior to use. Emulsified diesel fuel products have been verified for use by
EPA and CARB.

CNG is an alternative fuel consisting mostly of methane and odorless and colortess.
CNG, requires a special infrastructure, and is available at approximately 1,300
refueling stations. Emissions reductions can range from 35-60% for NOx emissions
and 70-90% for PM emissions.

Liquefied Natural Gas (LNG) is similar to CNG in that it too is odorless, colorless,
and composed of mostly methane. Most LNG vehicles are used by fleet managers,
thus refueling infrastructures are located at the fleet operation site and not available
to the general public. LNG can reduce NOx emissions by approximately 50%.

Propane or Liquefied Petroleum Gas (LPG) is a byproduct of natural gas processing
and petroleum refining. It burns more cleanly than gasoline, but its supply is limited.
Propane-fueled vehicles are already common in many parts of the world.

Idle reduction technologies can be very effective strategies to reduce emissions
including greenhouse gases. These operational strategies can reduce wait and
loading times for cargo and passenger vehicles. Add-on devices are available that
reduce idling on long haul trucks, as well as fixed equipment that provides electricity
to heat and coo! trucks and their loads.

13



U.S EPA Headquarters Library
Mail code 3404T
1200 Pennsylvania Avenue NW
Washington, DC
202-566-0556

Recommendations for
Reducing Emissions from the Legacy Diesel Fleet

Draft Interim Report of the Clean Diesel and Retrofit Work Group
Presented to the Clean Air Act Advisory Committee by the
Mobile Source Technical Review Subcommittee

March 24, 2006



F. Replace

As the emissions standards change, newly manufactured engines must meet new
emissions requirements. Voluntarily replacing oider diesel equipment prior to the
end of their operational life with diesel equipment that meets tougher emissions
requirements is a viable and often cost-effective strategy for cleaner air. Replacing
also involves the scrapping of the old engine/equipment to ensure it does not
teappear in the marketplace in another location and continue to contribute to excess
diesel emissions.

Table B-5 presents options for replacing diesel equipment.

20



Tax Incentives and Waivers. Companies and owner-operators are currently
charged an excise tax for several innovative technologies on the market today. This
tax hinders them from purchasing these technologies. An excise tax waiver would
remove this barrier and provide an extra incentive for companies to purchase
efficient technologies. An income tax waiver, federal and state, for the incremental
capital purchase, will greatly improve the appeal of such a program.

Another barrier in the marketplace is the application of weight limitations for add-on
technologies, such as auxiliary power units (APUs) and some retrofit devices. A
weight waiver should be applied to these products so that trucking companies can
continue to carry maximum loads if they decide to invest in emission control
technology. For example, the Energy Bill (Pub L 109-49) includes a 400-pound
weight exemption for APUs.

Truck Labeling. Many trucking companies (especially those companies or fleets
that are recognized by the public) are interested in marketing their environmental
progress and believe that one of the most cost effective ways they could do this is
with their trucks. A truck labeling program would allow trucking companies, owner-
operators, and any company with a trucking fleet to showcase those trucks that
have innovative, emission reduction technologies. Only those trucks that are
equipped with sophisticated, proven emission control technology would be able to
display the label or iogo. Specific emissions thresholds must be established to
create a “level playing field” for all companies so that when one sees a truck with a
label or logo, it is clear that it is a low- emission truck. The SmartWay Transport
Partnership is currently developing a truck labeling program.

2. Programs Applicable to State and Local Government Officials

SIP and Conformity Credits. Although each of the strategies discussed above
create incentives for emissions reductions from freight, state and local air quality
agencies have had difficulty claiming SIP and/or Conformity credits for these
reductions because most long-haul trucks do not operate primarily in a single area.
Instead these trucks operate inter-state, regionally, or nationally. Creating a
program or air quality guidance that describes how emission reductions from long-
haul trucks could be credited in SIPs would serve as a significant incentive for
states and local governments to, in turn, create programs offering incentives as
described above.

Fuel Efficiency/Emissions Reductions. The SmartWay Transport Partnership's
technology verification program is studying the relationship between fuel efficiency
and emissions reductions. Trucking companies and owner-operators are interested
in increasing their fuel efficiency because it will reduce their fuel consumption, save
money, and reduce emissions. State agencies and local officials are interested in
emissions reductions for human health protection and SIP compliance. Therefore, it
is important to be able to quantify the emissions reductions that result from
increased fuel efficiency. The relationship between increased fuel efficiency and

36



playing field for small companies when combined with attractive loan programs.
However, participation might be limited unless they are attractive. Among
construction companies is a concern that contract requirements and regulations
could provide a competitive advantage to large, private sector equipment owners
with sufficient capital to meet cleaner requirements, while discriminating against
smailer businesses that could not afford to retrofit equipment.

EPA should:

mw Identify ways to use Federal grants to leverage private funding, and state/local
grants to maximize the pool of funds and benefits to equipment owners.

m Ensure adequate resources are available to administer programs or contract
program administration out to other organizations.

ta Develop model language for contract-based incentives by working with the
industry and procurement officials.

TM Model SIP credits for voluntary retrofits after the TERP program, where they are
not part of the 3% SIP maximum, and are enforceable credits.

TM Investigate emissions benefits from changing operational behavior, such as
teducing idling and enhancing maintenance, and then establish appropriate
guidelines.

mTM Develop tools to improve understanding of emissions inventories, retrofit costs,
and commensurate benefits to improve policy decisions. Communicate these to
state and local officials and use them to enhance construction project credits.

t Improve the technology verification process by: allowing reasonable extensions
of technology from the highway sector to the nonroad sector; allowing
conditional technology verification (with finite duration); considering reciprocity
with the Swiss VERT process, perhaps on an interim basis.

D. Concluding Remarks

The Work Group spent much collective time and effort on assessing the various
options for advancing emissions reductions via retrofit programs. The costs of
emission reductions are significant, but the societal benefits are much larger. Few
public investments show as much promise in providing these returns.

Along the way, awareness of the options increased in each sector, and sector
champions were developed. So, in a way, some of the recommendations are well
on their way to being implemented (e.g., education and outreach). Further, the
Work Group is largely committed to taking the next steps to help EPA implement the
recommendations. As a final recommendation, we are recommending that EPA
keep the Retrofit Working Group active and alive, perhaps not in exactly the same
form as it currently exists under the Mobile Source Technical Review Subcommittee
(MSTRS), but in some form, as a mechanism to continue to promote improvements
in diesel emissions reduction programs, nationwide.

viii



DRAFT - DO NOT CITE OR QUOTE

Administrative burdens of grants may also be too high to make them worth the
effort. Ports are very competitive, so additional financial burdens will result in lost
business if they are not universal. Homeland Security initiatives cause competition
for funds, but perhaps also coordination opportunities. Currently, demonstrated
emission reduction technology available for ports is limited, but expanding. Finally,
each port is unique, and many experience local, state, and federal jurisdictional
Issues.

Flexible program design and education and outreach opportunities exist.
Recommended incentives include grants, tax incentives, loan programs and
rebates, contract or lease requirements, recognition programs, and regulatory
credits.

Additionally, EPA should:

f@ Include grant programs for ports in its budgetary process, and create a model
program to demonstrate to states how they can use their fee authority, similar to
California's Carl Moyer Program or TERP.

% Coordinate with the DOT and Homeland Security to begin addressing air quality
impacts of major infrastructural programs.

wm Explore SIP credit structure related to ports.

ta Adopt recognition, education, and outreach programs that specifically target
ports.

4. Construction

The construction industry uses more diesel engines than any other sector—more
than 2 million, almost 20% of the total—that vary in all important aspects (e.g., size,
configuration, cycle, age). Thirty-one percent of these engines were manufactured
before emission regulations were implemented, so the sector has a disproportionate
amount of emissions—32% of all mobile NOx and 37% of PM. Most of the
equipment is used in public works and commercial projects. Many construction
companies are small businesses: 92% have fewer than 20 employees,

This sector has some unique characteristics that provide challenges in designing
programs to promote retrofit. Emissions and economic impacts depend on
frequency and time of use, location, and application. Thus, priorities and programs
within the sector need to be carefully considered, while specificity of incentives
might be difficult. Emission control retrofits may represent risks, so full grants might
not be as attractive in many applications. Also, income tax incentives might have
limited value due to low profitability frequencies in the industry. Finally, as emission
control retrofit technology is slowly coming into the sector, grant periods need to be
long enough to allow the market to take advantage of the opportunities.

Contractual incentives are a powerful tool for the industry, but need to be carefully
designed. Contract modifications, which will reward clean practices, can level the

E-vii



DRAFT —- DO NOT CITE OR QUOTE

employees, 92% have fewer than 20 employees. An additional two million
businesses, mainly sole proprietorships, have no employees.

1. Diesel Emissions Reduction Technology Strategies

Approximately 2.1 million pieces of nonroad construction equipment are currently in
use. EPA has been phasing in engine emissions standards for new model years
and certain horsepower classes since 1996. The term “tier level” refers to the
emission standards that a particular engine meets with tier 1 standards being the
first or earliest set of emissions standards and tier 3 being the standards that new
engines are meeting today. The strictest standards, tier 4, will phase in over the
next decade. The higher the tier level, the cleaner the engine.

Of the more than 2 million engines that the construction industry uses, about 31%
(or 650,000 pieces of equipment) have engines manufactured before any emissions
standards took effect and, therefore, have no emission controls.” Currently, the
retrofit technologies and repowering options for reducing the emissions from these
older engines are limited. Early replacement is another but costly option.

Approximately 36% of construction equipment contains basic engine based
emissions controls and meets EPA's tier 1 level and roughly 28% of equipment
meets tier 2 levels. Only an estimated 5% of construction equipment meets EPA’s
current standard at the tier 3 emissions level. Appendix C contains more detailed
information.

