## DraftDDNational Clean Gasoline

Alliance of Automobile Manufacturers June 2009 

# National Clean Gasoline

An Investigation of Costs and Benefits

June 2009

Alliance of Automobile Manufacturers

Published at

U www.autoalliance.org

For more information, contact

Ellen Shapiro

Director of Automotive Fuels

Alliance of Automobile Manufacturers 1401 Eye Street, N.W. Washington, DC 20005

202

- 326

- 5533 eshapiro@autoalliance.org

## National Clean Gasoline

Alliance of Automobile Manufacturers June 2009

## National Clean Gasoline

Executive Summary

i

Alliance of Automobile Manufacturers June 2009 

### EXECUTIVE SUMMAR Y

Introduction

The Alliance of Automobile Manufacturers (Alliance)

F 1

F recently commissioned two studies examining the costs and benefits of introducing a cleaner national gasoline , defined as a Clean Air Act regulatory standard, into the U.S. market. The first study , conducted by Math Pro , Inc., investigated the refining costs of producing the proposed fuel standard

, and the second study

, conducted by Air Improvement Resources, Inc., investigated the standard ’s impacts on emissions

from on

- road gasoline

- powered vehicles (excluding motorcycles)

. T he Alliance d esigned the gasoline standard to reduce vehicle emissions and , importantly, to enable lean burn gasoline engines, which are a new
, fue l efficient vehicle technology

. The Alliance also sought to create a
standard that could be used as a single national gas oline

, eventually replacing the so

- called boutique gasoline s being sold in parts of the U.S. to reduce emissions

. For study purposes, t he

Alliance named its proposed fuel ―National Clean Gasoline‖ (NCG)

. Fuel quality plays a critical role in vehicle ope ration and emissions because it affects the combustion process and can interact with vehicle components , including, but not limited to, emission control systems

. Certain gasoline compounds

— especially those containing sulfur

— reduce the effectiveness of emission control systems , thereby causing vehicle emissions to

increase.

F 2

F As another example, g asoline’s distillation characteristics affect combustion efficiency and smoothness, and its vapor pressure affect s evaporative emissions. Depending on the pr operty or contaminant, effects may occur immediately

, build up gradually over time or be

ir reversible

. M ost importantly for policymakers, fuel quality may affect a vehicle’s ability to comply with emission standards, deliver planned fuel economy, use cert ain technologies or satisfy customers

. This is why vehicles and fuels must be viewed as a system

. 

### Quality of N ational Clean Gasoline

In specifying NCG, t he Alliance cap ped sulfur at 10 parts per million (ppm), which is significantly lower than current federal limits

.

F 3

F As noted , sulfur reduces the effectiveness of catalytic converters used to meet stringent U.S. and California vehicle emission standards.

Manufacturers have been abl e to build compliant vehicles despite the sulfur levels found in federal gasoline, but vehicle emissions would be much lower if the sulfur levels were lower. As

1 The Alliance is a trade association of eleven car and light truck manufacturers

— BMW Group, Chrysler, Ford Motor Company, General Motors, Jaguar Land Rover, Mazda, Mercedes

- Benz, Mitsubishi Motors, Porsche, Toyota and Volkswagen.

2 Metallic additives also reduce the effectiveness of emission controls, but the federal government and California prohibit their use in federal and California reformulated gasolines, respectively, and virtually all U.S. refiners refrain from using such additives in convention al gasolines.

3 EPA regulations require gasoline produced for sale outside of California to have an annual average of no more than 30 ppm sulfur at retail with a per gallon cap of 80 ppm, but the EPA test tolerance limit allows an individual gasoline samp le sold at retail to contain as much as 95 ppm sulfur. California rules require sulfur to be no more than 30 ppm, and the average today is about 9 ppm, which is better than the federal limit but still not as clean as gasoline standards in Europe and Japan , which allow a maximum of 10 ppm sulfur. Under its ―Phase 3‖ gasoline regulation,

California is scheduled to reduce its maximum per gallon sulfur limit to 20 ppm on December 31, 2011, and the average is expected to decline further.

## National Clean Gasoline

Executive Summary

ii

Alliance of Automobile Manufacturers June 2009 EPA seek s to reduce smog

- forming emissions further, reducing gasoline sulfur levels would be a helpful control strategy. It would also help reduce emissions in California where sulfur levels

are relatively low, even if the state did not adopt NCG, because vehicles coming into the state would be cleaner than they are now.

Sulfur is also important b ecause certain new technologies require different emission control systems that are more sensitive to sulfur

. Like diesel engines, l ean

- burn gasoline engines are

very efficient at burning hydrocarbons , which improves the vehicle’s fuel economy compared

wi th similar vehicles using conventional spark ignition engines

. Lean burn gasoline engines, however, are optimized for fuel economy, which can lead to hi gher engine

- out NOx emissions

, also like diesel. The higher NOx emissions require n ew
, advanced emission control systems

similar to those used in diesel vehicles to enable compliance with stringent U.S. and California

emission standards , but the systems are quickly poisoned by sulfur

. L ean burn gasoline technology can work acceptably only with gasoline containing less than 10 ppm sulfur (also

ca lled ultra

- low sulfur gasoline or ULSG)

.
The Alliance constrained additional gasoline properties either to match existing federal or voluntary ASTM standards (e.g., benzene, driveability index)

, the lowest level acceptable for vehicle operation across the U.S. (e.g., vapor pressure) or to comply with EPA’s Complex Model

constraints (e.g., aromatics , olefins )

. E thanol content was set at 10% by volume (the limit under existing federal regulations) to reflect the national ethanol mandate volumes required under the

Renewable Fuel Standard in the Energy Independence and Security Act of 2007

.

## National Clean Gasoline

Executive Summary

iii

Alliance of Automobile Manufacturers June 2009 Table 1: Proposed National Clean Gasoline Specifications

Property Units Limit Comments

Sulfur p pm 10 max Reduces emissions from the existing

fleet and enable s fuel efficient lean burn technologies. Regulated by EPA

and California.

RVP psi 7 max Selected to match the lowest emitting value while maintaining acceptable vehicle operation. Regulated by EPA

and some states.

Benzene % v/v 0.62 avg New EPA national toxics standard (―MSAT2‖)

. Ethanol % v/v 10 max Current federal maximum.

Octane Regular

Premium (R+M)/2 87 min

9 3 min Based on industry practice. Limits

apply at all altitudes. 4

F

ASTM Driveability

Index

F 5 * 1250 max T he ASTM voluntary standard

, which

is enforceable in some states . DI is important for engine calibration

, engine performance and emissions.

Alliance Distillation

Index 5 * 1200 max F or sensitivity analys i s (preferred Alliance DI limit)

.

Aromatics, Olefins, E200, E300 * Unconstrained for NCG but indirectly regulated through EPA’s Complex

Model , which is used to certify gasoline compliance

.

* No units apply but

, in this context, temperatures are measured in degrees Fahrenheit

.


### Approach

The studies target ed 2010 as the earliest possible year for implementing the N C G specifications.

The refining economics study was completed first

, to provide baseline data for the emissions analysis. The study modeled NCG costs to reflect a phased rollout : first, it introduced NCG in

current federal RFG areas; second, it replaced all low RVP gasolines with NCG; and third, it replaced all conventio nal gasoline with NCG. This sequence begins with the least

- cost fuel replacement and moves on to progressively more costly fuel replacements. The study area

4 In general, refine rs select octane levels to meet consumer demand. The Alliance believes it is acceptable for Premium gasoline to be defined as having a minimum 91 octane ((R+M)/2).

5 The Alliance used the ASTM Driveability Index limit, which applies at the refinery gate, as the basis for the study instead of its preferred Distillation Index, which applies at the retail pump, because recent changes have brought the ASTM limit much closer to the Alliance recommendation and because refiners are using the ASTM limit in the

mar ket. To determine the impact of imposing the Alliance Distillation Index with a tighter limit, a sensitivity analysis was conducted.

## National Clean Gasoline

Executive Summary

iv

Alliance of Automobile Manufacturers June 2009 covered most of the U.S. (PADDs

F 6

F 1

- 3) and its gasoline pool but excluded the Rockies and West

C oast states ( PADDs 4 and 5 ) for reasons explained in the study

.
The refining economic s study estimate d the refining costs of producing the specified new fuel in volumes consistent with the three implementation phases

. This analysis was limited to

examin ing refining costs; it d id not include analyzing NCG’s possible impacts on fuel distribution, price (which is determined by market forces) or other non

- refinery factors. T he primary analysis assumed a crude oil price of $51.20/barrel, which was the reference case projection derived by the Energy Information Administration for it s 2007 Annual Energy

Outlook (AOE2007)

.

F 7

F T he unprecedented rise i n crude oil prices during 2008, however, led the

Alliance to conduct a sensitivity analysis using a crude o il price of $125/barrel.

The emissions study used fuel quality estimates from the refining economics study as inputs to

well

- accepted and publicly available emissions modeling tools. For public policy purposes, it is

insufficient to know how emissions c hange for one vehicle ; models must be used to estimate the

fleet

- wide emission impacts

, to accommodate variations in vehicle type, age, usage and other

factors , including fuel quality

. Emissions also change year to year; this study looked at the

emission changes between 2010 and 2020 for the same geographic area covered by the cost study. Recent results from an EPA study of toxic emissions from Tier 2 vehicles were included as part of a sensitivity analysis

. 

### Findings

Refining Economics

. The estimated average cost of producing the full volume of NCG, using the

AEO2007 crude oil reference price estimate, is 2.7 5 ¢/gallon ; the estimates are slightly lower for

PADDs 1 and 2 . The estimated marginal cost of introducing the last increment of NCG is about

3.9 ¢/gallon and slightly higher in PADDs 1 and 3 . Improving the distillation index by usi ng the

Alliance ’s preferred Distillation Index equation and limit of 1200

— i.e., tightening the distillation

constraints further

— would i ncrease average refining cost by about 1¢/gallon in PADD 1 only; other regions would see no impact on average refining costs because their gasoline already meets

this limit . The estimated marginal cost for the last increment of NCG is about 5 ¢/gallon, als o only in PADD 1. T hese estimates pertain to average refining cost s , and as such, they do not

indicate cost s that would be incurred by any individual refineries.

The sensitivity analysis using a higher crude oil price indicates that large increases in crude oil prices lead to moderately higher refining costs for producing NCG. With crude oil at $125/barrel, the estimated average cost of producing the full volume of NCG is about 4.5¢/gallon, an increase of 1.75¢/gallon compared with the estimates based on crude oil priced at $51/barrel . The corresponding estimated marginal cost of producing the last increment of NCG

is about 6.5 ¢/gallon, which is an increase of about 2.5 ¢/gallon. Assuming no change in electricity and n atural gas prices, each $10 change in the price of crude oil would lead to a change of about 0.24 ¢/gallon in the average cost of producing NCG.

6 ―PADD‖ means Petroleum Administration Defense District; see www.eia.doe.gov for a map. Roughly, PADD 1 corresponds to t he east coast, PADD 2 corresponds to the Midwest and PADD 3 corresponds to the gulf coast states.

7 Energy Information Administration, ―Annual Energy Outlook 2007 with Projections to 2030,‖ Report #:DOE/EIA

0383(2007), February 2007, available at http://ww w.eia.doe.gov/oiaf/archive/aeo07/index.html (May 21, 2009).

## National Clean Gasoline

Executive Summary

v Alliance of Automobile Manufacturers June 2009 Table 2. Estimated Refining Cost Changes

Estimated Average Refining Cost,

at Two Crude Oil Prices Cost Impact of Higher C rude

P rice Refining Cost of NCG units $51/bbl $125/bbl

Average cost ¢/gal 2.75 4.5 1.75

Average cost ( Alliance DI sensitivity case ) ¢/gal 3.75 (PADD 1 only) * *

Incremental cost ¢/gal 4 6.5 2.5

Incremental cost ( Alliance DI sensitivity case ) ¢/gal 8.75 (PADD 1 only) * *

*Not estimated.

Emissions

. The emissions investigation found that NCG would have significant impacts on evaporative hydrocarbon (HC) and exhaust nitrogen oxides ( NOx ) emissions. Between the study years of 2010 and 2020 and on a per

- PADD basis, evaporative HC reductions ranged from 12% to 19%, and exhaust NOx reductions ranged from 10% to 14%. Exhaust HC emissions also declined, ranging from 1% to almost 4% from their already very low baseline. The sensitivity analysis using newer Tier 2 emission impacts suggest s these vehicles are more sensitive to fuel sulfur effects than the existing models indicate

. Compared to the national on

- road HC and NOx emissions inventory, these reduct ions are significant , especially if the estimates are conservative as the sensitivity analysis suggests. This finding could be very important to states trying to meet more stringent ozone ambient air quality standards.

Table 3. Summary of Emission Redu ctions due to NCG

2010 2015 2020

Exhaust HC 1

– 3% 1.5

– 3.5% 1.75

– 3.75%

Evaporative HC 12

– 19.5% 11.5

– 18.5% 11

– 18.5%

NOx 10

– 11% 12

– 13% 13

– 14%

## National Clean Gasoline

Executive Summary

vi

Alliance of Automobile Manufacturers June 2009 

### Conclusion

T hese studies highlight the potential benefits and costs of improving national gasoline quality. The estimated costs are reasonable, even when crude oil prices are high. T he emission benefits

would be substantial. Additional benefits to gasoline supply accrue simply by eliminating the many boutique gasolines introduced over the years for air pollution control purposes

. Introducing an ultra

- low sulfur gasoline nationwide would enable automakers to introduce a new fuel efficient vehicle technolog y

— lean burn gasoline e ngines

— increasing the options for improving fuel economy for both automakers and consumers

. All of these factors support improving fuel quality on a national basis as a feasible emissions control strategy that will also help the country meet other important national objectives.

