# Nonconformance Penalties for On

- highway Heavy

- duty D iesel Engines:
Technical Support Document

# Nonconformance Penalties for On

- highway Heavy

- duty D iesel Engines:
Technical Support Document

EPA-420-R-12-014 August 2012

### Table of Contents

CHAPTER 1 : INTRODUCTION

............................................................................ 3
1.1 Background on Nonconformance Penalties

.................................................................. 3
1.2 Previous NCP Rulemakings and Regulations

.............................................................. 4
1.3 Promulgation of 2007/2010 Emission Standards

......................................................... 6
1.4 The Onboard Diagnostics (OBD) System Requirements for 2010 and Later HeavyDuty On-highway Engines

....................................................................................................... 7
1.5 The Heavy-Duty Vehicle and Engine Greenhouse Gas Emissions Standards

.......... 8
1.6 Characterization of the Heavy-Duty Engine and Vehicle Industries

......................... 8
1.6.1 Vehicle Applications and Classes

........................................................................ 8
1.6.2 Engine and Vehicle Manufacturers

.................................................................... 9
1.7 Energy Paradox

............................................................................................................. 14
1.8 Relation of NCP Costs to Rulemaking Costs

.............................................................. 15
CHAPTER 2 : TECHNOLOGIES TO MEET THE 2010 NOX STANDARD STANDARDS

............................................................................................................. 16
2.1 Engine Service Classes

.................................................................................................. 16
2.2 Emission Control Technologies for Diesel Engines

.................................................... 16
2.2.1 Air Handling System and Turbocharging Technology

................................... 16
2.2.2 Advanced Fuel Injection Systems

..................................................................... 17
2.2.3 Diesel Particulate Filters and Oxidation Catalysts

.......................................... 17
2.2.4 Selective Catalytic Reduction

............................................................................ 18
2.3 Optimization Strategies

................................................................................................ 20
2.3.1 Engine-Out NOx Emission Reduction Strategies

............................................ 20
2.3.2 Integrated Aftertreatment System

.................................................................... 21
2.3.3 Integrated Engine and Aftertreatment Strategies

........................................... 22
2.3.4 Integrated Engine and Vehicle Strategies

........................................................ 25
2.4 Summary of Strategies Used by Engine Manufacturers for 2010

............................ 25
2.4.1 SCR Engines

........................................................................................................ 25
2.4.2 Non-SCR Engines

............................................................................................... 25
2.4.3 Marketing Claims

............................................................................................... 26

iiiCHAPTER 3 : COMPLIANCE COSTS

................................................................... 27
3.1 Methodology

.................................................................................................................. 27
3.1.1 General Methodology

......................................................................................... 27
3.1.2 Net Present Value of Costs

................................................................................. 29
3.1.3 Costs Analysis

..................................................................................................... 29
3.1.4 Upper Limit

......................................................................................................... 31
3.2 Manufacturer Cost Data

.............................................................................................. 32
3.3 EPA Analysis of Costs for Heavy Heavy-Duty Engines

............................................ 33
3.3.1 Consideration of Manufacturer Cost Estimates

.............................................. 33
3.3.2 Basis of EPA Cost Estimates

............................................................................. 34
3.3.3 NCP Compliance Costs: COC 90 ........................................................................ 35
3.3.4 NCP Compliance Costs: COC 50 ........................................................................ 46
3.3.5 MC 50 and F

.......................................................................................................... 46
3.4 EPA Analysis of Costs for Medium Heavy-Duty Engines

......................................... 47
CHAPTER 4 : REGULATORY PARAMETERS AND FINAL PENALTIES

..... 48
4.1 Heavy Heavy-Duty Engine NCP Equations and Parameters

................................... 48
4.1.1 Refund for Engineering and Development Costs

............................................ 49
4.2 Factors Influencing Competition

................................................................................. 50
4.2.1 Market Prices

...................................................................................................... 51
4.2.2 Market Share

...................................................................................................... 52
4.2.3 Sensitivity to Operating Costs

........................................................................... 52 Appendix A : Calculations

...................................................................................................... 54 Appendix B : Alternative Heavy Heavy-Duty Compliance Costs

....................................... 59 Appendix C : Medium Heavy-Duty (MHD) Compliance Costs

.......................................... 69

ivCL List of Acronyms

AEO Annual Energy Outlook CH 4 methane compliance level CO carbon monoxide CO 2 carbon dioxide COC 50 estimate of the average total incremental cost to comply with standard relative to complying with the upper limit COC 90 estimate of the 90 th percentile total incremental cost to comply with standard relative to complying with the upper limit CPI Consumer Price Index DEF diesel exhaust fluid DOC diesel oxidation catalyst DPF diesel particulate filter EGR exhaust gas recirculation EIA U.S. Energy Information Administration EPA U.S. Environmental Protection Agency F factor used to estimate the 90 th percentile marginal cost based on the average marginal cost F E&D engineering and development factor FEL family emission limit g/hp-hr gram per horsepower-hour GHG greenhouse gas GVWR gross vehicle weight rating HC hydrocarbon HD heavy-duty HHD heavy heavy-duty HDDE heavy-duty diesel engine HDE heavy-duty engine HDGE gasoline-fueled heavy-duty engine HDOBD heavy-duty onboard diagnostics HDV heavy-duty vehicle HLDT heavy light-duty truck ICM indirect cost multiplier LDT2 Light-Duty Truck 2 LHDGE gasoline-fueled light heavy-duty engine MC 50 estimate of the average marginal cost of compliance with the standard MC 90 estimate of the 90 th percentile marginal cost of compliance with the standard MHD medium heavy-duty MOVES Motor Vehicle Emissions Simulator mpg miles per gallon N 2 nitrogen N 2 O nitrous oxide

1NCP nonconformance penalty NHTSA National Highway Traffic Safety Administration NOx oxides of nitrogen NPV net present value OBD onboard diagnostics PM particulate matter S emission standard SCR selective catalytic reduction TSD Technical Support Document UL upper limit VMT vehicle miles travelled X compliance level above the standard at which NCP equals COC 50

2

## Chapter 1: Introduction

The Technical Support Document (TSD) for this rulemaking presents analyses and supporting data for the provisions EPA used for establishing nonconformance penalties (NCPs) for model year 2012 and later on-highway heavy-duty diesel engines. This document updates and replaces the Interim Technical Support Document. 1 That earlier document supported an Interim Final Rule (that was subsequently vacated by the U.S. Court of Appeals for the District of Columbia Circuit) and a Notice of Proposed Rulemaking (NPRM) that were promulgated on January 31, 2012 (77 FR 4678 and 77 FR 4736). This document supports the Final Rule that follows the NPRM.
This TSD addresses technical and analytical issues, rather than policy issues. See the preamble to this Final Rule and the Response to Comments document for discussions of policy matters and other more subjective discussions. For example, see the FRM preamble and the Response to Comments document for our explanation of why we believe that the NCP criteria have been met for the 2010 NOx emission standard for heavy heavy-duty diesel engines.



### 1.1 Background on Nonconformance Penalties
Section 206(g) of the Clean Air Act (the Act), 42 U.S.C. 7525(g), allows EPA topromulgate regulations permitting manufacturers of heavy-duty engines (HDEs) or heavyduty vehicles (HDVs) to receive a certificate of conformity for HDEs or HDVs that exceed the applicable emissions standard, provided that they pay an NCP and that their emissions do not exceed an appropriate upper limit. Congress adopted section 206(g) in the Clean Air ActAmendments of 1977 as a response to perceived potential for problems with technologyforcing heavy-duty emissions standards. If strict technology-forcing standards were promulgated, then some manufacturers, "technological laggards," might be unable to comply initially and would be forced out of the marketplace. NCPs were intended to remedy this potential problem - the laggards would have a temporary alternative that would permit them to sell their engines or vehicles by payment of a penalty. At the same time, conforming manufacturers would not suffer an economic disadvantage compared to nonconforming manufacturers, because the NCP would be based, in part, on money saved by the technological laggard. The resulting provisions of the Act require that NCPs account for the degree of emission nonconformity; increase periodically to provide incentive for nonconforming manufacturers to achieve the emission standards; and, most importantly, remove any competitive disadvantage to conforming manufacturers.

3Section 206(g)(1), which authorizes NCPs, states that they may be offered for heavyduty engines and vehicles. The Act also states the penalty may vary by pollutant and by class or category of vehicle or engine. HDVs are defined by section 202(b)(3)(C) as vehicles in excess of 6,000 pounds gross vehicle weight rating (GVWR). A

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



### 1.2 Previous NCP Rulemakings and Regulations
The generic NCP rule (Phase I) was promulgated August 30, 1985 (50 FR 35374). It established regulations for calculating NCPs in 40 CFR Part 86 Subpart L. It also established three basic criteria for determining the eligibility of emission standards for nonconformance penalties in any given model year. First, the emission standard in question is a new emission standard or that the standard is an existing standard and becomes more difficult to meet. This can occur in two ways, either by the emission standard itself becoming more stringent, or due to its interaction with another emission standard that has become more stringent.
Second, EPA must find that substantial work is required in order to meet the emission standard. EPA considers "substantial work" to mean the application of technology not previously used in that vehicle or engine class/subclass, or a significant modification of existing technology, in order to bring that vehicle/engine into compliance. EPA does not consider minor modifications or calibration changes to be classified as substantial work. EPA considers that substantial work is required if such work is needed to bring emissions from the level of the previous standard to the level of the new or revised standard, even if at the time the NCP rulemaking is taking place, some manufacturers have already completed such work.

A Note that certain other provisions of the Clean Air Act and regulations also consider features other than GVWR when defining whether a motor vehicle is a heavy-duty vehicle.

4Third, EPA must find that a manufacturer is likely to be noncomplying for technological reasons (such a manufacturer have been referred to in earlier rules as a “technological laggard”). Prior NCP rules have considered a technological laggard to be a manufacturer who cannot meet a particular emission standard due to technological (not economic) difficulties and who, in the absence of NCPs, might be forced from the marketplace.
The above criteria were used to determine eligibility for NCPs during Phase II of the NCP rulemaking process (50 FR 53454, December 31, 1985). NCPs were offered for the following 1987 and 1988 model year standards: the particulate matter (PM) standard for 1987 diesel-fueled light-duty trucks with loaded vehicle weight in excess of 3,750 pounds (LDDT2s), the 1987 gasoline-fueled light HDE (LHDGE) HC and CO emission standards, the 1988 diesel-fueled HDE (HDDE) PM standard, and the 1988 HDDE NOx standard. As discussed in the Phase II rule, NCPs were considered, but not offered, for the 1987 HLDT NOx standard and the 1988 (later, the 1990) gasoline-fueled HDE (HDGE) NOx standard.
The availability of NCPs for 1991 model year HDE standards was addressed during Phase III of the NCP rulemaking (55 FR 46622, November 5, 1990). NCPs were offered for the following: the 1991 HDDE PM standard for petroleum-fueled urban buses, the 1991 HDDE PM standard for petroleum-fueled vehicles other than urban buses, the 1991 petroleum-fueled HDDE NOx standard, and the PM emission standard for 1991 and later model year petroleum-fueled light-duty diesel trucks greater than 3,750 lbs loaded vehicle weight (LDDT2s). As discussed in the Phase III rule, NCPs were also considered, but not offered for the methanol-fueled heavy-duty diesel engine and heavy-duty gasoline engine standards as it was concluded that those standards did not meet the eligibility criteria established in the generic rule. In addition, Phase III of the NCP rulemaking described how NCPs would be integrated into the HDE NOx and PM averaging program.
The availability of NCPs for HDVs and HDEs subject to the 1994 and later model year emission standards for particulate matter (PM) was addressed by Phase IV of the NCP rulemaking (58 FR 68532, December 28, 1993). NCPs were offered for the following: the 1994 and later model year PM standard for heavy-duty diesel engines (HDDEs) used in urban buses and the 1994 and later model year PM standard for HDDEs used in vehicles other than urban buses. NCPs were also considered, but not offered, for the 1994 and later model year methanol-fueled HDE PM standard and the 1994 and later model year cold carbon monoxide (CO) standard for heavy light-duty gasoline fueled trucks.
The availability of NCPs for HDVs and HDEs subject to the 1998 and later model year emission standards for NOx was addressed by Phase V of the NCP rulemaking (61 FR 6949, February 23, 1996). NCPs were offered for the following: the 1998 and later model year NOx standard for heavy-duty diesel engines (HDDEs), the 1996 and later model year for Light-Duty Truck 3 (LDT3) NOx standard, and the 1996 and later urban bus PM standard. A concurrent but separate final rule (61 FR 6944, February 23, 1996) established NCPs for the 1996 LDT3 PM standard and discussed other standards for which NCPs were considered.

5The availability of NCPs for 2004 model year HDE standards was addressed during Phase VI of the NCP rulemaking (67 FR 51464, August 8, 2002). NCPs were offered only for the NOx+NMHC standards. One notable aspect of that rule was that the upper limit for heavy heavy-duty diesel engines was set at a level above the previous standard. This was done because a legal settlement of compliance violations (i.e. a consent decree) allowed certain manufacturers to exceed the otherwise applicable 4.0 g/hp-hr NOx standard for a brief period. B The upper limit for these engines was set at 6.0 g/hp-hr to allow manufacturers to continue producing engines allowed by the consent decree.



### 1.3 Promulgation of 2007/2010 Emission Standards
The 0.20 g/hp-hr NOx standard currently applicable to heavy-duty engines was adopted January 18, 2001 (66 FR 5001) and first applied in the 2007 model year. However, because of phase-in provisions adopted in that rule and use of emission credits generated by manufacturers for early compliance, manufacturers were able to continue to produce engines with NOx emissions over 0.20 g/hp-hr until (and in some cases after) the 2010 model year.The phase-in provisions ended after model year 2009 so that the standards were fully phasedin for model year 2010. Equally important, the cap applicable to Family Emission Limits for credit-using engine families was lowered to 0.50 g/hp-hr beginning in model year 2010. Because of these changes that occurred in model year 2010, the 0.20 g/hp-hr NOx emission standard is often referred to as the 2010 NOx emission standard, even though it applied to engines as early as model year 2007. For this rulemaking, the fully phased-in NOx requirements are referred to as the 2010 NOx standards. (Note that the 2001 rulemaking also set new standards for pollutants other than NOx, but we are not setting NCPs for these other standards.)
While some manufacturers still retain NOx emission credits that currently allow them to produce engines with NOx emissions as high as 0.50 g/hp-hr, one manufacturer has been using the interim NCPs for some of their engine families in model year 2012. As seen in Figure 1-1, all manufacturers certified their model year 2012 medium and heavy-heavy duty engine families at NOx levels below 0.50 g/hp-hr. Note that these values are the final deteriorated emission results, not family emission limits.

B On October 22, 1998, the Department of Justice and the Environmental Protection Agency announced settlements with seven major manufacturers of diesel engines. The settlements resolved claims that manufacturers installed illegal computer software on heavy-duty diesel engines that turned off the engine emission control system during highway driving. The settlements were entered by the Court on July 1, 1999. The Consent Decrees allowed heavy-heavy service class diesel engines to continue to use emission control strategies which could result in NOx emission levels as high as 6 or even 7 g/hp-hr NOx.

60.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59NOx Emissions (grams/horsepower-hour)

Engine Family 2012 Model Year Heavy-Duty Engine NOx Certification Levels

Heavy Heavy

- Duty Engines Medium Heavy-Duty Engines

Figure 1-1: 2012 Model Year Medium and Heavy Heavy-Duty Engine NOx Emissions Certification Levels


### 1.4 The Onboard Diagnostics (OBD) System Requirements for 2010 and Later Heavy- Duty On-highway Engines
For 2010 and later model year heavy-duty diesel and gasoline engines used in highway applications over 14,000 pounds gross vehicle weight rating, EPA requires that all major emissions control systems be monitored and malfunctions be detected prior to emissions exceeding a set of emissions thresholds. Most notably, we require that the aftertreatment devices—e.g., the diesel particulate filters and NOx reducing catalysts—that will be used on highway diesel engines to comply with the 2010 emissions standards will be monitored and their failure will be detected and noted to the driver. We also require that all emission-related electronic sensors and actuators be monitored for proper operation.
For these highway applications over 14,000 pounds, we require that one engine family per manufacturer be certified to the OBD requirements in the 2010 through 2012 model years. Beginning in 2013, all highway engines for all manufacturers will have to be certified to the OBD requirements. This phase-in is designed to spread over a number of years the

7development effort required of industry and to provide industry with a learning period prior to implementing the complex OBD requirements on 100 percent of their highway product line.
These OBD requirements are potentially relevant to this NCP rulemaking because, when combined with lower emission standards, the OBD requirements can lead to increased repair costs because of lower emission thresholds. For example, a malfunctioning component that affected emissions to a small enough degree that it would not trigger an OBD response at a higher threshold could trigger an OBD response at a lower threshold. For most operators, this would lead to the malfunctioning component being repaired. While this would be good for the environment, it would be an additional cost to the operator.



### 1.5 The Heavy-Duty Vehicle and Engine Greenhouse Gas Emissions Standards
EPA and the Department of Transportation’s National Highway Traffic Safety Administration (NHTSA) issued the first-ever program to reduce greenhouse gas (GHG) emissions and improve fuel efficiency of heavy-duty trucks and buses in 2011. 2 The agencies adopted complementary standards under their respective authorities covering model years 2014-2018 and beyond, which together form a comprehensive national program, referred to in this document as the Heavy-Duty GHG rule. While improvements in the whole vehicle will be required, these regulations will specifically require reductions in the engine’s brakespecific fuel consumption (BSFC) for most medium and heavy heavy-duty engines. The program regulates combination tractors and vocational vehicles separately from the engines installed in these vehicles. This approach ensures existing technologies readily available to improve fuel efficiency are applied to both engines and trucks resulting in the maximum improvement in overall vehicle efficiency possible.
The Heavy-Duty GHG rule begins in model year 2014 and controls the CO 2 , N 2 O, and CH 4 emissions (NHTSA regulations also explicitly regulate fuel consumption) from HD engines. The program drives approximately 3 to 5 percent improvements in CO 2 emissions from engines in model year 2014 and an additional 2 to 4 percent improvement in model year 2017. The program also allows manufacturers to generate greenhouse gas emission credits by meeting these greenhouse gas emission standards prior to model year 2014.
The greenhouse gas requirements are potentially relevant to this NCP rulemaking because they affect the types of emission controls that manufacturers would pursue.



### 1.6 Characterization of the Heavy-Duty Engine and Vehicle Industries

1.6.1 Vehicle Applications and Classes
Heavy-duty engines are used in a wide variety of vehicle applications. Smaller engines are used in heavy-duty pickup trucks, vans and other vehicles using those same chassis. At the other extreme, the largest engines are used in cement mixers, garbage trucks, and line-haul tractors. In matching the engines to the vehicles, the minimum requirement is

8that the engine would be large enough to power a fully-loaded truck up a hill. More typically, especially for the larger trucks, the engine is selected to provide the best fuel consumption. In other cases, especially for light heavy-duty, larger engines are used to provide additional performance.
In applying heavy-duty emission standards, EPA categorizes heavy-duty vehicles into three service classes: light heavy-duty; medium heavy-duty; and heavy heavy-duty. Light heavy-duty includes heavy-duty pickup trucks and vans. Medium heavy-duty includes delivery trucks and recreational vehicles. Heavy heavy-duty includes buses and line-haul tractors. Table 1 lists the gross vehicle weight rating of the vehicles by service class. Engines are classified by the primary vehicle service class for which the engine is intended.

Table 1: Gross Vehicle Weight Rating of Light, Medium, and Heavy Heavy-Duty Engines and Vehicles

Service Class DOT Weight Classes GVWR (lbs.)
Light Heavy 2b-5 8,501 - 19,500
Medium Heavy 6-7 19,501 - 33,000
Heavy Heavy 8 33,001 +

1.6.2 Engine and Vehicle Manufacturers
Table 2 shows the major heavy-duty engine and vehicle manufacturers for the U.S. What is not shown in the table is the degree to which vehicle manufacturers buy engines from different engine manufacturers. The industry operates such that the vehicle manufacturer decides during the design stage which engines it will make available in its vehicles, and the ultimate customer chooses its engine from among the available options. The result is that most of the vehicle manufacturers use engines from two or more engine suppliers for at least some of their vehicle models. This practice makes the industry a very competitive marketplace. This is particularly true for the medium heavy-duty and heavy heavy-duty marketplace, where the Navistar International Corporation C i s currently the only engine and vehicle manufacturer that is not offering engines from another manufacturer in its U.S. vehicle models.
The light heavy-duty diesel market is a mix of integrated manufacturers and exclusive relationships between vehicle manufacturers and diesel engine manufacturers. Specifically, General Motors and Ford currently supply their own diesel engines in the light heavy-duty

C Engines made by Navistar International Corporation are typically known by the brand name Navistar, while trucks are known by the brand name International.