Strategies to reduce pollution from construction equipment include retrofitting with
pollution controls, replacing or repowering older engines to a higher tier, using
cleaner fuels, reducing idling time, and proper maintenance. Compared with
highway engines, challenges to retrofitting construction equipment with pollution
controls are unique. Retrofit technologies need to address issues like extended idle
and/or low speed operation periods, fuel quality (including sulfur levels), vibration,
high levels of fugitive dust, space limitations, and visibility are unique to this sector
and require additional attention when retrofit technologies are being considered.
Older engines may also have undesirable NOx/PM ratios for use with retrofit
technologies. In some cases, early engine or vehicle replacements are more cost
effective, in at least the long run than the application of a retrofit technology. Proper
maintenance and effective repair are the initial keys to achieving cleaner engines
followed by cleaner fuels and aftertreatment devices and systems. DOCs and
DPFs that are specifically designed for construction equipment will also help meet
the emissions reduction goals in this sector. While not in wide use in the U.S.,
Switzerland has thousands of pieces of construction equipment retrofit with DPFs
and will have 100 % of its construction fleet retrofit with in a few years. In the short
term, idling controls, DOC installations, DPFs, crankcase controls, engine upgrades,
and cleaner fuels with lower sulfur levels are among the easiest to implement and
will likely be the predominant choice until SCR, NOx adsorbers, and EGR are fully
optimized for application to construction equipment. The maturity of these systems

29 Environmental Protection Agency, Nonroad Model, www.epa.gov/otag/nonrdmd).htm.

49



Figure IV.2: U.S. Freight Transportation NOx &
PM-10 Emissions by Mode, 2002

Marine, Air,
18.1% 0.1%

Rail,

15.0% Truck,

66.8%
Source: U.S. EPA, National Emission Inventory.

To account for the impact current and future engine emission and fuel standards will
have on freight transportation, estimated future emissions from truck, rail, marine
vessels, and air have been made. These estimates anticipate total freight
emissions declining 63% by 2020.

As shown in Figure IV.3, the truck portion of total freight-related NOx and PMio
emissions is expected to be cut in half over the next 15 years even though the
truck's share of the freight market is expected to grow. NOx and PM emissions
from trucks are expected to decrease by 82% by 2020, the largest decrease of any
freight transportation mode.

Figure IV.3: U.S. Freight Transportation
NOx & PMio Emissions by Mode, 2020
Air,
0.6% Truck,

Marine, 31.6%

44.7%

Rail,
23.2%

Source: U.S. FHWA, Assessing the Effects of Freight Movement on Air Quality at
the National and Regional Levels, April 2005

32



D. Repair/Rebuild

Engines that are properly maintained and tuned perform better and typically emit
less pollution than engines that are not properly maintained. Rebuilding an engine
as a strategy for emissions reduction can also significantly lower emissions, run
more efficiently, and be cost-effective for high value equipment. Proper
maintenance or rebuilding lowers emissions by burning fuel more efficiently and can
reduce operation costs and extend engine life.

The following is a list of maintenance issues to consider:

Restricted air filters

Improper engine timing

Clogged, worn or mismatched fuel injectors
Faulty fuel injection pumps

Defective or misadjusted puff limiters

Low air box pressure

Improperly adjusted valve lash or governors
Malfunctioning turbo chargers and after-coolers
Maladjusted fuel racks

Defective air fuel controllers

Poor fuel quality

Improper driving gear

Air intake manifold leaks

17



interstate commerce. The District Court stated that the sections preempting states
form setting standards for new vehicles do not preclude a state or locality from
imposing its own exhaust standards upon the resale or re-registration of the vehicle.

In related recent rulings, the U.S. Supreme Court in Engine Manufacturers
Association v. South Coast Air Quality Management District"’ held that
requirements mandating a private operator's purchase of alternative-fueled vehicles
constitute a type of emissions standard that states and political subdivisions are
preempted from adopting under Section 209(a) of the CAA. On remand, the U.S.
District Court stated in its order denying a motion to implement the Supreme Court
decisions that purchase requirements as applied to state and local government fall
within the market participation exemption to preemption and are not preempted by
Section 209(a).

Regulation of Nonroad Vehicles and Engines. For nonroad vehicles and engines,
EPA can set new engine standards under CAA Section 213, but does not have any
statutory authority to set standards for in-use engines. California can regulate
certain new and non-new nonroad engines provided that it first obtains authorization
to do so under CAA Section 209(e)(2). No state, including California, can regulate
new engines used in construction and farm equipment under 175 horsepower (hp),
new locomotives, or new engines used in locomotives. In addition, no state other
than California may set standards for nonroad spark-ignited engines smaller than 50
hp. Other states may adopt California’s new or non-new nonroad standards that
have been authorized by EPA with the exception of spark-ignited engines smaller
than 50 hp.

All states can control the use, movement, and operation of registered nonroad
vehicles within their borders with the exception of locomotives. Locomotives
present unique challenges and are not addressed in this document. California may
request authorization (i.e., apply for a waiver) under Section 209 (e)(2) to establish
tetrofit programs for in-use nonroad engines and vehicles, and other states may
adopt California’s program.

Federal, state and local regulatory agencies are limited in their authorities to
regulate ocean-going vessels, especially vessels flagged in foreign countries.
Regulations applicable to ocean-going vessels are established by means of
international treaties.

5. Current Regulatory Programs

California Air Resources Board Retrofit Regulatory Program. As part of California's
Diesel Risk Reduction Program, CARB has developed and implemented several
tules and regulations to control PM from some diesel mobile sources, including
waste collection trucks, transit agency vehicles, and portable engines. For
example, CARB requires cleaner engines, cleaner fuel and the retrofitting of older

‘” Engine Manufacturers Association v. South Coast Air Quality Management District, 124 S. Ct 1756
(2004)

20



DRAFT — DO NOT CITE OR QUOTE

decreased emissions serves as an incentive for state and local govemments to form
assistance programs for the trucking industry.

3. Recommendations

The following action items are recommended for EPA to consider in developing a
diesel emissions reduction strategy for the trucking sector:

ia EPA should create a national capitalization program designed to provide capital
at attractive market rates and terms for trucking companies and fleets of all
sizes. Additionally, EPA should work with private lending institutions to create
innovative capitalization programs that include technology bundling. EPA should
explore the use of income tax waivers for such qualifying capital purchases.

‘@ In addition to federal leadership, aggressive coordinated leadership is needed
from ail parties including states, NGOs and trade associations to achieve
Congressional and state-legislative support to implement high dollar programs
for government grants, tax incentives/waivers and/or rebates structured both for
non-profit organizations and for-profit companies.

ta EPA should explore implementing the loan programs, tax incentives, and
labeling programs for hybrids. Some members also thought extended privilege
packages would be useful.

ui Use EPA’s SmartWay Transport Partnership to continue to increase the demand
for cleaner, more efficient freight delivery services.

‘a EPA should test and verify the effectiveness of innovative technology bundles
that include fuel saving and emission reduction technologies to determine the
emissions reduction potential and return on investment scenarios. EPA should
then publicize and market the results to states, local governments, and trucking
companies.

a EPA should work with states and local agencies to expand the number of
innovative loan programs that provide capital to trucking fleets for “SmartWay
Upgrade Kits.” Currently only Arkansas and Minnesota have such programs.

va EPA should work with states and local authorities, as well as private companies
to explore the development of extended privilege packages for trucking
companies.

a EPA should continue its efforts to create weight waivers for innovative
technology that can be added to trucks.

&

EPA should develop criteria identifying the emission control thresholds for a
SmartWay truck and should create a program that allows trucking companies to
label qualifying trucks in their fleet that meet the emission control thresholds.

37



DRAFT — DO NOT CITE OR QUOTE

4. Regulatory and Mandatory Requirements

Mandatory requirements can take several forms, the most familiar of which is a
federal or state regulation setting new engine emission standards or requiring after-
treatment technology. Regulatory requirements provide the opportunity to target
specific areas. Like incentives, they can also impact private fleets. Significant
government functions are needed to establish and maintain such requirements. A
good regulatory process allows all impacted parties, including industry, public health
and environmental groups, and members of the public the opportunity to provide
input into the development of the regulations. The regulatory process can promote
overall economic efficiency by comparing the costs of compliance with the public
health benefits.

All Work Group members acknowledge that regulatory mandates are one approach
to achieving air quality benefits. However, they disagree about who should pay for
the costs of retrofits required by regulation. Some members believe that the end
users should pay for the retrofits and that this principle is well-grounded in the
tradition of regulatory mandates. Others believe that, for regulatory approaches like
contract specifications, governments should provide funding mechanisms to support
the implementation of the specifications. Still others believe that it is unreasonable
to require end users to invest in retrofit equipment for engines that met all of the
regulatory requirements at the time of original purchase, regardless of the funding
issue.

Having noted this difference of opinion, the Work Group agrees that these
philosophical differences are better addressed in the political process. It should
also be noted that the EPA's authority to regulate the legacy fleet differs significantly
from its authority to regulate new engines.

Regulation of Highway Vehicles. At the federal level, EPA has the authority to set
emission standards for both on- and nonroad new engines and vehicles. However,
questions do exist regarding EPA's authority to regulate the in-use fleet for highway
engines and vehicles. Section 202(a)(3)(D) of the Clean Air Act (CAA) gives EPA
authority to set requirements for engines at the time of engine rebuild, but regulatory
authority to implement retrofits more broadly needs further review.

Under the CAA, only California may set its own emission standards for new highway
engines, subject to receiving a preemption waiver from EPA under Section 209(b).
Other states may adopt California standards pursuant to the terms of section 177 of
the CAA. States generally can adopt provisions relating to the use, operations, or
movement of engines and vehicles within their borders such as carpool lanes.

In the court case Allway Taxi Inc. v. New York,'® the Federal District Court held that
a state or locality can not impose its own emission control standards the moment

after a new car is bought and registered, as that would constitute an obvious
circumvention of the CAA and Congressional intent to prevent obstruction of

"6 allway Taxi Inc. v. New York, 340F.Supp. 1120 (S.D.N.Y.), add’d 468 F.2d 624 (d2. Cir.1972)

19





C. Sector-Specific Descriptions and Recommendations

1. School Buses

About 70% of the 480,000 school buses are owned and operated by the school
districts.° Since the majority of school districts have very limited funding, and
private contracts are tight for the remaining 30% of school bus transportation, all the
funding of retrofits in this sector will likely have to come from grants. Because of the
importance placed on children, and given that 30% of school buses are pre-1991
model year, reducing emissions from the nation’s school bus fleet should be a first

priority.

