STAFF REPORT

INITIAL STATEMENT OF REASONS FOR PROPOSED RULEMAKIN G
PUBLIC HEARING TO CONSIDER AMENDMENTS TO THE CURREN T

REGULATIONS FOR SMALL OFF-ROAD ENGINES

Date of Release: October 3, 2008 Scheduled for Consideration: November 20, 2008

Location: Byron Sher Auditorium Air Resources Board, Cal/EPA Headquarters

1001 I Street Sacramento, CA 95812

Air Resources Board
P.O. Box 2815 Sacramento, CA 95812

This report has been reviewed by the staff of the C alifornia Air Resources Board and approved for publication. Approval does not signif y that the contents necessarily reflect the views and policies of the Air Resources Board, nor does mention of trade names or commercial products constitute endorsement or recom mendation for use.1

TABLE OF CONTENTS

EXECUTIVE SUMMARY ..................................

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

1. INTRODUCTION .......................................

................................................... ................................................... ...3

2. BACKGROUND.........................................

................................................... ................................................... ....4

2.1 L EGAL A UTHORITY

................................................... ................................................... ................................4

2.2 R EGULATORY H ISTORY

................................................... ................................................... ..........................4

2.3 E MISSIONS I NVENTORY

................................................... ................................................... ..........................6

2.4 R ELATED F EDERAL R EGULATIONS

................................................... ................................................... .........7

2.5 P UBLIC P ROCESS

................................................... ................................................... ....................................7

3. DISCUSSION.........................................

................................................... ................................................... .........8

3.1 C ERTIFICATION E MISSIONS C REDITS

................................................... ................................................... ......8

3.2 P RODUCTION E MISSION C REDITS

................................................... ................................................... .........10

3.3 Z ERO E MISSION E QUIPMENT C REDITS

................................................... ................................................... ..12

3.4 W ARRANTY C ONTACT

................................................... ................................................... ..........................13

3.5 D URABILITY P ERIOD

................................................... ................................................... ............................13

3.6 E THANOL B LEND C ERTIFICATION F UEL O PTION

................................................... .....................................13

4. ENVIRONMENTAL AND ECONOMIC IMPACTS .................

................................................... .................14

4.1 E NVIRONMENTAL I MPACT

................................................... ................................................... ....................14

4.1.1 Emission Reductions................................

................................................... .........................................14

4.1.2 Environmental Justice..............................

................................................... .........................................14

4.2 C OST AND C OST -E FFECTIVENESS

................................................... ................................................... .........15

4.3 E CONOMIC I MPACT ON THE E CONOMY OF THE S TATE

................................................... .............................15

4.3.1 Legal Requirement..................................

................................................... ..........................................15

4.3.2 Businesses Affected ................................

................................................... ...........................................15

4.3.3 Engine Manufacturers ...............................

................................................... .......................................16

4.3.4 Impact on Small Businesses.........................

................................................... .....................................17

4.3.5 Potential Impact on Distributors and Dealers.......

................................................... ...........................17

4.3.6 Potential Impact on Business Competitiveness.......

................................................... ..........................17

4.3.7 Potential Impact on Employment.....................

................................................... .................................17

5. ALTERNATIVES CONSIDERED ............................

................................................... ....................................17

5.1 N O A CTION

................................................... ................................................... ...........................................18

5.2 M ORE S TRINGENT E MISSION S TANDARDS TO C OMPENSATE FOR THE B ANKED E MISSION C REDITS ...........18

5.3 H ARMONIZATION WITH THE U.S. EPA’ S C REDIT P ROGRAM

................................................... ....................18

5.4 I SSUES OF C ONTROVERSY

................................................... ................................................... .....................19

5.5 S UMMARY OF A LTERNATIVES E VALUATED

................................................... .............................................19

6. CONCLUSIONS AND RECOMMENDATIONS....................

................................................... .....................19

7. REFERENCES .........................................

................................................... ................................................... ....20

APPENDIX A: Proposed Amendments to the Small Off-Ro ad Equipment and Engines Exhaust

Emission Regulation
APPENDIX B Proposed Amendments to the California Ex haust Emission Standards and Test

Procedures for 2005 and Later Small Off-Road Engine s2 

### EXECUTIVE SUMMARY

The amendments proposed herein to the California em issions regulations and test procedures for new small off-road engines (SORE) an d equipment are intended to address issues that have developed since the Air Re sources Board (Board or ARB) last considered the regulations (September 2003) and to enhance alignment with other ARB and United States Environmental Protection Agency ( U.S. EPA) regulations.

In addition to the changes discussed below, staff i s proposing that the Board modify the SORE regulations to address the excessive accumulat ion of emission credits. Specifically, staff proposes the removal of the mec hanisms which allow for generation of new production emission credits. Staff also propos es limiting the lifetime of existing production emission credits and new certification e mission credits. These proposed changes would result in a more balanced emission cr edit program which should encourage introduction of new cleaner technology, y et keep in check excessive emission credit balances. If the proposed changes are not adopted, emissions related to the more than 10,265 tons of combined certificat ion and production emission credits could represent an increase of 5.4 tons per day ove r a 5-year period, if all the current certification and production emission credits were spent. Without the limitations proposed by staff, the large bank of HC+NOx credits could jeopardize the State’s Implementation Plan.

To encourage the increased use of zero emission equ ipment (ZEE) such as electrics, staff proposes to allow certification emission cred it generation for advanced technology ZEE capable of performing at the same level as prof essional-grade equipment.