## National Clean Gasoline

vii

Alliance of Automobile Manufacturers June 2009 

## TABLE OF CONTENTS

EXECUTIVE SUMMAR Y

................................ ................................ ............. I

Introduction

................................ ................................ ................................ ................................ i Quality of National Clean Gasoline

................................ ................................ .......................... i Approach

................................ ................................ ................................ ................................ ... iii Findings

................................ ................................ ................................ ................................ ..... iv

Conclusion

................................ ................................ ................................ ................................ . vi



### C HAPTER 

### 1: R EFINING 

### E CONOMICS OF A 

### N ATIONAL 

### C LEAN 

### G ASOLINE



### ......... 1

— I



### C HAPTER 

### 2: E MISSION 

### B ENEFITS OF A 

### N ATIONAL 

### C LEAN 

### G ASOLINE



### ............ 2

— I



### A PPENDIX 

### A. M ATH 

### P RO 

### I NC



### .

A PPENDIX 

### B. A IR 

### I MPROVEMENT 

### R ESOURCE 

### , I NC



### .

## National Clean Gasoline

Refining Economics

1

— i

Alliance of Automobile Manufacturers June 2009 

### Chapter 1

0B 

### Refining Economics of a N ational Clean Gasoline

## National Clean Gasoline

Refining Economics

1

— ii

Alliance of Automobile Manufacturers June 2009 

## FINAL REPORT

REFINING ECONOMICS OF
A NATIONAL CLEAN GASOLINE STANDARD

FOR PADDS 1

- 3

A study performed for



## The Alliance of Automobile Manufacturers

by



## Math Pro Inc.

P.O. Box 34404

West Bethesda, Maryland 20827

- 0404

June 27 , 2008

## National Clean Gasoline

Refining Economics

1

— iii

Alliance of Automobile Manufacturers June 2009 1B 

### CONTENTS

1. I NTRODUCTION



### ................................ ................................ .................. 1

— 1

1.1 Background

................................ ................................ ................................ ............. 1

— 1

1.2 Proposed NCG Standard

................................ ................................ ........................ 1

— 1

1.3 Technical Approach

................................ ................................ ................................ 1

— 2

1.4 Summary of Results

................................ ................................ ................................ 1

— 4

1.5 Organization of the Report

................................ ................................ .................... 1

— 4



### 2. B OUNDARY 

### C ONDITIONS FOR 

### R EFINERY 

### M ODELING



### .............................. 1

— 6

3. P ROJECTED 

### B ASELINE 

### R EFINERY 

### O PERATIONS FOR 

### 2010

.................... 1

— 8

4. E STIMATED 

### A VERAGE 

### P ROPERTIES OF THE 

### U.S. G ASOLINE 

### P OOL



### ......... 1

— 9

5. R ESULTS OF THE 

### C ALIBRATION 

### , R EFE RENCE 

### , AND 

### S TUDY 

### C ASES



### ........ 1

— 11

6. R ESULTS OF THE 

### DI S ENSITIVITY 

### C ASES



### ................................ ........... 1

— 15

7. R ESULTS OF THE 

### C RUDE 

### P RICE 

### S ENSITIVITY 

### A NALYSIS



### ...................... 1

— 17

8. A NALYTICAL 

### I SSUES



### ................................ ................................ ........ 1

— 19

9. C OMMENTS ON 

### S TUDY 

### R ESULTS AND 

### F INDINGS



### ................................ . 1

— 21

9.1 Magnitude of the Estimated Average and Incremen tal Costs

.......................... 1

— 21

9.2 NCG Costs Depend on Phase

- In Sequence

................................ ......................... 1

— 21

9.3 Capabilities of Foreign Refiners to Produce NCG Were Not Considered

...... 1

— 21

9.4 Other Factors Cou ld Affect Refining Costs of NCG

................................ ......... 1

— 22

9.5 Logistics System Effects Were Not Considered

................................ ................. 1

— 22

9.6 Aggregate Refinery Modeling and Possible Over

- Optimization

...................... 1

— 23



### A PPENDIX



### ................................ ................................ ............................. 1

— 24

## National Clean Gasoline

Refining Economics

1

— 1

Alliance of Automobile Manufacturers June 2009 

### 1. I NTRODUCTION

The Alliance of Automobile Manufacturers (the Alliance) retained Math Pro Inc. to analyze the

technical and econom ic effects of a contemplated new federal standard for a national ―clean gasoline‖ (NCG) for use throughout the United States (ex California). The NCG standard would augment the federal standard for reformulated gasoline, and NCG would replace special

gaso lines (―boutique fuels‖) and conventional gasoline. This report deals with the technical approach and the results of the analysis.

1.1 Background

We understand that the Alliance advocates an NCG program because it would reduce emissions by gasoline

- powered vehicles in the U.S. in three ways.

 In the existing vehicle fleet, NCG would offer better emissions performance than the boutique fuels and c onventional gasoline (CG) that it would replace; the NCG standards also would improve the emissions performance of federal reformulated gasoline (RFG).

 In future vehicles, general availability of NCG would allow automobile manufacturers to tailor engine de signs to a narrow and predictable range of gasoline properties, thereby enabling more economical and effective compliance with new emissions standards.

 In future vehicles, NCG would enable use of improved emission control technology that is

sensitive to the sulfur content of gasoline.

The contemplated NCG program would phase in over time. Initially, for example, the NCG standards might be superimposed on the RFG program

– gasoline sold in RFG areas would have to meet both sets of standards. Next, NCG c ould become the gasoline of choice in areas choosing to use a cleaner gasoline for meeting the 8

- hour ozone standard. Ultimately, the NCG program could result in the U.S. gasoline pool (ex California) comprising no more than two gasoline types: NCG and fe deral RFG/NCG.

NCG would be a cleaner burning gasoline than either CG or low

- RVP gasoline; but it would have higher refining costs, with the magnitude of the cost increase depending on the NCG standard and its phase

- in sequence. The refining cost and inve stment requirements for NCG production would tend to increase with NCG’s volume share of the U.S. gasoline pool.

1.2 Proposed NCG Standard

For purposes of this study, NCG is defined in terms of a set of gasol ine properties, shown in

Table 1 on the next page.

## National Clean Gasoline

Refining Economics

1

— 2

Alliance of Automobile Manufacturers June 2009 The Driveability Index (DI) standard in Table 1 applies to the Driveability Index definition recently adopted by ASTM

F 1

F :

DI ( o F) = 1.5*T 10 + 3.0*T 50 + 1.0*T 90 + 2.403*(Vol% EtOH).

The l ast term in the equation adjusts the DI upwards by about 24 numbers when ethanol is blended at 10%, to reflect ethanol’s observed adverse effects on driveability.

The study considered a phased introduction of NCG into the U.S. gasoline pool, with the

follo wing assumed sequence of NCG volume additions: (1) augmentation of the RFG standards with the NCG standard (that is, introduction of NCG in current RFG areas); (2) replacement of

all low

- RVP (7.0 and 7.8 RVP gasoline); and (3) replacement of all CG. This sequence begins

with the least

- cost replacement and moves on to progressively more costly ones.

1.3 Technical Approach

We analyzed the refining economics of the proposed NCG standard at each step in the phase

- in sequence by means of regional refinery LP modeling, using our proprietary refinery modeling system. In particular, we applied three models, representing aggregate refining operations in PADD 1, PADD 2, and PADD 3, respectively.

F 2

F The target tim e period for the analysis was the 2010 summer season, as specified by the Alliance.

1 ASTM Subcommittee D02.A Section 3 adopted the new standard, ASTM D4814

- 06a, in November 2006.

2 We did not consider PADDs 4 and 5 in the analysis, because (i) the total gasoline volume produce d and consumed in PADDs 4 and 5 ex California is small and (ii) the NCG standard would not apply in California.

## National Clean Gasoline

Refining Economics

1

— 3

Alliance of Automobile Manufacturers June 2009 The refinery modeling reflected the following assumptions regarding national and state policies affecting gasoline quality.

 All gasoline is ethanol

- blended at 10 vol% in 2010 (― National E10” ), resulting in national ethanol use of about 141⁄2 bgy. (By contrast, the Department of Energy’s Annual Energy Outlook 2007 (

AEO 2007

) projected ethanol use of about 10.8 bgy in 2010);

 No use of MTBE in gasoline;

 Implementation of the 8

- hour ozone standard;

 Continuation of the 1 psi RVP waiver for ethanol blended CG and for low

- RVP gasoline in those states (mostly in the Midwest) now granting the waiver (which does not apply for low

RVP gasoline during the peak ozone months, July and Au gust);

 Continuation of the RVP waiver for NCG that replaces CG, but not for NCG that replaces

low

- RVP gasoline, even in the Midwest; and

 No increase in the number of distinct gasoline types, per Title 15 Subtitle C of EPAct2005.

We developed regional (i.e ., PADD

- level) projections based on price and national volume projections from AEO 2007 (Reference Case) and on prior Math Pro studies of

 Demand for and refinery production of gasoline;

 Additional volumes of special gasolines

– 7 RVP, 7.8 RVP, and RFG

– th at would be called out (i.e., specified in SIPs) in response to the 8

- hour ozone standard; and

 Ethanol use consistent with national E10.

The refinery modeling encompassed a 2002 Calibration Case, a 2010 Reference Case, three 2010 Study Cases and three DI Sensitivity Cases. The three Study Cases represented the staged introduction of NCG in the aforementioned sequence. The three DI Sensitivity Cases represented the introduction of NCG in the same sequence, but with a maximum Driveability Index of 1200, ra ther than 1250 as in the Study Cases. Each case encompassed separate modeling runs for PADD 1, PADD 2, and PADD 3.

All of these cases incorporated a crude oil price of $51.2/Bbl ($2006), the AEO 2007 Reference case projection for 2010. Because the recen t run

- up in crude oil prices calls that projection into question, we conducted a brief sensitivity analysis in which we estimated the effects of a much higher crude oil price for 2010

– $125/Bbl ($2006)

– on the refining economics of NCG production (with D I capped at 1250).

F 3

F This sensitivity analysis did not involve additional refinery modeling. Rather, we estimated a set of prices for other refinery inputs and refined products consistent with a crude oil price of $125/Bbl and then applied these prices to the refinery input and output volumes returned by the various Study Cases.

3 We used projections from AEO 2007 in the refining analysis because we conducted the analysis in the third quarter of 2007, prior to the publ ication of AEO 2008

. By way of comparison, the AEO 2008 Reference Case projects a crude price of $ 78 /Bbl in 2010.

## National Clean Gasoline

Refining Economics

1

— 4

Alliance of Automobile Manufacturers June 2009 1.4 Summary of Results

Table D

- 1a (Appendix D) summarizes the primary economic results of the original Study Cases in the refining analysis (with AEO 2007’s projected crude oil price). The table shows the estimated average refining cost of the proposed NCG standard, by PADD, in ¢/gal of NCG and billions of dollars of refinery investment, at each of the various NCG phase

- in stages.

Averaged over PADDs 1, 2, and 3, the estimated average cost of producing NCG at the assumed maximum market coverage

– with NCG augmenting all RFG and replacin g all low

- RVP gasoline and CG in the three PADDs

– is about 23⁄4¢/gal . The corresponding estimated average

incremental cost for the last increment of NCG introduced (to replace CG) is about 4¢/gal

. The results of the DI Sensitivity Cases in the refining a nalysis (not shown in Table D

- 1a) indicate that lowering the DI standard to 1200 in the NCG program would (i) increase the average refining cost of NCG in PADD 1 (only) by about 1¢/gal and the incremental cost (for displacing CG) by about 5¢/gal (given AEO 2007’s projected crude oil price) and (ii) have no effect on average refining costs in the other PADDs. However, as discussed later in this report, the DI 1200 standard would likely impose additional costs on some individual refineries, costs

not capture d in our aggregate refinery modeling.

Table D

- 1b (Appendix D) summarizes the estimated effects of increasing crude price on the primary economic results of the refining analysis. At a projected crude oil price of $125/Bbl ($2006), the estimated average cost of producing NCG (averaged over PADDs 1, 2, and 3) at the assumed maximum market coverage

– with NCG augmenting all RFG and replacing all low

RVP gasoline and CG in the three PADDs

– is about 41⁄2¢/gal . That is, we estimate that the

increase in crude o il price from $50/Bbl to $125/Bbl increases the average refining cost of the NCG program by about 13⁄4¢/gal and the corresponding average incremental cost for the last increment of NCG introduced (to replace CG) by about 23⁄4 ¢/gal (relative to the results of t he original Study Cases.)

Table D

- 1b also indicates that, for crude prices in the vicinity of $125/Bbl, a $10/Bbl change in crude price would lead to a change of about 1⁄4¢/gal in the average cost of producing NCG (assuming no change in electricity and natur al gas prices).

1.5 Organization of the Report

The following sections of the report describe the development of the regional refining models for analyzing prospective effects of the NCG program, pres ent the results of the analysis, and discuss analytical issues that emerged in the refinery modeling.

 Section 2 shows the boundary conditions (refining capacity, refining inputs & outputs, etc.) developed for calibrating our refinery models.

 Section 3 dis cusses the projections of refinery inputs and refined product out

- turns developed to establish the baseline (Reference case) for 2010, the target year for the analysis.

 Section 4 provides information on average properties of the U.S. gasoline pool, develop ed from data provided by the Alliance and EPA.

## National Clean Gasoline

Refining Economics

1

— 5

Alliance of Automobile Manufacturers June 2009  Section 5 presents results of the refinery modeling analysis for the Calibration, Reference, and Study Cases.

 Section 6 presents results of the refinery modeling analysis for the DI Sensitivity Cases, in

whic h the DI standard is lowered from 1250 to 1200.

 Section 7 discusses the sensitivity analysis to estimate the effect of higher crude oil prices on the economics of NCG production.

 Section 8 discusses analytic issues that arose in the refinery modeling and that influence the study results.

 Section 9 discusses the results and findings of the analysis.

## National Clean Gasoline

Refining Economics

1

— 6

Alliance of Automobile Manufacturers June 2009 

### 2. B OUNDARY 

### C ONDITIONS FOR 

### R EFINERY 

### M ODELING

Boundary conditions are the constraints in a r efinery model that represent actual or forecast market and technical conditions to which refinery operations must conform. They are used in the development and calibration of refinery models representing the operations of a specific refinery or group of r efineries

– for this study the aggregate operations of refineries in PADDs 1, 2, and 3. Boundary conditions include refining capacity; refinery inputs of crude oil, unfinished oils, and blendstocks; refinery out

- turns of finished products, such as gasolin e and diesel fuel; specifications for the properties of refined products (e.g., octane, RVP, and sulfur for gasoline); and certain regulatory standards that constrain refining operations (e.g., RFG standards implemented through the Complex Model and MSAT s tandards).

Calibration of a refinery model involves adjusting technical data elements in the model such that the model yields solution values that match with sufficient precision certain key measures of refinery operations in the calibration period, in thi s case Summer 2002. In this study, matching the properties of the gasoline pool ―produced‖ by the refinery models to the actual PADD

- level pool properties estimated from Alliance or EPA data is of particular importance. This requirement is discussed in S ection 4.

Tables A

- 1 through A

- 5 show the boundary conditions developed for this study for the calibration period, Summer 2002.

 Table A

- 1 shows petroleum refining capacity by PADD for 2002 and 2006. We used refining capacity reported for 2002 to calibrate the PADD 3 refining model to operations in the summer of 2002. We used refining capacity reported for 2006 to develop the models representing refinery operations in Summer 2010.

 Tables A

- 2a and A

- 2b show refinery inputs, volumes of feed going to specific refinery processes, crude oil properties, and net production of refined products, by PADD.

 Tables A

- 3a, A

- 3b, A

- 3c , and A

- 3d show PADD

- level estimates of refinery production of gasoline, by type (conventional, low

- RVP, and RFG), and gasoline blendstock us e.

 Table A

- 4 shows average prices for refining inputs of crude oil, electricity, and natural gas for 2002, and projected prices for 2010.

 Table A

- 5 shows the supply of major refined products by PADD.

Information on refined product supply from this table, in combination with EIA projections of aggregate energy supply and regional energy use, was used to develop projections of

PADD

- level energy supply, as discussed in Section 3.

Not shown in this set of tables are other boundary conditions

– including vario us constraints on the average properties of refined products, Complex Model constraints, and MSAT standards

– used in configuring and calibrating the 2002 regional models. Constraints on the average properties of refined products bear on the RVP of gasoli ne, the benzene and sulfur content of gasoline (based on gasoline properties discussed in Section 3), and the sulfur content of on

- road

## National Clean Gasoline

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Alliance of Automobile Manufacturers June 2009 and off

- road diesel fuel (based on previous Math Pro studies). The Complex Model and MSAT constraints are based on analy ses in previous Math Pro studies.