9pick-up trucks for their respective companies. Chrysler exclusively uses Cummins-supplied diesel engines in their Ram light heavy-duty pickup trucks.
However, in the medium heavy-duty and heavy heavy-duty vehicle market, there is awider range of engines available to choose from for the same vehicle. For example, an enduser can purchase a Western Star vehicle with either a Cummins or a Detroit Diesel engine in it. Engines produced by Cummins tend to be offered by all of the major heavy duty truck manufacturers in at least some of their truck models. In this sense, it has been common practice in the medium and heavy heavy-duty marketplace to treat the engine almost as a commodity.

Table 2: Heavy-Duty Engine and Vehicle Manufacturers
Heavy-Duty Diesel Engine Manufacturers (Brands) Cummins Daimler (Detroit Diesel, Mercedes Benz) Ford General Motors Hino Navistar PACCAR Volvo Truck (Volvo, Mack) Heavy-Duty Vehicle Manufacturers (Brands) Chrysler (Ram) Daimler Trucks (Freightliner, Western Star) Ford (Ford) General Motors (Chevrolet, GMC) Hino (Hino) Isuzu (Isuzu) Navistar (International) Nissan (Nissan) PACCAR (Kenworth, Peterbilt) Volvo Truck (Volvo, Mack)

10Figure 1-2 contains an estimate of the 2011 market share by sales volume of diesel engine manufacturers in the heavy-duty market for the major engine manufacturers in the U.S. This table indicates that Ford dominates the sales of diesel engines with nearly 60 percent, while Cummins follows at approximately 14 percent. The remaining quarter of the diesel engine sales are made up of General Motors, Navistar, Mack, Detroit Diesel, Volvo, PACCAR, Hino, and Mercedes Benz. It is important to note that when all service classes are considered together, the distribution is dominated by light heavy-duty pickups and vans, which are sold in much higher numbers than medium heavy-duty and heavy heavy-duty trucks.

2011 Diesel Engine Market Share

Ford

Cummins
GeneralMotors

Navistar
Detroit Diesel
Mack
Volvo Truck

PACCAR

Hino
Mercedes

- Benz

Figure 1-2: 2011 Diesel Engine Manufacturer Market Share. Source: Ward’s Automotive Group

11Figure 1-3 illustrates by sales volume that in a similar manner to the HD engine market, the HD truck market is a competitive marketplace with a number of players.

2011 Diesel Truck Manufacturer Market Share

Ford
International
General Motors
Daimler

PACCAR Volvo/Mack

Hino

Figure 1-3: 2011 Diesel Truck Manufacturer Market Share. Source: Ward’s Automotive Group

We also separately evaluated the market share by sales volume of each of the largest Class 8 heavy-duty truck manufacturers in 2008 through 2011 (shown in Figure 1-4). These are the types of trucks for which the NCPs may be used. Although the market share of each varies from year to year, each manufacturer generally has had about 20 to 30 percent of the Class 8 market. These annual variations occur for a variety of reasons, such as introduction of a new model by one manufacturer or new purchases by large fleets (which represent a large fraction of new Class 8 purchases). When considering these data, it is important to note that economic conditions in 2009 and 2010 led to significantly reduced sales in the heavy-duty market relative to 2008, and market shares in these years may be especially variable. However, sales in 2011 have returned to 2008 levels or better. The 2011 market share of each manufacturer resembles the 2008 breakdown, although Navistar’s market share was slightly lower. Preliminary data shows that Navistar’s market share may be even lower for 2012.

12Since producing engines that comply with a 0.20 g/hp-hr NOx emission standard is obviously more difficult than producing those with NOx emissions at 0.50 g/hp-hr, it can bepresumed that allowing a manufacturer to produce engines with NOx emissions at 0.50 g/hphr without paying an NCP would bestow some competitive advantage. The two most likely ways in which such an advantage would be manifested would be either higher profit per engine or increased market share. Increased market share could result from offering engines at lower prices or by offering engines with superior performance.
However, such advantage does not appear to have affected market share. In 2010 and 2011, Navistar was selling engines with NOx emissions near 0.50 g/hp-hr by using banked NOx credits, without paying any penalty. D However, International’s share of the Class 8truck market was no higher in 2011 than it was in 2008. Only International is using nonSCR E engines in its 2011 Class 8 trucks, and it is using them in all of its trucks. F So the small decrease in International’s market share between 2008 and 2011 indicates that, while selling non-SCR engines in its trucks may provide some competitive advantage, it has not allowed Navistar to increase in market share.

Class 8 Truck Market Share

40%

0% 5% 10% 15% 20% 25% 30% 35%

Daimler
International

Paccar Volvo/Mack

2008 2009 2010 2011

Figure 1-4: Class 8 Truck Market Share. Source: Ward’s Automotive Group

D While interim NCPs were available in 2012, no NCPs were available in 2010 or 2011.

E See Chapter 2 for a discussion of SCR and non-SCR emission control technologies.

F Note that while some other manufacturers have certified engines using emission credits, only Navistar is selling non-SCR engines for the U.S. market. So the market share for Navistar trucks is exactly the same as the market share for Navistar engines and the market share for non-SCR engines.

13

### 1.7 Energy Paradox
It is often asserted that there are cost-effective fuel-saving technologies that markets do not take advantage of. This is commonly known as the “energy gap” or “energy paradox.” Standard economic theory suggests that in normally functioning competitive markets, interactions between vehicle buyers and producers would lead producers to incorporate all cost-effective technology into the vehicles that they offer, without government intervention. Unlike in the light-duty vehicle market, the vast majority of vehicles in the medium- and heavy-duty truck market are purchased and operated by businesses with narrow profit margins, and for which fuel costs represent a substantial operating expense.
Even in the presence of uncertainty and imperfect information – conditions that hold to some degree in every market – we generally expect firms to attempt to minimize their costs in an effort to survive in a competitive marketplace, and therefore to make decisions that are in the best interest of the company and its owners and/or shareholders. Nevertheless, it is possible that truck buyers and operators may sometimes ignore opportunities to make investments in higher fuel efficiency that appear to offer significant cost savings.
The existence of an energy paradox is relevant to this NCP rule because EPA has historically used a lifetime cost analysis to set penalties that are required by the statute to be set at a level that would not provide a competitive advantage for manufacturers paying NCPs. To the extent an energy paradox exists, it would mean that the competitive advantage of reduced operating costs (or disadvantage of increased operating costs) would be less than the actual lifetime operating cost difference.
As discussed in the recent heavy-duty GHG rule, 3 there are several possible explanations in the economics literature for why trucking companies do not adopt technologies that would be expected to increase their profits: there could be a classic market failure in the trucking industry – market power, externalities, or asymmetric or incomplete ( i.e. , missing market) information; there could be institutional or behavioral rigidities in the industry (union rules, standard operating procedures, statutory requirements, loss aversion, etc.), whereby participants collectively do not minimize costs; or the engineering estimates of fuel savings and costs for these technologies might overstate their benefits or understate their costs in real-world applications.
To try to understand why trucking companies have not adopted these seemingly costeffective fuel-saving technologies, EPA surveyed published literature about the energy paradox, and held discussions with numerous truck market participants. The heavy-duty GHG rule discussed five categories of possible explanations derived from these sources. These hypotheses include imperfect information in the original and resale markets, split incentives, uncertainty about future fuel prices, and adjustment and transactions costs. As the discussion indicated, some of these explanations suggest failures in the private market for fuel-saving technology in addition to the externalities caused by producing and consuming fuel that are the primary motivation for the rules. Other explanations suggest market-based behaviors that may imply additional costs of regulating truck fuel efficiency that are not accounted for in this

14analysis. An additional explanation – adverse effects on other vehicle attributes – did not elicit supporting information in the public comments. Anecdotal evidence from various segments of the trucking industry suggests that many of the hypotheses discussed may play a role in explaining the puzzle of why truck purchasers appear to under-invest in fuel efficiency, although different explanations may apply to different segments, or even different companies. The published literature does not appear to include empirical analysis or data related to this question.



### 1.8 Relation of NCP Costs to Rulemaking Costs
Traditionally, NCP costs are different than compliance costs presented in the rulemaking analysis that supported the implementation of the standards. This occurs for several reasons. Most importantly, since the Clean Air Act requires that NCPs be set to protect the complying manufacturer, it is necessary to avoid underestimating reasonably projected actual costs. Standard-setting costs, on the other hand, should be EPA’s best estimate of the average costs of compliance. NCP costs also represent costs that apply during the first few years of a new standard. Thus, unlike standard-setting cost analyses, NCP analyses generally do not include the effects of manufacturing learning that occurs in reality, but do include the full amortized annual fixed costs which are eliminated after the first few years of production. For these reasons, even if the NCP and standard-setting analyses are based on the same factual information, the NCP estimates of compliance costs should be higher than standard-setting estimates. However, it is also usually true that the factual cost information available during the NCP rulemaking process reflects a more complete understanding of the optimum technology path for compliance and the operating costs and savings which occur over the life of the vehicle/engine as compared to the information that existed during the standard-setting rulemaking.
Moreover, in the cases of this current NCP rulemaking (and to some extent, the last NCP rulemaking), there are substantial differences in the emission characteristics of the baseline engine used in the analyses. The standard-setting analysis for the 2007/2010 standards estimated compliance costs relative to engines emitting 2.0 g/hp-hr or more NOx (the amount allowed by the 2004 NMHC+NOx emission standard), while this NCP analysis is estimating compliance costs relative to engines with NOx emissions at 0.50 g/hp-hr (the upper limit).
Finally, it is also important to note that this NCP analysis is being conducted after manufacturers chose to add SCR hardware to achieve lower fuel consumption for operators. However, when first adopting the 0.20 g/hp-hr NOx standard, we projected that manufacturers would have used less expensive lean NOx traps (LNTs) to meet the standard, which would have not had much impact on fuel consumption rates.

15

## Chapter 2: Technologies to Meet the 2010 NOx Standard

All engines that currently meet the 2010 0.20 g/hp-hr NOx emission standard without using credits rely on selective catalytic reduction (SCR) aftertreatment systems that use diesel exhaust fluid (DEF) to reduce NOx emissions. They also include traditional emission control technologies such as cooled exhaust gas recirculation (EGR) and injection timing optimization to reduce engine-out NOx emissions. The one non-SCR manufacturer also uses these traditional emission controls, but to a greater degree. All of the manufacturers use integrated diesel oxidation catalysts (DOC) and diesel particulate filters (DPFs) to control particulate matter (PM). This chapter summarizes these technologies and explains the effect on costs for different strategies for optimizing them.



### 2.1 Engine Service Classes
Manufacturers design light heavy-duty, medium heavy-duty, and heavy heavy-duty engines differently. The lighter duty engines tend to have smaller displacements, operate at higher engine speeds, and are not as likely to be rebuilt. This impacts mixing, heat rejection, and engine life. These differences affect which emission controls are most appropriate for each service class. In general, it can be more difficult to reduce engine-out NOx emissions from the light and medium heavy-duty engines than it is from heavy heavy-duty engines. Thus, while the emission controls discussed in this chapter can be applied to engines of any service class, other constraints lead to differences in optimal technology packages for each service class.



### 2.2 Emission Control Technologies for Diesel Engines
This section describes the emission control technologies that were used to meet the 2007 NOx and PM standards and are being used to meet the 2010 NOx standard. See Section 2.4 for a discussion of how the different engine manufacturers are using these technologies.

2.2.1 Air Handling System and Turbocharging Technology
Cooled exhaust gas recirculation (EGR) lowers NOx emissions principally by replacing a portion of the fresh intake air oxygen with exhaust by-products and other inert gases, such as CO 2 , water vapor, and N 2 . The amount of exhaust that is recirculated varies with engine conditions. Thus, a cooled EGR system must be capable of routing different amounts of exhaust gas from the exhaust system to the intake system, as well as cooling the exhaust during that process. These inert gases dilute the in-cylinder mixture and reduce the peak cylinder temperatures during the combustion process and thus reduce NOx formation. The downside of EGR is that it tends to increase PM emissions and fuel consumption and can degrade engine oil. Manufacturers are continuing to make improvements to EGR systems, such as reducing pumping loss in the EGR piping system, which allows more EGR to flow

16without sacrificing engine performance. All engines that currently meet the 2010 0.20 g/hp-hr NOx emission standard use EGR as part of their emissions solution.
Advancements in turbocharger technology can improve engine performance while meeting emissions standards. Variable geometry turbines with better control and higher efficiency allow optimal EGR control, thus better emission control. The degree to which an engine depends on EGR for NOx control impacts the performance requirements of the turbocharger and thus the costs of the turbocharger. While turbo-compound is mainly used to improve engine thermal efficiency, its integration with the engine air handling system provides the engine manufacturer more flexibility for combustion optimization, thus delivering optimal overall engine system performance. The DD15 and DD16 engines developed by Detroit Diesel are examples of this strategy.

2.2.2 Advanced Fuel Injection Systems
Modern fuel injection systems for HD diesel engines, such as the common-rail system or advanced electronically controlled injectors, provide engineers with the ability to perform pilot injection, ramped injections, and post injections (in some cases multiple pilot and/or post injections). They can also provide engineers with complete control over injection timing, pressure and duration. These systems provide important flexibilities for engineers, including the ability for improved engine-out NOx and PM emissions performance. They are especially significant with respect to minimizing a trade-off between NOx emissions and fuel consumption.

2.2.3 Diesel Particulate Filters and Oxidation Catalysts
A DPF is a device (typically ceramic) that collects PM in the exhaust stream. The high temperature of the exhaust heats the ceramic structure and allows the particles inside to break down (or oxidize) into less harmful components. All on-highway heavy-duty diesel engine manufacturers use DPFs to reduce PM. Periodic regeneration to oxidize and remove loaded soot is required for all DPFs. One method of regeneration, called active regeneration, directly injects the fuel into the exhaust stream and a DOC or other device then oxidizes the fuel in the exhaust stream, providing the heat required for DPF regeneration. Active regeneration increases the fuel consumption of the vehicle, in some cases by more than one percent. The other regeneration method, called passive regeneration, uses NO 2 to directly react with soot in the exhaust at much lower exhaust temperatures than active regeneration. This requires increasing the NO 2 fraction of the NOx, which is usually low coming out of the engine. Both active and passive regeneration require some catalytic materials in the exhaust, especially for high soot conditions. Advanced thermal management can be used in production engines to eliminate the need for active regeneration, thus significantly improving fuel efficiency. Volvo’s 2010 DPF+SCR system has eliminated active regeneration for on-highway vehicles. 4 All other manufacturers using SCR are working in the same direction, minimizing or eliminating active regeneration, thus improving fuel economy and providing efficiency improvements in the real world, although they are not directly reflected in the HD engine test procedure. Given its very

17low engine-out NOx levels, Navistar is more dependent on active regeneration than the SCR engine manufacturers.

2.2.4 Selective Catalytic Reduction
Selective Catalytic Reduction (SCR) is an exhaust aftertreatment system used to control NOx emissions from heavy-duty diesel engines by converting NOx into nitrogen (N 2 ) and water (H 2 O). The technology depends on the use of a catalytic converter and a chemical reducing agent, which generally is in an aqueous urea solution, and is often referred to as DEF. DEF is injected into the exhaust upstream of the catalyst where it forms ammonia and carbon dioxide according to the following equation:
CO(NH 2 ) 2 +H 2 O → 2NH 3 + CO 2

The ammonia then reacts with NO and NO 2 molecules as summarized by the following equations:

4NO + 4NH 3 + O 2 → 4N 2 + 6H 2 O

2NO 2 + 4NH 3 + O 2 → 3N 2 + 6H 2 O

Thus, one molecule of urea can reduce two molecules of NO or one molecule of NO 2 . However, not all urea molecules will find NOx molecules with which to react. Manufacturers design their system to inject slightly more urea than this stoichiometric amount. This is called overdosing the system. The excess ammonia reacts with oxygen to form N 2 and water. DEF dosing rates vary among engines and are roughly proportional to the amount of NOx being reduced. For 2010 model year engines, DEF rates typically range between two and four percent of fuel consumption. In other words, DEF consumption is approximately two to four gallons for every 100 gallons of fuel consumed.
The ideal rate can be calculated relative to fuel consumption rates for a given brakespecific NOx reduction from the following equation:

௱஻ௌேை௫ ൌ ቀ ݅݋ ݐ ܴܽ ݈݁ ݑ ܨ ݋ ݐ ܦܧܨ ݈݁ܽܫ݀ ஻ௌி஼ ቁቀ
ெ ௐ ଵ

ಿ ೀೣ ቁቀ ெ ௢௟௘௦௎௥௘௔ ଵ
ெ ௢௟௘௦ேை௫ ቁቀ
௎௥௘௔ெ ௢௟௔௥஽௘௡௦௜௧௬ ቁ

For example, for the proposal, we calculated the ideal DEF rate needed to achieve a 0.30 g/hp-hr NOx emission reduction (i.e., the difference between the upper limit and the standard) based on the assumptions shown below in Table 3.

18Table 3: DEF Calculation Assumptions
Assumptions for DEF Calculations Brake-Specific Fuel Consumption 0.2173 liter/hp-hr 5

Molar Percent of Total NOx that is NO at SCR Inlet 50%

Urea Concentration in DEF 32.5% by mass (5.904 mol/liter)

೒ ଴Ǥଷ଴ ቆ ൌ ݋݅ ݐ ܴܽ ݈݁ ݑ ܨ ݋ ݐ ܦܧܨ ݀ܫ݈݁ܽ ଷ଻Ǥଶଵ଴ ೓೛ష೓ೝ

೗೔೟೐ೝೞ ೓೛ష೓ೝ ቇቀ ଵ
ଵ ቁቀ ଵ ͵ ʹ ସ଺Ǥ଴଴଺௚Ȁ௠ ௢௟ ቁቀ ଴Ǥ଻ହ
ହǤଽ଴ସ ቁൌ ͲǤͲͲ  ͅͳ

This means that under these conditions, the DEF rate would need to be increased by 0.38gallons for every 100 gallons of fuel consumed (beyond the amount need to get to 0.50 g/hphr NOx).
The catalyst in the SCR systems used today in the HD engine industry generally contains either copper/zeolite or iron/zeolite formulations. Both formulations can achieve NOx conversion rates of over 90 percent. In general, iron/zeolite substrates have a greater acceptable maximum temperature for durability; whereas the copper/zeolite substrates have higher NOx efficiency rates at lower exhaust temperatures. 6

A robust SCR system can achieve more than 90 percent reduction in cycle-weighted NOx emissions. Improvements have been made over the last several years to improve the NOx conversion rate and reduce the impact of temperature on the conversion rate. Figure 2-1 shows the improvement over a three year period in both NOx conversion efficiency and maximizing conversion efficiency over a wider gas temperature range. 7

Figure 2-1: SCR Efficiency Rate Improvement over Time. 8

19

### 2.3 Optimization Strategies
Manufacturers can design and calibrate the EGR, fuel injection, and aftertreatment systems in different ways to optimize engines with respect to hardware costs, performance, emissions, operating costs, and reliability. In the context of this rulemaking, one of the central trade-offs to be optimized is the one between engine-out NOx emissions and DEF consumption rates.
There are two typical paths to reduce NOx emissions at the tailpipe – improving the NOx conversion efficiency of the aftertreatment or reducing the NOx emissions coming out of the engine. However, most manufacturers have found the most effective way to meet 2010 emissions standards is the use of integrated engine and aftertreatment approach while continuously improving engine fuel economy. The next few sections will discuss each approach in more detail.
All on-highway heavy-duty diesel engine manufacturers except one have been relying on SCR to reduce NOx emissions. SCR NO X conversion efficiency allows higher engine-out NO X emissions (while still meeting the tailpipe NO X standard due to the aftertreatment), and therefore, gives more room for engine system optimization.