Staff is also proposing to streamline the regulatio ns and harmonize with U.S. EPA to the

extent feasible.

Staff is proposing other minor amendments including :

• Durability period to include a “years” definition

• Clarification of warranty contact requirement

• Permitting the use of fuel with up to ten percent ethanol in certification testing

A more in depth description of staff’s proposal is included in Chapter 3 of this report.

Staff recommends that the Board adopt this proposal

.3

1. INTRODUCTION

Small off-road engines (SORE) are spark-ignition en gines rated at or below 19 kilowatts (25 horsepower). The vast majority of these engine s use gasoline, but some use an alternative fuel such as liquefied petroleum gas (L PG) or compressed natural gas (CNG). SORE are used to power a broad range of law n and garden equipment including lawn mowers, leaf blowers, and lawn tract ors, as well as generators and small industrial equipment. Exhaust and evaporative emis sions from off-road equipment are a significant source of hydrocarbon (HC) and oxides of nitrogen (NO
x ) emissions in

California. Both NO
x

and HC emissions contribute to the State’s ozone p roblem.

This report presents proposed changes to the curren t SORE regulations. These proposed changes include the elimination of “produc tion emission” credit generation and limitations on the lifetime and usage of “certi fication emission” credits, as well as other minor changes. These terms, and the overall credit generation provisions, are discussed in greater detail later in this report. The changes to the credit program would help ensure advancement of cleaner engine technolog y, while preserving manufacturer flexibility.

This report addresses the need for the proposed reg ulatory changes, provides a summary of the proposed amendments, presents the en vironmental and economic impacts of the proposal, and discusses alternatives to staff’s proposal. Appendix A contains the Proposed Amendments to the Small Off-R oad Engine Exhaust Emission Control Regulations. Appendix B contains the Propo sed Amendments to the California

Exhaust Emission Standards and Test Procedures for 2005 and Later Small Off-Road Engines.4

2. BACKGROUND

2.1 Legal Authority

In 1988, the Legislature enacted the California Cle an Air Act (CCAA), which declared that attainment of state ambient air quality standa rds is necessary to promote and protect public health, particularly the health of c hildren, older people, and those with respiratory diseases. The Legislature also directe d that these standards be attained by the earliest practicable date. Specifically, Healt h and Safety Code (HSC) sections

43013 and 43018 direct ARB to achieve the maximum f easible and cost-effective

emission reductions from all off-road mobile source categories, which includes the SORE category addressed in this proposal.

2.2 Regulatory History

In December 1990, the Board approved exhaust emissi on control regulations for new SORE. These engines are equal to or less than 19 k ilowatts and include both handheld equipment (such as string trimmers and chain saws) and nonhandheld equipment (such as lawn mowers and generators, as well as industria l equipment).

The SORE regulations include exhaust emission stand ards, emissions test procedures, and provisions for warranty and production complian ce programs (See Title 13, California Code of Regulations, sections 2400-2409 and the documents incorporated therein). The SORE category was the first off-road category subject to emission control regulations. The adopted regulations consisted of two tiers. The first tier began in 1995, while the Tier 2 standards were to become eff ective with the 1999 model year.

In March 1998, the Board revised the Tier 2 standar ds and delayed their implementation from 1999 to 2000, but required manufacturers to me et the emission standards for the life of the engine instead of just when the engines are new. In addition, the Board approved an emissions credit program. The program involved two types of credits: certification emission credits and production emiss ion credits.

Certification emission credits are similar to those used in other ARB emission programs (e.g., the heavy-duty diesel program) to provide fl exibility to manufacturers. Certification emission credits are generated when a manufacturer certifies an engine to a family emission limit (FEL) below the applicable emission standard. Thus, they represent real and enforceable emissions reductions beyond those r equired by regulation. The value of the credits is determined by the following formu la:

Certification Emission Credits = (Standard – FEL) x Sales x Power x Emission Dura bility Period x Load Factor5

Production emission credits are generated based on the amount the production line test result, or Compliance Level (CL), is below the FEL, using a similar formula:

Production Emission Credits = (FEL – CL) ×

Sales × Power × Emissions Durability Period × Load Factor

Production emission credits were originally intende d for a manufacturer to use to offset compliance problems, but no manufacturer has had to use production emission credits for that purpose to date. The manufacturer also is allowed to convert production

emission credits to certification emission credits at a rate of 1.1 production emission

credits to 1.0 certification emission credit. When a manufacturer accumulates a large amount of production emission credits, it tends to convert them to certification emission credits, which in turn allows the continued product ion of engines which emit above the standard. Because they are based on the manufactur er’s compliance level, production emission credits do not necessarily represent emiss ion reductions beyond those required by regulation. Manufacturers traditionall y target a compliance level below the actual standard to ensure compliance in production, even without the possibility of obtaining production emission credits; any air qual ity benefit from the compliance level is achieved regardless. (This is addressed further in Section 3.2.) In short, the production emission credits have been more of a det riment to air quality than a benefit.

The adoption of production emission credits was uni que, in that no other existing mobile source category was allowed to generate and use pro duction line credits for compliance purposes. At the time the 1998 proposal was drafte d, the United States Environmental Protection Agency (U.S. EPA) was also considering t he use of production emission credits and staff’s proposal was intended to harmon ize with the anticipated, future U.S. EPA rulemaking. Ultimately, however, U.S. EPA decided against offering production emissions credits as an option for these engines and equipment in its final

rule.