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Alliance of Automobile Manufacturers June 2009 

### 3. P ROJECTED 

### B ASELINE 

### R EFINERY 

### O PERATIONS FOR 

### 2010

Tables B

- 1 through B

- 7 show our projections of refinery inputs and outputs for the target period, Su mmer 2010. We developed the projections primarily using data from the Department of Energy’s Petroleum Supply Annual 2004 in combination with aggregate energy forecasts and regional energy demand forecasts from AEO 2007

.

 Tables B

- 1 to B

- 3 show projections for 2010 of total U.S. petroleum supply and disposition, imports and exports of petroleum products, and regional growth in energy consumption. We used these projections in developing the PADD

- level projections shown in subsequent tables.

 Table B

- 4 shows projected supply of major refined products, by PADD.

 Table B

- 5 shows refinery inputs and refined product out

- turns, by PADD.

 Tables B

- 6a, B

- 6b, B

- 6c, and B

- 6d show projections of gasoline out

- turns, by PADD and by type of gasoline, and the corres ponding projected pattern of use of gasoline blendstocks.

These projections assume implementation of the 8

- hour ozone standard by 2010, and consequent increases in the shares of low

- RVP and reformulated gasoline in the gasoline pool. Our estimates of the effects of the 8

- hour ozone standard on gasoline markets come

from Math Pro Inc.’s earlier published work for the American Petroleum Institute (API).

F 4

F

 Table B

- 7 shows projected national ethanol use of about 141⁄2 bgy, allocated by PADD,

consistent with blending ethanol at 10 vol%.

Tables A

- 1 (2006 data), A

- 4 (2010 projection), B

- 5, B

- 6c, B

- 6d, and B7 establish the primary boundary conditions for the 2010 Baseline (Reference) case.

The 2010 Reference and Study cases reflect an increase in refined pro duct out

- turns (net of purchased gasoline blendstocks), relative to the 2002 Calibration cases, of about 8% for PADD 1, 10% for PADD 2, and 20% for PADD 3 (which includes projected increases in shipments of refined products to the other PADDs). The 2010 r egional refined product out

- turns reflect about a 16% projected aggregate increase in U.S. refinery out

- turns (including ethanol) over those in

2004.

4 ―Potential Effects of 8

- Hour Ozone Standard on Gasoline Supply, Demand, and Production Costs‖; Prepared for

the American Petroleum Insti tute by Math Pro Inc.; March 2005

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Alliance of Automobile Manufacturers June 2009 

### 4. E STIMATED 

### A VERAGE 

### P ROPERTIES OF THE 

### U.S. G ASOLINE 

### P OOL

Tables C

- 1 and C

- 2 show estimated average gasoline properties, by gasoline type, for the years 2000 through 2004. We derived these property sets from gasoline sampling data from the

Alliance’s North American Fuel Surveys and from data in EPA refinery and importer reports and federal RFG Area Surveys. The Alliance surveys are taken at the retail level

F 5

F ; the EPA reports are at the refinery and blender level.

Table C

- 1 shows the average properties of RFG and CG for t he U.S. (ex California) derived from the Alliance surveys and reported by EPA. The average gasoline properties derived from the two sources are in good agreement, except for the pool averages for aromatics and olefins content.

The Alliance

- derived estima te for pool aromatics for 2003 is 28.8 vol%, whereas the EPA survey data indicate pool aromatics at 25.7 vol%, about 3 percent points lower. The

Alliance

- derived estimates of aromatics in both RFG and CG are higher than the corresponding estimate in the E PA reports. Likewise, the Alliance

- derived estimate for aromatics in RFG is higher than the estimate derived from the EPA RFG Area Surveys.

The Alliance

- derived estimates for the olefins content of RFG are generally within a percent point of the values in the EPA reports and the estimates derived from the EPA RFG Area Surveys. However, the Alliance

- derived estimates of olefins for CG are about 2 percent points lower than the values in the EPA reports.

Table C

- 2 shows estimated average properties for RFG a nd CG by PADD of origin , not consumption. We estimated average properties for both the Alliance surveys and the EPA federal RFG Area Surveys by assigning the surveyed cities to specific PADDs, according to the sourcing of their gasoline supplies. For exa mple, cities assigned to PADD 3 included all of those located in PADD 3, along with the Washington metropolitan area and all cities in the southeast. Cities assigned to PADD 1 included Pittsburgh and all cities in the northeast, except those in New Englan d (e.g., Boston), because the latter areas are supplied largely by imports. All cities in PADD 2 were assigned to PADD 2.

Because the EPA data sources encompass more of the national gasoline pool than the Alliance fuel surveys, we chose to rely more heavil y on the EPA sources than on the Alliance surveys with respect to the target aromatics and olefin contents in the Calibration Case. In particular, we used average gasoline properties derived from the 2003 EPA reports (reflecting refinery

- level reporting) as the gasoline property targets for the 2002 Calibration model run. (The average gasoline properties reported in the Alliance surveys are stable between 2002 and 2003, suggesting that average gasoline properties in 2002 were similar to those we have avail able for 2003 from EPA data.)

For each PADD, we adjusted E 130 for most blendstocks, E 200 and E 300 for FCC naphtha and reformate, and olefin content for FCC naphtha. In addition, for PADDs 1 and 2, we adjusted the

5 Excluding California and Nevada (areas supplied exclusively by California refineries) and Fairbanks, AK, the Alliance Survey reports the properties of retail gasoline samples taken in twenty

- one cities: eight RFG cities, eight

low

- RVP cities, two ethanol

- blended CG cities, and three CG cities. The Surveys provide nearly complete coverage for RFG areas, broad coverage of low

- RVP areas, and thin coverage of CG areas.

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Alliance of Automobile Manufacturers June 2009 olefins and sulfur content of FCC naphtha. Table D

- 7 (discussed below) compares the average gasoline pool properties returned by models in the Calibration Case, which reflect these adjustments in blendstock properties, with the average gasoline pool properties estimated from the 2003 EPA data. For PADD 3, the average aromatic contents are about 2 percent points higher than indicated by the 2003 EPA data.

We elected not to adjust the aromatics contents of the primary aromatics

- containing blendstocks in the refining models (reformate and FCC naphtha), becau se these aromatics contents are consistent with information from various industry sources on the aromatics content of PADD 3 gasoline blendstocks. The divergence in aromatics content may arise from the way we handled gasoline blendstock production in this study, versus how refiners report such production. We include in the finished gasoline volume all gasoline blendstock volumes produced, rather than treating these volumes as a separate category. The other average gasoline properties from the

Calibration case for PADD 3, along with those for PADDs 1 and 2, are close to the reported average gasoline properties.

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Alliance of Automobile Manufacturers June 2009 

### 5. R ESULTS OF THE 

### C ALIBRATION 

### , R EFERENCE 

### , AND 

### S TUDY 

### C ASES

F 6

As descr ibed in Section 1.3, we developed and analyzed a series of refinery modeling cases to assess the effects of the contemplated NCG program. Each case encompassed separate modeling

runs for each PADD of interest.

 The 2002 Calibration Case serves to calib rate the model to historical data for Summer 2002.

 The 2010 Reference Case establishes the Summer 2010 baseline case to which the Study Cases are compared.

The Reference Case incorporates refining capacity sufficient to produce projected refined product out

- turns, meet the Tier 2 sulfur standards for gasoline, and supply the volumes of

low

- RVP gasoline and RFG to meet the (projected implementation of the) 8

- Hour Ozone Standard. The Reference Case assumes that all gasoline is E10.

 Study Cases 1 through 3 assess the effects of progressively increasing the share of the gasoline pool meeting a NGC standard.

 In Study Case 1: RFG, the federal RFG standards are augmented by the NCG standard

-

- specifically, the NCG standards for 7.0 RVP, 5 ppm sulfur content, and DI 1250 are

overlaid on the RFG standards.

 In Study Case 2: Low

- RVP , all 7.0 and 7.8 RVP gasoline is replaced by NCG (with all RFG also conforming to the NCG standard).

In Study Case 3: CG , all CG (except for a small export volume in PADD 3) is replaced by NCG (in addition to all RFG and low

- RVP gasoline).

Tables D

- 1 through D

- 7 show the results of the Calibration, Reference, and Study cases, for

each PADD.

 Table D

- 1 summarizes the economic results of our analysis. The table shows the estimate d refining costs of the NCG standard in ¢/gal of NCG and in billions of dollars of refinery investment, at the various phase

- in stages.

Average per

- gallon costs increase progressively as the NCG standard covers first RFG, then

low

- RVP gasoline, and final ly CG. The estimated average per

- gallon cost of NCG for the aggregate of PADDs 1

- 3 increases from about 11⁄2¢/gal in Study Case 1 to about 3¢/gal in Study Case 3.

Incremental per

- gallon cost of NCG (the cost of the last increment of NCG volume) likewise

i ncreases to about 4¢/gal in Study Case 3.

Aggregate refinery investments in new process capacity increase progressively with increasing NCG share to about $2 billion in Study Case 3. Capital charges and fixed costs

6 Results of the Sensitivity cases are discussed in Section 6.

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Alliance of Automobile Manufacturers June 2009 associated with this investment represent slightly less than 20% of total per

- gallon costs in Study Case 3.

Finally, the proposed NCG program would induce small improvements in the energy density of the ga soline pool in Study Cases 2 and 3. This would reduce the national cost of NCG, by about 1⁄2¢/gal, but not the refining industry’s costs.

 Table D

- 2 shows refining operations and, for the Study cases, new capacity additions.

The 2010 Reference case is conf igured such that Existing Capacity in Table D

- 1 includes any capacity added by the refinery model (beyond that reported in 2006) to produce the projected refinery out

- turns and to meet regulatory standards.

F 7

F Results returned by the refinery models

show progressively more (but still relatively small amounts of) new capacity as the NCG share of the gasoline pool increases.

Additional capacity in the Study cases is needed mostly for RVP control (debutanization and depentanization). Some minor additions o f crude distillation and fractionation capacity also are made in Study Cases 2 and 3. Overall, DI control called for no investment in new capacity, because of the effects of blending ethanol at 10 vol% on the distillation curves of gasoline, notwithstandi ng the ethanol adjustment factor in the DI equation.

 Tables D

- 3a and D

- 3b show estimated refinery inputs and outputs.

The refinery models are constrained to respond to requirements for progressively increasing volumes of NCG by adjusting refinery inputs, capacity, and operations, not by adjusting outputs of gasoline and other finished refined products. That is, output vo lumes of all refinery products are fixed, except for certain light gases (propane, butane, and mixed C4/C5s).

The volumes of certain refinery inputs, such as pyrolysis gasoline (an ethylene plant by

product), ethanol, naphtha, kerosene, heavy gas oil, an d residual oil, are held constant across the Reference and Study cases. Other inputs, such as crude oil, iso

- butane, and normal butane, are priced and their volumes are allowed to vary across cases.

 Tables D

- 4a, 4b, and 4c shows the estimated average properties of each gasoline type, by PADD, in each case, as well as the Complex Model emission reductions for RFG (as calculated by the reduced

- form of the Complex Model embedded in the refinery model, not by the actual Complex Model).

In the Calibration Case, we adjusted properties of some gasoline blendstocks such that the weighted average properties of the gasoline pool closely approximated those estimated from the EPA data, as discussed in Section 4.

7 Merchant MTBE plants operating in 2002 are represented in the 2002 Calibration case. No merchant MTBE plants are represented in the 2010 Reference and Study cases, but retrofitting refinery

- based MTBE units operating in PADD 3 in 2006 to alkylate product ion was allowed.

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Alliance of Automobile Manufacturers June 2009 In Study Case 1, the average pool aromatics conte nt and DI increase somewhat for PADD 2,

but remain about the same for PADDs 2 and 3.

F 8

F The (small) effect on gasoline properties arising in PADD 1 from augmenting the RFG standards with the NCG standard occurs for several reasons. A larger fraction of t he gasoline pool is RFG in PADD 1 than in the other PADDS, and (as discussed in more detail in Section 8) the NCG sulfur standard would lead

to reduction in the sulfur content of most of the non

- NCG gasoline produced in PADD 1.

In Study Case 2, there generally are small increases in aromatics and DI, reflecting still greater geographic coverage of NCG’s low sulfur and RVP standards (and the loss of the 1 psi ethanol RVP waiver) as low

- RVP gasoline is replaced by NCG. Olefins levels also

decline due to more extensive treatment of FCC naphtha to reduce the sulfur content of NCG.

In Study Case 3, these trends to increased aromatics content and DI and reduced olefins content DI continue as the NCG standard expands to cover all gasoline (except for some

exp orts in PADD 3).

With respect to the 2010 Reference Case, the net effect of full imposition of the NCG standard a gasoline is to (1) lower pool average RVP, sulfur, and olefins and (2) raise somewhat average aromatics and DI. However, pool average aroma tics and DI would remain lower than in gasoline produced in 2003/2004, as shown in Exhibit C

- 2.

 Tables D

- 5a, 5b, and 5c show the estimated composition of the various gasoline types produced and of the entire gasoline pool.

The primary changes in the estimated composition of the total gasoline pool are that the volume fractions of: (1) C4s decline somewhat (because of RVP control); (2) FCC naphtha declines slightly (due to the cost of sulfur control); and (3) medium and heavy reformate increases (to ma ke up the octane lost in desulfurizing FCC naphtha to 5 ppm). These changes are rather small, but become more noticeable as the share of NCG in the gasoline pool expands.

 Table D

- 6 shows the shadow values (marginal costs) of Complex Model parameters, DI, and octane for each gasoline type. Non

- zero values in this table for Complex Model parameters and DI indicate the limits on specific gasoline properties and on DI that constrain refinery operations, i.e., impose additional costs.

The two Complex Model parameters whose shadow values progressively increase across the Study Cases are RVP and benzene. The shadow value of RVP increases because it is controlled directly by the NCG standard and the extent of RVP control increases as NCG expands its share of t he gasoline pool. The shadow value of benzene increases because of the indirect effect of the NCG standards on gasoline pool octane. FCC naphtha desulfurization, required to achieve the sulfur standard, leads to some octane loss. The lost octane is repl aced by an increased volume share of reformate, a high

- octane blendstock that

8 In general, the properties shown in Tables 4a, 4b, and 4c and the gasoline compositions in Tables 5a, 5b, and 5c may change within Study Cases for individual types of gasolines without affecting the refinery model’s objective

functio n, i.e., the refining models may have multiple alternate optima with respect to gasoline properties and compositions across different types of gasoline.

## National Clean Gasoline

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Alliance of Automobile Manufacturers June 2009 contains benzene. The shadow value on sulfur also would have increased across the Study Cases, except for a special modeling procedure that we employed to directly control the

s ulfur content of FCC naphtha and other sulfur

- containing blendstocks to 5 ppm or lower. Finally, the cost of octane progressively increases because of the octane lost via FCC naphtha desulfurization and the reductions in high

- octane C4 blendstocks due to RVP control.