2.3.1 Engine-Out NOx Emission Reduction Strategies
Tailpipe NOx emissions reductions (i.e., downstream of all aftertreatment) can be achieved by reducing the NOx emissions from the engine (i.e., engine-out emissions) by different methods. First, engine-out NOx emissions can be reduced by optimization of combustion. This includes retarding injection timing and combustion chamber optimization in matching different fuel injection strategies depending on applications. Retarding injection timing tends to reduce the peak pressure and temperature inside the engine cylinder and therefore tends to reduce the amount of NOx created in the cylinder. However, this type of injection timing change can increase fuel consumption of the engine. By appropriately optimizing piston bowl geometry and matching it with the injection angle and pressure, NOx emissions can be reduced in some but not all operating modes. Over the full range of operating conditions such benefits are limited.
An increased EGR rate can also reduce the amount of NOx produced in the engine. EGR replaces a portion of the fresh intake air oxygen with exhaust by-products and other inert gases, such as CO 2 , water vapor, and N 2 . It leads to lower cylinder temperature and therefore less NOx emissions. EGR rates have a linear impact on NOx emissions. However, an increase in EGR rates may lead to a reduction in power and increase PM emissions. Although this approach is one of the ways to reduce overall NOx emissions, the challenges in balancing the benefits of emissions reduction and thermal efficiency are significant.

202.3.2 Integrated Aftertreatment System
An advanced integrated aftertreatment system can allow individual components to be optimized, such as DOC, DPF, and SCR, on a system level. In general, catalyst efficiency is dependent on catalyst volume, surface area, chemical composition of the substrate, and packaging configurations. An increase in catalyst volume can increase the amount of emissions that are converted. However, a larger catalyst would typically have a higher hardware cost. An increase in surface area of the catalyst increases the amount of exhaust gas which can be catalyzed. Surface area increases can be achieved through smaller pore sizes, however, this can lead to higher system backpressure which can reduce engine power and increase fuel consumption of the engine. Optimization of DOC and DPF precious metal loading can have profound impacts on NOx reduction of a downstream SCR catalyst, while reducing system cost.
Depending on technologies as well as applications, different manufacturers use different system configurations to achieve optimal NOx reduction. An example of this approach is the one-box system that packages the DOC, DPF, and SCR together, such as the one being used by Detroit Diesel in its 2010 production engine. 9 This integrated system makes the vehicle packaging more compact and the engine more efficient in performance due to lower back pressure. Cummins’ 2010 SCR system utilizes a decomposition reactor that is integrated with the total aftertreatment system, which is different from other manufacturers’ aftertreatment systems. 10 This decomposition reactor component converts DEF into ammonia through hydrolysis. A long pipe between DPF and SCR ensures DEF to be well mixed with exhaust gas, thus achieving optimal NOx conversion efficiency.

212.3.3 Integrated Engine and Aftertreatment Strategies
An increase in aftertreatment efficiency allows an engine to maintain constant or even increasing engine-out NOx emissions while reducing tailpipe NOx emissions. A given aftertreatment system’s efficiency is impacted by changing DEF rates. An increase in DEF rate can increase the efficiency of the NOx conversion in the SCR system with proper engine control strategies. The ammonia produced from the DEF along with the catalyst converts NOx into nitrogen and water. Figure 2-2 shows an example of how one engine reacts to various engine-out NOx conditions at one operating condition. As shown, DEF consumption rates have a linear impact on NOx emissions over a broad range. However, the benefits of increasing DEF rates will decline at some point and the conversion efficiency will be limited more by the residence time and other catalyst characteristics.

Figure 2-2: Fluid Consumption Impact on Engine NOx Emissions Rates. 11

22There are some negative impacts of increased DEF dosing rates. First, the operating cost of the vehicle increases with dosing rates. As discussed in more detail in Chapter 3, DEF costs approximately $2.60 per gallon in 2012. As an example, an increase in DEF of 0.5 gallon of DEF consumption for every 100 gallons of fuel consumed (which would generally be described as a one-half percent increase in DEF) may lead to an increase annual operating costs ranging from a few dollars to $220 per year depending on the number of miles travelled. Second, an increase in DEF consumption will require either an increase in DEF capacity on the vehicle or an increase in the frequency of DEF refills. Optimal calibrations balance the fuel and DEF consumptions and can be found as indicated in Figure 2-2.
More advanced and higher efficiency aftertreatment systems provide engine manufacturers more opportunities to improve engine fuel economy while meeting emissions standards. Figure 2-4 shows NOx trade-off on fuel economy and PM emissions with different engine technology road maps. Although some of the technologies noted in this figure may be beyond current production feasibilities and more in the area of research today, the figure does show the relation between SCR efficiency and engine technology requirements in order to meet 2010 emissions standards. This figure also qualitatively highlights the penalty of fuel economy for an engine that solely relies on non-SCR solution in order to meet 2010 emissions standards.
As indicated in Figure 2-3, the typical technologies to improve both engine emissions and fuel economy include, but not limited to, better air handling system, lower friction loss of EGR piping, optimal fuel injection strategies, optimized combustion system, and advanced engine and aftertreatment system control. It is important to emphasize that this figure represents a snapshot of technology for a developmental engine. Thus, while the general trends shown can be considered to broadly represent other engines, the absolute values cannot.
SCR manufacturers provided comments in response to the proposal’s treatment of fuel costs. For the proposal, we developed a baseline engine which maintained the same fuel consumption, at the expense of extra DEF costs. However, several commenters noted that fuel is a major cost for this sector and manufacturers have the ability to optimize their compliant engines relative to fuel and DEF consumption to achieve a fuel savings if they were to increase the tailpipe NOx emissions to the upper limit. The fuel consumption advantage would come from higher engine-out NOx emissions, lower engine-out soot emissions which would lead to fewer particulate filter regenerations, and the possibility for lower exhaust system backpressure.

23

### BSNOx (g/hp-hr)

Figure 2-3: Fuel economy, NOx, and PM emissions with different engine technology. 12

242.3.4 Integrated Engine and Vehicle Strategies
Engine manufacturers develop engines to achieve the optimum balance of factors such as emissions, fuel consumption, horsepower, and costs. Vehicle manufacturers conduct similar optimizations of the vehicle and have an impact on the overall fuel consumption. The recent Heavy-Duty GHG rule noted the opportunities to reduce GHG emissions and fuel consumption through both engine technologies and vehicle improvements. Aerodynamics, rolling resistance, weight, and other vehicle attributes will impact the power required to move the vehicle down the road. For example, an improvement to a vehicle’s aerodynamics will reduce the amount of power required from the engine and thus reduce the fuel consumed. When considered together, improvement to the vehicle efficiency can be well over 10 percent, which would be enough to offset any increase in fuel consumption due to specific emission reduction strategies used to reduce NOx to meet the 2007 and 2010 NOx emission standards (such as EGR). This can make it difficult for purchasers to discern whether changes in fuel consumption are due to changes in the engine or vehicle.



### 2.4 Summary of Strategies Used by Engine Manufacturers for 2010

2.4.1 SCR Engines
Most engine manufacturers chose to comply with the 2010 NOx emission standard by adding SCR to the engine models they produced in 2007-2009. They also recalibrated the engines to reduce fuel consumption rates to levels lower than the 2007-2009 engines. In general, the approach with an SCR system appears to be a sound and cost effective pathway to achieve 2010 emissions standards while improving fuel economy and it is the primary path being used around the world. The reduction in operating costs due to improved fuel consumption may be more than enough to offset the cost of supplying the SCR system with DEF. So the incremental cost impact to the operator is the net effect of an upfront increase in hardware costs that can be offset significantly by reduced operating costs.

2.4.2 Non-SCR Engines
Navistar is the one engine manufacturer that chose instead to comply with the 2010 NOx emission standard by using an in-cylinder EGR solution in combination with NOx emission credits earned prior to the 2010 model year. In this solution, a higher EGR rate is required in order to meet desired emission targets, compared to a typical engine system with the SCR solution. Therefore, requirements on air handling, EGR and charged air cooling are much higher than the 2007-2009 engines. Consequently, a two-stage turbocharger system with a relatively large intercooling system is used. In addition, the 2010 model year engines contained many other improvements in the fuel injection and combustion systems, as well as better integration between engine and aftertreatment systems relative to the engines they produced in 2007-2009. Electronic control of the total engine and aftertreatment system is also considerably enhanced. Many of these changes were made to partially offset the tendency of the increased EGR to increase fuel consumption.

25More recently, Navistar has announced that it plans to change its emission control strategy to include urea-based SCR. 13 At the time of this FRM, Navistar expected that its new emission control strategy would be in production sometime in the 2013 model year, but that it would continue to produce non-SCR engines with NOx emissions at nearly 0.50 g/hp-hr NOx until then.

2.4.3 Marketing Claims
Each manufacturer claims in its marketing materials that its 2010 engines offer superior performance relative both to its earlier engines and to those of its competitors. Examples of these claims have been placed in the docket for this rulemaking. 1 4, 15, 16, 17, 18 If the claims of the SCR engine manufacturers are true, then it would seem that non-SCR engines have no advantage over SCR engines. However, if the claims of the non-SCR engine manufacturer are true, then it would seem that non-SCR engines have a significant advantage over SCR engines.
In general, SCR engine manufacturers claim that fuel consumption for their 2010engines is several percent better than non-SCR engines, including both their own 2009 nonSCR engines, and their competitor’s 2010 non-SCR engines. They further claim that these fuel savings more than offset the cost of DEF. On the other hand, the one manufacturer of non-SCR 2010 engines claimed that DEF costs are not offset by fuel savings with SCR.
To some extent, manufacturers’ comments on this rulemaking appear to contradict some of these marketing claims. Since the purpose of NCPs is to remove competitive advantages, SCR engine manufacturers arguing for higher penalties based on the costs of SCR are indicating (either explicitly or implicitly) that non-SCR engines have significant advantages over SCR engines. Similarly, manufacturers arguing for lower penalties are indicating that non-SCR engines do not have significant advantages over SCR engines.
It is beyond the scope of this rulemaking for us to evaluate the accuracy of these claims other than to state that there is significant uncertainty related to the precise difference in operating costs between SCR and non-SCR engines. While we do not believe that manufacturers are being dishonest in either their marketing claims or comments on the NPRM, it appears that they are being somewhat selective with respect to the information they present. Thus, while we have considered information provided by manufacturers, we are basing the NCPs on our own analysis of compliance costs and performance.

26

## Chapter 3: Compliance Costs

This chapter describes our analysis of the costs of compliance. The analysis is based on our projections of costs to engine and vehicle manufacturers and operating costs for vehicle owners. This chapter does not include detailed analysis of engine pricing or vehicle purchaser perceptions that could affect purchase decisions (see Section 4.2).
Note that the cost parameters being finalized are generally higher than the values proposed. These changes reflect new information received during the public comment period. Most significantly, this new information (that was not available at the time of the proposal) supports using higher fuel prices and lower DEF prices. The Energy Information Administration (EIA) now projects that fuel prices will be higher than the EIA estimates available at the time of the proposal. On the other hand, more recent data on DEF now indicates that DEF prices will be lower than the DEF price used for the proposal. Both of these changes lead directly to higher estimated compliance costs.
In addition, we received comments suggesting that the effectiveness of the NCPs in meeting the statutory requirement to remove competitive disadvantage for complying manufacturer needs to be evaluated relative to engines that could be developed in the near term (such as a reoptimized SCR engine), especially in light of the higher projected fuel prices. In response to these comments, EPA is revising the COC 90 baseline engine used to estimate worst case compliance costs because we believe that the revised baseline engine better represents an engine optimized for higher fuel prices than the baseline engine used for the proposal. G



### 3.1 Methodology

3.1.1 General Methodology
The costs of compliance for model year 2012 are the primary inputs for determining NCPs. In each of our six previous NCP rulemakings, we estimated costs using a methodology appropriate for the specific circumstances that applied at the time. None were approached in exactly the same way. In each case we considered key factors such as differences in calibration, hardware, and operating costs, but there have been some NCP calculations where other potential individual cost or cost saving elements have been included or excluded for various reasons.
Prior to the proposal, and during the public comment period, we received cost of compliance information from several engine manufacturers and used that information to inform our own analysis of compliance costs. In the most recent NCP rule (67 FR 51464,

G Note that we assume that current compliant engines have generally been optimized for 0.20 g/hp-hr NOx.

27August 8, 2002), EPA based the NCPs directly on the average of actual compliance costs relative to its current model year engines for all manufacturers. This was possible because each of the manufacturers had actually produced engines at the upper limit. It was relatively simple for them to provide us with a confidential engineering analysis of the costs they actually incurred, the cost of the additional hardware, and differences in performance characteristics. It was also reasonable for EPA to assume a high degree of accuracy in these costs. In the case of this NCP rule, however, compliant manufacturers have generally not designed and optimized their in-production engines for the U.S. market at 0.50 g/hp-hr NOx (the upper limit H ) and then reengineered their engines to meet the 0.20 g/hp-hr standard. IThus, a compliance cost estimate based directly on actual experience for the full range of inproduction engines was not available for this NCP rule.
The NCP penalty formulas are based primarily on the cost difference between an engine emitting at the upper limit (the baseline engine) and one emitting at the standard (the compliant engine). Thus, the assumption of what technologies are on the baseline engine is central to the calculation of the penalties. We are using one engine to represent the baseline for 90th percentile costs and a combination of engines to represent the average costs. However, it should be noted that since we are estimating the marginal costs of compliance to be constant (i.e., the cost to reduce emissions from 0.30 g/hp-hr to 0.20 g/hp-hr is not different from the cost to reduce emissions from 0.50 g/hp-hr to 0.40 g/hp-hr), we calculate a penalty curve that is a straight line. This in turn makes our estimate of the average cost of compliance irrelevant to the calculation of the penalty. So most of the discussion in this chapter focuses on estimation of the compliance costs for a near worst case engine which is the COC 90 value. References to the baseline engine refer to the engine used for the baseline for COC 90 . As described in Section 3.3.2, we are assuming the baseline heavy heavy-duty engine is already equipped with SCR. Specifically, EPA is assuming that the baseline heavy heavyduty (HHD) engine (or upper limit engine) is an optimized, SCR-equipped engine that complies with all other emission standards and requirements (but EPA is not necessarily assuming that such an engine exists in the current market). We estimated incremental costs both in terms of dollars per engine and dollars per g/hp-hr for the theoretical average and worst case manufacturers.
We also evaluated alternative baseline engine scenarios for heavy heavy-duty engines. Our analysis of these scenarios is summarized in Appendix B. These scenarios were evaluated to determine if they represented realistic scenarios in which the alternative baseline engine would have a greater competitive advantage than the baseline engine used in this analysis. These scenarios generally represent alternatives recommended by commenters.

H See Section 3.1.4 for a description of the upper limit.

I Note that one SCR engine manufacturer is using emission credits to certify one medium heavy-duty engine family with a NOx FEL at 0.50 g/hp-hr.

283.1.2 Net Present Value of Costs
All costs are presented in 2011 dollars. Because the NCP is paid by the manufacturer in the model year that the engine is produced, we need to account for cost differences at the point of sale. All costs were calculated or converted to net present value (NPV) for calendar year 2012. Costs that occur after production (e.g., DEF costs) are discounted by 7.0 percent per year. It is also important to remember that since all costs are presented in terms of constant 2011 dollars, the discount rate does not include an adjustment with respect to the rate of inflation. However, the regulations include inflation-related provisions to calculate NCPs for later years using these 2012 costs.
Costs expressed in terms of 2010 or earlier dollars were adjusted upwards based on the Consumer Price Index (CPI) to be equivalent to 2011 dollars. For example, the difference between a 2009 dollar and a 2011 dollar would be approximately five percent. We recognize that concerns have been raised about using the CPI to adjust costs for inflation (in previous rulemakings, though no issues were raised during the comment period for this rulemaking). We are not aware of a better method for adjusting general costs for inflation. Also, given the relatively small number of years involved in the inflation adjustments (generally three years or less), we believe that any errors introduced into the analysis by using the CPI would not be significant.

3.1.3 Costs Analysis
This section describes the cost categories that we considered in our analysis. These costs include engine manufacturing costs, vehicle manufacturing costs, and operating costs. Engine manufacturer costs of emissions control include variable costs (for incremental hardware, assembly, and associated markups), fixed costs (for tooling, research and development, etc.), and warranty costs. We also evaluated whether vehicle manufacturers are expected to incur some variable hardware costs or some fixed costs. Owner costs can include fuel costs, diesel exhaust fluid costs, maintenance and repair costs, and costs associated with any time that the vehicle is down for repair.
To produce a unit of output, engine and truck manufacturers incur direct and indirect costs. Direct costs include cost of materials and labor costs. Indirect costs are all the costs associated with producing the unit of output that are not direct costs – for example, they may be related to production (such as research and development), corporate operations (such as salaries, pensions, and health care costs for corporate staff), or selling (such as transportation, dealer support, and marketing). Indirect costs are generally recovered by allocating a share of the costs to each engine or vehicle sold.

29For this cost analysis, EPA considered both the direct (or “piece”) costs and indirect costs of individual components of technologies. For the direct costs, we followed the bill of materials approach utilized in the Heavy-Duty GHG rule. 19 A bill of materials, in a general sense, is a list of components or sub-systems that make up a system— in this case, an item of technology which reduces NOx emissions.
Indirect costs were accounted for using the Indirect Cost Multiplier (ICM) approach. The heavy-duty engine cost projections in this analysis used this same approach used in the Heavy-Duty GHG rule. For the GHG rule, EPA contracted with RTI International to update EPA’s methodology for accounting for indirect costs associated with changes in direct manufacturing costs for heavy-duty engine and truck manufacturers. 20 These indirect cost multipliers are intended to be used, along with calculations of direct manufacturing costs, to provide improved estimates of the full additional costs associated with new technologies. As shown in Table 4 below, the ICM varies with the complexity of the technology and the maturity of the technology.

Table 4: Indirect Cost Multipliers Used in this Analysis 21

CLASS COMPLEXITY NEAR TERM LONG TERM HD diesel engines Low 1.15 1.12 Medium 1.24 1.18 High1 1.28 1.19 High2 1.43 1.29

The NCP regulations contain provisions to refund manufacturers for their research and development costs. Thus, EPA notes that the near term, low complexity ICM value of 1.15 includes an ICM for research and development of two percent (0.02). 22 This means that for each $100 dollars of incremental direct hardware costs, there would also be an additional $2 for research and development. We received comments that EPA should include a greater cost for research and development. However, we see no evidence that research and development costs for the noncomplying manufacturer are substantially lower than for complying manufacturers. Thus, we are continuing to use the ICM method to estimate the research and development cost element. The remaining thirteen percent (0.13) of the ICM includes two percent (0.02) for incremental warranty costs, and eleven percent (0.11) for other manufacturing overhead.
Any DEF or fuel cost impacts on the operator are dependent on the number of miles projected to be driven by the vehicle, along with estimates for the prices for fuel and DEF. For this analysis, we used the projected mileage accumulation rates generated by the Motor Vehicle Emissions Simulator, more commonly called MOVES, EPA’s official mobile source emission inventory model. 23 The MOVES2010a version was used along with some postprocessing of the MOVES output to develop separate projections of vehicle miles travelled (VMT) for the medium and heavy heavy-duty engine classes. These annual VMT projections

30are shown in Appendix A and include a projection of vehicle survival fractions that are based on scrappage rates. (Note that the mileage estimates in this rule are slightly different from the estimates used in the final rulemaking that established the 2010 heavy-duty engine criteria pollutant standards).
For the Final Rule, we updated the fuel price projections and used the Energy Information Administration’s (EIA) Annual Energy Outlook 2012 (AEO2012) to project fuel prices through 2035 and applied the annual projected price increase found in AEO2012 to project the fuel prices through 2042. 24 The annual fuel price values (dollars per gallon) used in this analysis were adjusted from 2010 dollars (as supplied in AEO2012) to 2011 dollars. The annual fuel price projections are included in Appendix A.
We revised the source for current and future DEF prices in the Final Rule based on the comments we received on the Interim TSD. Instead of using a constant DEF price through 2042, we are projecting that the long term DEF prices will trend with the prices of industrial natural gas, which is used in the production of urea, at an annual increase of 1.3 percent based on AEO 2012. For the near term, we used the Integer Research retail DEF pricing projections for 2012 through 2014, which range between $2.60 and $2.50 per gallon. 25 Note that our analysis uses an annual average price, which does not consider seasonal variations in DEF prices or other short term fluctuations.

3.1.4 Upper Limit
The upper limit (UL in the NCP formula) used in the NCP derivation is the emission level established by regulation above which NCPs are not available and a heavy-duty engine cannot be certified or introduced into commerce. CAA section 206(g)(2) refers to the upper limit as a level above the emission standard, set by regulation, that corresponds to an emission level EPA determines to be “practicable.” The upper limit is an important aspect of the NCP regulations not only because it establishes an emission level above which no engine can be certified, but it is also a critical component of the cost analysis used to develop the NCP factors. The regulations specify that the relevant NCP costs for determining the COC 50 and the COC 90 factors are the cost difference between an engine emitting at the upper limit and one that meets the new standards (see 40 CFR 86.1113-87).
The regulatory approach adopted under the prior NCP rules sets the default upper limit at the prior emission standard when a prior emission standard exists and that standard is changed and becomes more stringent. EPA concluded that an upper limit at the previous standard should be reasonably achievable by all manufacturers with vehicles in the relevant class. Thus, the manufacturers can, if they choose, pay NCPs and continue to sell their engines and vehicles while finishing their development of complying engines. A manufacturer of a previously certified engine or vehicle should not be forced to immediately remove an HDE or HDV from the market when an emission standard becomes more stringent. The prior emissions standard generally meets these goals, because manufactures have already certified their vehicles to that standard.