In 2003, the Board adopted more stringent exhaust e missions standards. These new standards applied to engines above 80 cc (generally used in nonhandheld equipment such as lawn mowers and generators), and were based on reductions achievable with the use of a catalyst. The new catalyst-based stan dards were to be implemented with the 2007 model year for engines with displacements between 80 and 225 cc, and with the 2008 model year for engines 225 cc and above. Overall, these catalyst-based standards represented an additional 35 percent redu ction in exhaust emissions from the previous HC+NOx emission standards.

The current exhaust emission standards for spark-ig nition SORE are shown in

Table 2.1.6 Table 2.1. Tier 3 Exhaust Emission Standards for S park-Ignition Engines (grams per kilowatt-hour)

Model Year Displacement Category Durability Periods (hours) Hydrocarbon

plus Oxides of Nitrogen (1)(3) Carbon

Monoxide Particulate

2005 and <50 cc 50/125/300 50 536 2.0 (2)

subsequent 50-80 cc, inclusive 50/125/300 72 536 2. 0 (2)

2007 and subsequent >80 cc - <225 cc 125/250/500 10.0 549

2008 and subsequent ≥ 225 cc 125/250/500/1000 8.0 549

(1) The Executive Officer may allow gaseous-fueled (i.e., propane, natural gas) engine families, that satisfy the requirements of the regulations, to certify to either the hydrocarbon p lus oxides of nitrogen or hydrocarbon emission stan dard, as applicable, on the basis of the non-methane hydrocarbon (NMHC) portion of the total hydrocarbon emissions. (2) Applicable to all two-stroke engines. (3) Engines used exclusively to power products whi ch are used exclusively in wintertime, such as snow throwers and ice augers, at the option of the engine manufacturer, need not cer tify to or comply with standards regulating emissio ns of HC+NO

x or NMHC+NO

x , as applicable. If the manufacturer exercises the opti on to certify to standards regulating such emission s, such engines must meet such standards. If the engine is to be used in any equi pment or vehicle other than an exclusively winterti me product such as a snowthrower or ice auger, it must be certified to the applicable stand ard regulating emissions of HC+NO

x or NMHC+NO

x as applicable.

During the extensive public process before the Boar d meeting in 2003, many of the engine and equipment manufacturers strongly opposed the use of catalysts on the small off-road equipment, claiming the use of catalysts c reated safety issues. Since safety issues dominated the discussions, potential emissio n credit issues were overshadowed. Staff did not foresee that the potential for accumu lation of credits would become so overwhelming that engine manufacturers would not ne ed to make modifications to their engines for years past the introduction of the more stringent emission standards. In fact, as of the end of the 2007 model year, manufac turers have banked over 10,265 tons of combined certification and production HC+NO x emission credits, and are expending the credits to avoid using catalysts and avoid producing engines that meet

the Tier 3 emission standards. This means that eve n though the new Tier 3 emission standards are in effect, California is not fully ac hieving the cleaner air these standards

were intended to deliver. If the combined credits were expended over a five-year period typical of equipment life, emissions would be 5.4 t ons per day higher than if the engines met the standards. These credit issues, the focus of staff’s proposal, are discussed in greater detail in Section 3 of this report.

2.3 Emissions Inventory

Figure 2.1 illustrates the contribution of SORE to statewide HC+NOx emission levels for calendar years 2000, 2010, and 2020. Since the imp lementation of exhaust emission standards for small engines, the emissions contribu tion has declined and was projected

to decline further over the next decade as a result of the emission standards adopted in 2003. However, due to the large amount of banked c ertification and production emission credits, the exhaust emission levels may n ot decline for years.7 Figure 2.1. SORE Evaporative and Exhaust Emissions Inventory

Statewide ROG (1) + NOx Emissions

0 50 100 150 200Tons Per Day

2000 2010 2020

Model Year

(1) ROG, or reactive organic gases, is the reactive part of hydrocarbon

emissions which contribute to the formation of ozo ne in the presence
of sunlight and other gases

.

2.4 Related Federal Regulations

Federally, SORE are regulated under title 40, Code of Federal Regulations, part 90. The federal “phase 2” standards currently in effect are equivalent in stringency to the California Tier 2 standards. Although the federal program allows generation and use of certification emission credits, it does not include any provision for production emission

credits.

In September 2008, the U.S. EPA adopted changes to several equipment categories including regulations for SORE which would reduce h ydrocarbon emissions by about 35 percent compared to their current levels. These “p hase 3” standards will bring the

national emission standards down to the same levels as California Tier 3 standards. The new exhaust emission standards are to begin in 2011 or 2012, depending on the size of the engine. U.S. EPA also included new req uirements to reduce evaporative emissions from these fuel systems. The U.S. EPA’s evaporative emission standards, which will also go into effect in 2011 and 2012, ar e comparable in stringency to ARB’s program, which was adopted in 2003 and went into ef fect in 2007.

2.5 Public Process

Staff conducted public workshops on November 14, 20 07 and April 21, 2008 to aid in developing the proposed regulations. Workshop noti ces were sent out via email on the msprog listserve list and orspark listserve list to all stakeholders, including environmental organizations, engine manufacturers, equipment manufacturers, and trade associations, as well as other interested par ties. At the workshops and subsequently, staff has shared draft proposed regul atory language with all stakeholders. Public information concerning the development of th is proposal was also made

available on ARB's website at www.arb.ca.gov/msprog/sore/sore.htm

.8

During development of this proposal, staff also met with many of the engine and equipment manufacturers individually to discuss the ir concerns. A list of meetings held

with a number of stakeholders is summarized in Tabl e 2.2 below.