 Table D

- 7 compares the results of the Calibration Case with reported refinery operating data for Summer 2002. As discussed earlier, the gasoline pool properties closely match reported data, with the exception of aromatics content. With respe ct to process throughput volumes, computed crude throughput and FCC and coker feed rates are within 2% of volumes reported by EIA. Reported and modeled hydrocracker feed rates for PADD 3 differ considerably, primarily because EIA defines hydrocracking fee d to includes volumes fed to lube plants and resid hydrocrackers, whereas we include only feed to distillate hydrocrackers.

The marginal costs of gasoline and distillate production returned in the Calibration Case are lower than reported market prices in 2002. However, the marginal costs have the same general relationship as market prices, i.e., gasoline marginal costs are higher than distillates, etc. In our experience, small changes in process capacity constraints can move the marginal

cost estimates arbitrarily close to reported prices. We did not pursue making such changes because this study focuses not on 2002 but on 2010, a period defined by a different set of process capacities and refined product out

- turns.

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Alliance of Automobile Manufacturers June 2009 

### 6. R ESULTS OF THE 

### DI S ENSITIVITY 

### C ASE S

As described in Section 1.3, we analyzed a set of refinery modeling cases to assess the effects of a more stringent DI standard on the estimated cost of the contemplated NCG program. The results of the DI Sensitivity Cases indicated that a DI 1200 standar d, rather than DI 1250, would affect average refining costs only in the PADD 1 refining sector. Average refining costs in PADD 1 would increase by about 0.1¢/gal in Sensitivity Case 1 (relative to Study Case 1), 1⁄2¢/gal in Sensitivity Case 2, and 1¢/gal in Sensitivity Case 3. Likewise, investments in new refining process capacity also increased

– by about $0.3 billion and $0.4 billion in Sensitivity Cases 2 and 3, respectively, relative to the corresponding Study Cases.

The lower DI standard would affect the PADD 1 refining sector because the average DI of the gasoline pool produced in that PADD is > 1200 in the Study Cases assessing the 1250 DI standard. PADD 1 refineries would have to produce a gasoline with average DI below 1200 (around 1175) in order to insure compliance with a maximum DI of 1200 at the pump. To meet the lower DI standard PADD 1 refineries would have to back out heavy, high

- octane gasoline blendstocks, such as reformate, and replace them with lighter, high

- octane blendstocks, mainly

a lkylate and isomerate. The refineries would have to compensate for the resulting RVP increase by increasing depentanization. PADDs 2 and 3 produce gasoline pools with average DI below or close to the 1175 refinery

- gate DI target in the Study Cases, in wh ich NCG has a DI 1250

standard.

However, results from aggregate refinery modeling, as conducted in this study, can significantly understate the effects of imposing the lower DI standard, because of the significant refinery

- to

refinery variation in average DI of the gasoline pool. Aggregate refinery models represent refinery operations in which all blendstocks produced in the region are available for blending in all gasoline batches, whereas individual refineries have a smaller pool of blendstocks from whic h to draw. Those refineries having high pool average DI likely would have to modify their refining operations, rather than simply trading high

- DI blendstocks for low

- DI blendstocks from another refinery, as is done implicitly in the aggregate refining mod els.

The chart on the next page shows the distribution of estimated pool average DI, separately for RFG and CG (including low

- RVP gasoline) produced by individual refineries (ex

- California) in 2004. (The effect on DI of ethanol blending at terminals is no t captured in the data underlying this chart.) Clearly, significant variation exists in average pool DI across refineries. The higher the average DI of a refinery’s current gasoline pool, the higher the likely difficulty and cost of the refinery’s meetin g a tighter DI standard.

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Alliance of Automobile Manufacturers June 2009

## National Clean Gasoline

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Alliance of Automobile Manufacturers June 2009 

### 7. R ESULTS OF THE 

### C RUDE 

### P RIC E 

### S ENSITIVITY 

### A NALYSIS

As described in Section 1.3, we conducted a brief analysis to estimate the effects of crud e oil price on the refining economics of NCG production (with DI capped at 1250). In particular, we considered a 2010 crude oil price of $125/Bbl ($2006) in place of the $51.2/Bbl value used in the primary analysis.

We conducted this sensitivity analysis using a simple approach that did not involve additional refinery modeling. On the basis of historical price series, we estimated average prices for all refinery inputs (other than crude oil) and refined products that would be consistent with a crude oil p rice of $125/Bbl. We applied these estimated prices to the refinery input and output volumes returned by the refinery model in each Reference Case and Study Case, to obtain the indicated cost differentials for each case, with crude oil at $125/Bbl (and co mmensurate prices for purchased electricity and natural gas). For each Study Case, the estimated refining cost of the NCG program with crude oil at $125/Bbl is the difference in the gross refining margin (GRM)

F 9

F plus the difference in purchased energy costs between the Study Case and its Reference

Case.

Table D

- 1b (Appendix D) summarizes the results of this analysis. With crude oil price at $125/Bbl ($2006), the estimated average cost of producing NCG (averaged over PADDs 1, 2, and 3) at the assumed maximum market coverage

– with NCG augmenting all RFG and replacing all low

- RVP gasoline and CG in the three PADDs

– is about 41⁄2¢/gal . In other words, increasing the crude oil price from $50/Bbl to $125/Bbl increases the estimated average refining cost of the NCG program by about 13⁄4¢/gal . Similarly, increasing the crude price increases the corresponding average incremental cost for the last increment of NCG introduced (to replace CG) to about 61⁄2¢/gal ; that is, by about 23⁄4 ¢ / gal (relative to the original Study Cases).

Table D

- 1b also indicates that each additional $10/Bbl increase in crude price would increase the average refining cost of the NCG program by about 0.24¢/gal (at constant nat ural gas and electricity prices).

The refining cost of any regulatory program affecting refined product quality

– in this instance, the contemplated NCG program

– is the sum of the changes (relative to a baseline) induced by that program in (i) gross ref ining margin (as defined here), (ii) the cost of refinery energy purchases (mainly natural gas and electricity), and (iii) other refinery operating costs (e.g., catalysts and chemicals, etc.) plus the capital charges associated with investments in new

refi ning capacity called out by the program. Refinery LP modeling, such as we conducted in this study, considers all of these factors. The crude price sensitivity analysis that we conducted considers only the first and second: the changes in GRM and in the c ost of refinery energy purchases.

Because the sensitivity analysis did not involve refinery modeling

– an optimization technique that identifies minimum cost refining operations

– the results of the analysis may embody some

overstatement of the effect o f increasing crude price. In particular, the sensitivity analysis did

9 Gross refining margin is the total revenue from refined product sales minus the total cost of crude oil and other refinery inputs (excluding natural gas and electricity)

.

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Alliance of Automobile Manufacturers June 2009 not consider changes in refinery capital investments (which refinery modeling would have). Refinery modeling might have revealed some additional investment called out to partially

coun teract higher energy prices.

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Alliance of Automobile Manufacturers June 2009 

### 8. A NALYTICAL 

### I SSUES

Various study assumptions and premises merit discussion and should be considered in assessing the results of the refinery modeling.

 The proposed NCG standard has a 10 ppm cap on sulfur content. To meet this limit, refineries would have to desulfurize FCC naphtha to

U <

U 5 ppm. FCC naphtha is usually the largest single constituent of a refinery’s gasoline pool (typically comprising abo ut 35% of pool volume) and the primary source of sulfur in gasoline (accounting for about 95% of the sulfur content of untreated gasoline).

We understand that many of the FCC naphtha treating units that have been or will be

installed to meet the Tier 2 sul fur standard are capable of producing a treated FCC naphtha with sulfur content < 10 ppm. However, some units (particularly retrofitted units) may not have this capability and may need an additional treatment stage to achieve the 10 ppm sulfur

cap contemp lated for NCG. Retrofitting an additional treatment stage would entail some additional investment. To estimate the potential impact of retrofitting on our cost estimates, we postulated that all FCC naphtha hydrotreaters would have to be retrofitted at a cost equal to 30% of the estimated grassroots ISBL cost of a new unit (about $1500 K/Bbl/day). This investment raises the estimated total investment in new process capacity by about $1.5 billion (to a total of about $3 billion) and the estimated cost of f ully implementing the NCG standard by about 0.2

– 0.3¢/gal.

 As noted above, NCG production would entail desulfurizing the FCC naphtha blended to NCG to about 5 ppm sulfur. If a refinery opted to produce NCG, it would probably

desulfurize all of its FCC naphtha to 5 ppm (not just the portion blended to NCG), because of constraints on tankage and the difficulty of segregating ultra

- low sulfur from low sulfur blendstocks. Thus, NCG production could lead to very low sulfur levels in the non

- NCG gasoline pro duced by refineries opting to produce some NCG.

We captured this effect in Study Case 1 by requiring all FCC naphtha produced by RFG refineries judged likely to continue producing RFG when NCG is first phased in to be desulfurized to 5 ppm and blended in co

- produced low

- RVP gasoline and CG. (The RFG/other gasoline splits in these refineries range from about 40/60 to 60/40). In Study Case 2, we assumed that non

- RFG refineries producing low

- RVP gasoline would produce CG in about the same volume (i.e., a 50/50 split), leading to FCC naphtha desulfurization of twice the amount necessary solely for low

- RVP gasoline. (The exception is for PADD 1, where larger coastal RFG refineries also produce the bulk of low

- RVP gasoline and where

we assume that small inla nd refineries would forego producing low

- RVP gasoline as the NCG program was phased in).

This analytical procedure shifts part of the cost of desulfurizing low

- RVP gasoline and CG to RFG and of desulfurizing CG to low

- RVP gasoline as the NCG program is phased in; it does not change the cost of fully implementing the NCG standard. It also leads to improvement in estimated emissions performance of some low

- RVP gasoline and CG during the phase

- in of NCG by virtue of the early reductions in their sulfur lev els.

## National Clean Gasoline

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Alliance of Automobile Manufacturers June 2009  Typically, the investment for expanding existing units is about half to two

- thirds of the cost of adding the same capacity in grassroots units. The investment costs shown in Table D

- 6 reflect grassroots investment economics. We specified grassroots investment economics in the Study cases and Sensitivity cases, rather than expansion economics, as a simple means of dealing with various investment considerations.

On one hand, most additional capacity in crude distillation, alkylation, and isomerizat ion likely would come about by expansion of existing units, rather than construction of new units, and would therefore incur investment costs consistent with expansion economics. On the other hand, w e did not include any ancillary refining costs that coul d be incurred to control the sulfur content of gasoline blendstocks that need not be treated in order to meet the Tier 2 gasoline sulfur standard.

F 10

F We assumed in the Reference Case that gasoline blendstocks likely to have high sulfur content relative to the Tier 2 standard, such as straight run naphtha, coker naphtha, natural gas liquids, and pyrolysis gasoline, would be treated to reduce sulfur to low levels (5 ppm or less). In the end, because estimated investment costs are low, modifying the procedur e to use expansion, rather than grassroots, investment economics for some units would have only a minor effect on our cost estimates.

 We allowed DI ―quality shifting‖ to occur from NCG to co

- produced low

- RVP gasoline and CG (i.e., low

- RVP gasoline and CG p roduced by NCG refineries), subject to an arbitrary refinery gate, upper limit on DI of 1220. That is, we constrained the DI for other low

- RVP gasoline and CG to Reference Case levels. Presently, no regulatory mechanism exists to prevent quality shifting in response to a NCG standard.

 As customary, our analysis does not address additional costs incurred downstream of the refinery

– from the refinery gate to the pump

– in moving, storing, and distributing NCG. However, we think any such costs would be l ow because NCG would replace existing gasoline types and, under EPAct2005, could not lead to an increase in the number of distinct gasoline types in commerce.

 Capital charges in the refinery model and in the cost analysis reflect a rate of return on

inves tment of 10%. EPA uses lower rates of return when estimating the ―social‖ (national) costs of regulations; refiners often use higher rates of return when evaluating refinery investment opportunities.

10 Ancillary refining costs are refining costs that are not registered in the refinery model, such as those discussed here that refineries may incur in meeting a 5 ppm sulfur standar d. Refinery LP models do not register ancillary costs not because they are imaginary, but because it is hard to express them as explicit functions of refinery operating variables.

## National Clean Gasoline

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Alliance of Automobile Manufacturers June 2009 

### 9. C OMMENTS ON 

### S TUDY 

### R ESULTS AND 

### F INDINGS

9.1 Magnitude of the Estimated Average and Incremental Costs

Averaged over PADDs 1, 2, and 3, the estimated average cost of producing NCG at the assumed maximum market coverage

– that is, with NCG augmenting/replacing all RFG, low

- RVP gasoline, and CG in the three PADDs

– is about 3¢/gal of NCG (for a crude oil price of $51 ($2006)). The corresponding estimated incr emental cost for the last increment of NCG at maximum market coverage (that is, replacing CG) is about 4¢/gal. (Table D

- 1)

To provide some perspective for these estimates, note that the estimated average and incremental refining costs are in the same rang e as most corresponding estimates for federal Phase 1 RFG, prior to its implementation in 1995. After implementation, and prior to the institution of state MTBE bans, spot price differentials between CG and federal RFG usually were usually in the range of 2¢ to 4¢/gal, except in periods of temporary supply disruption. The estimated refining costs for NCG are below estimates of the cost of the California MTBE ban, prior to its implementation in 2004, and of the cost of a national MTBE ban.

In summary, t he results of the analysis indicate that NCG would be a relatively costly gasoline program, but not necessarily more costly than some other gasoline programs that U.S. consumers have accepted.

This finding applies over the entire range of crude oil pri ces considered in this study. (Note that the estimated refining costs indicated by the crude price sensitivity analysis (Section 7) are not directly comparable to the results obtained in any prior studies of proposed regulatory standards affecting gasolin e, because all prior studies incorporated crude prices very much lower than $125/Bbl.)

9.2 NCG Costs Depend on Phase

- In Sequence

Except for the average refining cost at full market coverage, the average and incremental refining costs of NCG would be a function of its phase

- in sequence (that is, the sequence in which other gasoline types would be augmented/replaced by NCG). In particular, the estimated costs shown

in Table D

- 7 apply only to t he assumed phase

- in sequence: RFG first, low

- RVP gasoline second, and CG third, simultaneously in all PADDs.

Other sequences, with or without regional variations, would lead to different cost progressions for NCG’s introduction, but the average c ost of t he NCG program at full market coverage would be unaffected by the phase

- in sequence.

9.3 Capabilities of Foreign Refiners to Produce NCG Were Not Considered

We project imports of finished gasoline and blending components to constitute more than 12% of total U.S. gasoline supply in 2010. Most gasoline imports come into PADD 1, where imports constitute about 31% of total gasoline supply (including inter

- regiona l transfers from PADD 3).

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Alliance of Automobile Manufacturers June 2009 Imports of gasoline into PADD 1 in 2010 will be in the form of blendstocks (CBOBs, RBOBs, etc.) subsequently blended with ethanol at 10 volume% to make finished gasoline. A handful of refineries in eastern Canada, the Virgin Is lands, and Venezuela are consistent suppliers, accounting for most of PADD 1’s gasoline imports. The rest of the imports come from ―opportunity‖ suppliers, refineries in northern Europe, Africa, the Middle East, and Asia.