The school bus sector is leading the others on Federal funding due to an early start
from the EPA Clean School Bus USA Program, which has awarded about $17.5
million in FY2003 through 2005. These efforts have reduced emissions from

about 7,400 buses through replacements, refueling, and retrofits. The use of clean
diesel fuel accounts for the majority of the buses (3,969), followed by diesel
oxidation catalysts (2,169). Further, an additional 23,000 buses have been cleaned
using state programs and Supplemental Environmental Project (SEP) funds.

The recommendations to advance retrofits in this sector are:

® The amount of funds available for reducing emissions through government
grants should be increased and its disbursement rate accelerated. Tax
incentives, such as tax credits, sales and property tax exemptions, and waivers
of registration fees will also have value for the privately-operated fleets.

TM Incentive grants should be geographically diverse and focus on producing the
greatest emission reductions for the least cost by concentrating on replacing the
2,000 pre-1977 buses first.

w Education and outreach is important, as many school districts are not aware of
the grant programs.

2. Freight

Moving freight consumes about 20% of all energy in the U.S. Trucks move about
66% of freight, while rail moves 16%. The remaining 18% is moved by water,
pipeline, and air. Ground freight accounts for 40% of transportation-related NOx
and 30% of PM emissions. Since two-thirds of these emissions come from trucks,
the Work Group decided to focus on the truck sector. The rail and airport sectors
should be examined later, but appear to be moving forward with their own unique
efforts such as idle reduction, use of green switcher locomotives, and improvements
to ground service equipment in the airport sector.

EPA's SmartWay Program, a market-based incentive that combines energy
efficiency and environmental performance, is the focal point of the freight sector's

® This and other statistics taken from data published in the 2005 issue of Schoo/ Bus Fleet
Magazine's Fact Book.

iv



B. Description of Diesel Emission Reduction Technologies and
Strategies

Many technologies and fuels are available for reducing diesel emissions. Some
technologies are primarily used to reduce PM while others specifically reduce NOx.
The key is to know the capability of the technology and how well it will work on a
given engine to produce the desired results. Proper engine maintenance is always
important to ensure appropriate performance of all technologies, for example
engines with high oil consumption rates should be repaired prior to installing retrofit
technologies.

The following sections describe various technologies available to reduce emissions
from existing engines. Appendix B provides detailed comparison of technologies
available for ports and construction.

1. Technologies

Diesel Oxidation Catalysts (DOCs) are the most commonly used exhaust
aftertreatment technology. A DOC is a catalyzed flow-through metallic or ceramic
substrate. A DOC uses catalytic reactions to convert pollutants to water and carbon
dioxide (CO2). A DOC can reduce PM by 20-50% and HC and CO by up to 90%.

A number of DOCs are already verified by the EPA and CARB. DOCs are often
selected because they may be used with a variety of fuels, but they generally
achieve greater levels of reduction with lower sulfur fuels. DOCs may be used in
most applications, and installation is relatively straightforward with very little
maintenance required. DOCs perform well on equipment with variable duty cycles.

Diesel Particulate Filter (DPF) is a device that collects and burns exhaust PM at
high temperatures. Prior to installation of a DPF, data logging must be performed to
ensure the exhaust temperature of the vehicle meets the appropriate specifications.
Monitors are required to track exhaust back pressure and exhaust temperature.
DPFs generally require periodic cleaning of accumulated ash, which mostly comes
from the lube oil and requires special handling. If lube oil consumption is high, more
frequent cleaning of the filter will be needed. A high efficiency DPF is desirable
because it can achieve a 90% or greater reduction in PM, HC, and CO.

A number of passive and active DPF systems have been verified under the EPA
and CARB verification programs. Passive DPF systems continuously or periodically
Tegenerate using the natural exhaust conditions coming from the engine, while
active DPF systems utilize heat from another source to burn collected PM. Some
passive DPF systems require ultra-low sulfur diesel (ULSD), but all passive systems
perform better with cleaner fuels (i.e., the range of passive regeneration is extended
when cleaner fuels are used). Active DPF systems utilize fuel oxidation or electrical

10



E. Repower

Repower is a term used to describe replacing an older engine with a newer cleaner
engine or replacing a diesel engine with one that can use alternative fuels. Table
B-4 shows the different techniques for repowering engines.

18



DRAFT - DO NOT CITE OR QUOTE

authorized dealers) for independent owner/operators to upgrade engines or
purchase a package of diesel emissions reduction/fuel savings technologies.
This approach may be applicable for some terminal operators and teasing
companies.

w Freight Infrastructure. EPA should coordinate with DOT (MARAD and FHW)
and Homeland Security to start addressing major infrastructure support needs to
accommodate the projected growth in waterborne freight and global trade trends
in an environmentally beneficial way that improves air quality. EPA could
facilitate an analysis of air quality impact of options.

a Credits. EPA should work with stakeholders to develop guidance for quantifying
and claiming regulatory credits that are surplus, verifiable, quantifiable and
enforceable, including a way to bank credits from early voluntary mobile source
diesel emissions reductions projects at a discounted rate against future needs,

sw Recognition. EPA should create a national award or recognition program for
port authorities and other entities that operate at ports. EPA should promote the
visibility of the National Clean Diesel Campaign and ports contribution to the
effort.

= Sharing Best Practices. EPA should develop educational materials and tools to
continue the education and coalition-building that has become the cornerstone
of voluntary efforts to encourage diesel emission reduction activities at ports.
Programs could include case studies; best practices; technical information in the
form of print, web and interactive workshops; regional collaborative; and local
on-going forums.

% Technology Verification. EPA should enhance its verification program and work
with manufacturers and fuel suppliers to ensure adequate emission control
strategies are available.

% Emissions Inventory. Encourage port authorities and other stakeholders to
quantify emissions inventories voluntarily. EPA should work with stakeholders to
develop emissions inventory guidance.

mm Evaluation. Six months after the sunset of the Clean Diesel and Retrofit
Working Group, EPA should evaluate its progress with the MSTRS.

47



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As can be seen from the above, each of these measures has both positive and
negative attributes. Performance of retrofit programs may be optimized by
combining different incentives. Developing, combining and coordinating incentive
programs within a region, within a construction project, or across multiple projects
within a region is likely to be more effective than attempting to structure one or more
incentives independently.

4. Recommendations

The following action items are recommended for EPA to consider in developing a
diesel emission retrofit strategy for the construction sector:

Developing Programs, Assistance or Model

@ Develop and encourage innovative ways to leverage the combination of private
financing of investor funds with available government grant funds (including tax
incentives, rebates and performance bonuses) to maximize the benefits to
equipment owners and minimize the burdens on recipient agencies. Ensure that
Federal agencies such as EPA who operate grant and loan programs have
adequate resources to successfully administer the programs.

m Provide more opportunities for government grants and rebates to be given to
non-profit and/or for-profit entities to avoid the cost and burden to state/local
government agencies associated with grant administration and retrofit product
acquisition.

m Develop a program of low interest loans to assist state and local governments in
increasing the support for funding of retrofit projects.

Work with the construction industry and government procurement officials to
establish model language for contract allowances and incentives and project-
specific contract specifications leading to consistent mechanisms for
encouraging emission reduction strategies.

TM Develop model language for voluntary construction retrofit programs that if
implemented by states would qualify for SIP credit and not be calculated as part
of the maximum 3 % allowance for voluntary programs. An example of such a
program would include the Texas TERP where participation is voluntary but is
an enforceable measure in the SIP.

TM Investigate and assess operational modifications that have emissions benefit.
Then work with the construction industry and government agencies that create
construction projects to develop a set of effective and appropriate guidelines for
idle reduction, and effective maintenance and repair programs designed to
reduce emissions from construction equipment/operation.

m Providing Information, Education an itreach

54



DRAFT - DO NOT CITE OR QUOTE

school bus activity due to issues of possible budget augmentation.) Third, some
states, such as California, New York and Washington, have developed funding
mechanisms for school bus retrofits and replacements. In addition, the rising cost
of petroleum coupled with the $0.50/gallon excise tax credit (which for school
districts will operate like a grant program) established by the volumetric Excise Tax
Credit for Alternative Fuels in the recently passed Federal SAFETEA-LU (Pub L
109-59) may provide some school districts with a sufficient economic incentive to
purchase new alternative fuel schoo! buses.

Knowledge/Skill/Technical Capacity at the Local Level. |n order to successfully
implement a clean school bus project, personnel within the school district must have
some technical capacity with pollution control options and strategies. In addition,
personnel must be able to write a successful grant application and handle the
additional responsibilities of grant management. Not all school districts, especially
those that are smaller and have fewer resources, have the capability to investigate
various strategies for retrofitting or replacing diesel-powered school buses in their
fleets.

Private Fleets. In significant areas of the country, particularly the Northeast, Mid-
Atlantic, upper Midwest, and in large urban centers (most of which are in
nonattainment areas), the majority of school buses are owned and operated by
private companies under contract to public school districts. Currently, private
contractors must apply for Clean School Bus grant funds jointly with a school
district. If a school district chooses not to participate in the Clean School Bus USA
Program, the private contractor has no way of applying for grant funds, and those
communities become ineligible to participate in the program.

Cleaner Fuel Availability and Device Applicability. While mandated to be available
nationwide in October of 2006, at present ULSD fuel is available only in areas near
refineries or ports from where it can be shipped relatively cheaply, or in areas where
the demand is sufficient that fuel suppliers will truck the fuel to fleets. The price per
gallon for ULSD compared to regular diesel fuel varies widely, depending on how
far the fuel must be shipped and by what mode. For the short term, this limits the
use of certain retrofit technologies, namely some DPFs since they must be used in
conjunction with ULSD.