Table 2.2 List of Meetings and Telephone Calls

Stakeholder Date(s) American Honda Co. 2/8/08, 8/12/08 Andreas Stihl AG & Co. 10/4/07, 2/8/08, 3/27/08, 8/ 12/08, 8/22/08 Briggs & Stratton Corp. 2/8/08, 4/3/08, 8/12/08 ECHO Incorporated 2/8/08, 3/10/08, 4/24/08, 8/12/08 , 8/22/08 Engine Manufacturers Association 2/8/08, 4/24/08, 6 /24/08, 8/12/08

John Deere 8/12/08 Kawasaki Motors Corp. 2/8/08, 8/12/08 Kohler Co. 2/7/08, 2/8/08, 4/21/08, 4/24/08, 8/12/0 8, 8/22/08

Lion Cells 7/14/08

MECA 11/29/07 Outdoor Power Equipment Institute 2/8/08, 4/24/08, 8/12/08, 8/22/08 RedMax/Zenoah America, Inc. 2/8/08, 8/12/08 Robin America (Fuji Heavy) 8/12/08 Shindaiwa Inc. 2/8/08, 3/27/08, 8/12/08, 8/22/08

Tecumseh 8/12/08 The Toro Company 2/8/08, 4/24/08, 8/12/08, 8/22/08 TTI/Techtronic Industries 2/8/08, 8/12/08

As a result of the oral and written comments receiv ed, staff made significant changes to the proposed regulations, which are reflected in th e staff's proposal.

3. DISCUSSION

3.1 Certification Emissions Credits

Certification emission credits were intended to pro vide flexibility to manufacturers. In concept, manufacturers would earn certification emi ssion credits by introducing some engine families with cleaner technologies (e.g., ca talysts) earlier than necessary, then have more time to improve other engine families tha t were smaller in volume or were otherwise more challenging to bring into compliance . Staff’s expectation was that averaging, banking and trading of certification emi ssion credits would provide manufacturers with another tool to manage complianc e, while also encouraging early introduction of clean engines.

While the certification emission credit program did provide flexibility, it has had mixed results with regards to advancing technology. Inst ead of using catalysts, which are a technically feasible and cost-effective means to co mply with the Tier 3 standards,9

manufacturers have been able to use banked credits (which could include production

emission credits that have been converted to certif ication emission credits), allowing them to certify “dirtier” engines. Most importantl y, this is not a situation involving just one or two manufacturers. As shown in Table 3.1, f or 2008 model year engines with a displacement between 80 and 225 cc, over 90 percent exceeded the HC+NOx standard through the use of credits. Overall, seven out of ten new 2008 model year SORE

exceed the certification emission standard.

Table 3.1. 2008 Model Year SORE Engines which Ex ceed the

SORE Tier 3 HC+NOx Standard Engine Displacement Total Estimated

Sales Number of engines

exceeding the

standard Percentage of

engines exceeding

the standard Less than or equal to 80 cc 894,707 164,227 18.4% From 80 to 225 cc 3,295,601 3,005,791 91.2%

Greater than or equal to 225 cc 399,147 149,756 37.5%

Total 4,589,455 3,319,774 72.3%
Note: Excluding cold-weather only equipment which do not need to meet HC+NOx standard.

Manufacturers that do certify with catalyst-equippe d engines tend to be smaller companies which are new or are not able to obtain m any certification or production emission credits. Other manufacturers who may not have intended to use the credit program found it necessary to participate in the cr edit program to remain competitive
with manufacturers who used emission credits. Over all, the effect has been to delay implementation of cleaner technology. Furthermore, the large bank tends to indicate

that the emission standards themselves are not as s tringent as they could be, in that many more credits were generated than were needed.

There are other reasons that can further explain ho w this situation has occurred. Some manufacturers made incrementally cleaner engines an d banked many certification emission credits over a long period of time. Speci fically, manufacturers have been able to bank certification emission credits since 1999, when the emission standards were much more lenient (i.e., 16.1 g/kW-hr for lawn mowe r engines). Relatively minor

modifications made at that time enabled manufacture rs to come in well below the emission standard, and thus generate and bank credi ts for years. Although the current standards are now more stringent (i.e., 10 g/kW-hr for lawn mower engines), some of the same engine families which were used to accumul ate certification emission credits before the emission standard change were able to us e emission credits to meet the current emission standard without improvements.

To further exacerbate the situation, the certificat ion emission credits remain available for use indefinitely, even though the engines from whic h the emission credits were generated deteriorate, fall out of warranty, and ar e taken out of service. Thus, since certification emission credits are intended to repr esent air quality benefits which are10

time sensitive, allowing the credits to be banked f or an indefinite time period has led to large credit banks which slow progress towards clea ner engines and results in dirtier air.

To remedy this issue, staff proposes that the certi fication credit lifetime be limited to five years. This limit coincides with the useful lifeti me of SORE equipment. Although many lawn mowers or other engines remain in service much longer than five years, staff is unaware of any supporting evidence that would sugge st that these mowers remain in emissions compliance beyond that time period, nor i s there any mechanism to enforce emissions compliance beyond the emissions durabilit y period. Staff believes limiting the credit life to five years strikes a balance between not allowing for credits at all and keeping credits from accumulating indefinitely.