31In the past, EPA has rejected suggestions that the upper limit should be more stringent than the prior emission standard because it would be very difficult to identify a limit that could be met by all manufacturers. For this rule, however, all manufacturers are currently certifying all of their engines at or below the 0.50 g/hp-hr FEL (family emission limit) cap. Thus, since NCPs were not intended to allow manufacturers to increase emissions, we are setting the upper limit at 0.50 g/hp-hr instead of the previous standard (or an equivalent NOx level such as 2.3 g/hp-hr NOx for model years 2004-2006 or 1.2 g/hp-hr for model years 2007-2009). This will conform to the purpose of NCPs, which is to allow manufacturers to continue selling engines they are producing, but not to encourage backsliding.



### 3.2 Manufacturer Cost Data
We received responses (before and/or after the NPRM) from manufacturers representing virtually all of the current U.S. heavy heavy-duty diesel engine market. However, all of the data that we received were identified as confidential business information (CBI). Therefore, we are not including details of the information in this document. Instead we are presenting only a broad description of the information provided.
Some engine manufacturers submitted confidential cost estimates in their comments to the NPRM which identified the incremental costs they would expect to incur taking a model year 2012 engine from 0.50 g/hp-hr NOx to 0.20 g/hp-hr. Two other manufacturers provided cost information based on projections of the costs incurred to take an engine from 1.2 g/hp-hr NOx to 0.20 g/hp-hr. We also received similar cost information before the proposal.
As discussed above in Chapter 2, there are a variety of means to reduce NOx. Each of the manufacturers who currently produce heavy heavy-duty diesel engines which emit less than 0.20 g/hp-hr NOx provided information about at least one pathway to reduce NOx from 0.50 to 0.20 g/hp-hr. Each provided a combination of changes to hardware (and other associated costs such as warranty costs), DEF consumption rate, engine-out NOx emissions, and/or fuel consumption. In general, there were two distinct options presented to the Agency in public comments for baseline engine technology as shown in Table 3-2.

Table 5: Manufacturer Baseline Engine Scenarios

SCR? EGR?

Baseline Engine Option #1 Yes Yes

Baseline Engine Option #2 No Yes

32More than one manufacturer chose Option #1 and assumed the baseline 0.50 g/hp-hr engine would contain both SCR and EGR. One of these manufacturers stated that relatively small changes would have been needed to hardware, such as changes to the loading in the SCR catalyst, ammonia oxidation catalyst and DOC; the addition of a sensor to control DEFdosing for OBD; thermal management of the exhaust system; and re-optimization of engineout NOx emissions, fuel consumption, and DEF dosing to achieve 0.20 g/hp-hr NOx. Similarly, another manufacturer stated hardware changes may be required, but did not provide details in their public comments. Based on these manufacturers’ projections that fuel will be much more expensive than DEF, they assumed that 0.50 g/hp-hr engines would have been recalibrated to have much higher engine-out NOx emissions. This would reduce fuel costs but increase DEF costs.
Other SCR engine manufacturers suggested the Option #2 pathway, which assumed a non-SCR baseline engine with high performance EGR system (representing their 2007-2009 engines with 1.2 g/hp-hr NOx) and that they added SCR systems to achieve the 0.20 g/hp-hr NOx emissions level. They noted that there would be both an improvement to the fuel consumption due to the SCR system, a cost for the DEF consumption required for the SCR, and an increase in warranty/maintenance costs.
The non-SCR manufacturer also projected the costs it would incur to achieve 0.20 g/hp-hr without SCR. Its methodology is not summarized here because we cannot do so without disclosing its research plans. We merely note that it projected costs lower than EPA’s estimated COC 50 and COC 90 costs.
In summary, all of the SCR manufacturers stated that the compliance costs should include some cost for additional hardware (several hundred to a few thousand). Although not all of them estimated total incremental compliance costs to reduce NOx emissions from 0.50 g/hp-hr to 0.20 g/hp-hr, those that did generally estimated the incremental costs to be in the $8,000 to $15,000 range. They recommended that EPA set the maximum penalty at a level at least as high as these cost estimates. See the Response to Comments document for an explanation why we believe these higher estimates are not appropriate.



### 3.3 EPA Analysis of Costs for Heavy Heavy-Duty Engines
The NCP regulations are structured to calculate the penalty amounts based on certain cost parameters, primarily based on the total incremental costs (relative to the upper limit) and marginal costs for the average and highest cost manufacturer. EPA has independently estimated these costs.

3.3.1 Consideration of Manufacturer Cost Estimates
In the most recent previous NCP rule phase, EPA based the NCPs primarily on the average of actual compliance costs for all manufacturers. This was possible because each of the manufacturers had actually produced engines at the upper limit. It was relatively simple for them to provide us with a confidential engineering analysis of the costs they actually

33incurred, the cost of the additional hardware, and differences in performance characteristics. There was little opportunity for strategic estimates since manufacturers needed to reflect actual costs that EPA could largely confirm. Thus, it was reasonable for EPA to assume a high degree of accuracy in these costs.
The same cannot be said for this NCP rule. In nearly all cases, manufacturers thathave reached 0.20 g/hp-hr generally did not have equivalent production engines at 0.50 g/hphr (the upper limit). In some cases they had development engines, but this does not fully address the costs that would have been incurred for production engines. Only Cummins has equivalent engines at 0.20 and 0.50; and even then, only for medium heavy-duty engines. While manufacturers have a great deal of experience projecting production costs based on development engines, there is no way for us to verify the actual hardware, fuel, and DEF costs that would have occurred across the industry. Thus, we must consider the costs to be at least somewhat speculative. It also must be considered that each of the manufacturers was aware that their estimated costs could be used to determine the amount of the NCP paid by a competitor. We are concerned about this because we cannot independently verify the validity of the manufacturers’ costs. Thus, while we have used the technical and cost inputs from all of the manufacturers to inform our estimate, we believe under these circumstances it would be inappropriate to simply average these inputs.
Finally, it is important to emphasize that neither the Clean Air Act nor our regulations require us to give any special consideration to manufacturers’ estimates of compliance costs. In the end, the compliance costs must be those that EPA determines to most appropriately conform to the intent of the Clean Air Act. As EPA noted in the generic Phase I NCP rule, NCP costs are to be based on “the best cost and emission performance data available to EPA during the specific NCP rulemaking.”

3.3.2 Basis of EPA Cost Estimates
Based on our technical judgment and discussions with engine manufacturers, EPA is assuming the baseline engine meeting the 0.50 g/hp-hr NOx level is equipped with SCR (as well as a cooled EGR system) to control the tailpipe NOx emissions. See Appendix B for a discussion of other alternative baseline engines that we considered. As noted later in Chapter 4 of this document, we believe this method leads to penalty parameters that will remove the competitive disadvantage for complying manufacturers.
For the Interim TSD, we selected a baseline engine that led us to cost out a technology package to reduce tailpipe NOx emissions from 0.50 g/hp-hr to 0.20 g/hp-hr which had constant engine-out NOx emissions (and thus had no impact on fuel consumption), but included some hardware modifications and a higher DEF consumption rate. We have revised our technology packages and cost estimates for the new baseline engine, which was based on stakeholder comment and the updated fuel and DEF costs.
The purpose of adopting NCPs is to allow a noncompliant manufacturer to continue selling its engines. However, the Clean Air Act directs EPA to set the NCPs at a level that

34will “remove any competitive disadvantage” to complying manufacturers. Thus, the statute effectively requires us to set the penalties at a level that we reasonably expect to protect the complying manufacturers, but not substantially higher than that. For the proposal and interim rule, EPA evaluated the NCPs in the context of competition between SCR engines with NOx emissions at or below 0.20 g/hp-hr and non-SCR engines with NOx emissions at or just below 0.50 g/hp-hr. This was appropriate because these two categories represented the vast majority of heavy heavy-duty engines being sold currently. However, EPA agrees with commenters that the final NCPs must be high enough to also protect complying manufacturers from acompetitive disadvantage relative to SCR engines that are more fully optimized for 0.50 g/hphr than were considered for the proposal and interim rule. The final rule must be more forward looking to also address potential competitive advantages that could arise in the future. The Clean Air Act’s requirements to “remove any competitive disadvantage” to complying manufacturers effectively requires EPA to consider not only existing engines with NOx emissions over the standard, but also engines that could reasonably be developed during the period in which NCPs are available. In this case, this requires EPA to also consider SCR engines that would be reoptimized for 0.50 g/hp-hr.

3.3.3 NCP Compliance Costs: COC 90 This section provides details on the total compliance costs to reduce the tailpipe NOx emissions of a baseline engine at 0.50 g/hp-hr to 0.20 g/hp-hr. As mentioned above, our assumed baseline engine with 0.50 g/hp-hr NOx emissions contains an SCR aftertreatment system. As discussed in Chapter 2 above, there are many pathways that can be used to reduce tailpipe emissions, including changing the engine-out emissions, increasing the efficiency ofthe aftertreatment system, and hardware changes. For the Final Rule, we re-evaluated fuelDEF optimization based on the updated fuel price projections from AEO 2012 and from revised DEF prices based on Integer Research and the natural gas price trend projection from AEO 2012. The pathway we analyzed for the Final Rule includes both fuel and DEF operating costs.

We first calculated COC 90 , which represents the total life-cycle costs for reducing the emissions to the standard level for an engine produced by the manufacturer with the highest production costs. Our estimated 90th percentile costs (COC 90 ) are shown in Table 6. The derivation of this estimate is described in detail below.

Table 6: Heavy Heavy-Duty COC 90 Estimates (Net Present Value to 2012 in 2011$)

COC 90 NPV of Hardware and Lifetime Operating Costs $3,775

353.3.3.1 Operating Costs: Optimizing Fuel and DEF Consumption
For the proposal, we estimated that reducing NOx emission from 0.50 g/hp-hr to 0.20 g/hp-hr would require an increase in DEF consumption of 0.40 gallons for every 100 gallons of fuel consumed, but would not change fuel consumption. This was consistent with our projection that there would be little price difference between DEF and fuel. For most engines, without a difference in fuel and DEF prices, there is little to be gained by reoptimizing for lower fuel consumption because much or all of the savings would be offset by higher DEF costs. However, we now have new information indicating that fuel prices will likely be significantly higher than DEF prices for the foreseeable future. We agree with commenters that engines manufacturers designing engines for 0.50 g/hp-hr NOx would have responded (and could still respond) to this price difference by optimizing the engines to have slightly higher engine-out NOx to improve fuel consumption and reduce the excess NOx by increasing DEF consumption. In essence, this strategy would save money for operators by trading an increase in DEF consumption for a similarly sized volume reduction of the more expensive diesel fuel.
As noted earlier, we first defined a baseline engine (at the upper limit) and a compliant engine (meeting the 0.20 g/hp-hr tailpipe NOx emissions standard), both equipped with SCR. We estimate that the baseline engine would have engine-out NOx emissions of approximately 4.8 g/hp-hr. This value was derived from the assumption that the engine would have 0.50 g/hp-hr tailpipe NOx emissions and that its aftertreatment system is 90 percent efficient at reducing NOx (for a system at the end of the useful life). This efficiency level was based on discussions with manufacturers. Similarly, we derived the engine-out emissions of the compliant engine emitting 0.20 g/hp-hr at the tailpipe assuming that this engine’s aftertreatment system could achieve 94 percent end-of-useful life efficiency due to the additional hardware we discuss below. We estimate that complying engines have engine-out NOx emissions around 3.0 g/hp-hr. These values are largely consistent with confidential business information we received from some manufacturers.
To determine the DEF consumption for each engine, we considered test data showing how NOx emissions and DEF consumption were related for a SCR engine. We obtained test data from a heavy-duty engine equipped with SCR tested at the National Vehicle and Fuel Emissions Laboratory. Figure 3-1 shows the impact of DEF dosing rate on NOx emission reduction achieved in the SCR system follows a linear trend, as long as the SCR catalyst is large enough. We used the linear trend equation for each scenario to determine the DEF dosing rate based on the NOx emissions reduction required of the resized aftertreatment system. The baseline engine, which would require a 4.3 g/hp-hr NOx reduction (4.8 g/hp-hr engine-out minus 0.5 g/hp-hr tailpipe NOx emissions) would require a DEF dosing rate of 5.9 percent. Similarly, the compliant engine would require a 2.8 g/hp-hr NOx reduction (3.0 g/hp-hr engine-out emissions minus 0.2 g/hp-hr tailpipe NOx emissions) in the aftertreatment system and therefore a DEF dosing rate of 3.8 percent.

36y = -73.679x + 0.0149 R2 = 0.9959

-10

-8 -6 -4 -2 0 2

0.001 0.021 0.041 0.061 0.081 0.101 0.121NOx Reduction (g/hp-hr)

DEF Dosing Rate (gal DEF/gal Fuel) NOx Reduction Achieved from Diesel Exhaust Fluid Dosing Rates

Figure 3-1: Diesel Exhaust Fluid Dosing Rate Impact on NOX Reduction

37We estimated the fuel consumption impact due to engine calibration changes, such as changes to injection timing and EGR rates, to achieve various engine-out NOx emissions. Figure 3-2 shows our estimate of the impact. This curve was developed from confidential business information provided by engine manufacturers, based on the following principles:

 Manufacturer data should be roughly weighted based on each manufacturer’s approximate share of the heavy heavy-duty engine market.

 Data provided in the 3.0 to 4.8 g/hp-hr range should be given a greater weight because this is the range that represents the expected change in engine-out emissions and resulting fuel consumption from the baseline engine to a compliant engine. Thus, this is in the range used to define the final penalty amount.

 Data provided in more detail should be weighted more highly than data provided in lesser detail.

 The line should be continuous, but curve slightly to reflect the known trend of flattening at higher NOx levels.

 The projections for NOx levels below 3.0 g/hp-hr should represent fuel consumption changes observed and reported for 2010 engines relative to 2009 engines.

 The curve should be somewhat conservative to protect complying manufacturers, but not unreasonably conservative. It should be conservative with respect to both the analysis used to set the penalty and the alternative scenarios.
We project that the fuel consumption of the compliant engine with engine-out emissions of 3.0 g/hp-hr would be approximately 1.9 percent worse than the baseline engine with engine-out emissions of 4.8 g/hp-hr. This net value is very similar to the net values recommended by several commenters. See the Response to Comments document for this Final Rule for a more complete discussion of how this value compares to the values recommended by commenters.
It is important to emphasize that we do not believe that a 1.9 percent increase in fuel consumption is actually a worst case assumption. We are not using a truly worst case assumption because we believe that may very well overstate the market value of reduced fuel consumption. As is described in Section 1.7, there is reason to believe that many truck purchasers may undervalue future fuel savings (relative to our estimate of the net present value). Thus, including full lifetime costs of even the likely difference in fuel consumption rates is somewhat conservative. However, we believe that the 1.9 percent increase is somewhat higher than the likely difference for most engines, and it therefore even more conservative.

380.97 0.98 0.99 1.00 1.01 1.02 1.03 1.04

0.00 1.00 2.00 3.00 4.00 5.00 6.00Relative Fuel Consumption

Engine-out NOx Emissions (g/hp-hr) Engine-Out NOx Emissions Impact on Relative Fuel Consumption

Figure 3-2: Engine-Out NOx Emissions Impact on Relative Fuel Consumption
Next we calculated the NPV of the DEF and fuel consumption changes. We estimated the NPV of the DEF impact using DEF prices discussed in Section 3.1.3 and in Appendix A. These DEF prices are lower in the near term, but higher in the very long term than we assumed for our proposal. We estimated the NPV of the fuel impact using projected fuel prices from the Annual Energy Outlook 2012 which are significantly higher than the 2011 prices used for the proposal. The baseline fuel economy of a typical heavy heavy-duty vehicle was based on the baseline fuel consumption rates generated for the Heavy-Duty GHG rule. 26 The baseline fuel economy used in the analysis was 4.93 mpg for heavy heavy-duty vehicles. The stream of undiscounted DEF savings and fuel costs for the heavy heavy-duty engines going from 0.50 g/hp-hr to 0.20 g/hp-hr are included below in Table 7. The NPV of the total fluid costs shown in Table 7, using a seven percent discount rate, is $2,642 for heavy heavy-duty engines (in 2011 dollars).

39Table 7: Undiscounted DEF and Fuel Costs for Heavy Heavy-Duty Engines (2011$)

Calendar Year Fuel Costs DEF Savings Total Fluid Cost 2012 $1,247 -$878 $369 2013 $1,132 -$850 $282 2014 $1,117 -$775 $342 2015 $1,064 -$724 $340 2016 $992 -$675 $317 2017 $924 -$628 $296 2018 $858 -$584 $274 2019 $791 -$543 $248 2020 $729 -$503 $226 2021 $667 -$462 $205 2022 $607 -$423 $184 2023 $555 -$389 $167 2024 $509 -$358 $151 2025 $469 -$329 $140 2026 $428 -$302 $126 2027 $387 -$277 $110 2028 $351 -$253 $98 2029 $321 -$232 $89 2030 $293 -$213 $80 2031 $270 -$194 $76 2032 $247 -$177 $70 2033 $220 -$163 $57 2034 $199 -$149 $50 2035 $182 -$137 $46 2036 $168 -$125 $42 2037 $154 -$114 $39 2038 $141 -$105 $36 2039 $130 -$96 $34 2040 $119 -$88 $31 2041 $110 -$81 $29 2042 $101 -$74 $27

3.3.3.2 Hardware, Warranty, and Research & Development Costs

An SCR aftertreatment system originally designed for 0.50 g/hp-hr NOx would require hardware modifications to achieve tailpipe emissions levels of 0.20 g/hp-hr. Based on conversations with manufacturers and our own engineering analysis, we believe that the lower NOx emissions levels would require:

 The addition of SCR catalyst volume to gain NOx efficiency,

 Improvements to the diesel oxidation catalyst (DOC) due to the lower engine-out NOx emissions and higher soot conditions,

 An optimized turbocharger to cover a broader range of EGR flow, and

 An ammonia sensor for better control over the urea injection.

40Note that this list of hardware changes is consistent with the list of hardware changes provided by Cummins in its public comments. Nearly all these costs would actually be born directly by the engine manufacturer, but in some cases some small fraction may be born by the vehicle manufacturer. For simplicity, our analysis includes engine manufacturing and vehicle manufacturing costs together.
The incremental SCR catalyst costs were estimated from the direct manufacturing costs of a SCR system projected for a light-duty pickup truck in the 2017-2025 Light-Duty Greenhouse Gas Emissions Notice of Proposed Rulemaking. 27 We first converted the costs from 2009 dollars to 2011 dollars and then scaled the direct manufacturing cost of the SCR catalyst based on the ratio of a typical engine displacement in each engine class, as shown in Table 8 below.

Table 8: SCR Direct Manufacturer Cost (2011$)
Light-Duty (4.0L) HHD (13L) Complete SCR $427 $1,387 Catalyst
As proposed, we estimated the incremental cost of the catalyst to improve the NOx conversion efficiency through increased SCR catalyst volume and/or improved loading is estimated to be 20 percent of the total catalyst cost J , as shown below. The Agency then applied a 1.15 indirect cost multiplier (ICM) to convert the direct manufacturing costs to marked up costs. The 1.15 multiplier consists of two percent for research and development and 13 percent for warranty and other costs. 28 The marked up costs are shown below in Table 9.

Table 9: SCR Catalyst Incremental Cost

HHD Incremental Direct Manufacturing Cost $277 Research and Development Cost (2%) $6 Warranty and Other Cost (13%) $36 Total Incremental SCR Catalyst Cost $319
The incremental DOC costs were estimated using the same cost process used for the SCR catalyst. The direct manufacturing costs of the DOC are estimated from a light-duty pickup truck DOC cost in the 2017-2025 Light-Duty Greenhouse Gas Emissions Notice of

J This value can be calculated from the conversion efficiencies noted in Section 3.3.3.1. If you assume a uniform conversion rate throughout the catalyst, to achieve an overall conversion of 90 %, each fifth of the catalyst must reduce NOx emissions by 37%: (1-.37)^5 = 0.10. Reducing these NOx emissions by an additional 37 percent results in a 94% conversion; (1-.37)^6 = 0.06.