DPFs have been verified by EPA and CARB with different temperature
specifications, and not all DPFs are appropriate for school bus operations. When
applications do not meet minimum temperature specifications, they do not
regenerate to burn off the collected PM and may require more frequent
maintenance or may fail entirely. !n the past, there have been minimum
temperature issues in some school bus operations. However, some filter devices
have since been proven and verified to meet these low-temperature applications. In
addition, new technology to thermally regenerate fitters through plug-in technology
will be temperature-independent and should allow filters to be used on all model
years of school buses. Pre-installation data logging is imperative to determine the
proper fit between technology and operating environment.

27



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infrastructure. Currently, most of the school districts applying for Clean School Bus
grant funds for alternative fueled buses do so because they already have alternative
fueled buses and have ready access to the necessary re-fueling infrastructure. A
school district that has neither alternative fueled schoo! buses nor ready access to
the infrastructure may not choose the alternative fuel bus option because of the
absence of available infrastructure grants under the Clean School Bus USA
Program. Some state programs, however, include infrastructure grants, such as
California’s Lower-Emitting School Bus Program."

3. Diesel Reduction Strategies

School bus fleets are employing a variety of strategies to reduce their diesel
pollution. Some districts are retrofitting their buses with DOCs, which provide a
20-40% or more reduction in particulate matter pollution. DPFs offer up to a 95%
reduction in PM. If ULSD can be obtained, districts have switched over with few
problems, with the exception of a few engine types whose fuel pumps have
malfunctioned. Some districts have implemented CNG projects, often in
conjunction with a large city or county CNG facility or the vehicle owner's own
facility. Biodiesel and other fuels have been used routinely in districts with few
problems.

Newer technologies, such as open or closed crankcase ventilation systems, wire
mesh filters and thermally-regenerated filters (which can be used on nearly all
model year vehicles) look promising. Finally, many districts are implementing idling
reduction policies, which save fuel and provide health and environmental benefits.
Each district chooses the diesel reduction option which best suits its own conditions,
considering funding, routes, number of vehicles and other variables.

4. Incentives for the School Bus Sector

More Funding. Clearly, making funds available in the form of SEPs, grants, or other
funding mechanisms seems to be the best incentive for the implementation of clean
school bus projects. The need and desire for funding outstrips the availability by at
least 10:1 for grant and SEP opportunities. Once the funding is available school
districts become interested in implementing clean school bus projects.

Tax Incentives. A federal tax credit for the purchase of clean school buses and
Tetrofit equipment could encourage private fleet owners to update their fleets
voluntarily. Similarly, states can encourage cleaner school buses among the private
sector by providing sales or property tax exemptions, and waivers of registration
fees. With an estimated 140,000 school buses under private ownership, these
incentives could make a significant difference in air quality.

** This is a grant program that pays for the incremental costs of purchasing new altemative fuel
school buses or retrofitting certain diesel buses with exhaust aftertreatment devices. It also provides
grant funding to help defray the cost of building alternative fuel infrastructure. See

http: /Awww.arb.ca.gov/msprog/schoolbus/schoolbus.htm for more information.

28



DRAFT — DO NOT CITE OR QUOTE

approaches to reduce air pollution, suggesting that a diversity of incentives and
technologies may be needed to achieve voluntary reductions.

Appendix B lists possible diesel emission reduction strategies which are categorized
by switching to cleaner fuels, installing retrofit devices, implementing operational
strategies, and repowering engines or replacing engines or equipment. Many ports
are taking a leadership role in switching to cleaner fuels, such as using 500 ppm
highway grade diesel in nonroad equipment or ULSD in advance of the required
deadlines. Several major terminal operators have favored replacement options
because of their need for reliability and having engine manufacturers cover all
warranty claims. Trucking companies may favor options that save fuel (e.g., gate
improvements and anti-idling). Switching to cleaner fuels (e.g., ULSD in nonroad
equipment) is a very promising strategy for reducing emissions.

1. Challenges

Perceived or real barriers may exist that must be overcome with carefully crafted
incentives that accommodate the differing business models at ports. With
pragmatic incentive packages, entities operating at ports would be more likely to
voluntarily adopt effective emission reduction strategies. Towards this end, there
are economic, technological, educational, and programmatic challenges for ports in
implementing emissions reductions, as detailed below:

Economic. Ports are a collection of competitive enterprises where bottom line
concerns are paramount. Cost of technologies and cleaner fuels, reliability (as
down time can be costly both to port authorities and terminal operators and to ships
and trucks who call on the ports), and access to capital (for equipment
modernization) may be issues. In addition, ports are facing Homeland Security
mandates that often require resources, but also can provide additional opportunities
for emission reductions. Grant application deadlines may be out of sync with port
business cycles or the administrative burdens may be high for the relatively small
fraction of a project that a grant may provide. Grant funding is also limited and,
therefore, may not be able to fund all merit-worthy projects. Some small
businesses, such as independent truckers, may be uncomfortable with federal or
state grant process and may work best with rebates offered through truck dealers or
retrofit and electrification programs administered by ports or other local agencies
that could simplify the process, such as currently done in Los Angeles and Long
Beach through Gateway City funding. As waterborne freight increases, port
operations across the country face pressure to move more cargo with limited
resources. In some cases, addressing air quality issues can aid ports in meeting
efficiency demands, and these options should be pursued. Ports located in states
and municipalities that are working to reduce greenhouse gas emissions have
added reasons to favor strategies that increase efficiency and reduce fuel
consumption. Competition among ports and enterprises is also an issue. Moving
forward, voluntary incentives that assist ports in becoming more efficient and
productive in a competitive market while reducing emissions will be desirable.
Failure to do so could merely transfer the air emissions and the associated
economic benefit to another community without solving the problem. Ports,

43



Grant programs can be highly effective in achieving targeted, cost-effective
emissions reductions and can leverage matching funds, thereby creating a
partnership for sharing the responsibility of reducing emissions. However, grant
programs can be difficult to start up and resource intensive to implement and
administer to ensure the emissions reduction. It is difficult to provide funding
directly to the private sector at the federal level, so federal funds would most likely
help retrofit government fleets or be passed through a state or local agency or
nonprofit organization. Utilizing rebates may help alleviate some of the
administrative burden of grants for both governments and grant applicants.

In a rebate system, a governmental! or non profit entity establishes rebate
specifications and announces the availability of a pre-determined number of rebates
at a set funding amount for particular types of projects that reduce emissions. For
example, State Q may provide up to $1,000 each to the first 500 applicants who will
implement strategy X, Y, or Z. Rebate programs need to be structured carefully in
order to ensure that the financial benefit ultimately flows to the technology user, and
that overall economic development is not discouraged. Nonprofit co-ops could be
utilized to help small businesses apply for clean diesel grants. Both grants and
rebate programs often suffer from the vagaries of the annual appropriations process
unless dedicated funding streams are enacted.

Examples of grant programs include California's Carl Moyer Program, the Texas
Emissions Reduction Plan, the Ports of Long Beach and Los Angeles Gateway
Cities Clean Air Program, EPA's Clean School Bus USA, the National Clean Diesel
Campaign, and Idle Reduction Grant Programs. CARB estimates that the Carl
Moyer Program reduced NOx emissions by about 14 tons per day at a cost of about
$3,000 per ton. Though the historical focus of the program has been NOx, funding
for engine/vehicle replacement has also reduced PM by 1 ton per day. These
benefits accrue from each project for a minimum of 5 years. As of June 2005, the
Texas Emissions Reduction Plan has granted more than $183 million dollars
towards diesel reduction projects that average roughly $4,600 for every ton of NOx
reduced.

Supplemental Environmental Projects in Settlements of Legal Actions against
Environmental Violators. A Supplemental Environmental Project (SEP) is a project
that is negotiated as part of a legal settlement in litigation against environmental
violators. In order for a project to be eligible for inclusion as a SEP, it must have
nexus to the violation that has occurred and must be administered by the defendant
in the litigation.

SEPs have been used to reduce emissions from school buses and other types of
diesel engines. They can be quite large and achieve important reductions in diesel
emissions. For example, the federal government and Toyota agreed to a $20
million SEP for school bus retrofits. Some states, including Iilinois, Massachusetts,
and Connecticut, have also successfully included SEPs in environmental settlement
agreements.

16



expansions may provide opportunities for this incentive to be used, as has been the
case in the Ports of Long Beach and Los Angeles.

Recognition/Awards: Companies are increasingly finding that it makes good
business sense to proactively embrace environmental stewardship rather than react
to government regulation or a negative public image. Government can help
encourage these steps by offering guidance, education, and recognition. However,
while recognition and awards programs provide positive incentives for action, they
do not address some of the key barriers to action, such as implementation cost.

Regulatory Credits. Many public port authorities have identified barriers to voluntary
action within the regulatory process. Offering ports the ability to claim site-specific
emissions credits, either within a SIP, a NEPA process, or during a general
conformity rulemaking, is an incentive. Governmental entities and public port
authorities can be motivated by SIP and conformity credits to reduce diesel
emissions. Without a way to bank site-specific credits, ports might not make early
reductions that they feel would be needed for later expansions or projects. Any
credit program should ensure the credits are surplus, verifiable, quantifiable and
enforceable. In addition, record keeping and monitoring for credits must be
reasonable to avoid creating another barrier to early reductions. In this regard
public port authorities and others have requested guidance and recognition for
claiming credits and an ability to bank them for future use.

3. Recommendations

Solutions differ from one port to another. EPA should assemble a suite of solutions
recognizing that different enterprises will have different drivers for emission
reductions. These solutions will be implemented on a local, port-specific basis.

i Grants. EPA should work through its budget process to recommend grant
programs be offered to demonstrate technologies and to encourage the routine
adoption of cost-effective diesel emission reduction techniques. Both port
authorities and private companies who do business at ports are interested in
receiving grants. Because of the constraints on the Federal level to award
grants to private entities, EPA should also work with stakeholders to create a
mode! state program and educate states about how they can use their fee
authority to create a program like California's Carl Moyer Program or Texas’s
TERP to provide grants to retrofit or modernize port-related equipment.