3.2 Production Emission Credits

Production emission credits also contribute to the problem of excessive credit banks. As mentioned previously, manufacturers design their engines such that during production line testing, the engines will perform “ comfortably” below the emission standard, or FEL. Thus, in general, any emissions margin observed during production testing is used by manufacturers as an emissions “c ushion” to ensure compliance. However, only in the SORE program 1 are manufacturers permitted to use the emissions margin to generate production emission credits. It was envisioned that these generated/banked credits could be used at a later d ate if emissions compliance problems were encountered. However, no such proble ms have been encountered since the adoption of the SORE credit program in 19 98. Thus, the production emission credit balances continue to grow.

In a sense, manufacturers are getting a double bene fit from their compliance margins. Credits are recognition that an engine is cleaner t han the required emission standard. In contrast, the primary purpose of any production compliance margin is to ensure that the chance of exceeding the emission standards in a ctual production is minimized. Thus, it is essentially part of the design strategy to meet the emission standards, not an additional effort to go beyond the requirements. A s noted, no other ARB program allows generation and use of credits based on produ ction line emission results that fall

below the emission standard or FEL.

In addition to allowing a manufacturer to benefit f rom its compliance margin, production emission credits are intrinsically inflated beyond the actual value of the compliance margin. This inflation occurs because of the diffe rences between certification testing and production line testing. Whereas certification testing is conducted on the worstcase engine model within an engine family, producti on line testing can be on any engine

(1) Although the U.S. EPA had considered using pro duction emission credits at one time for small spar kignition engines, it ultimately rejected the idea. When the U.S. EPA emission standards went into eff ect, the manufacturers of small engines were able to mak e the transition to the phase 2 emission standards without the use of production emission credits. Th e U.S. EPA has not introduced production emission credits for their phase 3 emission standards. Thus , termination of the production emission credit pro gram would harmonize with U.S. EPA.11

model. There is no guarantee that the engines used for production line testing are representative of the worst-case engine model. Thu s, the amount of production emission credits generated can exceed the value of the nominal compliance margin.

This leads to yet another concern in that the exist ing program allows production

emission credits to be converted to certification e mission credits. As the production emission credits, which provide no real emission be nefits, are converted to certification emission credits, the overall credit banks grow eve n larger. Although only a small amount of production emission credits are currently banked as production emission credits, over 4,500 tons have already been converte d to certification emission credits. Overall, production emission credits represent more than half of the total banked credits, as shown in Table 3.2.

Table 3.2. Comparison of Production Emission Credi ts to Total Banked Emission
Credits

Tons HC+NOx Percentage of

Total Banked
Credits Total Banked Credits 10,265

Production Credits Banked 782 7.6 %

Production Credits Converted to

Certification Credits 4,526 44.1 %

Total Contribution of Production Credits 5,308 51.7 %
Note: Credit values, incorporating 2007 model year reports received as of August 22, 2008

Finally, it must be recognized that production emis sion credits are not necessary to meet current SORE requirements. Production emissio n credits are being used to delay compliance with the current Tier 3 standards, even though cost-effective technology is available to sufficiently reduce emissions. If the production credit program is removed, manufacturers would still have an incentive to prod uce cleaner engines because the

manufacturer would still be able to claim certifica tion credits for the cleaner-thanrequired engines.

For these reasons, staff has concluded that the pro duction emissions credit program has not functioned as envisaged; it has resulted in higher emissions and needs to be eliminated. Staff therefore proposes to end genera tion of new production emission credits in 2009, but to allow manufacturers an addi tional year, until 2010, to use or convert production credits to certification credits . This period would ensure that those manufacturers who have already converted their prod uction emission credits to

certification credits do not have an unfair advanta ge over those who have not yet

converted them.12

3.3 Zero Emission Equipment Credits

The Board has long been interested in ways to expan d the use of electric equipment in the SORE category. In 2004, staff reported to the Board specifically on potential electrification programs, concluding at that time t hat the residential market has significant penetration of electric equipment, but that current electric equipment cannot meet the demands of the commercial user. However, advances in similar equipment such as power tools, and advances in battery develo pment have led staff to propose modifications to the SORE program to encourage manu facturers to develop professional grade zero-emission equipment (ZEE). In addition to providing reductions in criteria pollutants, increased use of ZEE would provide greenhouse gas reductions.

Although electric equipment can be classified and l abeled as “Blue Sky” equipment under the current regulations, such equipment are n ot eligible to participate in the emission credit program. Staff proposes to modify the program, to allow certification emission credit generation for advanced technology ZEE capable of performing at the same level as commercial gasoline-powered equipment . To insure that real air quality benefits are achieved, staff proposes that this equ ipment meet the following requirements.

• The equipment must be able to perform at a level e quivalent to that of currently available, professional level SORE equipment (i.e., equipment used by professional gardeners).

• The equipment must not be powered by an electric c ord. Corded equipment already exists and is generally not conducive to pr ofessional usage, and so awarding emission credits for it would not advance technology beyond its current

state.

• Each recharge or refueling should allow the equipm ent to perform at a professional performance level for the same duratio n as typical professional equipment of the same type. Furthermore, the time to repower (e.g., time to replace battery pack) the ZEE should be equivalent to the time of refueling typical spark-ignition equipment.

• The equipment must be as durable as the equivalent professional SORE equipment. Thus, it should be able to be operated over the appropriate SORE test cycle repeatedly for the maximum durability pe riod for that equipment.