41Proposed Rulemaking. 29 We first converted the DOC costs from 2009 dollars to 2011 dollars and then scaled the direct manufacturing cost of the DOC based on the ratio of a typical engine displacement in each engine class, as shown in Table 10 below.

Table 10: DOC Direct Manufacturer Cost (2011$)
Light-Duty (4.0L) HHD (13L) DOC $528 $1,717
We agree with commenters who stated that the DOC would require additional precious metals in the compliant engine because the lower total engine out NOx emissions would also lead to lower NO 2 concentrations in the exhaust. Because NO 2 is used to regenerate the DPF, manufacturers would need to actually produce additional nitrogen dioxide from the DOC in order to completely regenerate the DPF. Similar to our estimate of the required catalyst change, we estimate that the improved loading would cost approximately 20 percent of the total DOC cost, as shown below in Table 11. Also shown in the table below, we then applied a two percent mark up for research and development and 13 percent for warranty and other costs. 30 This cost is similar to costs provided in confidential comments from engine manufacturers.

Table 11: DOC Incremental Cost

HHD Incremental Direct Manufacturing Cost $343 Research and Development Cost (2%) $7 Warranty and Other Cost (13%) $45 Total Incremental DOC Cost $395

4212. 32 We are adding the cost of an ammonia sensor which allows for better control of the urea injection to achieve lower tailpipe NOx emissions. The cost for an ammonia sensor was developed by converting a sensor’s retail price to a direct manufacturing cost and then to a marked up cost, similar to the procedure used above for the SCR catalyst cost. The direct manufacturing costs were calculated based on the Retail Price Equivalent (RPE). The RPE for heavy-duty engines is 1.35 as found in the study conducted by ICF International for the Heavy-Duty Greenhouse Gas Emissions rulemaking. 31 The sensor costs are shown in Table

Table 12: Incremental Sensor Cost

HHD Sensor Retail Price $221 Sensor Direct Manufacturing Cost $164 Sensor Research and Development Cost (2%) $3 Sensor Warranty and Other Cost (13%) $21 Total Incremental Sensor Cost $189
We calculated the costs of modifications required for the variable geometry turbocharger. Based on the Light-Duty GHG cost estimates, we estimated that the VGT would have a direct manufacturing cost of $218 (2011$) for a large pick-up truck. Using cylinder displacement volume to ratio the costs into the heavy heavy-duty class, we derived the VGT costs included in Table 13.

Table 13: VGT Direct Manufacturer Cost (2011$)
Light-Duty (4.0L) HHD (13L) VGT $218 $709
We agree with commenters who stated that the turbomachinery may require additional costs in the compliant engine because the higher EGR rates required to achieve the lower engine-out NOx emissions would require additional thermal management and performance balancing. Our estimate is that the improved VGT would cost approximately 20 percent more than the total VGT cost for the 0.50 g/hp-hr baseline engine, as shown below in Table 14. This value is similar to costs provided in confidential comments from engine manufacturers.

Table 14: VGT Incremental Cost for COC 90

HHD Incremental Direct Manufacturing Cost $142 Research and Development Cost (2%) $3 Warranty and Other Cost (13%) $18 Total Incremental VGT Cost $163

433.3.3.3 Operating Costs: Post Warranty Repair and Demurrage
Manufacturers would generally be expected to incur additional warranty costs due to the addition of new components, as noted above in the hardware costs. Using our ICM method, we estimate that this incremental warranty cost would be two percent of the incremental hardware cost. Typically, this would cover the additional costs of repairs that are needed during the warranty period that are associated with incremental hardware costs. Note that, as is described later in this section, we believe there would also be additional warranty costs associated with the effect of the lower emission levels on the OBD system, rather than the incremental hardware costs.
There can also be additional unscheduled repairs to the new hardware after the warranty period ends. In addition, for both warranty repairs and post-warranty repairs, there are also real costs incurred by the vehicle owners for demurrage (i.e., the time during whichthe vehicle is out of service). Some manufacturers provided us with estimates with postwarranty repair costs with demurrage, while others did not. After reviewing these different estimates, it became clear that they were not consistent with our estimates of warranty repairs, and that we needed to estimate post-warranty repair and demurrage costs independently.
For the Final Rule, we calculated the post-warranty repair and demurrage costs relative to the incremental warranty costs. We used the ratio of post-warranty repair costs and demurrage costs relative to warranty costs developed in the 2004 NCP Technical Support Document. 33 Table 15 includes the costs developed for warranty, post-warranty repair, and demurrage for the 2004 NCP rule.

Table 15: 2004 Heavy Heavy-Duty Engine NCP Costs

2004 HHD Expressed as Percent of Warranty Costs Warranty Costs $380

- Post-warranty repair Costs $370 97% Demurrage Costs $220 58%
We utilized the ratio of the post-warranty repair and demurrage costs relative to the warranty costs from 2004 to calculate the 2012 post-warranty repair and demurrage costs, as shown in Table 16 below.

Table 16: Final Rule Warranty, Post-Warranty repair, and Demurrage Costs for 2012 MY HHD Engines Associated with Incremental Hardware Costs

COC 90 Warranty Costs (see Section 3.3.3.2) $19 Post-warranty repair Costs $18 Demurrage Costs $11

44In addition to the typical warranty and post-warranty repair costs, commenters stated that there may be an increase in repair costs for compliant engines compared to engines at the upper limit. Since OBD systems must detect emission problems relative to thresholds specified as an addition to the family emission limit (or compliance level for NCP engines) and notify the operator of concerns, using NCPs to certify above the standard could result in fewer emission-related repairs. We estimate that the warranty and post warranty costs of the OBD-related issues are $38 based on the assumption that a HHD engine costs approximately $30,000 and that all warranty costs are two percent of the direct manufacturing cost, per our Indirect Cost Multiplier approach that is being used throughout this analysis. We assumed that 50 percent of the warranty costs are emission-related, and of those, only five percent are related to OBD threshold levels. This leads to an OBD-caused warranty level of $15, and using the ratios in Table 15, the post warranty OBD and demurrage operator costs would be $23. The OBD-related repair costs for HHD engines are included below in Table 17. It is important to emphasize that such costs are appropriate for NCP rulemakings that address competitive effects; however, such costs were not included in our OBD rule because the OBD system is only catching failure modes for which manufacturers were already responsible.

Table 17: Final Rule OBD-Related Repair Costs for 2012 MY HHD Engines

OBD Related

Warranty OBD Related Post-warranty

repair and demurrage OBD Threshold Related Costs $15 $23

3.3.3.4 Total Costs

The total estimated costs for COC 90 for HHD engines are included below in Table 18.

Table 18: HHD COC 90 Costs

COC 90 Fuel Operating Costs $8,833 DEF Operating Savings -$6,191 Hardware Costs $927 Research and Development Cost $19 Warranty and Other Manufacturer Costs $135 Post-warranty Repair Costs $41 Demurrage Costs $11 Total Cost $3,775

453.3.4 NCP Compliance Costs: COC 50 This section describes our estimate of the typical compliance costs to reduce tailpipe NOx emissions 0.50 g/hp-hr to 0.20 g/hp-hr. This cost is COC 50 . Note that while this value does not affect the actual penalty curve, the regulations require that we determine a value for COC 50 .
We calculated COC 50 from two parallel estimates of compliance costs. The first was the COC 90 cost, which was described in the previous section and is intended to represent the total life-cycle costs for reducing the emissions from the upper limit to the standard level for an SCR engine. The second is an estimate of the total life-cycle costs for reducing the emissions to the standard level for a non-SCR engine. As described in Appendix B, we estimated this cost to be $994. We calculated COC 50 as a weighted average of these two values, assuming the SCR costs represent 80 percent of the fleet and the non-SCR costs represent 20 percent of the fleet. The resulting weighted average of the estimated cost for EGR ($994) and the COC 90 cost for SCR ($3,775) is $3,219.

3.3.5 MC 50 and F

MC 50 and F are two parameters used in the existing regulations in the calculation of the value X (see 40 CFR 86.1113-87 (a)(4)). X is the compliance level (g/hp-hr) above the standard where the penalty equals COC 50 . This section describes the derivation of MC 50 and F for heavy heavy-duty engines.

3.3.5.1 Estimated value of MC 50

MC 50 is the marginal cost of compliance for the average vehicle, expressed in terms of dollars per g/hp-hr of NOx emission controlled. In concept, it would be based on the difference in total compliance costs for an engine that had emissions equal to the standard (i.e., 0.20 g/hp-hr) and an engine that had emissions slightly above the standard. For example, if we had an estimate of the total cost of compliance for a typical engine with emissions equal to 0.30 g/hp-hr, then we would calculate MC 50 as the difference between that cost and the average divided by the difference in emissions (0.10 g/hp-hr). However, in the case of this rulemaking, we do not have such detailed information. Moreover, the range of NOx emissions control is narrow, which means that marginal cost can reasonably be assumed to be constant over the range. Therefore, we have calculated MC 50 as COC 50 (the estimated costs of the average control strategies that we believe will be used by manufacturers to achieve NOx control in the 0.20 to 0.50 g/hp-hr range), divided by the difference between the upper limit and the standard (0.30 g/hp-hr). This is $10,729 per g/hp-hr for heavy heavy-duty.

463.3.5.2 Estimated value of F
The parameter F is defined in the existing regulations as a value from 1.1 to 1.3 that describes the ratio of the 90th percentile marginal cost (MC 90 ) to MC 50 . We calculated F by first calculating an MC 90 in the same way that we calculated MC 50 . We then calculated the value of F that would give these values of MC 90 , and then set F equal to MC 90 divided by MC 50 . Using this approach we calculated MC 90 to be $12,583 per g/hp-hr for heavy heavyduty. This led to F values of 1.173 for heavy heavy-duty.



### 3.4 EPA Analysis of Costs for Medium Heavy-Duty Engines
The Interim TSD provided EPA’s proposed NCP values for both medium and heavy heavy-duty engines. We have decided to seek additional comment before finalizing medium heavy-duty engine NCPs. However, we performed an analysis of three alternative methods to calculate medium heavy-duty NCP values, which mirror the approaches evaluated for heavy heavy-duty engines. The description and analysis of these alternatives are included in Appendix C.

47

## Chapter 4: Regulatory Parameters and Final Penalties

4.1 Heavy Heavy-Duty Engine NCP Equations and Parameters
EPA's existing regulations for calculating NCPs are contained in 40 CFR Part 86 Subpart L. NCP schedules can be calculated from those same equations using the Upper Limit, COC 50 , COC 90 , MC 50 , and F values from the previous chapter, and a standard level (S) of 0.20 g/hp-hr NOx. The values for X are calculated using these values and the following equation from Subpart L:
X = (COC 50 / F / MC 50 ) + S
The purpose of this equation is to achieve a penalty curve in which the slope for engines with compliance levels near the standard is equal to the 90th percentile marginal cost of compliance (MC 90 equals MC 50 times F).

Table 19: NCP Parameters

NCP Parameter Heavy Heavy-Duty Engines COC 50 $3,219 COC 90 $3,775 MC 50 ($ per g/hp-hr) $10,729 MC 90 ($ per g/hp-hr) $12,583 F 1.173 UL (g/hp-hr) 0.50 S (g/hp-hr) 0.20 X (g/hp-hr) 0.456
When the factors listed in Table 19 are input into the existing NCP equations specified in 40 CFR 86.1113(a)(1) and (2), for year n=1 (that is, the first year the penalties are available, thus the annual adjustment factor is equal to 1), the resulting penalty versus compliance level for each service class are shown in Figure 4-1.

48$­ $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 $4,000

0.20 0.25 0.30 0.35 0.40 0.45 0.50NCP Value



### NOx Emissions Level (g/hp-hr) 

## 2012 Heavy Heavy-Duty Engine NCP

Figure 4-1: Heavy Heavy-Duty Engine NCP

4.1.1 Refund for Engineering and Development Costs
Section 86.1113-87(h) of the existing regulations specifies provisions under which a manufacturer that pays NCPs can recover some of the amount it has paid, provided it certifies a conforming replacement for the engines which used the NCPs. The maximum amount that can be recovered is limited to 90 percent of the portion of the penalty which EPA determines to be related to engineering and development. Thus, it is necessary for EPA to establish in each NCP rule a factor for each service class (F E&D ) which define the fractions of the NCP which is considered to be related to engineering and development. As discussed in Chapter 3, we determined that $19 of the NCP COC 90 value is related to engineering and development. Thus, the F E&D value is equal to $19 divided by the COC 90 value of $3,775, or 0.005.

Table 20: Engineering and Development Refund Factors

Service Class F E&D Factor Heavy Heavy-Duty Engines 0.005

49

### 4.2 Factors Influencing Competition
The structure of the NCP regulations is intended to result in NCPs that will remove the competitive disadvantage to complying manufacturers. It does this by setting the maximum penalty based directly on the nominally worst case (90th percentile) cost that a complying manufacturer (and the operator) had to pay to reduce emissions from the upper limit to the standard.
However, subjective factors can possibly make the monetary value of the competitive advantage higher or lower than the compliance costs incurred by the complying manufacturers and users. Possible factors include:

 Perceived inconvenience of using DEF

 Public relations benefits for a company using the cleanest engines

 Fears of new technology

 Uncertainty about future fuel and DEF prices

 Operator preference for a particular vehicle manufacturer limiting engine choice

 Marketing claims and unknown performance characteristics
For example, a purchaser unfamiliar with SCR technology may imagine that costs and convenience will be worse than they actually would be, and as a result may avoid purchasing an SCR-equipped truck unless the manufacturer discounts the price. This would exacerbate the disadvantage for SCR manufacturers beyond what would be calculated based on costs alone. On the other hand, a trucking company that promotes itself as being an environmentally responsible company may be willing to pay a premium to ensure that its trucks have low-emitting engines. Similarly, a purchaser with a strong preference for a particular truck brand may be relatively unaffected by the price of the compliant engines if they are the only engines it can get in a truck of that brand. These factors would tend to make the disadvantage for compliant manufacturers less than what would be calculated based on costs alone.
In particular, it is worth noting that to the extent the energy paradox (discussed in Section 1.7) applies, purchasers would tend to discount future operating costs or savings relative to purchase prices. While we include the full net present value of lifetime operating costs/savings in our COC 50 and COC 90 values, we considered the possibility of an energy paradox when evaluating how conservative to make our assumptions about operating cost parameters. See Section 4.2.3 for a discussion of how sensitive the effectiveness of NCPs is to the assumed operating costs.
The analyses are presented here primarily for the comparison of engines equipped with SCR to those that are not equipped with SCR because we believe that NCPs will be used only for such engines. We note that the NCP must also prevent SCR engine manufacturers from gaining any competitive advantage by paying NCPs to increase NOx emissions. Because the NCPs being established are based on that specific scenario, we are confident that

50the NCPs are high enough to prevent this from happening. Nevertheless, we evaluate this scenario further in Section 4.2.3.
EPA recognizes that insufficient information is available to conclusively prove that the NCP removes all competitive disadvantages to all complying manufacturers. However, it is still helpful to consider market data to put the amount of the NCPs into context. To do this, EPA considered the available information about market prices and market share. As described below, both market prices and market shares support our conclusion that the NCPs are large enough to remove the competitive disadvantage to complying manufacturers.

4.2.1 Market Prices
When heavy-duty truck manufacturers increase prices to recover costs associated with reducing emissions, they typically identify the cost as an emission surcharge. The surcharges are applied at the time the trucks are purchased and are intended to cover all additional costs to the engine and truck manufacturers, including R&D, tooling, hardware, warranty and other overhead. They are not intended to cover operating costs. In many cases, purchasers may negotiate a lower surcharge, especially when purchasing a large number of trucks at once.
We considered the surcharges that manufacturers publicly released as the additional cost for the 2010 emission controls. The surcharges ranged from $9,000 to $9,600 for SCR equipped heavy heavy-duty engines, and was $8,000 for the one non-SCR manufacturer. 34 To the extent these surcharges are based on the actual costs, it suggests that the cost advantage for non-SCR engines is about $1,000 to $1,600 dollars. Of course, different manufacturers may be applying different discounts to their surcharges, or use different factors to mark up their actual costs. As discussed in Appendix B, we believe that the actual cost difference could be significantly more than this.
Note that these costs are relative to the manufacturers’ 2009 engines which generally had NOx emissions near 1.2 g/hp-hr; this level is significantly above the upper limit for the NCPs. So these costs do not reflect the costs upon which the NCP are based. For complying manufacturers, the surcharges include the costs that would be associated with reducing NOx emissions to 0.50 g/hp-hr as well as the cost associated with further reducing NOx emissions to 0.20 g/hp-hr.
These surcharges are not fundamentally inconsistent with our understanding of the differences in hardware costs between the two technology paths. SCR manufacturers need to recover the costs of the SCR catalyst itself, as well as the costs of the urea supply and delivery systems. The non-SCR manufacturer needs to recover the costs of the additional turbochargers and EGR coolers, along with changes to the loading of the DPF. We believethe hardware costs of SCR systems could be $4,000 more than the hardware costs of the nonSCR system. Of course, each manufacturer also needs to recover its R&D, warranty and other overhead costs. As discussed in Appendix B, we believe that much of the additional hardware cost will be recovered by operators due to reduced fuel consumption for SCR engines.

514.2.2 Market Share
As noted in Chapter 1, we also evaluated the market share of each of the largest Class 8 heavy -duty truck manufacturers in 2008 through 2011 (shown in Figure 1-4). Although the market share of each manufacturer normally varies from year to year (for a variety of reasons, such as introduction of a new model by one manufacturer or new purchases by large fleets), observing longer term trends can be instructive. The most significant trend observed is that the one non- SCR manufacturer has actually lost market share since 2008, even though it appears to be offering its engines with a lower emissions surcharge

. Preliminary data shows that its market share may be even lower for 2012.

4.2.3 Sensitivity to Operating Costs

More than one-half of our estimated compliance costs for heavy heavy

- duty engines are due to a projected difference in net operating costs between engines at 0.20 g/hp

- hr and engines at 0.50 g/hp-hr. Thus, it is appropriate to evaluate the market impacts of potential errors in the analysis. In particular, we evaluated three alternative price scenarios. In the first, we estimate costs in the same way as for our COC 90 analysis, except we assume tha t annual operating costs are higher than we assumed because DEF costs 60 percent less than fuel, as recommended by Cummins in its comments on the NPRM. This same scenario could result from fuel prices being higher than we assumed in our analysis. The second and third scenario s would be the same as the first, but we would discount future costs by three percent or zero percent instead of seven percent. We believe these scenarios significantly overestimate the annual operating costs associated with meeting the 0.20 g/hp-hr standard and represent worse than worst case scenario s. Figure 4-2 plots the streams of costs for all scenarios as a function of vehicle age for the first 10 years of a vehicle’s lifetime. This figure shows that even using very conservative price assumptions, it would take at least four years for an operator to save enough money to recover the cost of the first year NCP. Since the NCP will increase in each subsequent model year, recovery times will also increase . Thus, since manufacturers consistently tell us that they do not voluntarily pursue engines changes with payback periods this long, we can conclude that the NCPs being established are high enough to preclude any SCR engine manufacturer from backsliding.

52$­ $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 $4,000 $4,500 $5,000

8 9 10Net Savings, NCP Penalty NCP Recovery Time Assuming Various Fluid Prices (Manufacturer Savings plus Cummulative Operating Savings vs Vehicle Age)

MY 2012 NCP

EPA with 7% discount rate

Lower DEF Price with 7% discount rate Lower DEF Price with 3% discount rate Lower DEF Price undiscounted

1 2 3 4 5 6 7 Operating Year

Figure 4-2- NCP Recovery Time for Various Fluid Prices.

We also considered a scenario based on late comments from PACCAR. In those comments, PACCAR claimed that an SCR engine optimized for 0.50 g/hp-hr NOx would have four percent better fuel consumption than a 0.20 g/hp-hr engine, but would consume two percent more DEF. It is important to note that this is a much larger impact than was claimed by any other engine manufacturer in comments on this rule. Nevertheless, while we cannot verify these claims, we did evaluate a scenario in which an SCR engine would reduce fuel consumption by four percent but increase DEF consumption by two percent. If one assumes that this engine would have the same hardware savings as our baseline engine but not incur significant additional development costs, it would take more than two years for operator savings to offset the net cost of the first year NCP (the NCP amount minus the hardware savings). To the extent that a manufacturer incurred additional development costs or was unable to achieve the same hardware savings, this payback period would be longer. Also, the annual escalation of the NCP amount would also make the payback period longer for later model years. We do not believe that this scenario justifies a higher penalty, especially considering the uncertainty associated with it.