@ Tax incentives. EPA should work with the IRS to develop a model tax credit for
companies (marine terminal operators, vendors who lease diesel equipment,
railways and/or trucking firms) who endeavor to modernize their fleets to achieve
early emission reductions. Favorable depreciation provisions for tax purposes
should be included for the differential cost of equipment voluntarily purchased to
reduce air emissions.

m Low Interest Loans/Rebates. EPA should identify financial institutions that could
work together in an area to provide low interest loans (or rebates through

46



DRAFT - DO NOT CITE OR QUOTE

% Make available information on, and support relationships with the numerous
other grant programs from other Federal and state agencies to help broaden the
overall funding pool and leverage available EPA grant funds for retrofit-related
projects.

t ~Develop tools for making good policy decisions regarding reducing emissions
from construction equipment. This would include improving the construction
industry's emissions inventory and equipment populations and developing a
framework for characterizing and quantifying the economic benefits of various
approaches to financing the acquisition of retrofit products for the construction
industry, and make the information available to state/local/regional government
agencies as a tool to guide their decisions on structuring retrofit programs.

m Develop a model process and guidelines that can be used for construction
projects to provide rational estimates of emission reductions and related cost
effectiveness from use of retrofit products.

fa Work with interested stakeholders by establishing ongoing outreach and
educational initiatives in the construction sector, including a website (maintained
by either EPA or a private sector or industry association organization) targeted
to the construction sector.

TM Assess and encourage the combination of replacement and repowers with
retrofit devices.

improving ti ification Proces:

w Accelerate the process for verifying retrofit technologies for use in the
construction sector. EPA should evaluate: 1) establishing a special (less
burdensome) process for extending the verification for products already verified
for on-road applications to nonroad applications, and/or consider 2) establishing
a conditional verification with a finite duration (e.g., six months, one year) based
on an initial demonstration of technical performance with a requirement for
additional technical support to be submitted to obtain full verification status.

m Investigate and where at all practical, incorporate (possibly on an interim status
basis) the use of technologies and products that have been approved via the
European VERT verification process, as a measure to advance the availability of
retrofit products for construction and other nonroad applications.

t# Investigate the approval of more labs so that competition among various labs
could possibly reduce the cost of testing.

55



2. Incentives
3. Recommendations.
D. Construction Sector Report
1. Diesel Emissions Reductior logy Str:
2. Considerations for Designing Incentives ..
3. Diesel Reduction Incentives
4. Recommendations...............
Appendix A. Work Group Members and Organizations.
Appendix B. Emission Control Technology (ECT) Overview for Ports and
Construction Sectors...
A. Refuel....
B. Retrofit
C. Operational Strategies
D.
E
F.

. Repair/Rebuild..
. Repower

BS8altnNoan



DRAFT - DO NOT CITE OR QUOTE

provide companies with an incentive to purchase retrofit technologies, but they
also allow the companies to immediately become more profitable.

The following example demonstrates the profitability of this type of loan program”:
Consider a $14,300 technology bundle of an: auxiliary power unit, wide base tires
and wheels, trailer aerodynamics, and an oxidation catalyst

Monthly loan payment: $400

Monthly fuel savings: 600

Monthly profit: $ 200 Money in an owner's pocket
After three years, profits for the company jump to $600 per month.

Even with a particulate filter, at a total cost of $19,400, this technology bundle is still
profitable.

Monthly loan payment: $ 580

Monthly fuel savings: $ 600
Monthly profit: $ 20 Money in an owner's pocket

After three years, profits for the company jump to $600 per month.

Extended Privilege Packages. More than ever, the trucking industry is under
pressure to deliver faster, to deliver within very tight delivery schedules, and to work
within just-in-time delivery constraints. These factors, coupled with the expected
growth in freight movement over the next decade provide some opportunity to
minimize the “hassle” associated with moving goods across the country. Those
companies and organizations that agree to participate in emission reduction
programs would be granted certain privileges that would improve the company’s
throughput and improve their ability to deliver on time. Extended privilege packages
could include, but are not limited to:

&@ Use of high occupancy vehicle (HOV) lanes;

a Priority parking;

ia Easy access to loading docks (avoiding wait times);

ia Weigh station and inspection flexibility;

@ Tolling leniency; and

a Efficient border crossing systems.

Some of these privileges must be developed and implemented by state or local
governments, while others may require federal government oversight. In some
cases, extended privileges can be developed and implemented by private shipping
companies (e.g., maintaining a loading dock bay reserved only for low emission
trucks).

?3 Assuming annual fuel consumption of 18,000 gallons and fuel cost of $2.50/gal, 2,400 hours idling,
and a 36 month loan at 4.8% APR

35



DRAFT - DO NOT CITE OR QUOTE

Demand for transport by truck and rail has dramatically increased over the past two
decades, to the extent that travel currently exceeds infrastructure capacity. The
EPA has established strict regulations for the trucking industry, which are expected
to decrease air emissions. However, additional reductions can be realized by
providing the industry with incentive-based programs, geared toward encouraging
trucking companies to voluntarily increase their fuel efficiency and decrease their
impact on the environment by applying emission reduction technology planned for
2007 engines to earlier model year trucks.

In this section, incentive programs are grouped into two categories: 1) programs
applicable to trucking companies, drivers, and owner-operators; and 2) programs
applicable to state and local government officials. Programs applicable to trucking
companies, drivers, and owner-operators are those that include monetary
assistance and public recognition as incentives for reducing emissions. Programs
applicable to state and local governmental officials are those that include State
Implementation Plan (SIP) and conformity credits as incentives for establishing
assistance programs for the trucking industry.

4. Programs Applicable to Trucking in the Freight Sector

National Grants. Trucking companies and owner-operators often lack the capital to
invest in emission reduction technologies or to purchasing new model year, lower
emission trucks. Grant programs typically cover part or all of the initial cost of these
technologies, and have proven to be effective at providing companies with
incentives to use these technologies.

The Diesel Emission Reductions Act (DERA), also known as the Voinovich Bill, is
by far the best national effort to achieve the legacy engine emissions improvement.
These provisions have been included in the recent Energy Bill (Pub L 109-49), and
will provide states with $200 million in grants for retrofitting existing diesel fleets.”
However, for a grant program to be effective, it is essential that significant
governmental funding, above and beyond that authorized through DERA, is
available.

The SmartWay Transport Partnership. The SmartWay Transport Partnership is a
voluntary EPA program that provides trucking companies (including owner-
operators) with market-based incentives to reduce emissions. Shippers commit to
decrease their environmental footprint and to use SmartWay carriers. Carriers
(those who move goods for shippers) commit to adopt technologies and strategies
that improve fuel efficiency, save money, and reduce their emissions. As a result,
carriers are encouraged to continue to improve their environmental performance so
that their company is more attractive to potential shippers that may hire them. This
provides trucking companies with a direct incentive to voluntarily reduce their

2° “Bush signs Energy Bill, Clean Diesel Provisions into Law.” Diese! Technology Forum. Website:
http:/Awww.dieselforum.org/ accessed September 29, 2005.

33



International Truck and Engine Corporation Peter Reba

John Deere Glen Chruschiel
Howard Gerwin
Taylor Davis

Lubrizol Kevin Brown

Manufacturers of Emission Controls Association Dale McKinnon
Antonio Santos
National Student Transportation Association Robin Leeds

National Association of State Directors of Pupil
Transportation Services

National Biodiesel Board Tom Verry

Natural Gas Vehicle Coalition Paul Kerkhoven

Natural Resources Defense Council Rich Kassel

New York Department of Environmental Steve Flint

Conservation Thomas Lanni

Northeast States for Coordinated Air Use

Management

Propane Education Research Council Brian Feehan

Puget Sound Dennis McLerran

Port of Seattle Barbara Cole

U.S. Maritime Administration Danny Gore
Daniel Yuska

Union of Concerned Scientists Patricia Monahan
Michele Robinson

_Other Participating Organizations

Alberici Group

Alcaide & Fay

American Petroleum Institute

Ames Construction

APM Terminals

Carnegie Mellon Department of Mechanical Engineering
Cleaire Advanced Emission Controls, LLC
Clean Diesel Technologies

Coordinating Research Council
DaimlerChrysler

Emissions Technology, Inc.

Emisstar

EPA Regions 5 &9

Exxon Mobil

Foothills Contracting

Hawn Dredging

Johnson Matthey

Marathon Ashland

National Association of Waterfront Employers



DRAFT - DO NOT CITE OR QUOTE

Il. Background

Diesel exhaust plays a key role in the health impacts of air pollution,® and analyses
have indicated that cleaning up diesel emissions has a significant benefit to society.
For example, analysis of EPA’s 2007 Heavy-Duty Highway Final Rule has
determined that full implementation of the rule will return to society net benefits of
$70 billion annually.® Similarly, the 2004 nonroad regulations will result in a net
benefit of $80 billion annually.'° EPA is in the process of fully analyzing the return
to be realized through reducing emissions from the legacy fleet. The Union of
Concerned Scientists (UCS) has estimated that for every dollar invested in retrofits,
$9-16 dollars are returned to society."' The following discussion elaborates on the
health and environmental considerations.

A. The Case for Reducing Diesel Emissions

Diesel engines emit small particles (PMz.5) and gases, including air pollutants such
as benzene and polycyclic organic matter (POM), which are known to be toxic
above certain levels. Diesel engines also emit ozone-forming nitrogen oxides (NOx)
and hydrocarbons (HC). Therefore, reducing diesel emissions is an important
public health issue and air quality concern. Some examples of vehicles and
equipment operating diesel engines include trucks, school buses, transit buses,
construction equipment, cargo-handling equipment, locomotives, ferries, and ships.
Figure II.1 presents the contribution of NOx, PMio, and volatile organic carbon
(VOC) emissions from mobile sources as compared to stationary sources. Figure
1.2 presents each sector's contribution to the mobile source population. Figure II.3
presents each sector's contribution to PM2.5 emissions, and Figure II.4 presents
contributions to NOx emissions.