To obtain certification, a manufacturer would need to provide a description of the equipment (including performance data showing that it meets the ZEE criteria), a description of the power source, and an energy dens ity or specific energy test. All other standard certification requirements such as providing the warranty, labels, etc. would also need to be met. Upon certification of a dvanced technology ZEE, the manufacturer would receive credits determined by th e following equation:

ZEE Certification Emission Credits = Equivalent HC+NOx Emissions Standard x Sales x P ower x EDP x Load Factor13

In general, ZEE credits could be averaged, banked, and traded as normal certification emission credits, and would be subject to the same five-year credit life. However, because ZEE emission credits could be generated by manufacturers not currently in the SORE category (e.g., those who produce electric equ ipment, but not engines), staff proposes some additional limitations on ZEE usage t o ensure that any potential influx of emissions credits does not result in the delay of i mprovements to engine-powered equipment that has been seen under the current cred it program. Specifically, staff proposes that ZEE credits can be used only up to 40 percent above the standard. If an engine family’s emissions are higher than 40 percen t above the standard, they would

need to use other certification credits to cover th e difference. Staff believes that the addition of ZEE credits will promote advanced techn ology and allow manufacturers additional flexibility. Staff intends to follow th e implementation of the ZEE credit program closely to ensure it accomplishes its goal of encouraging advanced technology.

3.4 Warranty Contact

Currently, warranty guidelines require that manufac turers provide an American toll free number with the assumption that the receiver of the call would speak English. Although this guideline has been in place for several years, some newer manufacturers are not complying with this requirement or its intent. Sta ff therefore proposes to place this requirement in regulatory language to clarify what is needed to protect the consumers who purchase such equipment in the State of Califor nia. Manufacturers are generally in support of this proposed provision.

3.5 Durability Period

Most ARB and U.S. EPA engine programs include a use ful life definition in terms of years of use, extent of engine operation in hours, or vehicle usage in miles. Currently, the SORE and equipment durability period is only de fined in terms of hours. These engines do not typically have hour meters on them, so there is no way of determining how long an engine has been operated and whether or not it meets the time requirements. Staff proposes to amend the durabili ty period to add five years of use as an alternative to hours. For example, for engines which currently have a durability period of 125 hours, the durability period would be come either five years or 125 hours, whichever comes first. The five-year period is equ ivalent to a typical median life of SORE equipment; U.S. EPA also uses this time period in their new rule.

3.6 Ethanol Blend Certification Fuel Option

Staff proposes to allow manufacturers the option to use a certification fuel with up to ten percent ethanol content, provided that they use the same fuel for certification with the U.S. EPA. This option would enhance harmonization with U. S. EPA, and could reduce testing costs for some manufacturers.14

4. ENVIRONMENTAL AND ECONOMIC IMPACTS

4.1 Environmental Impact

4.1.1 Emission Reductions

The intent of the proposed regulations is to obtain the emission reductions from small engines and equipment which was expected from the p reviously adopted Tier 3 standards. By 2010, on an annual average basis, th e Tier 3 emission standards would

result in statewide emission reductions of 3.2 tons per day of NOx and 18.5 tons per day of HC. In 2020, the estimated reductions incre ase to 7.5 and 42.0 tons per day for NOx and HC, respectively. Although there are no ne w incremental benefits from this proposal, the proposal will assure these benefits a re realized. If the proposed changes are not adopted, emissions related to the more than 10,265 tons of combined certification and production emission credits could result in an increase of 5.4 tons per day for 5 years, if all the current certification a nd production emission credits were spent.

The emission reductions from fully meeting the Tier 3 standards are part of the reductions needed to attain health-based air qualit y standards in California. As such, these reductions are included in the State Implemen tation Plan (SIP). Extensive usage of banked credits that allow engines to emit above the standards would interfere with

attainment and exceed the emission limits in the SI P. Specifically, without the limitations proposed by staff, the large bank of HC +NOx credits could jeopardize the

SIP.

4.1.2 Environmental Justice

State law defines environmental justice as the fair treatment of people of all races, cultures, and incomes with respect to the developme nt, adoption, implementation, and enforcement of environmental laws, regulations, and policies (Senate Bill 115, Solis; Stats 1999, Ch. 690; Government Code § 65040.12(c)) . The Board has established a framework for incorporating environmental justice i nto the ARB's programs consistent with the directives of State law. The policies dev eloped apply to all communities in California, but recognize that environmental justic e issues have been raised more in the context of low income and minority communities, whi ch sometimes experience higher exposures to some pollutants as a result of the cum ulative impacts of air pollution from multiple mobile, commercial, industrial, area wide, and other sources. Over the past twenty-five years, the ARB, local air districts, an d federal air pollution control programs have made substantial progress towards improving th e air quality in California. However, some communities continue to experience hi gher exposures than others as a result of the cumulative impacts of air pollution f rom multiple mobile and stationary sources and thus may suffer a disproportionate leve l of adverse health effects. Since the same ambient air quality standards apply to all regions of the State, all communities, including environmental justice communities, will b enefit from the air quality benefits associated with the proposal. Alternatives to the proposed recommendations, such as15

recommending no change to the current program could adversely affect all

communities. As additional relevant scientific evi dence becomes available, the small off-road engine standards will be reviewed again to make certain that the health of the public is protected with an adequate margin of safe ty.

To ensure that everyone has an opportunity to stay informed and participate fully in the development of the proposal, staff has held worksho ps in El Monte and has distributed information through the internet, as described in s ection 2.5 of this report.