An important assumption in the analysis was that gasoline production in each PADD of interest would remain unchanged with the introduction of NCG. This assumption implies that (1) the total volume of gasoline imports would remain unchanged with the introduction of NCG and (2) imported low

- RVP gasoline and CG would be replaced by imported NCG in step with the shift in domestic gasoline production.

We assumed that foreign refineries, collectively, would supply the indicated amounts of NCG imports, and do so at delivered prices consiste nt with the marginal production costs of the U.S. refining sector. In practice, that may or may not be the case. However, analysis of the capabilities and economics of foreign suppliers is far beyond the scope of this study.

9.4 Other Factors Could Aff ect Refining Costs of NCG

As noted in Section 8, many FCC naphtha desulfurization units installed to meet the Tier 2 sulfur standard already have the capability of desulfurizing FCC naphtha to the extent needed to produce gasoline containing

U <

U 10 ppm sulfur. However, some units (particularly retrofitted units) may not have this capability. They would require some additional investment in order to

achieve the NCG sulfur standard.

Meeting the NCG sulfur standard could also require desulfurization of other gasoline blendstocks that (unlike FCC naphtha) did not require treatment to meet the Tier 2 gasoline sulfur standard (30 ppm average). We did not attempt to capture these investme nts in the Study Cases and Sensitivity Cases. Rather, we assumed that these desulfurization costs were embodied in the Reference Case, in which total refining capacity includes the process capacity installed to meet the Tier 2 gasoline sulfur standard. H ence, the results of the analysis do not reflect the costs that would be incurred if some refineries had to install new desulfurization capacity expressly to produce NCG in the specified volumes.

9.5 Logistics System Effects Were Not Considered

Consistent with the ground

- rules established for the study, we did not consider the technical and economic effects of an NCG program on the gasoline distribution system, from the refinery to the pump.

These effects would likely be minimal. As EPAct2005 dictates, NCG would have to replace another gasoline type at each step of the phase

- in, and NCG could not lead to any increase in the number of distinct gasolines in commerce in the U.S.

F 11

F During periods of supply shortfall or supply interruption, the wi despread use of a standard NCG would tend to enhance the

11 The assumed phase

- in sequence satisfies the EPAct2005 requirements in P ADDs 1, 2, and 3. For purposes of this study, we ignored the small volumes of low

- RVP gasolines currently used in PADD 4.

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Alliance of Automobile Manufacturers June 2009 distribution system’s flexibility in responding and mitigating the price spikes that often occur in

such situations.

9.6 Aggregate Refinery Modeling and Possible Over

- Optimization

We conducted the refinery modeling using regional aggregate refining models. Such models essentially pool all regional refining capacity and intermediate and final gasoline blendstocks, as

th ough all refining capacity in the region were fully integration. Consequently, all aggregate refining models have a tendency to ―over

- optimize‖

– that is, to return operating results better than the refining sector could achieve in practice under the cond itions represented in the models.

The results returned by the PADD

- level refining models in this analysis may embody some over

optimization in representing the phase

- in of NCG

– most notably with respect to quality shifting. An aggregate model can pract ice quality shifting among gasoline types to a greater extent than can individual refineries. As noted in Section 8, quality shifting from NCG to other gasoline types would, directionally, reduce the cost of NCG production but impair emissions performance of the gasoline types that were the ―quality sinks.‖ In practice, as NCG phased in, some refineries might produce NCG and others might not, further limiting the extent to which quality shifting could occur.

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### APPENDIX

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Alliance of Automobile Manufacturers June 2009 Table A

- 3a: Allocation of Annual Gasoline Use by Region, State,

and Gasoline Type, 2002 (K b/d)

Gasoline Type

EtOH California RFG

Region Conven

- Mandate Low RVP Areas Federal Federal State Arizona

& State tional (Minn.) 7.8 7.2 7.0 RFG Area Area CBG Total

PADD 1 1,346 0 446 0 170 1,184 0 0 0 3,146

Subdistrict 1A 54 0 28 0 0 330 0 0 0 413

Connecticut 98 98

Maine 19 28 47

Massachusetts 176 176 New Hampshire 13 32 45

Rhode Island 25 25

Vermont 23 23

Subdistrict 1B 361 0 72 0 0 720 0 0 0 1,153

Delaware 26 26

District of Columbia 10 10 Maryland 18 141 159 New Jersey 252 252

New York 166 201 367 Pennsylvania 177 72 88 337

Subdistrict 1C 931 0 346 0 170 134 0 0 0 1,580

Florida 269 253 522 Georgia 154 170 324

North Carolina 189 93 282

South Carolina 153 153 Virginia 112 134 246 West Virginia 54 54

PADD 2 1,653 178 269 17 58 362 0 0 0 2,536

Illinois 113 17 207 338

Indiana 176 6 26 208

Iowa 105 105

Kansas 62 18 80 Kentucky 106 35 140 Michigan 172 166 337

Minnesota 178 178

Missouri 118 40 48 206

Nebraska 58 58

North Dakota 24 24

Ohio 345 345

Oklahoma 90 27 117

South Dakota 30 30

Tennessee 131 70 202

Wisconsin 122 46 168

PADD 3 615 0 353 0 59 283 0 0 0 1,310

Alabama 139 31 170

Arkansas 95 95

Louisiana 74 78 152 Mississippi 106 106

New Mexico 62 62

Texas 140 275 28 283 726

PADDs 4 & 5 ex CA 471 0 289 0 0 0 0 0 99 859

Alaska 17 17

Arizona 71 99 170

Colorado 61 76 138

Hawaii 29 29

Idaho 38 38

Montana 29 29

Nevada 1 57 12 69 Oregon 53 52 105

Utah 14 46 60 Washington 82 102 184 Wyoming 20 20

CALIFORNIA 731 267 998

UNITED STATES 4,085 178 1,357 17 287 1,829 731 267 99 8,849

1 Nevada reports a small volume of RFG sales. We assume this is spillover of CaRFG and report it as State Area CaRFG. Note: Gasoline is classified by the area into which it is sold. Volumes reflect year

- long (annual, rather than seasonal)

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Table B

- 1: Petroleum Supply and Disposition

-- Historical 2000

- 2005 and

AEO 2007 Reference Case Forecast for 2010
(K b/d, except as noted)

AEO Projected Growth

Historical Forecast 2004

- 2010 Supply & Disposition 2000 2001 2002 2003 2004 2005 2010 Cumulative Annual

Crude Oil Supply 14,840 15,050 14,880 15,340 15,529 15,271 15,659 0.8% 0.1%

Domestic 5,820 5,740 5,740 5,690 5,468 5,178 5,665 3.6% 0.6%

Alaska 970 960 980 990 910 864 689

- 24.3%

- 4.5%

Lower 48 4,850 4,780 4,750 4,710 4,558 4,314 4,977 9.2% 1.5% Net Imports 9,020 9,310 9,140 9,650 10,061 10,093 9,994

- 0.7%

- 0.1%

Liquids from Natural Gas Plants 1,910 1,870 1,880 1,720 1,809 1,717 1,801

- 0.5%

- 0.1%
Other Inputs

1 350 300 670 440 341 389 1,018 198.4% 20.0%

Ethanol 221 255 692 213.3% 21.0% Liquids from Coal 0 0 0

- - Other 120 134 326 170.9% 18.1%

Net Product Imports 1,400 1,590 1,420 1,640 2,098 2,508 1,797

- 14.3%

- 2.5% Imports 2,390 2,540 2,390 2,600 3,057 3,578 3,025

- 1.0%

- 0.2%

Gross Refined Products 2 2,040 2,080 1,610 1,850 2,069 2,449 1,781

- 13.9%

- 2.5%

Unfinished Oils 270 380 410 340 490 582 409

- 16.5%

- 3.0%

Ethers 80 80

Ethanol 10 7 19 97.1% 12.0% Gasoline Blending Components 3 370 410 488 540 816 67.2% 8.9% Exports 990 950 970 960 959 1,070 1,228 28.1% 4.2%

Refined Petroleum Products Supplied 19,750 19,710 19,700 20,060 20,760 20,750 21,589 4.0% 0.7%

LPG 2,231 2,044 2,163 2,074 2,132 2,030 2,218 4.0% 0.7%

E85 0 0 0 0 0 0 2

- - Motor Gasoline 4 8,500 8,620 8,850 8,940 9,105 9,159 9,531 4.7% 0.8%

Jet Fuel 1,730 1,660 1,610 1,580 1,630 1,679 1,954 19.9% 3.1%

Distillate Fuel & Kerosene 3,670 3,880 3,790 3,930 4,058 4,118 4,532 11.7% 1.9%

Residual Oil 1,050 860 700 770 865 920 786

- 9.2%

- 1.6%

Other 5 2,569 2,646 2,587 2,766 2,970 2,844 2,568

- 13.5%

- 2.4%

Energy Prices ($2004) Crude Oil ($/b) All Imported Crudes 30.00 23.51 24.62 28.46 36.09 47.87 49.82 Imported Low Sulfur Light Crudes 41.72 55.24 55.93 Natural Gas ($/mcf)

Lower 48 Wellhead 3.90 4.35 3.07 5.08 5.64 7.31 5.60

Industrial End

- Use 4.79 5.28 4.00 5.77 6.68 8.43 6.63 Electricity, Industrial End

- Use (¢/Kwh) 5.0 5.1 5.2 5.3 5.3 5.5 6.0

Domestic Refining Crude Distillation Capacity (K b/d) 16,600 16,800 16,800 16,800 16,947 17,126 17,822 Capacity Utilization (%) 93.0 93.0 91.0 93.0 93.0 91.0 89.1

Note: Projected growth rates are calculated using 2004 as the base year because of the impact of hurricane Katrina in 2005.
1 Includes alcohols, ethers, petroleum product stock withdrawals, domestic sources of blending components, other hydrocarbon s, and coal and natural gas converted to liquid fuel.

2 Includes non

- ether, gasoline blending compon ents for 1999

- 2001.
3 Includes imports of ethers in 2002 and thereafter.

4 Includes ethanol and ethers blended into gasoline.
5 Includes aviation gasoline, petrochemical feedstocks, lubricants, waxes, asphalt, road oil, still gas, special naphthas

petroleum coke, crude oil product supplied, and miscellaneous petroleum products.

Source: Derived from Year

- by

- Year Tables 1, 8, 11, & 12, Annual Energy Outlook 2007 (Early Release), EIA/DOE; and Tables A11, A13, and A14,

Annual Energy Outlook 2007 (and previous), EIA/DOE; and Table B

- 7, Economic Report of the President, 2006

.

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Table B

- 3: Projected Growth in Use of Refined Products,

by Region

2004 to 2010

Region

Petroleum PADD P 4&5 ex

Product 1 2 3 1 AZ/NV/CA Calif. 2 Total

Total Growth

Motor Gasoline 1 4.5% 3.2% 6.9% 6.7% 4.9% 4.7%

Jet & Kerosene 17.2% 17.3% 22.5% 19.7% 21.5% 19.9%

Distillate 7.1% 11.2% 16.3% 16.2% 17.7% 11.7%
Residual Oil

- 14.6%

- 34.5%

- 15.6% 20.5% 26.3%

- 9.2%

Petro Feedstock

- 5.1%

- 5.0%

- 2.3%

- 7.3%

- 8.1%

- 3.5%
Other

- 23.9%

- 26.2%

- 12.5% 1.9%

- 21.1%

- 18.2%

Average Annual

Motor Gasoline 1 0.7% 0.5% 1.1% 1.1% 0.8% 0.8%

Jet & Kerosene 2.7% 2.7% 3.4% 3.0% 3.3% 3.1%

Distillate 1.2% 1.8% 2.5% 2.5% 2.8% 1.9%
Residual Oil

- 2.6%

- 6.8%

- 2.8% 3.2% 4.0%

- 1.6%

Petro Feedstock

- 0.9%

- 0.8%

- 0.4%

- 1.3%

- 1.4%

- 0.6%
Other

- 4.5%

- 4.9%

- 2.2% 0.3%

- 3.9%

- 3.3%

1 Includes ethanol blended into finished gasoline. Note that the regional growth estimates are based on AEO 2006, adjusted for total U.S. growth from AEO2007 (Early Release),
as regional energy use is not provided in AEO 2007 (Early Release). We relied on the AEO20 06 projections as indicators of the relative growth in petroleum energy demands across regions. 1 Includes 50% of Arizona energy use. 2 Includes 50% of Arizona and 100% of Nevada estimated and projected energy use.

Sources: Derived from S upplement Tables 1

- 10, Annual Energy Outlook 2006, DOE/IEA ; Tables 48, 49, & 50 (Prime Supplier Sales), Petroleum Marketing Annual 2004 , DOE/EIA;
Table M21, Federal Highway Statistics 2004

, FHWA; and Census Population Estimates.

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Alliance of Automobile Manufacturers June 2009 Table B

- 6a: Allocation of Annual Gasoline Use by Region, States, and

Gasoline Type

-- 2010 (K b/d)

Gasoline Type

EtOH California RFG

Region Conven

- Mandate Low RVP Areas Federal Federal State Arizona

& State tional (Minn.) 7.8 7.2 7.0 RFG Area Area CBG Total

PADD 1 920 0 826 0 164 1,491 0 0 0 3,401

Subdistrict 1A 52 0 32 0 375 0 0 0 459

Connecticut 123 123

Maine 16 32 48

Massachusetts 191 191 New Hampshire 13 35 48

Rhode Island 26 26

Vermont 24 24

Subdistrict 1B 98 0 354 0 792 0 0 0 1,244

Delaware 28 28

District of Columbia 10 10 Maryland 16 163 178 New Jersey 290 290

New York 52 128 206 386 Pennsylvania 30 227 94 351

Subdistrict 1C 771 0 439 164 324 0 0 0 1,697

Florida 292 274 567 Georgia 125 63 151 339

North Carolina 118 78 100 296

South Carolina 109 64 173 Virginia 92 173 266 West Virginia 34 23 57

PADD 2 1,212 188 527 0 303 466 0 0 0 2,697

Illinois 125 233 357

Indiana 83 104 6 31 223

Iowa 113 113

Kansas 71 22 93 Kentucky 117 2 3 36 158 Michigan 75 99 168 341

Minnesota 188 188

Missouri 121 102 223

Nebraska 60 60

North Dakota 25 25

Ohio 81 281 362

Oklahoma 103 31 134

South Dakota 30 30

Tennessee 85 127 212

Wisconsin 124 9 43 177

PADD 3 648 0 330 0 62 403 0 0 0 1,443

Alabama 148 33 182

Arkansas 101 2 103

Louisiana 82 64 22 167 Mississippi 116 116

New Mexico 66 66

Texas 135 266 27 381 810

PADDs 4 & 5 ex CA 394 67 391 0 0 0 0 0 119 971

Alaska 23 23

Arizona 79 119 198

Colorado 49 92 140

Hawaii 34 34

Idaho 41 41

Montana 33 33

Nevada 13 76 89 Oregon 59 58 117

Utah 16 52 68 Washington 91 113 204 Wyoming 23 23

CALIFORNIA 746 273 1,019

UNITED STATES 3,174 255 2,074 0 529 2,361 746 273 119 9,531

1 We assume spillover of a small volume of CaRFG into Nevada occurs in 2008 and report it as State CBG. Note: Gasoline is classified by the area into which it is sold. Volumes reflect year

- long (annual, rather than seasonal)

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Table B

- 7: Projected Ethanol Annual Use, by Region

and Source of Gasoline Supply, 2010

K b/d

In Gasoline By Source Region/ Consumed of Gasoline

Source in the Region Supply

PADD 1 340 78

PADD 2 270 194

PADD 3 144 418

PADDs 4&5 ex CA 97 66

California 102 108
Imports 1

- 88

Total

K b/d 953 953 Bgy 14.6 14.6

1 Includes ethanol blended with imported finished gasoline and gasoline blendstocks.

Source: Derived from Exhibits B

- 6a, B

- 6b, B

- 6c, and B

- 6d.