53

## Appendix A. Calculations

This appendix provides additional details for the calculations used to estimate the NCP costs.



### 1. Calculation of Operating Costs
This section A.1 includes the values used in the fuel and DEF consumption cost calculations other than prices. Table A - 1 lists the inputs used for the analysis. 35 Table A - 2 shows the fleet average annual vehicle miles travelled of all 2012 model year vehicles within a given class (e.g., medium heavy-duty diesel vehicles) after considering the survival fraction of each vehicle class.

Table A - 1: Inputs Used for Operating Cost Analysis

Parameter Input Medium HD Vehicle Typical Fuel Economy (mpg) 9.7 Heavy HD Vehicle Typical Fuel Economy (mpg) 4.9 Discount Rate 7.0%

54Table A - 2: Annual Vehicle Miles Traveled by Calendar Year for Typical 2012 Model Year Vehicles

Calendar Year Medium HD Vehicle Heavy HD Vehicle 2012 34,698 82,130 2013 33,610 81,056 2014 30,664 75,406 2015 27,882 69,566 2016 25,349 64,019 2017 22,988 58,820 2018 20,822 54,014 2019 18,851 49,532 2020 17,074 45,303 2021 15,326 41,073 2022 13,784 37,113 2023 12,410 33,674 2024 11,212 30,606 2025 10,161 27,805 2026 9,180 25,162 2027 8,280 22,781 2028 7,460 20,553 2029 6,721 18,605 2030 6,109 16,822 2031 5,520 15,190 2032 4,934 13,679 2033 4,493 12,408 2034 4,054 11,206 2035 3,682 10,140 2036 3,321 9,172 2037 2,977 8,272 2038 2,683 7,484 2039 2,460 6,789 2040 2,185 6,133 2041 1,973 5,537 2042 1,821 5,043



### 2. Fuel Prices
The diesel fuel prices used in the Final Rule are based on the Annual Energy Outlook (AEO) 2012 fuel price projections adjusted to 2011 dollars. Below is the Consumer Price Index used in the fuel price conversion and a table with the annual diesel fuel price projections. The annual Consumer Price Index values used in this analysis are the following: 36

 2009 = 214.537

 2010 = 218.056

 2011 = 224.939

55The AEO 2012 fuel price forecasts are provided by EIA in terms of 2010 dollars. Thus, for this analysis, we adjusted EIA’s diesel fuel price projections upward by a factor equal to 224.9 divided by 218.1 to convert them into 2011 dollars. The diesel fuel prices used in the analysis are included in Table A - 3 below. These prices represent retail pump prices including taxes.

Table A - 3: Post-Tax Diesel Fuel Price Projections (2011$)

Calendar Year Diesel Fuel P rice per Gallon 2012 $ 3.86 2013 $ 3.55 2014 $ 3.77 2015 $ 3.89 2016 $ 3.94 2017 $ 4.00 2018 $ 4.04 2019 $ 4.06 2020 $ 4.10 2021 $ 4.13 2022 $ 4.16 2023 $ 4.20 2024 $ 4.23 2025 $ 4.30 2026 $ 4.33 2027 $ 4.32 2028 $ 4.35 2029 $ 4.39 2030 $ 4.43 2031 $ 4.52 2032 $ 4.60 2033 $ 4.52 2034 $ 4.51 2035 $ 4.58 2036 $ 4.65 2037 $ 4.73 2038 $ 4.80 2039 $ 4.88 2040 $ 4.96 2041 $ 5.03 2042 $ 5.12

56

### 3. DEF Prices
The DEF prices used in the Final Rule are included below in Table A - 4. The 2012 through 2014 DEF prices are based on Integer Research projections of retail DEF price. These prices are projected to decline due to economies of scale as DEF usage becomes more widespread. We are projecting the price of DEF will begin to increase after 2014 as natural gas prices increase. Thus, the 2015 and beyond DEF prices are based on the AEO 2012 industrial natural gas price trend of 1.3 percent increase per year. For example, the 2015 price is estimated to be equal to 101.3 percent of the 2014 price, and the 2016 price is estimated to be equal to 101.3 percent of the 2015 price. See Chapter 3 for additional information about these prices.

Table A - 4: Diesel Exhaust Fluid Price per Gallon (2011$)

Calendar Year Diesel Exhaust Fl uid Price per Gallon 2012 $ 2.60 2013 $ 2.55 2014 $ 2.50 2015 $ 2.53 2016 $ 2.57 2017 $ 2.60 2018 $ 2.63 2019 $ 2.67 2020 $ 2.70 2021 $ 2.74 2022 $ 2.77 2023 $ 2.81 2024 $ 2.84 2025 $ 2.88 2026 $ 2.92 2027 $ 2.96 2028 $ 3.00 2029 $ 3.03 2030 $ 3.07 2031 $ 3.11 2032 $ 3.15 2033 $ 3.20 2034 $ 3.24 2035 $ 3.28 2036 $ 3.32 2037 $ 3.36 2038 $ 3.41 2039 $ 3.45 2040 $ 3.50 2041 $ 3.54 2042 $ 3.59

57

### 4. Fuel and DEF Price Differences between FRM and NPRM
Figure A-1 shows the comparison between the fuel and DEF prices used in the FRM and in the NPRM.

$0.00 $0.50 $1.00 $1.50 $2.00 $2.50 $3.00 $3.50 $4.00 $4.50 $5.00

0 0 0
FRM Fuel Price FRM DEF Price

NPRM Fuel Price NPRM DEF Price

Figure A-1: Fuel and DEF Price Differences between the NPRM and FRM.

58

## Appendix B. Alternative Heavy Heavy-Duty Compliance Costs
As noted earlier, the goals of the NCP provisions are to set the penalties at a level that we reasonably expect to protect the complying manufacturers, but not so high that it effectively forces any noncomplying manufacturers from the market. To determine how to best meet these statutory goals, we considered the following methodologies for determining compliance costs:

1. 1.2 g/hp-hr NOx Baseline Engine - Scaled Cost of SCR Hardware 2. 0.50 g/hp-hr NOx Baseline Engine with EGR 3. 0.50 g/hp-hr Baseline Engine with Optimized SCR+EGR 4. 0.50 g/hp-hr Baseline Engine with Redesigned SCR+EGR

For heavy heavy-duty engines, we are using method #3 - basing our NCPs on costs of compliance relative to a reoptimized SCR engine. More specifically, we are basing our costs on an engine that could be produced in model year 2013 by making simple changes to SCR engines currently in production. As described below, we also considered the three other approaches. A summary of each approach is found in Section 4 of this Appendix B.
The purpose of analyzing these approaches is to determine if any of them would have been a more appropriate approach, because it uses a more optimal baseline engine, i.e., that a manufacturer would choose to build an engine to this design if it were to build an engine emitting at 0.50 g/hp-hr.



### 1. 1.2 g/hp-hr NOx Baseline Engine - Scaled Cost of SCR Hardware
Some commenters support basing the NCPs on the full cost of hardware needed to reduce NOx emissions from 1.2 g/hp-hr (the typical emission level of a 2009 engine) to 0.20 g/hp-hr, rather than comparing a compliant 0.20 g/hp-hr engine to a 0.50 g/hp-hr engine. However, since the regulations clearly state that compliance costs are to be calculated relative to the upper limit, this approach could only be used if we set the upper limit at 1.2 g/hp-hr. As discussed elsewhere, this would be inappropriate because all manufacturers currently certify engines at no more than 0.50 g/hp-hr. Therefore, while we estimated the COC 90 costs for a 0.20 g/hp-hr engine relative to a 1.2 g/hp-hr engine, we calculated the NCP cost for an engine with a compliance level at 0.50 g/hp-hr. This was done by scaling the total costs by 30 percent to reflect the smaller NOx emission reduction from the upper limit - a 0.30 g/hp-hr NOx reduction instead a 1.0 g/hp-hr NOx reduction. Note that while we evaluated this approach with respect to costs and competitive advantage, we think that it would not be appropriate to set the upper limit at 1.2 g/hp-hr. In particular, NCPs should not be available for levels that are higher than the level that EPA determines is practicable, which in this case would be no higher than 0.50 g/hp-hr.

59For this scenario, going from the 1.2 g/hp-hr engine to the 0.20 g/hp-hr engine, the manufacturer would need to add an SCR system (catalyst, DEF tank, brackets, and dosing unit), an ammonia clean up catalyst, and a NOx sensor. Consistent with the cost methodology discussed in Chapter 3, the costs were estimated from the direct manufacturing costs of a SCR system and DOC projected for a light-duty pickup truck in the 2017-2025 Light-Duty Greenhouse Gas Emissions Notice of Proposed Rulemaking. 37 We assumed that the ammonia clean up catalyst would cost approximately one-fourth of the cost of a DOC due to the catalyst volume difference between the two. We converted the light-duty costs from 2009 dollars to 2011 dollars and then scaled the direct manufacturing cost of the SCR system and ammonia clean up catalyst based on the ratio of typical engine displacement in each engine class, as shown in Table B - 1 below.

Table B - 1: Direct Manufacturer Cost (2011$)
Light-Duty (4.0L) HHD (13L) Complete SCR System $1,295 $4,208 Ammonia Clean Up Catalyst $132 $429
The cost for a NOx sensor was developed by converting a sensor’s retail price to a direct manufacturing cost, just as in Chapter 3. The retail price of the sensor is unchanged from the proposal. The direct manufacturing costs were calculated based on the Retail Price Equivalent (RPE). The RPE for heavy-duty engines is 1.36 as found in the study conducted by ICF International for the Heavy-Duty Greenhouse Gas Emissions rulemaking. 38 The sensor costs are shown in Table B - 2. 39

Table B - 2: Direct Manufacturer Sensor Cost

HHD Sensor Retail Price $221 Sensor Direct Manufacturing Cost $164
The Agency then applied a 1.15 indirect cost multiplier (ICM) to convert the direct manufacturing costs to marked up costs. The 1.15 multiplier consists of a two percent mark up for research and development and 13 percent mark up for warranty and other costs. 40 The marked up costs are shown below in Table B - 3.

Table B - 3: Total Hardware Cost

HHD Incremental Direct Manufacturing Cost $4,801 Research and Development Cost (2%) $96 Warranty and Other Cost (13%) $624 Total Incremental Cost $5,522
We next calculated the costs for post-warranty repair and demurrage using the ratio of each of these costs to the warranty costs that was established in the 2004 NCP rule, similar to

60the process used in Section 3.3.3.3 above. The 2004 ratios are listed in Table 15. Table B - 4 below shows the post-warranty repair and demurrage costs based on a warranty cost of $96.

Table B - 4: Post-warranty repair and Demurrage Costs for 2012 MY HHD Engines

HHD Post-warranty repair Costs $94 Demurrage Costs $56
In summary, the total hardware, post-warranty repair, and demurrage costs for a SCR system to achieve 0.20 g/hp-hr relative to a 1.2 g/hp-hr engine is $5,671.
Next, we estimated the fuel and DEF operating cost differences between an engine meeting 1.2 g/hp-hr using EGR and a compliant engine (meeting the 0.20 g/hp-hr tailpipe NOx emissions standard) using SCR. We estimate that the baseline engine would have engine-out NOx emissions of 1.2 g/hp-hr. We used the same compliant engine that we defined in the final scenario described in Section 3.3.3 where the engine-out emissions were derived based on the assumption that this engine’s aftertreatment system could achieve 94 percent efficiency (at the end of the useful life) and thus have engine-out NOx emissions of 3.0 g/hp-hr. As described in the Section 3.3.3 above, the compliant engine would require a 2.8 g/hp-hr NOx reduction in the aftertreatment system and therefore a DEF dosing rate of 3.8 percent. We also estimated that the compliant engine would have 2.25 percent better fuel consumption than the engine emitting at 1.2 g/hp-hr using the data in Figure 3-2 above.
The net present value (assuming a seven percent discount rate) of the fuel savings is $10,035 and the DEF costs is $11,354. Lastly, the COC 90 value was calculated based on the sum of the hardware costs, DEF costs, and fuel savings scaled to reflect the increment between a baseline engine of 0.50 g/hp-hr and 0.20 g/hp-hr per the equation below.
Scaling Factor = (0.50 – 0.20 g/hp-hr) ÷ (1.2 – 0.2 g/hp-hr) = 0.30

As shown in Table B - 5 below, the COC 90 value using this method would be $2,097, which is less than the COC 90 val ue calculated using an optimized SCR baseline engine (as described in Section 3.3.3). Since the COC 90 described in Section 3.3.3 reflects the competitive advantage of an SCR engine optimized for 0.50 g/hp-hr over a compliant engine, setting the penalty based on this scaled SCR cost approach would not protect the compliant manufacturers from competitive disadvantage relative to a reoptimized SCR engine.

Table B - 5: Scaled 1.2 g/hp-hr EGR Baseline Engine Costs – Heavy Heavy-Duty Engines

1.2 to 0.20 g/hp-hr COC 90 -equivalent for 0.50 to 0.20 g/hp-hr Hardware Costs $5,671 $1,701 DEF Costs $11,354 $3,406 Fuel Savings -$10,035 -$3,011 Total $2,097

61Based on comments received, we also calculated the NCP value using the surcharges used by SCR manufacturers in 2010, instead of a bill of materials approach. The emission surcharges that manufacturers have released publicly are what they determined to be the price increase necessary to recover costs associated with reducing emissions, including R&D, tooling, hardware, warranty and other overhead. Since many purchasers negotiate a lower price, the official surcharge can be assumed to be somewhat higher than the actual cost increase paid by the customer. The surcharges for SCR equipped heavy heavy-duty engines ranged from $9,000 to $9,600. To be conservative in this alternate analysis, we used $9,600. Calculating a COC 90 using a hardware cost of the highest emission surcharge ($9,600) would clearly be a worst case cost of compliance. Applying this value to a linear penalty curve with an upper limit of 1.2 g/hp-hr would result in the following scaling factor equation:
Scaling Factor = (0.50 – 0.20 g/hp-hr) ÷ (1.2 – 0.2 g/hp-hr) = 0.30
The hardware cost for a 0.50 g/hp-hr engine would be $2,880 based on the scaling factor. Because surcharges do not cover operating costs, we also need to evaluate the cost for DEF and the reduced costs for fuel. As shown in Table B - 6, combining the same additional DEF cost to take and engine from 1.2 to 0.20 g/hp-hr NOx and the same fuel savings to due to the SCR system would lead to a heavy heavy-duty COC 90 value of $3, 276 which is slightly less than the final NCP COC 90 value. This means setting NCPs based on this scenario would not protect the compliant manufacturers from competitive disadvantage relative to a reoptimized SCR engine.

Table B - 6: Scaled 1.2 g/hp-hr EGR Baseline Engine Costs Using a SCR Surcharge – Heavy Heavy-Duty Engines

1.2 to 0.20 g/hp-hr COC 90 -equivalent for 0.50 to 0.20 g/hp-hr Hardware Costs $9,600 $2,880 DEF Costs $11,354 $3,406 Fuel Savings -$10,035 -$3,011 Total $3,276
We did not choose the 1.2 g/hp-hr baseline for several reasons. First, as discussed above, a 1.2 g/hp-hr engine is inappropriate for a baseline engine where the upper limit is 0.50 g/hp-hr. While we have scaled the costs to do this calculation, it is impossible to determine how such an engine would have actually been changed to emit at 0.50 g/hp-hr.
Further, the calculations indicate that the costs of a hypothetical engine emitting at 0.50 g/hp-hr under this scenario would be greater than the costs of the optimized 0.50 g/hp-hr engine chosen in the final rule. This means it would be an unlikely choice of a manufacturer.
Put another way, the cost savings of using this approach would be only $2,097 or $3,276, compared to a compliant engine. A manufacturer currently meeting the 0.20 g/hp-hr

62standard but contemplating paying NCPs to meet a 0.50 g/hp-hr level would be unlikely to use this approach, as it does not optimize the cost savings a manufacturer would achieve. Given that NCPs are intended to protect compliant manufacturers from competitive harm from other manufacturers paying NCPs, we need to set the NCPs at the level we would expect a noncompliant manufacturer would save using an optimal cost-saving strategy.



### 2. 0.50 g/hp-hr Baseline Engine with EGR
We also analyzed a scenario with a baseline engine that achieved 0.50 g/hp-hr NOx with EGR only. We calculated the net hardware cost of adding SCR, but removing some hardware that would no longer be required with an SCR equipped engine.
Adding SCR to a 0.50 g/hp-hr engines would affect operating costs in three ways: it would add a cost for DEF, reduce costs for fuel, and could either increase or decrease the frequency of repairs.
For this scenario (like the scenario above), we added a SCR system (catalyst and dosing unit), an ammonia clean up catalyst, and a NOx sensor. The SCR costs were estimated the same as Scenario 1 above. The total hardware costs for the SCR system are shown in Table B - 7 below. In summary, the total hardware, post-warranty repair, and demurrage costs for a SCR system to achieve 0.20 g/hp-hr relative to a 1.2 g/hp-hr engine is $5,671.

Table B - 7: SCR Hardware Cost (2011$)

HHD Incremental Direct Manufacturing Cost $4,801 Research and Development Cost (2%) $96 Warranty and Other Cost (13%) $624 Post-warranty repair Costs $94 Demurrage Costs $56 Total Hardware Cost $5,671

Unlike Scenario 1 above, we did not scale the SCR costs for this alternative. Instead, we took the entire cost of the SCR system and subtracted the costs for the hardware that could be removed from a 0.50 g/hp-hr NOx EGR only engine. In other words, this would be the net cost of hardware changes made to the 0.50 g/hp-hr engines. Adding SCR would affect EGR cooling, diesel particulate filter regeneration, and turbocharging. We project that one of the two EGR coolers used on the 0.50 g/hp-hr engine could be removed because of the lower EGR requirements. In addition, we believe that the diesel particulate filter precious metal loading could be reduced by approximately 20 percent because the 0.20 g/hp-hr engine would have higher engine-out NOx emissions and lower engine-out PM emissions. Lastly, we project that the twin turbochargers used on a 0.50 g/hp-hr engine could be replaced with a single variable geometry turbocharger. We did not include any additional warranty savings beyond those associated with the hardware savings. However, Navistar has publicly noted that it has had very high emission-related warranty claims for its 2010 engines. To the extent

63there are additional warranty costs for non-SCR engines, our estimate of SCR compliance costs relative to a 0.50 g/hp-hr EGR engine would overestimate these costs. Nevertheless, this would not change our conclusion that a non-SCR engine would not have been an appropriate baseline engine for our NCP costs.
We estimated the EGR cooler costs based on the average retail price of four replacement EGR coolers available for 2008-2010 heavy-duty pickup trucks. 41 The retail prices for the HHD engines were scaled relative to the engine displacement. Then the retail prices were converted to direct manufacturing costs using the heavy-duty engine Retail Price Equivalent of 1.35 used throughout this analysis. The costs are included in Table B - 8 below.

Table B - 8: EGR Cooler Costs
HD Pickup Truck (6.4L) HHD (13L)

Retail EGR Cooler Cost $477 $969 Direct Mfr. EGR Cooler Cost $718
We estimated the diesel particulate filter precious metal loading and washcoat costs based on the costs derived from the 2017-2025 Light-Duty GHG NPRM. We assumed 20 percent of the loading could be saved based on the higher engine-out NOx emissions and lower soot emissions of the 0.20 g/hp-hr engine. The direct manufacturing costs were scaled relative to the engine displacements, as shown in Table B - 9 below.

Table B - 9: Diesel Particulate Filter Costs
Light-Duty Pickup Truck (4.0L) HHD (13L)

Diesel Particulate Washcoat and Precious Metal Loading Direct Mfr. Cost $861 20% of Diesel Particulate Washcoat and Precious Metal Loading $172 $560
The retail turbocharger costs were derived from the cost report developed by ICF International for the Heavy-Duty Greenhouse Gas rule. 42 The retail prices were converted to direct manufacturing costs using the heavy-duty engine Retail Price Equivalent of 1.35 used throughout this analysis. The costs are included in Table B - 10 below.

Table B - 10: Turbocharger Costs

Retail Price Direct Mfr. Cost Twin Turbochargers $1,000 $741 Variable Geometry Turbocharger $935 $693 Net HHD Turbocharger Cost $48

64The sum of the direct manufacturing costs for the components that could be removed from the 0.50 g/hp-hr EGR engine are included in Table B - 11, while the marked up hardware costs are included in Table B - 12.