4.2 Cost and Cost-Effectiveness

The proposed changes to the SORE program should not change the cost of complying with the Tier 3 standards as estimated in 2003, bec ause the estimates at the time did not assume extensive use of credits to comply. No additional expenses are expected for the engine manufacturers other than those alrea dy assumed previously.

4.3 Economic Impact on the Economy of the State

The proposed regulations are not expected to impose a significant cost burden, if any, to engine or equipment manufacturers. As noted in Section 4.2, the proposed regulations should not increase costs beyond those accounted for in the 2003 rulemaking. Based on the above assumptions, staff expects the proposed regulations to impose no adverse impact on California competiti veness and employment. The following sections are intended to fulfill ARB’s le gal requirements related to economic analysis and economic impact for stakeholders affec ted by these proposed regulations.

4.3.1 Legal Requirement

Section 11346.3 of the Government Code requires Sta te agencies to assess the potential for adverse economic impacts on Californi a business enterprises and individuals when proposing to adopt or amend any ad ministrative regulations. The assessment shall include a consideration of the imp act of the proposed regulations on California jobs, business expansion, elimination or creation, and the ability of California business to compete.

Also, section 11346.5 of the Government Code requir es State agencies to estimate the cost or savings to any state, local agency and scho ol district in accordance with instructions adopted by the Department of Finance. The estimate shall include any nondiscretionary cost or savings to local agencies and the cost or savings in federal funding

to the state.

4.3.2 Businesses Affected

Any business involved in the manufacturing of SORE and equipment will potentially be affected by the proposed regulations. Also, potent ially affected are businesses that16

supply engines and parts to these manufacturers, an d those businesses that buy and sell equipment in California.

4.3.3 Engine Manufacturers

There are currently 60 SORE manufacturers that mark et certified engines in California,

as shown in Table 4.2. Sixteen of these manufactur e only engines less than or equal to 80 cc for use in such applications as chainsaws, tr immers, and other handheld products. Twenty-nine exclusively manufacture engi nes greater than 80 cc for use in such applications as walk-behind and riding mowers, portable generators, and other nonhandheld products. Fifteen manufacturers produc e engines for both handheld and nonhandheld applications. None of the manufacturers is located in California although some have small repair and distribution operations in California. Some manufacturers of the evaporative emission components are located in California, but they would not be affected by these proposed modifications.

Table 4.2 Manufacturers with Small Engines Certified in Calif ornia (Model Year 2008)

Produce < 80 cc Produce > 80 cc Produce Both Andreas Stihl Alto U.S. Champion Power China Xingyue Group Briggs & Stratton Honda Motor Homelite Consumer Chongqing AM-Pride Kawasaki Heav y Industries Husqvarna AB Chongqing Dajiang Power Mitsubishi He avy Industries Husqvarna Outdoor Chongqing Huawei Lianlong Ningd e Cue Husqvarna Zenoah Chongqing Hybest Shandong Huashen g Zhongtian Kioritz Chongqing Lifan Shanghai Alton Makita Numazu Chongqing Maifeng Shindaiwa
Maruyama Chongqing Sanding Suzhou Erma Machinery McCulloch Chongqing Weima United Power Equipment MTD Southwest Chongqing Zongshen Wenling Zhengjian g Vehicle Nikko Tanaka Engineering Cummins Power Generation Wuxi Kipor Power Suzhou Honbase Eagle Solutions Yamaha Suzhou Tiger Fuji Heavy Industries Yancheng Jiangdo ng Yongkang Apollo Generac Power Systems Zhejiang Rob ot Zhejiang Zomax Jiangsu Changfa Group Jiangsu Sumec-Linhai

Kohler Kohler Power Systems

Kubota Liquid Combustion

Loncin Onyx Environmental

Power Solutions Shanghai Grow Development

Tecumseh Power

Tecumseh Products

Tornado

Westerbeke17

4.3.4 Impact on Small Businesses

The proposed regulations have only a minor impact o n small businesses that buy and sell off-road equipment. Any impacts that the smal l businesses might experience due to the Tier 3 standards were already considered at the 2003 Board Hearing.

4.3.5 Potential Impact on Distributors and Dealers

Most engine and equipment manufacturers sell their products through distributors and dealers, some of which are owned by manufacturers a nd some are independent. Most independently owned dealers are small businesses. Some low-volume manufacturers also deal directly with their customers. The distr ibutors and dealers sell about 1,700,000 units of small engine equipment per year in California. Although they are not directly affected by the proposed amendments, the a mendments may affect them indirectly. If an increase in the price of engines and equipment reduces sales volume, dealers’ revenue would be affected adversely. But again, no significant price increase, if any, is expected.

4.3.6 Potential Impact on Business Competitiveness

The proposed amendments would have no significant i mpact on the ability of California engine and equipment manufacturers to compete with manufacturers of similar products

in other states. This is because all manufacturers that produce these engines and equipment for sale in California are subject to the proposed amendments regardless of their location. Furthermore, all of the engine man ufacturers, and most of the equipment manufacturers, are located outside of California.

4.3.7 Potential Impact on Employment

The proposed regulations are not expected to cause a reduction in California employment because, as previously noted, the econom ic impact of the proposal should be minimal. Also, California accounts only for a s mall share of manufacturing employment in off-road engine, equipment, and compo nent production.

5. ALTERNATIVES CONSIDERED

Staff evaluated three additional alternatives to th e currently proposed regulations.