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Alliance of Automobile Manufacturers June 2009 Table C

- 2, cont: Average Properties of RFG and CG, by PADD of Origin, 2002

- 2004

PADD 3

RFG CG 1 Pool

2002 2003 2004 2002 2003 2004 2002 2003 2004

Alliance Surveys
Rvp (psi) 6.8 7.0 6.9 7.5 7.5 7.4 7.4 7.4 7.3 Oxygen (wt%) 2.0 2.1 2.1 0.1 0.1 0.2 0.5 0.6 0.6

MTBE (vol%) 10.1 10.9 10.8 0.6 0.7 0.7 2.7 2.9 2.9

Tame (vol%) 1.0 0.7 0.7 0.0 0.0 0.2 0.2 0.2 0.3

Ethanol (vol%) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Aromatics (vol%) 20.7 21.9 23.5 30.4 31.3 31.9 28.3 29.3 30.1 Benzene (vol%) 0.54 0.57 0.54 0.98 0.95 0.98 0.88 0.87 0.89 Olefins (vol%) 9.6 10.0 11.1 10.6 10.4 10.0 10.4 10.3 10.2 Sulfur (ppm) 165 123 78 331 244 90 295 218 87 E200 (%off) 48.9 50.2 49.1 41.7 41.5 42.7 43.2 43.4 44.1 E300 (%off) 83.1 82.7 81.7 78.1 77.7 79.7 79.2 78.8 80.1

DI 2 1,153 1,141 1,157 1,209 1,214 1,194 1,197 1,198 1,186 Octane (R+M)/2 88.0 88.0 88.2 88.1 88.2 88.3 88.1 88.1 88.3

EPA Refinery Reports Rvp (psi) 6.8 8.1 7.8 Oxygen (wt%) 2.3 0.1 0.6

MTBE (vol%) 8.9 0.7 2.5

Tame (vol%) 0.7 0.1 0.2

Ethanol (vol%) 1.6 0.0 0.3 Aromatics (vol%) 18.3 26.3 24.6 Benzene (vol%) 0.55 0.95 0.86 Olefins (vol%) 10.9 12.8 12.4 Sulfur (ppm) 131 308 270 E200 (%off) 49.1 43.8 45.0 E300 (%off) 84.3 78.4 79.6

EPA Federal RFG Area Surveys
RVP (psi) 6.8 6.8 6.9 Oxygen (wt%) 2.1 2.1 2.1

MTBE (wt%) 10.5 10.9 11.0
TAME (wt%) 0.9 0.9 0.8
Ethanol (wt%) 0.0 0.0 0.0 Aromatics (vol%) 19.9 19.2 21.0 Benzene (vol%) 0.59 0.61 0.57 Olefins (vol%) 11.3 11.3 11.2 Sulfur (ppm) 147 132 71 E200 (%off) 48.9 49.9 49.0 E300 (%off) 83.6 83.6 81.9

1 Includes low

- RVP gasoline

2 Does not include an adjustment to account for the adverse effects of ethanol on driveability

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### Chapter 2

2B 

### Emission Benefits of a National Clean Gasoline

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## Emission Benefits of a National Clean Gasoline (NCG)

August 2008

f or

Alliance of Automobile Manufacturers

by

Air Improvement Resource, Inc. 47298 Sunnybrook Lane Novi, Michigan

48374

248

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- 3140

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Alliance of Automobile Manufacturers June 2009 

### CONTENTS

1.0 E XECUTIVE 

### S UMMARY



### ................................ ................................ .... 2

— 1

2.0 I NTRODUCTION



### ................................ ................................ ............... 2

— 6

3.0 E MISSION 

### I NVENTORY 

### M ETHOD



### ................................ ........................ 2

— 8

3.1 Overview

................................ ................................ ................................ ................... 2

— 8

3.2 Fuel Characteristics by PADD

................................ ................................ .................. 2

— 8

3.3 EPA and ARB Predictive Models

................................ ................................ ............. 2

— 9

3.3.1 EPA Predictive Model

................................ ................................ ........................ 2

— 10

3.3.2 ARB Predictive Model

................................ ................................ ........................ 2

— 10

3.4 Results from EPA MSAT Testing of Tier 2 Vehicles

................................ ............ 2

— 13

3.5 Model Used in This Analysis

................................ ................................ .................. 2

— 16

3.6 MOBILE6.2 Technology Fractions

................................ ................................ ........ 2

— 16

3.7 Vehicle Activity Inputs

................................ ................................ ........................... 2

— 17

3.8 MOBILE6 Inputs

................................ ................................ ................................ .... 2

— 18



### 4.0 R ESULTS



### ................................ ................................ ..................... 2

— 20

4.1 Emission Percent Changes

................................ ................................ ...................... 2

— 20

4.2 Emission Inventory Changes

................................ ................................ .................. 2

— 21

4.3 Other Emission Reductions

................................ ................................ ..................... 2

— 24



### 5.0 D ISCUSSION



### ................................ ................................ ................ 2

— 25

R EFERENCES



### ................................ ................................ ........................ 2

— 28

A PPENDIX



### . E MISSION 

### C HANGES VS 

### RVP

................................ ................ 2

— 29

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### Emission Benefits of National Clean Gasoline

1.0 Executive Summary

Background. Several programs directed at changing the formulation of gasoline have provided dramatic reductions in VOC, CO, NOx and SOx emissions in the last 14 years. First, Federal and

Cali fornia Phase 1 reformulated gasoline reduced emissions in the early to mid

- 1990s. California Phase 2 reformulated gasoline reduced emissions in California in 1996, and Federal Phase 2

reduced emissions in non

- California areas in 2000. The Tier 2/Low sulfur regulations implemented by EPA in 2004 further reduced sulfur levels to improve catalytic converter performance and further reduce SOx emissions. Finally, California is finalizing changes to its RFG3 regulations, which involve the implementation of a new Predictive Model for evaluating alternative specifications to the California RFG3 specifications and adding the effects of new exhaust emissions data and ethanol permeation effects into the model.

In spite of the contributions to improved air quality that the above reformulations have made, further changes in gasoline specifications could be very beneficial. They would reduce emissions further, helping the states to attain the newly adopted 8

- hour ozone standards and other environmental objectives. Loweri ng the sulfur level, in particular, would enable new lean

burn spark ignition engines to be used in the U.S., which can reduce greenhouse gas emissions relative to conventional spark ignition engines. The Alliance of Automobile Manufacturers

initiated this study to estimate the emission benefits of a National Clean Gasoline NCG).

The specifications for National Clean Gasoline include a 7 RVP summertime limit, a 10 ppm sulfur cap, and a 1250 driveability index cap. D riveability index would be estimated with the recently revised ASTM DI equation, which adds an ethanol term , and newly adopted cap of

1250

.

F 19

F NCG would continue the 1 psi RVP waiver for NCG that replaces conventional gasoline, but would not continue the waiver in states with low RVP gasoline in the summer, whether or not they currently have a 1 psi waiver for ethanol.

Methodology. In areas with Conventional gasoline, RVP levels would be reduced from about 9.7 psi on average to just below 7 psi, and average sulfur levels would be reduced from about 30 ppm to 5 ppm. In areas with low RVP gasoline (either 7.8 or 7.2 psi), RVP would also be

redu ced to just under 7 psi, and average sulfur to about 5 ppm. Finally, in RFG areas, RVP is already under 7 psi, so average sulfur would be reduced from just under 30 ppm to about 5 ppm. There would be small changes in other fuel properties, such as aromatic s, olefins, and distillation properties (E200 and E300), as determined in a separate cost analysis conducted by Math Pro

, Inc.

Math Pro , Inc. estimated typical fuel properties that would occur in states in the part of the county generally east of the Rocky Mountain States (i.e., in Petroleum Administration Defense

Districts 1

- 3) if NCG were implemented. We used the fuel property information for the

Reference Case and for the NCG case from the Math Pro report to estimate the emission benefits

of NCG in PADDs 1

- 3.

19 The Alliance stands behind its own D istillation I ndex (which uses a different correction factor than the ASTM

index ) and recommen ded cap of 1200 as a way to further reduce emissions but specified the ASTM equation and cap for NCG to minimize fuel production cost estimates performed in a separate analysis.

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Alliance of Automobile Manufacturers June 2009 The MOBILE6 model was used to estimate baseline exhaust and evaporative emissions for the

on

- road fleet for 2010, 2015, and 2020, and also the evaporative hydrocarbon benefits of lower volatility due to NCG. The California ARB Predictive Model was use d with the MOBILE

generated baseline inventories to estimate the exhaust emission benefits of NCG. This model was modified slightly from the default model released by the ARB in May 2008 to include the RVP term on exhaust emissions. We also performed an em ission inventory sensitivity case, where we utilized emission testing performed by EPA as a part of the Mobile Source Air Toxics Rule on Tier 2 vehicles to develop fuel correction factors for Tier 2 vehicles.

Emissions were estimated on a county

- by

- county basis, using mostly local inputs. Inspection and Maintenance programs were also included where applicable. We also estimated separate benefits for areas with conventional gasoline, low RVP gasoline, and reformulated gasoline (RFG).

Results. NCG has a si gnificant effect on evaporative HC and exhaust NOx emissions, as shown in the chart below. This chart shows the percent reductions for 2010, 2015, and 2020 for all three PADDs. Evaporative HC reductions range from 12%t o 19%, and exhaust NOx reductions ran ge from 10% to 14%. Exhaust HC reductions range from 1% to almost 4%.

To show how the emission reductions compare with total on

- road inventories, baseline and NCG

inventories are shown in the two charts below. Total on

- road HC and NOx are reduced signifi cantly by NCG. These emission reductions would be important to states trying to meet the new, more stringent ozone ambient air quality standard adopted by the EPA.

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Alliance of Automobile Manufacturers June 2009

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Alliance of Automobile Manufacturers June 2009 We believe this emission inventory analysis is conservative. Our examination of the EPA MSAT Tier 2 vehicles showed that they were more sensitive to sulfur reductions than the ARB model indicates. If this higher sensitivity is included for Tier 2 (2007 and later fully phased

- in Tier 2 vehicles) vehicles, the emission benefits of NCG i ncrease from the above. This is shown in the

two charts below.

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Alliance of Automobile Manufacturers June 2009

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Alliance of Automobile Manufacturers June 2009 2.0 Introduction

Currently, 3 basic types of gasoline are used in non

- California areas of the U.S.

– conventional gasoline (CG), low RVP gasoline, an d federal reformulated gasoline (RFG)

. Most reformulated gasoline contains ethanol and is required in urban areas with severe ozone non

- attainment problems, as defined under the Clean Air Act

. A reas with less severe ozone non

- attainment problems have been allowed to adopt different fuel quality requirements, and many of those

areas have implemented low RVP gasoline to obtain additional evaporative VOC reductions compared to conventional gasoline. Conventional gasoline is used in the remainder of the nation.

The use of ethanol in all gasolines is increasing, both with EPA’s 2005 Renewable Fuel Standard (RFS) requirements, and now with the adoption of the Energy Security and Independence Act of

2007.

In 2004, EPA implemented low sulfur gasoline requirements, which limited maximum sulfur levels to 80 ppm and reduced average sulfur levels to 30 ppm and below. This reduction in sulfur improves catalytic converter performance, thereby reducing a variety of emissions from the

entire gasoline

- powered vehicle fleet. In 2007, EPA reduced toxic emission s from gasoline

powered vehicles and non

- vehicle evaporative emission sources by requiring benzene to be

reduced to 0.6 wt %.

In spite of the improvements in gasoline quality and emissions characteristics, additional improvements in gasoline can be identified that w ould further reduce emissions, and also reduce the number of different fuels used in the U.S. For example, the RVP o f conventional gasoline could be reduced, thereby reducing evaporative VOC emissions. Sulfur levels could also be further reduced, reducing exhaust VOC, CO, and NOx emissions.

F 20

F For purposes of investigation, the Alliance of Automobile Manufacturers deve loped a proposed gasoline specification called National Clean Gasoline (NCG) and undertook to study the fuel’s

emissions and costs . Estimated costs are contained in a companion report ―Refining Economics

of a National Clean Gasoline Standard for PADDs 1

- 3‖ (hereafter referred to as the ―Math Pro report‖) and the emissions inventory analysis is contained in this report. [1] The key limits for

National Cle an Gasoline are shown below.

 Sulfur cap: 10 ppm
 RVP cap : 7.0 psi
 D riveability Index cap: 1250

NCG is ass umed to have a benzene level consistent with EPA’s recent Mobile Source Air Toxics Rule, or 0.62 % by volume. [2] In addition, it is assumed to contain 10% ethanol by volume. There are no additional requirements for aromatics, olefins, E200, or E300. The driveability index cap is intended to provide better national control over the entire distillation range, especially as the RVP is reduced to 7.0 psi.

F 21

F In the above requirement, DI is estimated with the ASTM recently revised formula:

DI = 1.5*T10 + 3*T5 0 + T90 + 2.403*ETOH Vol % [3]

20 With the implementation of the revised Predictive Model in 2010 in Califor nia, it is likely that sulfur levels in California will be reduced to around 10 ppm, or 1/3 of the remainder of the U.S.

21 ASTM limits gasoline DI to 1250, but the standard applies at the refinery gate, not at retail (i.e., after blending with ethanol), an d not all states require the ASTM standard. The Alliance’s North American Fuel Survey conducted in the summer of 2007 showed several gasoline samples exceeding 1250 DI.

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Alliance of Automobile Manufacturers June 2009 Regarding the RVP waiver for ethanol blends in some states, NCG would continue the 1.0 psi RVP waiver for NCG that replaces conventional gasoline, but would not continue the waiver in states with low RVP gasoline in the summe r, whether or not they currently have a 1 psi waiver for ethanol. The reason for not continuing a 1 psi waiver in states that have low RVP is the assumption that these states are implementing low RVP to achieve air quality benefits, and

continuation of the waiver undermines these benefits.

This report addresses the emission inventory benefits of NCG in PADDs 1, 2, and 3 of the U.S.

F 22

F These three areas are shown in Figure 1, and comprise states in the eastern part of the U.S.

Figure 1

PADDs 4 and 5 were not evaluated because PADD 5 is predominantly California , whose fuel is already very close to NCG, and PADD 4 includes the mountain states where there are few ozone

nonattainment areas and relatively small gasoline volumes compared to the rest of the country

. This study uses fuel parameter inputs developed from the Math Pro report, and several different emission models to estimate emission inventory benefits of NCG. NCG is assumed to be fully implemented in 2010, and VOC and NOx emission benefits for on

- road vehicles are estimated for the 2010, 2015, and 2020 calendar years. There would be additional emission benefits from

off

- road equipment and vehicles for this fuel, but these are not evaluated in this report.