Table B - 11: Net EGR Direct Manufacturer Hardware Costs

HHD EGR Cooler $718 DPF Loading $560 Net Turbocharger Cost $48 EGR Direct Mfr. Hardware Cost $1,326

Table B - 12: Heavy Heavy-Duty Marked Up EGR Hardware Costs

HHD Incremental EGR Direct Manufacturing Cost $1,326 Research and Development Cost (2%) $27 Warranty and Other Cost (13%) $172 EGR Marked Up Hardware Cost $1,524
We next calculated the costs for post-warranty repair and demurrage using the ratio of each of these costs to the warranty costs that was established in the 2004 NCP rule, similar to the process used in Section 3.3.3.3 above. The 2004 ratios are listed in Table 15. The resulting values are shown in Table B - 13 below.

Table B - 13: Heavy Heavy-Duty EGR Post-warranty repair and Demurrage Costs

HHD EGR Hardware Cost $1,524 Post-warranty repair Cost $26 Demurrage Cost $15 EGR Incremental Cost $1,565

The net hardware costs, taking into account the SCR hardware that would be required to meet the 0.20 g/hp-hr NOx emissions and the components on the 0.50 g/hp-hr engine that would no longer be required, are $4,105 as shown in Table B - 14.

Table B - 14: Heavy Heavy-Duty Engine Net Hardware Costs

HHD SCR Incremental Cost $5,671 EGR Incremental Cost -$1,565 Net Hardware Cost $4,105

65Next, we estimated the fuel and DEF operating cost differences between an engine meeting 0.50 g/hp-hr using EGR and a compliant engine (meeting the 0.20 g/hp-hr tailpipe NOx emissions standard). We estimate that the baseline engine would have engine-out NOx emissions of 0.50 g/hp-hr. We used the same compliant engine that we defined in Section 3.3.3 where the engine-out emissions assumes that this engine’s aftertreatment system could achieve 94 percent efficiency (at the end of the useful life) and thus have engine-out NOx emissions of 3.0 g/hp-hr. As described in the final scenario above, the compliant engine would require a 2.8 g/hp-hr NOx reduction in the aftertreatment system and therefore a DEF dosing rate of 3.8 percent. We also estimated that the compliant engine with 3.0 g/hp-hr NOx engine-out emissions would have 3.25 percent better fuel consumption than the baseline engine with engine-out emissions of 0.50 g/hp-hr NOx using the data in Figure 3-2 above.
The net present value of the fuel savings are $14,355 and the DEF costs are $11,244, using a seven percent discount rate. The COC 90 value was calculated based on the sum of the hardware costs, DEF costs, and fuel savings. As shown in Table B - 15, the COC 90 value using this method would be $994, which is substantially less than the COC 90 value calculated using a SCR baseline engine, and therefore would not protect the compliant manufacturers relative to reoptimized SCR engines.

Table B - 15: 0.50 g/hp-hr EGR Baseline Engine COC 90 – Heavy Heavy-Duty Engines

COC 90 for 0.50 to 0.20 g/hp-hr Hardware Costs $4,105 DEF Costs $11,244 Fuel Savings -$14,355 Total $994
As with the 1.2 g/hp-hr baseline engine discussed above, the calculations indicate that the costs associated with a non-SCR engine emitting at 0.50 g/hp-hr under this scenario would be greater than the costs of the optimized 0.50 g/hp-hr SCR engine chosen in the final rule, and the cost savings of using this approach, would be less than the savings from the optimized 0.50 g/hp-hr engine. In fact, even if the substantial savings in operating costs is completely ignored (which would not be appropriate), this scenario would not lead to a competitive advantage that is significantly higher than the NCPs being finalized.

66

### 3. 0.50 g/hp-hr Baseline Engine with Completely Redesigned SCR+EGR
Some commenters supported (in CBI comments) basing the penalty on an SCR engine that was fundamentally redesigned to have NOx emissions at 0.50 g/hp-hr (rather than reoptimizing an existing design). For example, some manufacturers have suggested that it would be possible to redesign engines to meet 0.50 g/hp-hr without cooled EGR. This could result in significant saving for hardware and warranty costs.
We consider such redesigns to be speculative. Thus, we cannot accurately estimate
costs for any of these options. Nevertheless, we have concluded that such redesigns are highly unlikely. While it may well be technologically possible to redesign current SCR engines to meet 0.50 g/hp-hr NOx with significantly lower hardware costs, we do not believe that there is a feasible business model in which such savings would justify paying an NCP.
Fundamentally redesigning an engine would take a minimum of two years. So a manufacturer that began redesigning its engines today could not expect to have the new engine ready for production before model year 2015. At that point, the annual adjustments to the NCPs would have increased the penalty to $5,000 or more. Moreover, if the manufacturer elected to certify and produce such an engine, two things would happen. First, using NCPs in model year 2015 would result in a rapidly increasing penalty due to the annual adjustment factors, perhaps up to $8,000 by 2017. Second, if we determined that a manufacturer that was capable of complying was choosing to pay NCPs instead, we would revise the regulations to substantially increase the penalties to remove any cost advantage for such engines. Thus, a manufacturer would need to recover all of its investments within one or two model years.

67

### 4. Summary of Heavy Heavy-Duty Alternatives
We selected the cost methodology described in Chapter 3 because it best conforms to the statutory requirements to allow noncomplying manufacturers to continue selling engines without any competitive advantage. We considered two other options that would have been less protective for complying manufacturers and another option that we found to be unrealistic. These alternatives are summarized in the Table B - 16.

Table B - 16: Summary of the Alternatives Considered

Reoptimized SCRBaseline 0.50 g/hphr Engine 1.2 g/hp-hr SCR Baseline Engine with Scaled Costs 0.50 g/hp-hr EGR Baseline Engine 0.50 g/hp-hr Fundamentally Redesigned SCR Baseline Engine

Description of Base NCPs on a Base NCPs on the Base NCPs on a Base NCPs on a Alternative baseline engine thatachieves 0.50 g/hphr NOx using SCR that is reoptimized for fuel and DEF consumption. full cost of hardware needed to reduce NOx emissions from 1.2 g/hp-hr (the typical emission level of a 2009 engine) to 0.20 g/hp-hr scaled to represent the costs for an engine with a compliancelevel at 0.50 g/hphr. baseline engine thatachieves 0.50 g/hphr NOx without SCR. baseline engine thatachieves 0.50 g/hphr NOx using SCR that is fundamentally redesigned (such as removing cooled EGR or removing the DPF).

First-Year Penalty at 0.50 g/hp-hr $3,775 $2,097-$3,276 $994 Not determined

Comparison to Primary Methodology Primary methodology Less protective to complying manufacturers Less protective to complying manufacturers Unrealistic business model

68

## Appendix C. Medium Heavy-Duty (MHD) Compliance Costs
The purpose of adopting NCPs is to allow a noncompliant manufacturer to continue selling its engines. However, the Clean Air Act directs EPA to set the NCPs at a level that will “remove any competitive disadvantage” to complying manufacturers. Thus, the statute effectively requires us to set the penalties at a level that we reasonably expect to protect the complying manufacturers, but not so high that it effectively forces any noncomplying manufacturers from the market.
To determine how to best meet these statutory goals, we considered the following methodologies for determining compliance costs:

1. 1.2 g/hp-hr NOx Baseline Engine with EGR - Scaled Cost of SCR Hardware 2. 0.50 g/hp-hr NOx Baseline Engine with EGR 3. 0.50 g/hp-hr Baseline Engine with Optimized SCR+EGR



### 1. 1.2 g/hp-hr NOx Baseline Engine - Scaled Cost of SCR Hardware
Some commenters support basing the NCPs on the full cost of hardware needed to reduce NOx emissions from 1.2 g/hp-hr (the typical emission level of a 2009 engine) to 0.20 g/hp-hr, rather than comparing a compliant 0.20 g/hp-hr engine to a 0.50 g/hp-hr engine. However, since the regulations clearly state that compliance costs are to be calculated relative to the upper limit, this approach could only be used if we set the upper limit at 1.2 g/hp-hr. Therefore, we estimated the COC 90 costs for a 0.20 g/hp-hr engine relative to a 1.2 g/hp-hr engine, but calculated the NCP cost for an engine with a compliance level at 0.50 g/hp-hr. This was done by scaling the total costs by 30 percent to reflect the smaller NOx emission reduction from the upper limit - a 0.20 g/hp-hr NOx reduction instead a 1.0 g/hp-hr NOx reduction. Note that while we evaluated this approach with respect to costs and competitive advantage, we think that it would not be appropriate to set the upper limit at 1.2 g/hp-hr. In particular, NCPs should not be available for levels that are higher than the level that EPA determines is practicable, which in this case would be no higher than 0.50 g/hp-hr.
For this scenario, a manufacturer would need to add an SCR system (catalyst, DEF tank, and dosing unit), an ammonia clean up catalyst, and a NOx sensor. Consistent with the cost methodology discussed in Chapter 3, the costs were estimated from the direct manufacturing costs of a SCR system and DOC projected for a light-duty pickup truck in the 2017-2025 Light-Duty Greenhouse Gas Emissions Notice of Proposed Rulemaking. 43 We assumed that the ammonia clean up catalyst would cost approximately one-fourth of the cost of a DOC due to the catalyst volume difference between the two. We converted the light-duty costs from 2009 dollars to 2011 dollars and then scaled the direct manufacturing cost of the SCR system and ammonia clean up catalyst based on the ratio of typical engine displacement in each engine class, as shown in Table C - 1 below.

69Table C - 1: Direct Manufacturer Cost (2011$)
Light-Duty Pickup Truck (4.0L) MHD (8L)

Complete SCR System $1,295 $2,590 Ammonia Clean Up Catalyst $132 $264
The cost for a NOx sensor was developed by converting a sensor’s retail price to a direct manufacturing cost, just as in Chapter 3. The retail price of the sensor is unchanged from the proposal. The direct manufacturing costs were calculated based on the Retail Price Equivalent (RPE). The RPE for heavy-duty engines is 1.36 as found in the study conducted by ICF International for the Heavy-Duty Greenhouse Gas Emissions rulemaking. 44 The sensor costs are shown in Table C - 2. 45

Table C - 2: Direct Manufacturer Sensor Cost

MHD Sensor Retail Price $221 Sensor Direct Manufacturing Cost $164
The Agency then applied a 1.15 indirect cost multiplier (ICM) to convert the direct manufacturing costs to marked up costs. The 1.15 multiplier consists of two percent mark up for research and development and 13 percent mark up for warranty and other costs. 46 The marked up costs are shown below in Table C - 3.

Table C - 3: Total Hardware Cost

MHD Incremental Direct Manufacturing Cost $3,018 Research and Development Cost (2%) $60 Warranty and Other Cost (13%) $392 Total Incremental Hardware Cost $3,470
We next calculated the costs for post-warranty repair and demurrage using the ratio of each of these costs to the warranty costs that was established in the 2004 NCP rule. The 2004 NCP ratios are listed below in Table C - 4.

Table C - 4: 2004 Medium Heavy-Duty Engine NCP Warranty, Post-warranty repair, and Demurrage Costs

2004 MHD Costs Ratio to Warranty Cost Warranty Costs $90 Post-warranty repair Costs $170 53%

Demurrage Costs $100 111%

70We utilized the ratios of the post-warranty repair and demurrage costs relative to the warranty costs from 2004 to calculate the 2012 post-warranty repair and demurrage costs relative to a warranty cost of $60, as shown in Table C - 5 below.

Table C - 5: Post-warranty repair, and Demurrage Costs for 2012 MY HHD Engines

MHD Post-warranty Repair Costs $114 Demurrage Costs $67
In summary, the total hardware, post-warranty repair, and demurrage costs for a SCR system to achieve 0.20 g/hp-hr relative to a 1.2 g/hp-hr medium heavy-duty engine is $3,651.
Next, we estimated the fuel and DEF operating cost differences between an engine meeting 1.2 g/hp-hr using EGR and a compliant engine (meeting the 0.20 g/hp-hr tailpipe NOx emissions standard) using SCR. We estimate that the baseline engine would have engine-out NOx emissions of 1.2 g/hp-hr. We used the same compliant engine that we described in Section 3.3.3 where the engine-out emissions were derived based on the assumption that this engine’s aftertreatment system could achieve 94 percent efficiency (at the end of the useful life) and thus have engine-out NOx emissions of 3.0 g/hp-hr. As described in the Section 3.3.3 above, the compliant engine would require a 2.8 g/hp-hr NOx reduction in the aftertreatment system and therefore a DEF dosing rate of 3.8 percent. We also estimated that the compliant engine would have 2.25 percent better fuel consumption than the engine emitting at 1.2 g/hp-hr using the data in Figure 3-2 above.
The net present value of the 2.25 percent fuel savings is $2,002 and the DEF costs of a 3.8 percent dosing rate is $2,266, using a seven percent discount rate. Lastly, the COC 90 value was calculated based on the sum of the hardware costs, DEF costs, and fuel savings scaled to reflect the increment between our baseline engine of 0.50 g/hp-hr and 0.20 g/hp-hr per the equation below.
Scaling Factor = (0.50 – 0.20 g/hp-hr) ÷ (1.2 – 0.2 g/hp-hr) = 0.30
The resulting COC 90 value using this method would be $1,174, as shown in Table C ­ 6.

Table C - 6: Scaled EGR Baseline Engine COC 90 – Medium Heavy-Duty Engines
1.2 to 0.20 g/hp-hr COC90 for 0.50 to 0.20 g/hp-hr Hardware Costs $3,651 $1,095 DEF Costs $2,266 $680 Fuel Savings -$2,002 -$601 Total $1,174
Based on comments received, we also calculated the NCP value using the surcharges used by SCR manufacturers in 2010, instead of a bill of materials approach. The emission

71surcharges that manufacturers have released publicly are what they determined to be the price increase necessary to recover costs associated with reducing emissions, including R&D, tooling, hardware, warranty and other overhead. Since many purchasers negotiate a lower price, the official surcharge can be assumed to be somewhat higher than the actual cost increase. The surcharges for SCR equipped medium heavy-duty engines ranged from $6,000 to $7,300. To be conservative, we used $7,300. Calculating COC 90 using a hardware cost of the highest emission surcharge ($7,300) would clearly be a worst case cost of compliance. Applying this value to a linear penalty curve with an upper limit of 1.2 g/hp-hr would result in the following scaling factor equation:
Scaling Factor = (0.50 – 0.20 g/hp-hr) ÷ (1.2 – 0.2 g/hp-hr) = 0.30
The hardware cost for a 0.50 g/hp-hr engine would therefore be $2,190 based on the scaling factor. However, surcharges do not cover operating costs; therefore, the NCP value should also include operating costs related to DEF and fuel.
Assuming the same operating conditions as the previous scenario, the additional DEF cost to take and engine from 1.2 to 0.20 g/hp-hr NOx would be $2,266 based on 3.8 percent DEF dosing and the fuel savings to due to the SCR would be $2,002. Again, these values would be scaled to represent only the difference between 0.50 and 0.20 g/hp-hr NOx. The sum of the hardware and operating costs would lead to a medium heavy-duty NCP value of $2,269, as shown in Table C - 7.

Table C - 7: MHD Costs
1.2 to 0.20 g/hp-hr MHD for 0.50 to 0.20 g/hp-hr Hardware Costs $7,300 $2,190 DEF Costs $2,266 $680 Fuel Savings -$2,002 -$601 Total $2,269



### 2. 0.50 g/hp-hr NOx Baseline Engine with EGR
We also analyzed a scenario with a baseline engine that achieved 0.50 g/hp-hr NOx with EGR only. We calculated the net hardware cost of adding SCR, but removing some hardware that would no longer be required with SCR to the engine.
Adding SCR to a 0.50 g/hp-hr EGR engine would affect operating costs in three ways: it would add a cost for DEF, reduce costs for fuel, and could either increase or decrease the frequency of repairs.
For this scenario (like the scenario above), we added a SCR system (catalyst and dosing unit), an ammonia clean up catalyst, and a NOx sensor. The SCR costs were estimatedusing the same calculations as the previous scenario. In summary, the total hardware, post72warranty repair, and demurrage costs for a medium heavy-duty SCR system to achieve 0.20 g/hp-hr relative to a 1.2 g/hp-hr engine is $3,651,as shown in Table C - 8 below.

Table C - 8: Direct Manufacturer Cost (2011$)

MHD Incremental Direct Manufacturing Cost $3,018 Research and Development Cost (2%) $60 Warranty and Other Cost (13%) $392 Post-warranty Repair Costs $114 Demurrage Costs $67 Total Hardware Cost $3,651

Unlike Scenario #1 above, we did not scale the SCR costs for this alternative. Instead, we took the entire cost of the SCR system and subtracted the costs for the hardware that could be removed from a 0.50 g/hp-hr NOx EGR only engine. In other words, this would be the net cost of hardware changes made to the 0.50 g/hp-hr engines. Adding SCR would affect EGR cooling, diesel particulate filter regeneration, and turbocharging. We project that one of the two EGR coolers used on the 0.50 g/hp-hr engine could be removed because of the lower EGR requirements. In addition, we believe that the diesel particulate filter precious metal loading could be reduced by approximately 20 percent because the 0.20 g/hp-hr engine would have higher engine-out NOx emissions and lower engine-out PM emissions. Lastly, we project that the twin turbochargers used on a 0.50 g/hp-hr engine could be replaced with a single variable geometry turbocharger.
We estimated the EGR cooler costs based on the average retail price of four replacement EGR coolers available for 2008-2010 heavy-duty pickup trucks. 47 The retail price for the MHD engines was scaled relative to the engine displacement. Then the retail prices were converted to direct manufacturing costs using the heavy-duty engine Retail Price Equivalent of 1.35 used throughout this analysis. The costs are included in Table C - 9 below.

Table C - 9: MHD EGR Cooler Costs
HD Pickup Truck (6.4L) MHD (8L)

Retail EGR Cooler Cost $477 $596 Direct Mfr. EGR Cooler Cost $442
We estimated the diesel particulate filter precious metal loading and washcoat costs based on the costs derived from the 2017-2025 Light-Duty GHG NPRM. We assumed 20 percent of the loading could be saved based on the higher engine-out NOx emissions and lower soot emissions of the 0.20 g/hp-hr engine. The direct manufacturing costs were scaled relative to the engine displacements, as shown in Table C - 10 below.

73Table C - 10: Diesel Particulate Filter Costs
Light-Duty (4.0L) MHD (8L) Diesel Particulate Washcoat and Precious Metal Loading Direct Mfr. Cost $861 20% of Diesel Particulate Washcoat and Precious Metal Loading $172 $344
The retail turbocharger costs were derived from the cost report developed by ICF International for the Heavy-Duty Greenhouse Gas rule. 48 The retail prices were converted to direct manufacturing costs using the heavy-duty engine Retail Price Equivalent of 1.35 used throughout this analysis. The costs are included in Table C - 11 below.

Table C - 11: Turbocharger Costs

Retail Price Direct Mfr. Cost Twin Turbochargers $1,000 $741 Variable Geometry Turbocharger $935 $693 Net MHD Turbocharger Cost $48
The sum of the direct manufacturing costs for the components that could be removed from the 0.50 g/hp-hr EGR engine are included in Table C - 12, while the marked up hardware costs are included in Table C - 13.

Table C - 12: Net EGR Direct Manufacturer Hardware Costs

MHD EGR Cooler $442 DPF Loading $344 Net Turbocharger Cost $48 EGR Direct Mfr. Hardware Cost $834

Table C - 13: Medium Heavy-Duty Marked Up EGR Hardware Costs

HHD Incremental EGR Direct Manufacturing Cost $834 Research and Development Cost (2%) $17 Warranty and Other Cost (13%) $108 EGR Marked Up Hardware Cost $959
We next calculated the costs for post-warranty repair and demurrage using the ratio of each of these costs to the warranty costs that was established in the 2004 NCP rule, similar to the process used in Section 3.3.3.3 above. The 2004 ratios are listed in Table C – 4 above. The resulting values are shown in Table C - 14 below.

74Table C - 14: Medium Heavy-Duty EGR Post-warranty repair and Demurrage Costs

MHD Total EGR Hardware Cost $959 Post-warranty Repair Cost $32 Demurrage Cost $19 EGR Incremental Cost $1,009
The net hardware costs, taking into account the SCR hardware that would be required to meet the 0.20 g/hp-hr NOx emissions and the components on the 0.50 g/hp-hr engine that would no longer be required, are $2,642 as shown in Table C - 15.