® The impacts of air pollution are measured by indicators such as number of lost days of work,
incidence of hospitalization and emergency room visits. Analysis is based on peer reviewed studies
as described in Regulatory Impact Analyses. For a fuller discussion of health effects, see US EPA's
Hazard Assessment Document (HAD.)

° Regulatory impact Analysis: Control of Emissions of Air Pollution from Highway Heavy-Duty
Engines. EPA420-R-00-010. July 2000. Available online at: http:/Avwww.epa.gov/otaq/hd-

hwy. htm#regs.

°° Final Regulatory Analysis: Control of Emissions from Nonroad Diesel Engines. EPA420-R-04-007,
May 2004

*' Union of Concermed Scientists, 2004. “Sick of Soot: Reducing the Health Impacts of Diesel
Pollution in California.” Cambridge, MA. Available online at www.ucsusa.org

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TM FEASIBLE - Well-crafted incentives are needed to overcome barriers and likely
to spur voluntary action by public port authorities and other entities that own and
operate fleets in and around U.S. commercial seaports.

i FUNCTIONAL - Incentives will encourage implementation of emission reduction
strategies that yield meaningful air quality improvements at local and regional
levels.

@ FLEXIBLE - Incentives accommodate the different types of operating structures,
cargoes, equipment in use, and air quality challenges of the diverse U.S. public
port industry and are available to alt ports regardless of attainment status.

Grants. Grants have been identified as an important incentive to overcome the cost
barrier for strategies that don't offer strong business case support. Because of the
scale of many ports and the high cost of the diesel equipment in use, grant amounts
need to be large enough to overcome perceived administrative barriers of applying
for and overseeing grants. For example, the No Net Increase report from the Port
of Los Angeles preliminary estimate for holding the line on diesel emissions is
between $11.6 and $15.7 billion for a single major port, and this would result in $28
billion in public health benefit.

Tax Incentives. Tax incentives are appealing to many private companies (such as
terminal operators, and tug and tow companies) because they have no application
deadline, and allow firms to apply on their own schedules without fear that incentive
funds will be exhausted. However, public port authorities that pay no taxes cannot
take advantage of tax incentives. With tax incentives, unless they are very narrowly
targeted, it may be more difficult for the government to direct resources at the diesel
emissions of greatest concern or to make changes to the program. To be effective,
tax incentives, whether in the form of a tax deduction or a tax credit, must be set
high enough to induce firms to make improvements to their diesel equipment that
they otherwise would not do. Since efficiency gains are generally not realized from
the retrofit of diesel equipment or use of alternative fuels, and therefore no return on
investment, companies might not be motivated by a tax incentive of less than 100%.
However, a tax incentive of less than 100% could be successful if applied for a fleet
modernization strategy.

Loan Programs and Rebates. Especially appealing to small businesses, loan
programs provide flexible capital to fund emission reductions efforts. These
incentives may be appropriate for trucking firms serving ports.

Contract or Lease Requirements. Contract or lease requirement effectively
mandate emission standards. If employed on a port-by-port basis, they may put
ports at a competitive disadvantage with one another, with private terminal
operators, or others affected by the contract or lease. Also, contract or lease
requirements may negatively impact small businesses, as small companies may not
have the ability to finance the equipment upgrades necessary to win work under a
contract or lease specification. Additionally, the long leases at many terminals and,
thus, infrequent opportunities to negotiate new lease terms hinder the effectiveness
of lease specifications in achieving port-wide emission reductions. However, port

45



DRAFT — DO NOT CITE OR QUOTE

for incentives, while loan programs might confer an advantage to firms that already
have a credit history. Other programs might include size or location restrictions that
favor small or minority-owned businesses.

Unlike contractual incentives and allowances, contract requirements can restrict the
number of firms willing to construct a particular project. Emission reduction
strategies should be designed to maintain free and open competition to the extent
practicable.

Retrofit Market. The market for any one technology to reduce emissions from
existing construction equipment is relatively small because such equipment varies
so greatly in its size, configuration and use, and no one technology will work on
more than a subset of the total. The result is a chicken-and-egg problem:
construction equipment owners cannot make use of an incentive if suitable
technology is not available, but manufacturers may not offer suitable technology
until they can see a market large enough to support the cost of doing so. To avoid
this problem, incentives have to be left in place long enough, and they have to be
inclusive enough, to provide an incentive to the manufacturers, in the first place, to
create and offer suitable technologies. A broader and longer-lasting program may
be more costly but also increase availability of cost-effective pollution-reducing
technologies.

Outreach and Education. Making information available to equipment owners about
retrofit alternatives and incentives can be crucial to the success of an incentive
program. Owners may need technical assistance in learning how to qualify for an
incentive and in evaluating how different alternatives will affect their equipment.

3. Diesel Reduction Incentives

Incentives encourage or promote voluntary efforts to reduce emissions from
Nonroad construction equipment and would include tax-related incentives,
government grants and rebates, low interest loan programs, contractual incentives
and allowances, public recognition, non-government financing and fuel supplied by
a project owner. Noted in the following are regulatory and contractuat requirements
that some members of the Clean Diesel and Retrofit Work Group would also like to
have considered but other members of the group consider premature to suggest
and legally questionable. Everyone agrees that the construction industry faces
unique technical and economic challenges in reducing emissions from existing
diesel engines and therefore requires a creative approach to retrofit. The remainder
of this section describes the most prominent points associated with each incentive
as it relates to the construction sector.

Income Tax Incentives. Tax measures that defray part or all the cost of purchasing
and installing retrofit technology (e.g., forgiveness, credits and/or accelerated
depreciation) have the potential to influence private owners of construction
equipment. Some of these measures, however, are useful to only those equipment
owners who would otherwise have a tax liability against which to apply the

51



Figure ll.2

2004 Mobile Source Diesel by Sector

vosso8

Note: Port data cannot be broken out separately, but is included in agrcukure sector
retevant sectors 16%
“examples of nonraod include nonroad equipment used at industrial

sites and airport's

“other highway is smaller trucks and vehicles (LD to Class 5)

Figure I.3
2004 PMzs Emissions by Mobile Diesel Sectors

non-port marine*
%

other nonroadTM
* (height sector
32%

ther highway”
3%

WS school bus
TM

sgrcuttur sector transit
19% %

construction sector
2%

non-port marine includes recreational vessels and a fraction of C1. C2 and C3 marine

‘examples of other nonroad include equipment used at indusiial stes and sports

7 other highway refers 1o smaller trucks and vehicies (LD through Claas 5)



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Table of Contents

Table of Contents
EXECUTIVE SUMMARY
A. Overview ....

1. Incentives.

2. Mandates .

3. Technologies.

B. General Cross-Sector Reco!

C. Sector-Specific Descriptions and Recommendations

1. School Buses..

2. Freight......

3. Marine Ports.

4. Construction

D. Concluding Remarks Vili

|. Introduction .
il. Background...
A. The Case for Reducing Diesel Emissions

1. Health Considerations

2. Environmental Consid

B. Description of Diesel Emission Reduction Technologies and Strategies... 10

1. Technologies.

@ 2. Fuels...........
C. Description of Incentives and Strategies Considered

1. Primarily Government Funded Incentives . 15
2. Government and Private Sector Funded In 17
3. Primarily Private Sector Funded Incentives .. 18
4. Regulatory and Mandatory Requirements. .19
5. Current Regulatory Programs .. .20
6. Other Strategies .

lll. Summary of Key Sector Recommendations and Cross Sector Incentives......22

A. General

B. Cross Sector Recommendations

IV. Sector Analysis and Strategies .....
A. Clean School Bus Sector Report
EPA's Clean School Bus USA Program.
Key Issues ....... ee
Diesel Reduction Strategies.
Incentives for the School Bus Sector .
Other Recommendations for the Sector.
B. Freight Sector Report... eee
1. Programs Applicable to Trucking in the Freight Sector...

2. Programs Applicable to State and Local Government O'

3. Recommendations...............

C. The Marine Ports Sector Report.

@ 1. Challenges

gVsonna



as of December 2004 [note that these numbers are approximate as several 2003
and most 2004 grants are still on-going and subject to change].

Table IV.1. EPA 2003 and 2004 Clean School Bus Grants:
Technologies and Fuels as of December 2004

Technology/Fuel Number of devices/
ee __.|___ buses affected
Diesel Oxidation Catalysts 2169
(DOCs) _
DOCs and Crank Case Ventilation | 277
Systems __
DOCs and ULSD 87

DOCs and biodiesel (any blend) [215
Diesel Particulate Filters (DPFs) | 105

DPFs and ULSD 327

CNG Replacements 20_
(Biodiesel AO
| Emulsio 40
ULSD. ee 3969
Total 7449

Over 1 million children now ride cleaner school buses, and approximately 20 million
residents of communities in which clean school bus projects have taken place are
breathing cleaner air. In general, most projects have been straight-forward, with the
districts ably navigating both grant requirements and application of the technology
and/or fuel. Few technology failures or problems with cleaner fuels have been
reported thus far. That said, it is not altogether an “easy” project for school districts
to accomplish. Planning, partnerships with other organizations, and dedication to
the project help ensure successful implementation.

2. Key Issues

Districts must overcome a number of key issues in order to successfully implement
a clean school bus project.

Funding. Upgrading the Nation's diesel-powered large school buses still in need of
replacement or retrofit will be very expensive. For example, to replace just one bus
with a new clean school bus costs between $75-$100 thousand dollars. School
districts simply do not have the funds for a project that is not seen as an absolute
necessity ~ districts will not choose retrofit equipment over teacher salaries or
textbooks, nor should they. Therefore, other parties have had to fill the gap. First,
Federal funds primarily through EPA, as well as the U.S. Department of Energy,
have allowed many communities to implement clean school bus projects. Second,
settlements for Clean Air Act violations with companies on both the federal and
state level have funded school bus projects across the country. (At present, it
appears that SEPs with EPA in 2005 and perhaps beyond are no longer eligible for

26



C. Operational Strategies

Operational strategies can be used to reduce diesel emissions. These strategies
are cost-effective and make good business sense by maximizing efficient use of
port equipment and vehicles while optimizing the flow of cargo in and out of the port.
With new Homeland Security requirements, some port authorities are looking for
opportunities to reduce emissions while enhancing security and modernizing
information technology (IT).