These included:

• Take no action.

• Set more stringent emission standards to compensat e for the banked

emission credits.

• Harmonize with the U.S. EPA’s credit program.

These alternatives are discussed in detail below.18

5.1 No Action

The first alternative evaluated was to take no acti on. Under this alternative, many of the engine and equipment manufacturers would be able to continue to delay implementation of the new SORE emission standards a cross their entire product line for years. If the Board adopted yet more stringent sta ndards later, the same situation would likely occur; the manufacturers would have so many credits banked that cleaner engines would not be offered until years after the nominal implementation of the new standards. In particular, the production emission credits which are obtained from the compliance margin would continue to reduce emission benefits that were intended to provide improved air quality. Additionally, with t he adoption of U.S. EPA’s new emission standards, it is possible that manufacturers could produce SORE for California that have higher emissions than those in the rest of the country. Thus, staff believes that keeping the production emission credits and allowin g an unlimited lifetime for the

certification emission credits would be a detriment to California’s air quality in the near future. As noted in Section 4.1.1, if the proposed changes are not made, the usage of banked credits could jeopardize SIP attainment.

5.2 More Stringent Emission Standards to Compensate for the Banked

Emission Credits

Another alternative would be to require that SORE s tandards be set at a level that

would force the banked credits to be redeemed more quickly. The more stringent standard would likely need to be based on either al ternative fueled engines or electric powered equipment to be stringent enough to ensure that the existing credit banks are reduced to zero within five years. There are advan tages to this scenario in that as the credit banks disappear the engines would have to be much cleaner. However, those manufacturers who did not obtain any emission credi ts previously would need to meet the emission standards immediately, putting them at a great competitive disadvantage. Also, as different manufacturers exhausted their cr edit accounts, they might not be able to meet the more stringent standards and thus could be forced out of the California market. This option was considered in the previous rulemaking for this category and

was shown to be cost-ineffective.

5.3 Harmonization with the U.S. EPA’s Credit Progra m

Another alternative would be to adopt the U.S. EPA’ s SORE credit program. At first glance, this may seem to work toward harmonization between the California and federal program. It would eliminate the production emissio n credit problem. However, because the time frames for implementing the emission stand ards for the California and federal programs are different, this could cause major conf usion for the engine manufacturers in tracking the emission credits. There are benefi ts to the U.S. EPA’s program in that the phase 2 emission credits will expire within two years of a change in emissions standards. The concern however is that the new pha se 3 emission credits would not19

expire until after the next standard change is made and thus could be in place and result in higher emissions for a long period of tim e.

5.4 Issues of Controversy

There are several issues related to this proposal o n which staff and industry continue to disagree. These include the termination of the pro duction emission credits program, credit lifetime, and incentives for advanced techno logy.

With regards to the production emissions credits pr ogram, staff’s rationale is described in section 3.1.1. With regards to credit lifetime, staff had presented some alternatives during the workshop process that allowed longer lif etimes, either with discounting of credits, or with extended warranty coverage to ensu re that engines remained in service for the full life of the credits. Industry rejecte d these options, and did not provide sufficient evidence that the equipment life was gre ater than the proposed credit life.

Manufacturers also claimed that the limitation on t he lifetime of the emission credits would hinder development of new technology. Howeve r, a review of the number of engines which exceed the standards (shown in Table 3.1) shows that the current unlimited credit life has not encouraged early intr oduction of new emission control technologies. Regardless, staff intends to continu e to investigate how the program may be modified to encourage advanced technologies in a pplications for which they are currently not in widespread use.

5.5 Summary of Alternatives Evaluated

After carefully considering the remaining issues an d the suggested alternatives, staff believes its proposal is the best option.

6. CONCLUSIONS AND RECOMMENDATIONS

In developing the proposed regulations, staff’s goa l has been to achieve the greatest possible emissions reductions in a technologically feasible and cost-effective manner. Meeting the requirements of the proposed modificati ons is achievable using existing technologies and manufacturing processes and would add no costs that have not already been considered by the Board. The proposed regulations are necessary to meet air quality emissions reduction goals and to a chieve health based ambient air quality standards.

No alternatives considered by the Board would be mo re effective in achieving the purpose for which the regulations are proposed or w ould be as effective as or less burdensome to affected private persons than the pro posed regulations.

The staff recommends that the Board approve its pro posal.20

7. REFERENCES

ARB 1998: California Air Resources Board, Public H earing to Consider Amendments to the 1999 Small Off-Road Engine Regulations, Februar y 1998 (Staff Report).

ARB 2001: California Air Resources Board, Policies and Actions for Environmental Justice, December 2001.

ARB 2003: California Air Resources Board, Public H earing To Consider The Adoption Of Exhaust And Evaporative Emission Control Require ments For Small Off-Road Equipment And Engines Less Than Or Equal To 19 Kilo watts, August 8, 2003 (Staff Report).

ARB 2004: California Air Resources Board, Report t o the Board on the Potential Electrification Programs for Small Off-Road Engines , April 2, 2004 (Staff Report).

ARB 2007: California Air Resources Board, Public H earing to Consider Amendments to the California Reformulated Gasoline Regulations an d Other Changes, April 27, 2007 (Staff Report).

U.S. EPA 2007: United States Environmental Protect ion Agency, Control of Emissions from Nonroad Spark-Ignition Engines and Equipment; Proposed Rule, 72 Federal Register 28097-28393, May 18, 2007.