The remainder of this report is divided into the following sections:

 Section 3: Methods
 Section 4: Results
 Section 5: Discussion

22 PADD refers to Petroleum Administration for Defense District.

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Alliance of Automobile Manufacturers June 2009 3.0 Emission Inventory Method

3.1 Overview

Determining the emission benefits of NCG depends on having fuel characteristics for the states

in the 3 PADDs for the reference case and for the control scenarios. This information is available

from the Math Pro report.

In this analysis we estimate d the baseline VOC and NOx emission inventories with the MOBILE6.2 model. Emission inventories are estimated for exhaust and evap orative VOC, and NOx, from all on

- road gasoline vehicles except motorcycles.

To estimate inventories for NCG, we estimate d the evaporative VOC d ifferences based on RVP change s using the MOBILE6.2 model. But the exhaust emission differences cannot be estimated with MOBILE6.2 alone because the MOBILE model does not accept the different fuel inputs and evaluate their effects on exhaust emissions, other than sulfur, RVP and oxygen ates.

F 23

F To estimate the effects of NCG on exhaust inventories, the ARB Predictive Model was used to estimate the percent difference s in exhaust emissions, and the percent differences were applied to
exhaust emissions estimated from MOBILE6.2.

F 24

F The re m a inder of this section is divided into the following subsections:

 Fuel Characteristics by PADD
 EPA and ARB Predictive Models
 Results from EPA MSAT Testing of Tier 2 Vehicles
 Technology Fractions from MOBILE6.2
 Vehicle Activity Estimates
 MOBILE6 Inputs

3.2 Fuel Characteristics by PADD

The Math Pro report developed the costs of a national clean gasoline. The report contains tables

that describe the estimated characteristics of gasolines produced in PADDs 1, 2, and 3 under the

reference case and NCG cases , based on refinery modeling . The report also contains tables that

show the estimated volumes of fuels used in each PADD, and their source s (which PADD the gasoline came from).

Table B

- 6b of the Math Pro repor t shows the projected annual gasoline use and supply sources by region and type of gasoline. Tables D4a, D4b, and D4c show the average gasoline properties produced in each PADD for the 2010 Reference Case (baseline), and Study Cases 1

- 3. The

emission inven tory analysis only evaluated the Reference Case and Study Case 3 (full implementation of NCG).

F 25

F For each PADD, we weighted the fuel properties produced by

PADD in Math Pro ’s report by the volumes of fuel consumed in each PADD by their PADD

location. The r esulting fuel properties of fuel consumed by each PADD under the Reference Case and Study Case 3 are shown in Table 1.

23 While only RVP, su lfur and DI are controlled under NCG, other properties such as aromatics, olefins, E200, and E300 also change under NCG, and these changes must be taken into account in the emissions analysis.

24 The EPA Predictive Model was also evaluated, but the ARB Pre dictive Model was selected for this study. This is

discussed further in this section.

25 Math Pro also evaluated two study cases which phased

- in NCG, but for this analysis of emission inventory benefits, we wanted to consider only the fully phased

- in NCG re quirements.

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Alliance of Automobile Manufacturers June 2009 Fuel properties are shown for four regions for the reference case

– conventional, 7.8 RVP, 7.0 RVP, and RFG. Under NCG, the conventional, 7.8, and 7.0 RVP are converted to National Gasoline, and RFG is also modified to form a national clean RFG. As shown i n the table, the biggest changes are in RVP and sulfur. For example, RVP in conventional areas in PADD 1 is reduced from 9.7 to 7.27, and sulfur is reduced from 30 to 4.77 ppm. The reductions in RVP for RFG areas are much smaller because gasoline that meet s RFG requirements already has very low

RVP to reduce VOC emissions.

3.3 EPA and ARB Predictive Models

The NCG requirements reduce fuel volatility and sulfur levels, and also implement a DI cap. The

MO BILE6.2 model can be used to evaluate the impacts of volatility changes on evaporative emissions. The model is also capable of evaluating sulfur changes, but the model includes a sulfur floor of 30 ppm, such that values that are input below 30 ppm will be reset to 30 ppm. As

a result of this limitation and the fact that other fuel properties besides sulfur and volatility are changing, other models need ed to be considered for evaluating the exhaust emission changes. In this analysis, we considered the use of an EPA Predictive Model a near

- final version of the ARB Table 1. Weighted Average Properties of Fuels Used by PADD

PADD Scenario Fuel Type RVP

(psi) Oxy

(wt%) Arom

(vol%) Benz

(vol%) Olef

(vol%) Sulfur

(ppm) E130

(%) E200

(%) E300

(%)

1 Reference Conventional 9.70 3.24 24.72 0.620 11.72 30.00 10.32 51.86 77.83

7.8 RVP 7.63 3.48 23.61 0.620 11.63 30.00 7.52 46.87 81.98

7.0 RVP 6.96 3.48 26.00 0.620 9.88 30.00 6.47 43.00 88.39

RFG 6.94 3.48 17.38 0.593 11.52 30.00 7.25 46.09 81.93

NCG Nat'l Gas 7.27 3.48 26.33 0.620 6.32 4.77 6.54 48.04 78.83

RFG/Nat'l Gas 6.80 3.48 16.99 0.593 10.96 4.70 6.91 44.14 82.12

2 Reference Conventional 9.70 3.45 23.33 0.620 10.74 30.00 10.75 52.53 77.56

7.8 RVP 7.75 3.48 14.66 0.620 10.53 30.00 8.61 49.95 85.57

7.0 RVP 7.17 3.48 29.49 0.620 8.76 30.00 6.15 42.94 90.01

RFG 6.97 3.48 16.00 0.617 8.54 30.00 7.37 43.73 87.44

NCG Nat'l Gas 7.43 3.48 24.29 0.620 7.22 4.20 6.85 49.04 80.08

RFG/Nat'l Gas 6.80 3.48 16.04 0.617 3.89 4.61 7.45 42.19 85.54

3 Reference Conventional 9.70 3.21 24.52 0.620 10.96 30.00 10.25 52.96 78.46

7.8 RVP 7.64 3.48 21.45 0.620 7.00 30.00 7.09 50.63 87.74

7.0 RVP 6.96 3.48 26.00 0.620 9.88 30.00 6.47 43.00 88.39

RFG 6.81 3.48 16.01 0.601 10.10 30.00 7.57 42.30 81.35

NCG Nat 'l Gas 7.34 3.48 24.21 0.620 5.44 4.98 6.78 48.78 79.92

RFG/Nat' l Gas 6.80 3.48 16.24 0.601 10.95 4.98 6.67 44.31 87.53

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Alliance of Automobile Manufacturers June 2009 Predictive Model. We also evaluate d the recent EPA MSAT testing on Tier 2 vehicles to see how it would compare to these models.

3.3.1 EPA Predictive Model

AIR obtained an EPA Predictive Model spreadsheet from EPA. [4] The spreadsheet included the coefficients of several models that were developed by the EPA based on the CRC E

- 67 testing program. [5] EPA based the models on the results of this program bec ause it was the testing program available at the time that EPA evaluated alternative predictive models. The CRC E

- 67 testing program evaluated changes in fuel RVP, T50, and T90, but did not evaluate changes in sulfur levels below 30 ppm. Therefore, we woul d not expect this EPA Predictive Model to adequately reflect changes in emissions that would occur with low sulfur levels, but to confirm this expectation we evaluated the model further.

EPA fitted a number of different emission models through the E

- 67 dat a, and then averaged several of the best models for HC and NOx. We plotted VOC and NOx emissions versus sulfur level from the EPA combined Predictive Model, as shown in Figure 1. The figure shows very little change in emissions versus sulfur (the y axis s cale is small). For example, reducing sulfur from 50 ppm to 10 ppm reduces THC by just over 0.8% and NOx by 0.6%. These small changes are not consistent with either the ARB Predictive Model or the MSAT data, as shown in later sections. Therefore, the EPA P redictive Model was not used in this analysis.

Figure 1

3.3.2 ARB Predictive Model

California released proposed modifications to the Predictive Model in June 2007 and May 2008. [6,7] This followed approxima tely 3 years of work and stakeholder meetings in which the ARB added new emissions data, developed new analytical methods, and received much input, including additional analytical work from the stakeholders. This analysis uses the June 2007

version of the Predictive Model. Before finalizing this report we compared the two versions of

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Alliance of Automobile Manufacturers June 2009 the model to determine the effect that the later version of the model would have on estimated NCG benefits, and found that these benefits would increase slightly if the later v ersion of the

model were used.

The ARB Predictive Model includes the following fuel parameter inputs:

 RVP
 T50
 T90
 Sulfur
 Aromatics
 Olefins
 Benzene

The model estimates percent changes in VOC, NOx, and toxics emissions in comparison to those

of the Californ ia Phase 3 reformulated gasoline reference specifications. The Predictive Model is used by gasoline marketers to certify that alternative gasoline formulations will comply with the California Phase 3 regulation.

Figure 2 shows VOC and NOx emissions vs sul fur for the ARB Predictive model and the EPA

Predictive Model discussed earlier. The ARB Predictive Model shows that emissions are more

sensitive to sulfur than the EPA Predictive Model.

F 26

26 There are changes in emissions with other fuel properties as well, but these are not shown, as the primary effects are for sulfur and RVP. For further information on the effects of these fuel properties, please refer to the ARB

Predictive Mo del report.

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Alliance of Automobile Manufacturers June 2009 Figure 2

The Predictive Model estimates emission percent changes in calendar year 2015 from emission percent changes by 3 different technology groups

– Tech 3, Tech 4 and Tech 5 vehicles. The model year groups of these vehicles are as follows:

 Tech 3: 1981

- 1985 vehicles
 Tech 4: 1986

- 1995 vehicles
 Tech 5: 1996+ vehicles

For application in this study, we used the individual Tech group functions, rather than the aggregated Predictive Model output, because the aggregated model year output is only applicable for calendar year 2015, and this study evaluates from 2010 to 2020. This required the development of technology group fractions from the MOBILE6.2 model for this purpose. Section 3.6 shows these technology fractions as developed from MOBILE6.2.

The ARB PM needed one modification to be used in this analysis. The default ARB model does not include a term for the effect of RVP on exhaust emissions (the term occurs, but is ―zeroed out‖ in the model). The reason for this is that RVP values in California are in a very tight range around 7 RVP, and in that tight range, exhaust emissions are not expected to change. However,

in non

- California areas RVP in the summer can vary from 7 to 9 RVP. For this reason, we allowed the model to include the RVP term. No RVP interaction terms (such as RVP * sulfur, and RVP * T50) are pr esent.

F 27

F Appendix 1 shows a chart that illustrates how emissions change for RVP, and also compares the changes in exhaust emissions from the ARB PM to the MOBILE

model for exhaust.

27 The underlying RVP data used to develop the modified ARB model ranged from 6 to 10 psi.

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Alliance of Automobile Manufacturers June 2009 3.4 Results from EPA MSAT Testing of Tier 2 Vehicles

In preparation for implementing its Mobile Source Air Toxics rule, which was published in February of 2007, EPA conducted a vehicle test program with vehicles certified to the Tier 2 emission standards, where the vehicles were tested on a range of several fuel properties. [8]

The fuel properties varied in this testing program included RVP, sulfur, and benzene.

For this part of the analysis, we developed a model that predicts emissions versus fuel sulfur and RVP, based only on the MSAT data, so that the re sponse of the Tier 2 vehicles could be compared to the ARB model for Tech 3, Tech 4, and Tech 5 vehicles. In the following two figures, we have estimated the change for each vehicle in VOC and NOx emissions from the base sulfur value of 32 ppm to 6 ppm. Fi gure 3 for THC shows that 7 of the 9 vehicles show percent reductions of between 7% and 22% for reducing sulfur from 32 ppm to 6 ppm. Two vehicles show increases in THC emissions of 4% and 7%, respectively, but the average reduction is 11%. Figure 4 for N Ox shows that all 9 vehicles experienced reductions with lower sulfur. The NOx reductions range from 10% to over 50% reduction, and the average reduction is 33%.

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Alliance of Automobile Manufacturers June 2009 Figure 3

Figure 4

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Alliance of Automobile Manufacturers June 2009 Figures 5 and 6 show the percent changes in VOC and NOx emissions between 0 and 50 ppm sulfur for the ARB Predictive Model modified to include an RVP term, and the results of the MSAT data. The results show that the Tier 2 vehicles have the most sensitive response to reductions in sulfur levels. This is important becaus e Tier 2 vehicles will dominate the light duty

fleet in the 2015

- 2020 timeframe.

Figure 5

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Alliance of Automobile Manufacturers June 2009 Figure 6

3.5 Model Used in This Analysis

For most of this study, we use the individual Tech group responses of the ARB Predictive Model to evaluate the emission differences due to changes in fuel parameters for NCG. However, we conduct one sensitivity analysis where we used the ARB Predictive Mod el for Tech 4 and Tech 5 vehicles, and use the MSAT response for sulfur for fully phased

- in Tier 2 (2007 and later) vehicles. The purpose of this case is to show the effects of the more Tier 2 vehicles on the results, if their emissions response is more s ensitive to reduced sulfur levels, as indicated by the

MSAT data.

3.6 MOBILE6.2 Technology Fractions

The use of the ARB Predictive Model requires the development of technology fractions for the

three ARB technology groups from MOBILE6.2 information. However, since Tech 3 vehicles

include those of 1981

- 1985 model years, and since the first calendar year of evaluation is 2010 and MOBILE only computes emissions for 25 model years, there is no need to esti mate the Tech 3 fractions. Using MOBILE6, technology fractions were estimated for 2010, 2015, and 2020 for

Tec h 4 and Tech 5 vehicles. These fractions are shown in Figure 7.

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Alliance of Automobile Manufacturers June 2009 Figure 7

The figure shows that Tech 5 vehicles (1996+) dominate the 2010

- 2020 timeframe.

3.7 Vehicle Activity Inputs

Vehicle miles traveled (VMT) by vehicle class (all gasoline classes individually except motorcycles) and I/M status was estimated for 2010, 2015 and 2020 utilizing th e Clean Air Interstate Rule (CAIR) model inputs, and aggregating the VMT over each PADD area on a by

county basis.

F 28

F [9] VMT by PADD and I/M status is shown in Figure 8.

28 The CAIR rule was a recent rule that EPA modeled that contain mobile modeling inputs.

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Alliance of Automobile Manufacturers June 2009 Figure 8

3.8 MOBILE6 Inputs

Temperatures

– we used summer average minimum and maximum temperatures of 72F and 96F because this is the range of temperatures used by EPA to estimate the cost effectiveness of vehicle emission controls in a number of vehicle rulemakings.

Speeds

- Default MOBILE6.2 roadway types and speeds were utilized.

Inspection and Maintenance Inputs

– Using EPA’s National Mobile Inventory Model, (NMIM),
AIR determined the counties that have I/M, and in each PADD, modeled I/M and non I/M areas separately. [10] Although there may be considerable variation in I/M programs throughout the regions, all I/M programs were modeled as ― enhanced. ‖ T he I /M program values are shown in

T able 2. The table shows two I/M programs

– one for 1996

- 2050 vehicles (I/M Program 1 OBD only) and one for 1995 and earlier (I/M Program 2).