Table B-3 presents operational strategies available for ports.

12



C. Description of Incentives and Strategies Considered

EPA has set a goal of achieving maximum reductions from the legacy fleet over the
next 10 years. The Work Group agrees cleaning up pollution from these 11 million
engines will require substantial investment in the range of $50-100 billion.
However, the Work Group believes the task is not insurmountable and is one worth
doing in terms of return on investment to society. Each year, owners and operators
of the legacy fleet spend over $100 billion to operate and maintain existing engines
and vehicles. For just a fraction of what is spent, perhaps as little as 5%,
substantial gains could be achieved in reducing emissions from existing engines
and vehicles.

A variety of incentives are available for reducing diesel emissions, but none of them
provide a “silver bullet solution” that will reach every machine, vehicle, or truck, or
please every stakeholder involved. However, by combining incentives and tailoring
them to specific sectors, many of the incentives outlined below can or do work to
teduce emissions.

Table Il.1 presents a summary of incentives that are or have the potential to be
available for each sector addressed in this report.

Table II.1. Summary of Incentives and potential to apply in the sectors

: — To industry Sector si
Type of Incentive School | Construction | Ports | Freight
Bus
Tax Related incentives ox x
Government Grants and Rebates x x x
Supplemental Environmental Programs X (State) x x
Publicly Funded Cie: i 7 “x x
Voluntary Contract x
-X ra x"
x x | Xx
ii tory on _ _..% x _
Public Recognition, Environmental Stewardship x x x x
and Non-Monetary Incentives | cee
Regulatory and Mandatory Requirements x x x x

* May be applicable to marine port terminal operators which are private entities
**May be applicable to trucking operations at marine ports.

Following are summaries of incentives under consideration. With some notable
exceptions, most diesel emission reducing activities require a financial investment.
For this reason, incentives are broken into three categories based on what type of
entity bears the majority of the economic cost: primarily government-funded
Incentives, government- and private sector-funded incentives, and primarily private
sector-funded incentives. Regulatory and mandatory requirements, current
regulatory programs, and other strategies are also described.

14



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ll EPA should continue to study the relationship between fuel efficiency and
emissions reductions and should identify as many technologies as possible that
both reduce emissions and save fuel. For those technologies that both save fuel
and reduce emissions, EPA should prepare formal air quality guidance that will
allow states to credit emission reductions from fuel efficiency technologies in
SIPs and conformity. The guidance should identify methods by which several
nonattainment areas could receive credit as a result of retrofitted long haul
trucks passing through the area.

m EPA should determine how to apportion air quality benefits across multiple
jurisdictions based on fuel consumption and fuel tax reporting requirements and
other measures (e.g., satellite tracking). In addition, EPA should explore
technology-driven apportionment programs that would potentially facilitate the
involvement of national fleets in a national retrofit program while still allowing for
the calculation of local air quality benefits.

fTM EPA should work closely with DOE to undertake research and development of
new technologies to conserve fuel and reduce emissions. DOE needs to
continue to develop and test technologies.

One recommendation on which consensus was not reached was that EPA should
evaluate the feasibility of mobile-to-stationary source trading credits for shippers.

US EPA He: Library
1200 Mail code 34047
Pennayivania Avenue NW

fashington, DC 204
202-565-0556 0

38



lll. Summary of Key Sector Recommendations and
Cross Sector Incentives

Concurrent with the work of the Clean Diesel and Retrofit Work Group, Congress
has passed the Energy Bill (Pub L 109-49) and the SAFETEA-LU (Pub L 109-59),
both of which recognize the importance of reducing diesel emissions from the
legacy fleet as well as the need for more funding. Several of the recommendations
of this Work Group, specifically grants and loans for retrofit and replacement, have
been authorized by Congress to be funded at levels in excess of $200 million per
year. As discussed previously, the SAFETEA-LU includes provisions that make
Congestion Mitigation and Air Quality (CMAQ) Funding ($8.4 Billion over 6 years)
available for reducing emissions from diesel engines and vehicles used in
Construction projects built with funds authorized under the highway trust fund.
Since the context in which these recommendations were formulated has changed
significantly, the Work Group is considering the impact of these bills on its
recommendations. However, the following summarizes the recommendations to
date.

A. General

@ The potential benefits of cleaning up the legacy fleet are significant and worth
large scale public investment.
@ Public funds should be used to creatively leverage other investments.
@ The Work Group would like to see retrofit programs fully resourced, including
staff to run the programs.

iw Given the breadth of applications and uses of diesel engines, and the mix
between public and private fleet owners across the various sectors examined, it
is important to provide a range of options for addressing diesel emissions to
each sector.

i Maximize emissions reductions in each situation given the air quality needs and
technical feasibility.

w The SAFETEA-LU (Pub L 109-59) and Energy Bill (Pub L 109-49) provide new
opportunities for addressing diesel emissions from all sectors, and the members
would like to explore these opportunities and assist states and localities to take
full advantage of them.

B. Cross Sector Recommendations

i All of the sector sub-groups have identified Grants, Loans and Rebates as
attractive incentives. The Work Group is committed to advocate for establishing
such programs and is willing to participate in designing effective programs at all
levels.

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B. Freight Sector Report

Ground freight transportation, the movement of goods using trucking fleets and rail,
forms a solid foundation for maintaining our country's economic prosperity and
competitive advantage. Moving freight accounts for 20% of all energy consumed in
the transportation sector. Trucks carry about 66% of all freight shipped in the US,
while rail carries about 16% (water, pipeline, and air transport account for the rest).
Together, truck and rail transport consume over 35 billion gallons of diesel fuel each
year. This fuel consumption produces over 350 million metric tons of carbon
dioxide each year. In addition, ground freight contributes 40% of transportation-
related emissions of NOx and 30% of PM emissions.

The trucking industry transports the largest volume share of any mode of freight
transportation. Corresponding to its volume share, the trucking industry is also a
major contributor of air emissions from the freight sector. As shown in Figure IV.1,
trucking accounted for nearly two-thirds of the freight tonnage transported in the
U.S. in 2002. This volume exceeded the next largest mode of freight transportation
by a factor of 3.

Figure IV.1: Modal Share of Freight Tonnage,

2002
. Air,
Marine, ,
19.8% 0.1%

Rail,
15.4%

Truck,
64.6%

Source: Bureau of Transportation Statistics, National Transportation Statistics 2004.
Similarly, trucking accounted for two-thirds of the NOx and PM emissions from
freight transportation in the U.S. in 2002. As shown in Figure IV.2, NOx and PM

emissions essentially mirror the volume of freight transported from each of the
respective freight transportation mode.

31



DRAFT — DO NOT CITE OR QUOTE

Congestion Mitigation Air Quality (CMAQ) Funded Projects. CMAQ is a set-aside
under the Surface Transportation Program in the Highway Trust Fund, which is
funded from the fuel tax. Its express purpose is to reduce pollution and congestion
in areas that are designated as NAAQS nonattainment or maintenance. CMAQ
money is apportioned by a formula set by Congress and is used by metropolitan
planning organizations (MPO) to fund a variety of projects in their geographic area,
including retrofits. The MPO selects the projects to be funded. For the first time, the
most recent SAFETEA-LU (Pub L 109-59) specified that CMAQ money may be
used for reducing pollution from nonroad equipment used in construction projects
funded from the Highway Trust Fund. CMAQ is currently authorized at over $8.4
billion for a 6-year period beginning in FY2006.

Publicly Funded Cleaner Fuels. \nstead of contractors bearing the cost of cleaner
fuel, a contracting entity could provide cleaner fuel at the cost of the less clean fuel.
This incentive shifts the financial burden of purchasing cleaner fuel onto the entity
requesting services, such as a municipality. The provider of the cleaner fuel could
subsidize the incremental cost above what the contractor/operator would normally
spend on diesel. However, municipalities have very limited resources to subsidize
and distribute fuel, especially for very large operations.

2. Government and Private Sector Funded Incentives

Voluntary Contract Incentives, Bonuses and Allowances, Voluntary contract
incentives provide a mechanism for state and local governments to reduce diesel
emissions from public works projects by offering a bonus or providing an allowance
to contractors who are willing to retrofit their fleets. Contract incentives, bonuses or
allowances are distinguished in this section from contract or lease requirements or
other mandatory contractual practices. Contract allowances incorporate a payment
to the contractor to offset, fully or partially, the cost of emission-reducing activities.
It should be noted that the financial burden of reducing emissions could be placed
either on the governmental contracting entity or the private sector depending on the
design of the contract modification.

The contracting community views voluntary contract incentives as being more
accommodating to small business concerns. Although small businesses prefer
voluntary provisions rather than mandates, even voluntary provisions can result in
competitive disadvantage for small businesses with limited resources. This is
especially a problem for public entities that are required to provide a fair share of
their business opportunities to small and minority-owned businesses.

Low Interest Loan Programs. Low interest loans could help provide the necessary
capital for emission-reducing activities while minimizing the long-term financial
burden of a financial assistance program. They could be administered through a
governmental entity, port authority, or in a public-private partnership with a bank. In
a revolving loan program, the net interest paid over time could be used to fund other
projects.

17



|. Introduction

In 2000, EPA began the Voluntary Diesel Retrofit Program in response to the widely
accepted need to reduce diesel emissions from the existing fleet of nearly 11 million
diesel engines. Components of diesel exhaust can cause a multitude of health
problems and negative economic impacts. EPA has designated diesel exhaust as a
likely human carcinogen, causing many other health-related problems as well as
environmental and economic impacts.

New diesel engines and vehicles have been subject to EPA's regulatory program of
progressively more stringent emissions standards since the late 1980's for highway
engines and since the early 1990's for engines used in nonroad applications. EPA's
newest and most aggressive sets of standards for diesel engines and fuels will be
phased in between 2007 and 2014. These standards will achieve up to a 95%
reduction in pollution from new highway and nonroad diesel engines and vehicles.
However, the newest standards do not apply to the 11 million engines in the “legacy
fleet’ that were manufactured to meet previously applicable but less stringent
standards. Since these engines will remain in use for up to 30 more years, reducing
pollution from these existing engines and vehicles would significantly reduce
exposure to harmful diesel exhaust and help the Nation improve its air quality.

EPA has little authority to regulate existing engines. Also, these 11 million existing
engines are operated in a wide variety of applications and owned by a complicated
web of industries and businesses. These factors pose challenges for designing a
program that will achieve the desired emissions reductions needed to protect public
health.

The magnitude of the effort needed to create such a program led to the convening
of the Clean Diesel and Retrofit Work Group, as part of the Federal Clean Air Act
Advisory Council (CAAAC), under the auspices of its Mobile Sources Technical
Review Subcommittee (MSTRS). The charge to this work group was to make
recommendations to the Agency through the CAAAC process on how to best
address the emissions from the legacy diesel fleet with a focus on creating
voluntary incentive-based approaches.

The Work Group has defined the term “retrofit” to mean any diesel emissions
reduction strategy that can be used to reduce emissions from the legacy fleet
including, but not limited to, the use of after-treatment devices, engine replacement,
recalibrations, cleaner diesel and alternative fuels, and anti-idling devices and
operating strategies.

Over forty members (see Appendix A) officially made up the Clean Diesel

and Retrofit Work Group representing the full range of groups with a vested interest
in reducing pollution from the legacy fleet. The Work Group is co-chaired by
representatives from EPA and Corning, Inc., and is further divided into four “Sector
Groups”: School Buses, Ports, Freight, and Construction. EPA determined that

1



DRAFT — DO NOT CITE OR QUOTE

their own, and discriminate against smaller firms. Historically, regulatory
requirements have not been combined with grants or loans to mitigate these costs,
but have been provided for early compliance or for exceeding mandatory
requirements.*

Public Recognition. Recognition programs are relatively easy to implement and
provides equipment owners a critical sense of reward and accomplishment for their
initiatives. They are most effective when used in combination with other voluntary
incentives. The overall effectiveness is likely to depend on the amount of positive
publicity and/or prestige they can generate for equipment owners.

Non-government Financing. This typically involves a private organization (whether
nonprofit or profit) that raises capital from various “investors” and then provides
funding to equipment owners (whether public or private) to purchase retrofit
technology or pursue other emission reduction strategies. The government agency
that wants to reduce either its own or others’ diesel emission reductions then
reimburses the private organization for the funding, providing the organization
and/or its “investors” with a financial return in the form of a low-level multi-year
payback of the funding. The benefits of this approach are that the government
agency desiring the emission reduction project does not need to have on hand the
full funding that may be necessary to pursue emission reduction strategies, the
equipment owner does not need to incur the expense of pursuing those strategies,
and the cost of the retrofit project can be spread over an extended time period. The
financing entity assumes the risk for any payments that are not made. This
incentive is a particularly good complement to work in combination with other
measures as a means of accomplishing diesel emission reductions in an affordable
manner without placing undue financial burdens on the equipment owner or
government agency desiring the emission reduction benefits.

Fuel Supplied by Project Owner. This incentive shifts the financial burden of
purchasing cleaner (e.g., ultra-low sulfur) fuel onto the construction project owner
(or other client of the construction contractor). The project owner could pay for the
full cost of cleaner fuel, or just the difference in the cost of regular and cleaner fuel.
If the project owner paid the full cost of the cleaner fuel, it could require the
construction contractor to deduct the cost of the fuel it would otherwise have to
purchase from its bid, and at least theoretically, the overall cost of the construction
project would still increase by only the incremental cost of the cleaner fuel.
However, this arrangement could implicate the terms or conditions of the equipment
owner's fuel supply contract, or raise questions about fuel quality and/or equipment
warranties. °?

*' Califomia is the only state thus far to pass regulations requiring the cleanup of diesel trucks and
buses, with between 15 and 20% of diesel pollution sources currently regulated. In the next two
years, California plans to regulate all sources of diesel pollution, except federally preempted sources
like trains and ships.

* California is the only state thus far to pass regulations requiring the cleanup of diesel trucks and
buses, with between 15 and 20% of diesel pollution sources currently regulated. In the next two
years, California plans to regulate all sources of diese! pollution, except federally preempted sources
like trains and ships.

53



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C. The Marine Ports Sector Report

The United States has 185 deep-draft seaports located along the mainland coasts
of the Atlantic, Pacific, Gulf of Mexico and Great Lakes, as well as in Alaska,
Hawaii, Puerto Rico, Guam and the U.S. Virgin Islands. Together these ports
provide approximately 3,200 cargo and passenger handling facilities, according to
the U.S. Coast Guard. Most of these deep-draft ports are controlled by public
agencies that are arms of state or local governments or special districts, commonly
referred to as public port authorities. Additional in-land ports are on our nation’s
tivers and waterways.

Commercial seaports handle a variety of cargoes, including bulk (loose) cargo,
breakbulk commodities (packages such as bundles, crates, barrels and pallets),
liquid bulk (such as petroleum), roll-on/roll-off cargo (also called “RO/RO,” which
includes farm equipment, automobiles, and military deployment equipment), and
containerized cargo (steel boxes measured in 20-foot equivalent units or TEUs).
Cargo generally enters a port through a marine terminal, and several terminals
typically constitute a port.

Cargo volumes through deep-draft seaports are growing rapidly. The total volume
of foreign trade moving through U.S. ports is expected to double 1996 levels by the
year 2020.” It should also be noted that many commercial seaports serve the
cruise passenger industry, which is also growing rapidly. From 2002 to 2003, the
number of U.S. passengers cruising increased 9.4%.

Over 30 of the largest ports are located in areas that are designated as
nonattainment for the NAAQS for either PM or ozone or both, and many of these
are in areas that are projected to continue to be in nonattainment after many of
EPA's rulemakings take effect. Others are located in NAAQS maintenance areas or
where air quality levels are close to the health standards. Emission reductions from
port operations in these areas will contribute to continued compliance with the
NAAQS. Many ports and their surrounding communities have concerns with air
toxics, and diesel particulate matter has emerged as an important public health
threat. As cargo volumes continue to grow, more vessels, cargo-handling
equipment, trucks, and trains will be needed to accommodate this increased trade.
Mobile source emissions associated with goods movement are having an increasing
effect on adjacent communities. Many opportunities exist to reduce emissions from
diesel engines in and around port communities.

24 In 2002, ports invested nearly $1.7 billion to update and modernize their facilities, almost equaling
the record set in 2001, including: $140 million for general cargo; about $942 million in investments
related to containers; $241 million on infrastructure improvements. During the 5-year period between
2003 and 2007, public ports predict they will spend $10.4 billion (a record level), compared to actual
expenditures of $7 billion between 1998 and 2002. (Source: Source — Maritime Administration, U.S.
Department of Transportation, “United States Port Development Expenditure Report,” May 2004.

39



DRAFT - DO NOT CITE OR QUOTE

that still hold a significant share of the market. Whether owned by the port authority
or a terminal operator company, based on the Port of Los Angeles study, cargo
handling equipment constitutes approximately 10% of the port NOx and 13% of the
port direct PMzs5 emissions, For example, roughly 1,000 pieces of cargo handling
equipment were at the Port of Los Angeles. The main types of cargo handling
equipment at ports include yard tractors, cranes, forklifts, and top and side handlers.

Another major source of diesel emissions near ports emanates from the trucks that
call on ports, which are typically older models. These short-haul or “drayage” trucks
are usually independently owned and operated by small, economically struggling
companies. The owner of the cargo may contract for delivery services through a
trucking service company. Trucks can form bottlenecks at port terminal entrance
gates, where they may idle. A single port complex can receive thousands of trucks
entering and leaving on a typical day. For example, more than 32,200 diesel truck
trips occur in and out of the Port of Los Angeles and Port of Long Beach complex,
which is North America’s busiest port complex, and a large percentage are pre-
1984 model years that were not subject to today’s emission control requirements.
For example, in the Port of Los Angeles, heavy-duty trucks currently calling on
major container ports emit about 23% of the port NOx and about 9% of the port
directly emitted PM25. These figures are subject to uncertainties depending on
where one considers the boundary for port-related truck traffic.

More than three-quarters of all train traffic transports containers, and most of these
trains are traveling to or from marine ports. The rail category includes both line haul
(see the freight sector of this report) and switching. On-dock rail is used by some
ports to efficiently move cargo directly from ships to rail lines. On-dock rail cannot
be efficiently utilized at some ports due to space limitations on terminals, ownership
of lines, and other factors. Rail contributes approximately 13% of the port NOx
emissions and 6% of the port directly-emitted PMz,.5 at the Port of Los Angeles.

Marine vessels, including harbor craft (e.g., tugboats, towboats, and ferries) and
large ocean-going vessels (e.g., container ships, tankers, and cruise ships), emit
about 54% of the port NOx and 72% of the directly-emitted PMz 5 at the Port of Los
Angeles. Ocean-going vessels alone accounted for 53% of the port directly-emitted
PMz25. Container ship traffic to and from the US doubled between 1990 and 2001
and the rate of increase is expected to continue. Figures IV.4 and IV.5 represent
these figures.

While many port authorities and terminal operators have been proactive in
implementing programs to reduce emissions from terminal operations, many
significant opportunities still exist within a typical marine terminal. Ports have
invested in air pollution prevention projects at the same time they were coping with
substantial post-9/11 economic stress. These improvements must be achieved
while ports face a number of key challenges. For example, port authorities are
subject to mandates for Homeland Security measures at seaports. Ports are also
concerned about operational reliability, the need to manage risks that might impede
their ability to transfer cargo in a timely manner. Ports are also highly competitive
with each other in a dynamic market where freight owners and terminal operators

41



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