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Alliance of Automobile Manufacturers June 2009 

### Table 2. I/M Program Descriptions

Parameter I/M Program 1 I/M Program 2

Program Type OBD, Test Only IM240, Test Only

Calendar Years 2002

- 2050 1998

- 2050

Inspection Frequency Biennial Biennial

Model Years 1996

- 2050 1974

- 1995

Vehicles LDGV

- LDGT4 LDGV

- LDGT4

Stringency 20% 20%

Compliance 96% 96%

Waiver Rates 3% pre MY81, 3% MY81+ 3% pre MY81, 3% MY81+

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Alliance of Automobile Manufacturers June 2009 4.0 Results

This section presents the results of the inventory analysis. We discuss the percent changes in exhaust and evaporative emissions first, followed by the inventory impacts in tons per summer day.

4.1 Emission Percent Changes

The emission percent changes produced by implementing NCG are shown in Figure 9. The figure shows the percent reductions for exhaust VOC, evaporative VOC, and NOx. The percent reductions are shown by PADD and for 2010, 2015, and 2020.

The exhaust VOC and exhaust NOx benefits of NCG increase somewhat in each five

- year increment between 2010 and 2020. The increase between 2010, 2015, and 2020 is due to the phase

- out of Tech 4 vehicles with smaller benefits than Tech 5 vehicles.

Evaporative percent benefits are slightly lower in 2015 than in 2010, but stay constant between 2015 and 2020. On a percent basis, the evaporative benefits are the largest compared to exhaust emission reductions, ranging between 12% and 20% depending on the PADD. Th e NOx reductions range between 10% and 14%, and the exhaust VOC reductions range between 1% and

4%.

Figure 9

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Alliance of Automobile Manufacturers June 2009 4.2 Emission Inventory Changes

The emission inventory impacts by PADD and calendar year are shown in Figure 10. Total reductions for all 3 PADDS are also shown. Exhaust VOC impacts for the 3 PADD area are about 4 tons per day for all 3 years. Evaporative VOC impacts are 55 tpd in 2010, 39 tpd in 2015, and about 30 tpd in 2020. NOx impacts are 90 tpd in 2010, 64 tpd in 2015, and 49 tpd in

2020.

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Alliance of Automobile Manufacturers June 2009 Figure 10

Figures 11 and 12 show the change in emissions for NOx and total VOC from the base case to the NCG case, both by PADD, for the t otal of the PADDs, and by calendar year. NCG provides very significant reductions in both total VOC and NOx, continuing out to 2020. These reductions would be very valuable to states trying to attain either the existing or recently tightened 8

- hour

ambient ozone standard

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Alliance of Automobile Manufacturers June 2009 Figure 11

Figure 12

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Alliance of Automobile Manufacturers June 2009 4.3 Other Emission Reductions

In addition to reducing VOC and NOx, NCG probably also reduces other pollutants, such as carbon monoxide (CO), various toxics spec ies, and two greenhouse gases

– methane and nitrous oxide (N2O). CO would be reduced because it is the improvement in catalyst efficiency with lower sulfur that reduces both exhaust VOC and NOx, and would reduce CO as well. The exhaust toxic species such a s 1,3 butadiene and formaldehyde are usually estimated as a ratio to total exhaust VOC. If total exhaust VOC is being reduced with lower sulfur, then toxics would also be reduced. Finally, methane is also usually estimated as fraction of total exhaust VOC, so methane would be reduced, and N2O is fraction of total NOx, so if NOx is being reduced, then N2O is also being reduced.

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Alliance of Automobile Manufacturers June 2009 5.0 Discussion

The previous section shows that the reduction in sulfur and RVP will significan tly reduce VOC

and NOx emissions from the on

- road fleet, and continue to do so in the future with Tier 2 vehicles. These results are dependent on several variables, including the accuracy of projected fuel property changes in different regions of the U.S., the accuracy of such inputs as the vehicle fleet composition and VMT and the accuracy of the emission estimates produced by the MOBILE model (for evaporative emissions) and the ARB Predictive Model (for exhaust emissions).

With regard to changes in evapor ative emissions from MOBILE, these benefits are based on RVP tests on pre

- enhanced evaporative vehicles. Enhanced evaporative vehicles which started with the 1996 model year, and Tier 2 evaporative vehicles with lower exhaust standards, which

started in th e 2004 model year, could be less sensitive to changes in RVP than MOBILE indicates because of the greater degree of control these vehicles have of evaporative emissions. This can probably only be resolved through testing. For the time being, we have to rel y on MOBILE6’s predictions.

With regard to changes in exhaust emissions using the ARB Predictive model and the modifications made to enable modeling of RVP tailpipe effects, there is the normal level of uncertainty associated with the accuracy of any model . But the primary exhaust emission fuel property in this analysis is sulfur. Our examination of the available emission data indicates that the newest vehicle technologies are more sensitive to sulfur at levels below 30 ppm than older technologies, and so w e conclude that the exhaust emission reductions estimated in this study are reasonable. And, as indicated in the next paragraph and plots, the case could be made that the

reductions we have estimated here are too conservative.

Our analysis of the MSAT dat a showed that Tier 2 vehicles appear to be even more sensitive to sulfur than the Low Emission Vehicles tested in earlier testing programs These low emission vehicles were used a foundation for the Tech 5 group in the ARB Predictive Model. We performed a s ensitivity analysis to determine the effect of the higher sensitivity MSAT Tier 2 vehicles, assuming that 2007 and later cars and LDTs would have sulfur effects like the MSAT Tier 2 vehicles instead of the ARB Tech 5 effects. The results are shown in compa rison with the primary results in the previous section in the following two plots (VOC and NOx).

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Alliance of Automobile Manufacturers June 2009 Figure 13

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Alliance of Automobile Manufacturers June 2009 Figure 14

The results show that the VOC and NOx emission inventories decrease further from the primary case (emission benefits of NCG increase). If the MSAT Tier 2 vehicles better represent the effects of sulfur on late model vehicles, then the benefits of NCG as estimated in this study are

conservative.

## National Clean Gasoline

Emission Benefits

2

— 28

Alliance of Automobile Manufacturers June 2009 References

1. ―Refining Economics of a National C lean Gasoline Standard for PADDS 1

- 3‖, for
Alliance of Automobile Manufacturers, Math Pro , October 5, 2007.

2. Fact Sheet: Control of Hazardous Air Pollutants from Mobile Sources: Final Rule to Reduce Mobile Source Air Toxics, EPA420

- F

- 07

- 017, February 200 7.

3. ASTM D4814, Table 1, footnote C.

4. Personal communication with Megan Beardsley, EPA, October 2007.

5. ―Final Report, Effects of Ethanol and Volatility Parameters on Exhaust Emissions‖, CRC Project No. E

- 67, January 30, 2006.

6. 2007 Draft Predictive Model v3.0 (March 26, 2007), www.arb.ca.gov/fuels/gasoline/premodel/premodel.htm

7. California Procedures for Evaluating Alternative Specifications for Phase 3 Reformulated Gasoline Using the California Predictive Model, released May 1, 2008

, www.arb.ca.g ov/fuels/gasoline/premodel/premodel.htm.

8. ―Joint EPA

- Automobile Industry Tier 2 Vehicle Fuel Effects Test Program, Final Report,‖ December 2006.

9. ―Clean Air Interstate Rule, Emissions Inventory Technical Support Document,‖ 4 March
2005, US EPA.

10. Na tional Mobile Inventory Model, http://www.epa.gov/oms/nmim.htm

## National Clean Gasoline

Emission Benefits

2

— 29

Alliance of Automobile Manufacturers June 2009 Appendix

. Emission Changes vs RVP

As indicated in Section 3.3, the ARB PM needed one modification to be used in this analysis.

The default ARB model does not include a term for the effect of RVP on exhaust emissions (the term occurs, but is ―zeroed out‖ in the model). The reason for this is that RVP values in California are in a very tight range around 7 RVP, and in that tight range, exhaust emissions are not expected to change. However, in non

- California areas RVP in the summer can vary from 7 to 9 RVP. For this reason, we allowed the model to include the RVP term. No RVP interaction terms (such as RVP * sulfur, and RVP * T50) are pr esent

The charts below show the percent change in exhaust emissions with RVP for the ARB

Predictive Model with the RVP term not zeroed

- out. We also show the estimated changes in a calendar year 2015 run of MOBILE6 under summertime conditions. The ARB model sho ws

some exhaust HC reductions and minimal NOx reductions for reducing RVP. For comparison, the MOBILE model shows similar HC reductions and a slightly larger NOx reduction. The ARB PM model effects were used in the inventory analysis.

## National Clean Gasoline

Alliance of Automobile Manufacturers June 2009

## National Clean Gasoline

Appendix

Appendix A

Alliance of Automobile Manufacturers June 2009 APPENDIX A

. MathPro Inc.

U 

### Math Pro Inc. Capabilities

Overview

Math Pro Inc. is a consulting firm specializing in technical and economic analysis of the petroleum refining and related industries. The firm is recognized for sound, independent, and objective analysis of refining economics.

The principals of Math Pro Inc., Da vid S. Hirshfeld and Jeffrey A. Kolb, have extensive experience in the analysis of refining technology and economics. They have carried out

numerous studies

– for public and private sector clients

– of regulatory, economic, and technical issues affecting the refining industry in the U.S. and various parts of the world.

The firm’s clients include:

 Petroleum Companies and Industry Organizations

– American Petroleum Institute; National Petrochemical and Refiners Association; Western States Petroleum Associ ation; National Petroleum Council; Oxygenated Fuels Association; BP North America; ChevronTexaco; ExxonMobil; Tosco Corporation (now part of ConocoPhillips); Amoco Corporation; Irving Oil; Sun Company; Suncor Inc.; Plains LPG

 Chemicals and Bio

- fuels Compan ies

– Gevo, Inc.; Arkenol Inc.; ARCO Chemical Company; Lyondell Chemical Co.; Equistar Chemicals; Grace Davison

 Automobile Companies and Industry Organizations

– Engine Manufacturers Association; Alliance of Automobile Manufacturers; Association of Interna tional Automobile Manufacturers; Canadian Motor Vehicle Manufacturers Association; Ford Motor Co.; American Honda

 Consulting and Professional Service Firms

– TIAX LLC; Cambridge Energy Research Associates; Abt Associates; Comcept, Inc.; Kilborn, Inc.; Riv erstone Partners; Clean Fuels Clearing House; Clean Fuels Advisory Council;

 Government Agencies

– U.S. Environmental Protection Agency; U.S. Departments of Energy and Treasury; California Energy Commission; Arizona Department of Environmental Quality; Nati onal Renewable Energy Laboratory; Ozone Transport Assessment Group (OTAG); Alberta Energy Research Institute; Environment Canada; British Columbia Ministry of Environment, Land, and Parks; and the World Bank.

Project Experience

Math Pro Inc. has conducted s tudies for clients on a range of refining

- related issues, including:

 Refining values (in the U.S., Canada, and other countries) of a number of crude oils (including crude blends in the Strategic Petroleum Reserve) in various refineries;

 Effects on refinin g economics, under various economic scenarios, of refinery streams and blendstocks produced by suppliers outside the refining sector (e.g., ethanol, iso

- butanol, higher oxygenates, iso

- octane/iso

- octene, pyrolysis gasoline);

 Refining costs and national cos ts of prospective ethanol mandates, under various economic scenarios;

## National Clean Gasoline

Appendix

Appendix A

Alliance of Automobile Manufacturers June 2009  The Net Energy Value and the total production cost of corn ethanol, with current and prospective production technologies;

 Effects on refining economics of new process units or technolo gies (e.g., for gasoline and diesel fuel sulfur control, resid upgrading, coke gasification, etc.);

 Effects of changes in gasoline and diesel fuel specifications on refinery energy requirements and greenhouse gas emissions; and

 Refinery energy use and CO 2 emissions from processing various U.S., Canadian, and imported crude oils in different U.S. refining regions.

Math Pro Inc. has conducted numerous studies for public and private sector organizations, analyzing the economic consequences to the refini ng industry of environmental regulations and other government programs bearing on gasoline and diesel fuel quality, including:

 Federal and state ethanol mandates
 California reformulated gasoline (CARB 2, CARB 3, and CARB 3A) programs
 Gasoline toxics contr ol (MSAT1 and MSAT2) programs
 Gasoline sulfur control (U.S., Canada, Europe)
 Diesel fuel sulfur control (U.S., Europe)
 MTBE phase

- out (state and federal levels)
 Federal reformulated gasoline (RFG1 and RFG2) programs
 Federal oxygenated gasoline programs
 State gasoline programs and standards (including the Arizona CBG program)
 8

- hour ozone standard
 Driveability Index control proposals
 Vapor pressure (RVP) standards (U.S. EPA Phases 1 and 2)
 Lead phase

- down (in the U.S. and various European countries)

Many of these studies produced estimates of regulatory costs that were confirmed by the industry's operating results after the regulations took effect.

## National Clean Gasoline

Appendix

Appendix B

Alliance of Automobile Manufacturers June 2009 APPENDIX B

. AIR IMPROVEMENT RESOURCE, Inc.

3B AIR IMPROVEMENT RESOURCE, INC.

AIR IMPROVEMENT RESOURCE, Inc. (AIR) was formed in 1994 to provide engineering

and con sulting services in the area of mobile and stationary source emissions modeling and technology evaluation. AIR provides expert services on a broad spectrum of projects to national and international industries, associations, legal firms, and governmental ag encies. AIR performs studies for a broad range of clients in the following areas:

 emission inventory modeling and analysis
 emission characterization, including the effect of fuel composition on emissions
 statistical analysis of emission data
 technology ass essment  analysis of fuel properties and the effects of different fuel properties on emissions
 development of fuel economy models and future fuel economy projections
 costs and cost

- effectiveness of on

- highway and off

- highway vehicle engine/fuel

- related

emis sion regulatory controls
 health effects and exposure/risk assessment of air toxins analysis of ambient air data
 emissions and air quality trends analysis
 analysis of Inspection and Maintenance (I/M) programs and program data
 meteorological and climatologi cal research and consulting services
 air quality plan development including U.S. State and Federal Implementation Plans
 air dispersion modeling and photochemical grid modeling

AIR was founded by Thomas L. Darlington, President, who has twenty

- six years of experience with the automotive and engine industry in the field of mobile source emissions modeling, analyzing emissions data, fuels, and vehicle testing procedures. Other employees are shown

below:

Steven Cadle, Ph.D.

– 34 years at GM Research, expert i n real world vehicle emissions, particulate emissions, testing programs, well

- to

- wheels emissions

Jon Heuss

– 34 years at GM, expert in the relationship of emissions to air quality, the technical basis for air quality and emission standards, and health

- ef fects

Dennis Kahlbaum

– Professional Meteorologist, computer programmer, statistician, and analyst. Programmer of many emission inventory models.

George Wolff, Ph.D.

– 31 years at GM, Atmospheric Scientist, expert in air quality, climatology, greenhouse gas science.

A business and contracts manager supports the senior staff of analysts.