Table C - 15: Medium Heavy-Duty Engine Net Hardware Costs

HHD SCR Incremental Cost $3,651 EGR Incremental Cost -$1,009 Net Hardware Cost $2,642
Next, we estimated the fuel and DEF operating cost differences between an engine meeting 0.50 g/hp-hr using EGR and a compliant engine (meeting the 0.20 g/hp-hr tailpipe NOx emissions standard). We estimate that the EGR baseline engine would have engine-out NOx emissions of 0.50 g/hp-hr. We used the same compliant engine that we defined in the previous scenario where the engine-out emissions assumes that this engine’s aftertreatment system could achieve 94 percent efficiency (at the end of the useful life) and thus have engine-out NOx emissions of 3.0 g/hp-hr. As described in the final scenario above, the compliant engine would require a 2.8 g/hp-hr NOx reduction in the aftertreatment system and therefore a DEF dosing rate of 3.8 percent. We also estimated that the compliant engine with 3.0 g/hp-hr NOx engine-out emissions would have 3.25 percent better fuel consumption than the baseline engine with engine-out emissions of 0.50 g/hp-hr NOx using the data in Figure 3-2 above in Chapter 3.
The net present value of the fuel savings are $2,864 and the DEF costs are $2,244, using a seven percent discount rate. The COC 90 value was calculated based on the sum of the hardware costs, DEF costs, and fuel savings, as shown in Table C - 16. The COC 90 value using this method would be $2,022.

Table C - 16: 0.50 g/hp-hr EGR Baseline Engine COC 90 – Medium Heavy-Duty Engines

COC 90 for 0.50 to 0.20 g/hp-hr Hardware Costs $2,642 DEF Costs $2,244 Fuel Savings -$2,864 Total $2,022

75

### 3. 0.50 g/hp-hr Baseline Engine with Optimized SCR+EGR
For the proposal, we estimated that reducing NOx emission from 0.50 g/hp-hr to 0.20 g/hp-hr would require an increase in DEF consumption of 0.40 gallons for every 100 gallons of fuel consumed, but would not change fuel consumption. This was consistent with our projection that there would be little price difference between DEF and fuel. However, we now have new information indicating that fuel prices will likely be significantly higher than DEF prices for the foreseeable future. We agree with commenters that engines manufacturers designing engines for 0.50 g/hp-hr NOx would have responded to this price difference by optimizing the engines to have slightly higher engine-out NOx to improve fuel consumption and reduce the excess NOx by increasing DEF consumption.
For this Final Rule, we first defined a baseline and a compliant engine (meeting the 0.20 g/hp-hr tailpipe NOx emissions standard), both equipped with SCR. We estimate that the baseline engine would have engine-out NOx emissions of approximately 4.8 g/hp-hr. This value was derived from the assumption that the engine would have 0.5 g/hp-hr tailpipe NOx emissions and that the aftertreatment system is 90 percent efficient at reducing NOx. Similarly, we derived the engine-out emissions of the compliant engine emitting 0.20 g/hp-hr at the tailpipe assuming that this engine’s aftertreatment system could achieve 94 percent efficiency due to the additional hardware we discuss below. We estimate that the complying engine would have engine-out NOx emissions of 3.0 g/hp-hr.
To determine the DEF consumption for each engine, we considered test data showing how NOx emissions and DEF consumption were related for a SCR engine. We obtained test data from a heavy-duty engine equipped with SCR tested at the National Vehicle and Fuel Emissions Laboratory. Figure 3-1 above in Chapter 3 shows the impact of DEF dosing rate on NOx emission reduction achieved in the SCR system follows a linear trend. We used the linear trend equation for each scenario to determine the DEF dosing rate based on the NOx emissions reduction required of the aftertreatment system. The baseline engine, which requires a 4.3 g/hp-hr NOx reduction would require a DEF dosing rate of 5.9 percent. Similarly, the compliant engine would require a 2.8 g/hp-hr NOx reduction in the aftertreatment system and therefore a DEF dosing rate of 3.8 percent.
We estimated the fuel consumption impact due to engine calibration changes, such as changes to injection timing and EGR rates, to achieve various engine-out NOx emissions. Figure 3-2 above in Chapter 3 shows our estimate of the impact, based partially on confidential business information provided by engine manufacturers. We project that the fuel consumption of the compliant engine with engine-out emissions of 3.0 g/hp-hr would be approximately 1.9 percent worse than the baseline engine with engine-out emissions of 4.8 g/hp-hr.
Next we calculated the NPV of the DEF and fuel consumption changes. We estimated the NPV of the DEF impact using a DEF prices discussed above in Section 3.1.3 and included in Appendix A. We estimated the NPV of the fuel impact using projected fuel prices from the Annual Energy Outlook 2012. The baseline fuel economy of a typical medium heavy-duty

76vehicle was assumed to be 9.71 mpg based on the baseline fuel consumption rates generated for the Heavy-Duty GHG rule. 49 The NPV of the lifetime costs of the incremental decrease in DEF consumption is $1,235 and increase in fuel consumption of $1,762, using a seven percent discount rate and 2011 dollars.
An SCR aftertreatment system may require hardware modifications to achieve tailpipe emissions levels of 0.20 g/hp-hr. Based on conversations with manufacturers, we believe that the lower NOx emissions levels would require the addition of SCR catalyst volume to gain NOx efficiency, improvements to the diesel oxidation catalyst (DOC) due to the lower engine-out NOx emissions and higher soot conditions, an optimized turbocharger to cover a broader range of EGR flow, a sensor for better control over the urea injection. All of these costs would apply for both the typical and worst case engines, except for the turbocharger enhancements, which would only apply to the worst case engine.
The incremental SCR catalyst costs were estimated from the direct manufacturing costs of a SCR system projected for a light-duty pickup truck in the 2017-2025 Light-Duty Greenhouse Gas Emissions Notice of Proposed Rulemaking. 50 We first converted the costs from 2009 dollars to 2011 dollars and then scaled the direct manufacturing cost of the SCR catalyst based on the ratio of typical engine displacement in each engine class, as shown in Table C - 17 below.

Table C - 17: SCR Direct Manufacturer Cost (2011$)
Light-Duty Pickup Truck (4.0L) MHD (8L)

Complete SCR Catalyst $427 $853 20% SCR Catalyst Cost $171
The incremental cost of the catalyst to improve the NOx conversion efficiency through increased SCR catalyst volume and/or improved loading is estimated to be 20 percent of the total catalyst cost, as shown below. The Agency then applied a 1.15 indirect cost multiplier (ICM) to convert the direct manufacturing costs to marked up costs. The 1.15 multiplier consists of two percent for research and development and 13 percent for warranty and other costs. 51 The marked up costs are shown below in Table C - 18.

Table C - 18: SCR Catalyst Incremental Cost

MHD Incremental Direct Manufacturing Cost $171 Research and Development Cost (2%) $3 Warranty and Other Cost (13%) $22 Total Incremental SCR Catalyst Cost $196

77The incremental DOC costs were estimated using the same cost process used for the SCR catalyst. The direct manufacturing costs of the DOC are estimated from a light-duty pickup truck DOC cost in the 2017-2025 Light-Duty Greenhouse Gas Emissions Notice of Proposed Rulemaking. 52 We first converted the DOC costs from 2009 dollars to 2011 dollars and then scaled the direct manufacturing cost of the DOC based on the ratio of typical engine displacement in each engine class, as shown in Table C - 19 below.

Table C - 19: DOC Direct Manufacturer Cost (2011$)
Light-Duty (4.0L) MHD (8L) DOC $528 $1,057
We agree with commenters which stated that the DOC would require additional precious metals in the compliant engine because the lower engine out NOx emissions would require additional nitrogen dioxide production from the DOC. Our estimate is that the improved loading would cost approximately 20 percent of the total DOC cost, as shown below in Table C - 20. Also shown in the table below, we then applied a two percent mark up for research and development and 13 percent for warranty and other costs. 53

Table C - 20: DOC Incremental Cost

MHD Incremental Direct Manufacturing Cost $211 Research and Development Cost (2%) $4 Warranty and Other Cost (13%) $27 Total Incremental DOC Cost $243
The cost for an ammonia sensor was developed by converting a sensor’s retail price to a direct manufacturing cost and then to a marked up cost, similar to the procedure used above for the SCR catalyst cost. The direct manufacturing costs were calculated based on the Retail Price Equivalent (RPE). The RPE for heavy-duty engines is 1.36 as found in the study conducted by ICF International for the Heavy-Duty Greenhouse Gas Emissions rulemaking. 54 The sensor costs are shown in Table C - 21. 55

Table C - 21: Incremental Sensor Cost

MHD Sensor Retail Price $221 Sensor Direct Manufacturing Cost $164 Sensor Research and Development Cost (2%) $3 Sensor Warranty and Other Cost (13%) $21 Total Incremental Sensor Cost $189

78Finally, we calculated the costs of modifications required for the variable geometry turbocharger. Based on the Light-Duty GHG cost estimates, we estimated that the VGT would have a direct manufacturing cost of $218 (2011$) for a large pick-up. Using cylinder displacement volume to ratio the costs into the medium and heavy heavy-duty classes, we derived the VGT costs included in Table C - 22.

Table C - 22: VGT Direct Manufacturer Cost (2011$)
Light-Duty Pickup MHD (8L) Truck (4.0L) VGT $218 $436
We agree with commenters who stated that the turbomachinery may require additional costs in the compliant engine because of the higher EGR rates required to achieve the lower engine-out NOx emissions would require additional thermal management and performance balancing. Our estimate is that the improved VGT would cost approximately 20 percent of the total VGT cost, as shown below in Table C - 23.

Table C - 23: VGT Incremental Cost for COC 90

MHD Incremental Direct Manufacturing Cost $87 Research and Development Cost (2%) $2 Warranty and Other Cost (13%) $11 Total Incremental VGT Cost $100
Manufacturers would generally be expected to incur additional warranty costs due to the addition of new components, as noted above in the hardware costs. Typically, this would cover the costs of repairs that are needed during the warranty period. There can also be additional unscheduled repairs to the new hardware. In addition, for both warranty repairs and post-warranty repairs, there are also real costs incurred by the vehicle owners for demurrage (i.e., the time during which the vehicle is out of service).

79Some manufacturers provided us with estimates with post-warranty repair costs with demurrage, while others did not. After reviewing these different estimates, it became clear that they were not consistent, and that we needed to estimate post-warranty repair and demurrage costs separately.
For the Final Rule, we calculated the post-warranty repair and demurrage costs relative to the incremental warranty costs we calculated above. We utilized the ratio of the post-warranty repair and demurrage costs relative to the warranty costs from 2004 to calculate the 2012 post-warranty repair and demurrage costs, as shown in Table C - 24 below.

Table C - 24: Final Rule Warranty, Post-warranty repair, and Demurrage Costs for 2012 MY MHD Engines

MHD Warranty Costs $13 Post-Warranty Repair Costs $13 Demurrage Costs $8
We estimate that the warranty and post warranty costs of the OBD-related issues are $27 based on the assumption that a MHD engine costs approximately $20,000 and that all warranty costs are two percent of the direct manufacturing cost, per our Indirect Cost Multiplier approach that is being used throughout this analysis. We assumed that 50 percent of the warranty costs are emission-related, and of those, only five percent are related to OBD threshold levels. This leads to an OBD-caused warranty level of $10 and using the ratios in Table C-4, the post warranty OBD costs would be $17. The OBD-related repair costs for MHD engines are included below in Table C - 25. It is important to emphasize that such costs are appropriate for NCP rulemakings that address competitive effects, however, such costs were not included in our OBD rule because the OBD system is only catching failure modes for which manufacturers were already responsible.

Table C - 25: OBD Warranty and Post-Warranty Repair Costs for 2012 MY MHD Engines

OBD Related

Warranty OBD Related Post-warranty Repair OBD Threshold Related Costs $10 $17

80The total estimated costs for COC 90 for MHD engines are included below in Table C ­ 26

.

Table C - 26: MHD COC 90 Costs

MHD COC 90 Fuel Operating Costs $1,762 DEF Operating Savings -$1,235 Hardware Costs $633 Research and Development Cost $13 Warranty and Other Manufacturer Costs $92 Post-warranty Repair Costs $30 Demurrage Costs $8 Total Cost $1,303



### 4. Summary of the MHD NCP Analysis
As noted earlier, a complying manufacturer could be competing against not only EGRequipped engines, but also against SCR-equipped engines that could be reoptimized to emit at 0.50 g/hr-hr. Thus, in selecting our cost methodology we must consider both types of engines. For medium heavy-duty, we currently believe that the methodology based on a 0.50 g/hp-hr EGR engine would best conform to the statutory requirements to allow noncomplying manufacturers to continue selling engines without any competitive advantage. We are also considering the methodology based on a reoptimized 0.50 g/hp-hr SCR engine. However, we believe that the EGR baseline engine would have a larger competitive advantage over compliant medium heavy-duty engines, so that basing the penalties on the reoptimized SCR engine would be less protective for complying manufacturers. This is reflected in the fact that our estimate of the costs associated with bringing an optimized 0.50 g/hp-hr SCR into compliance is less than our estimate of the costs associated with bringing a 0.50 g/hp-hr EGR into compliance.
The reason the why the appropriate baseline engine for medium heavy-duty (an EGR engine) is different than the appropriate baseline engine for heavy heavy-duty (an SCR engine) is that medium heavy-duty vehicles do not normally accrue as many miles during their lifetimes as heavy heavy-duty vehicles, which reduces the lifetime operating costs. Purchasers of medium heavy-duty engines tend to more concerned about hardware costs (and less about operating costs) than purchasers of heavy heavy-duty engines.

81Note that while we evaluated approach involving a higher upper limit, we think that it would not be appropriate to set the upper limit at 1.2 g/hp-hr. In particular, NCPs should not be available for levels that are higher than the level that EPA determines is practicable, which in this case would be no higher than 0.50 g/hp-hr.

Table C-27. Summary of the MHD NCP Analysis

Reoptimized SCRBaseline 0.50 g/hphr Engine 1.2 g/hp-hr SCR Baseline Engine with Scaled Costs 0.50 g/hp-hr EGR Baseline Engine

Description of Base NCPs on a Base NCPs on the Base NCPs on a Alternative baseline engine thatachieves 0.50 g/hphr NOx using SCR that is reoptimized for fuel and DEF consumption. full cost of hardware needed to reduce NOx emissions from 1.2 g/hp-hr (the typical emission level of a 2009 engine) to 0.20 g/hp-hr scaled to represent the costs for an engine with a compliancelevel at 0.50 g/hphr. baseline engine thatachieves 0.50 g/hphr NOx without SCR.

First-Year Penalty at 0.50 g/hp-hr $1,303 $1,174 – 2,269 $2,022

82

## References

1 “Interim and Proposed Technical Support Document: Nonconformance Penalties for On-highway Heavy-Duty Diesel Engines,” EPA-420-R-12-004, January 2012.

2 Federal Register. Volume 76, September 15, 2011. Page 57106.

3 76 FR 57316, September 15, 2011.

4 FleetOwner.com. “SCR Will Eliminate Need for Active DPF Regeneration for Volvo Trucks Next Year.” March 2009. Last accessed on June 27, 2011 at http://fleetowner.com/mid-america/volvo-trucks-scr-solution0320/index1.html

5 The brake specific fuel consumption value in liters per hp-hour was converted from the baseline heavy heavyduty fuel consumption over the FTP cycle referenced in the Heavy-Duty GHG Rule (76 FR at 57236, September 15, 2011).

6 Cavataio, G., et.al. Performance Characterization of Cu/Zeolite and Fe/Zeolite Catalysts for the Selective Catalytic Reduction of NOx.

7 Cavataio, G., et.al. SAE 2008-01-1025. Enhanced Durability of Cu/Zeolite Based SCR Catalyst. 2008.

8 W. Tang, et al., BASF. DOE DEER Conference, October 4, 2011. Page 3.

9 R. Aneja, K, Yury, and D. Kayes, DEER Conference, Aug 3 -6, 2009, Page 14.

10 Cummins. “Meeting 2010 Emissions – The Cummins Solution” Last viewed on November 25, 2011 at http://cumminsengines.com/every/misc/Technology/Aftertreatment_System.page

11 T. Johnson, Corning; DOE DEER Conference, October 4, 2011; Page 20.

12 D. Stanton, DEER Conference, August 3 -6, 2009, page 4.

13 “Navistar Announces Advanced Clean Engine Technology To Meet Emissions Regulations”, Navistar Press Release, July 6, 2012.

14 “Frequently Asked Questions: Cummins EPA 2010 Heavy-Duty and MidRange Engines and Products,” Cummins Inc., September 12, 2011.

15 “Detroit Diesel’s New Fuel Efficient BlueTec Technology Masters Final Season of Winter Conditions Before Start of Production,” Press Release: Freightliner Trucks, February 9, 2009.

16 “SCR: Preferred Technology for EPA 2010 Engines,” and “SCR & Fuel Efficiency,” Volvo Trucks, 2009.

17 “MAXXFORCE ADVANCED EGR. THE SIMPLE ANSWERS,” Frequently Asked Questions,” Navistar, Inc., 2012.

8318 http://www.paccarengines.com/en-us/TechEmissions.aspx#scr . Last Accessed July 25, 2012.

19 76 FR at 57200 (September 15, 2011)

20 RTI International. Heavy-duty Truck Retail Price Equivalent and Indirect Cost Multipliers. July 2010.

21 Rogozhin, A., et. al., “Using indirect cost multipliers to estimate the total cost of adding new technology in the automobile industry,” International Journal of Production Economics (2009); “Documentation of the Development of Indirect Cost Multipliers for Three Automotive Technologies,” Helfand, G., and Sherwood, T., Memorandum dated August 2009; “Heavy Duty Truck Retail Price Equivalent and Indirect Cost Multipliers,” Draft Report prepared by RTI International and Transportation Research Institute, University of Michigan, July 2010.

22 RTI International. Heavy-duty Truck Retail Price Equivalent and Indirect Cost Multipliers. Table 4-8. July 2010.

23 Information regarding the MOVES model can be found at http://www.epa.gov/otaq/models/moves/index.htm

24 U.S. Energy Information Administration. Annual Energy Outlook 2012. Last accessed on July 12, 2012 at http://www.eia.gov/forecasts/aeo /

25 Cummins comments to the NCP NPRM. Docket EPA-HQ-OAR-2011-1000-0025. April 4, 2012. Page 17.

26 U.S.EPA. Final Rulemaking to Establish Greenhouse Gas Emissions Standards and Fuel Efficiency Standards for Medium- and Heavy-Duty Engines and Vehicles – Regulatory Impact Analysis. Page 6-2. The baseline fuel efficiency for HHD is 20.3 gal/100 mile and vocational diesel vehicles equal 10.3 gal/100 mile.

27 U.S. Environmental Protection Agency and National Highway Traffic Safety Administration. Draft Joint Technical Support Document: Proposed Rulemaking for 2017-2025 Light-Duty Vehicle Greenhouse Gas Emission Standards and Corporate Average Fuel Economy. Page 3-96. Last viewed on April 25, 2012 at http://www.epa.gov/otaq/climate/documents/420d11901.pdf . The SCR and DOC costs are built into the Advanced Diesel costs.

28 RTI International. Heavy-duty Truck Retail Price Equivalent and Indirect Cost Multipliers. Table 4-8. July 2010.

29 U.S. Environmental Protection Agency and National Highway Traffic Safety Administration. Draft Joint Technical Support Document: Proposed Rulemaking for 2017-2025 Light-Duty Vehicle Greenhouse Gas Emission Standards and Corporate Average Fuel Economy. Page 3-96. Last viewed on April 25, 2012 at http://www.epa.gov/otaq/climate/documents/420d11901.pdf . The SCR and DOC costs are built into the Advanced Diesel costs.

30 RTI International. Heavy-duty Truck Retail Price Equivalent and Indirect Cost Multipliers. Table 4-8. July 2010.

31 RTI International. Heavy-duty Truck Retail Price Equivalent and Indirect Cost Multipliers. July 2010.

32 NewGMParts.com. NOx sensor for a 6.6L diesel engine for a GM 3500 HD Pickup truck retailed for $221. Last accessed on 12/5/2011 at http://www.newgmparts.com/partlocator/index.cfm?action=getJointLocator&siteid=213815&chapter=§ioni

84ds=2,2496&groupid=2497&subgroupid=104139&make=6&model=Silverado%203500HD&year=2011&catalog id=2&displayCatalogid=0

33 U.S. Environmental Protection Agency. Final Technical Support Document: Nonconformance Penalties for 2004 Highway Heavy Duty Diesel Engines. August 2002. Table 3-7 on Page 27.

34 FleetOwner.com, “Daimler releases 2010 emissions surcharges”, August 6, 2009, Jim Mele.

35 U.S.EPA. Final Rulemaking to Establish Greenhouse Gas Emissions Standards and Fuel Efficiency Standards for Medium- and Heavy-Duty Engines and Vehicles – Regulatory Impact Analysis. Page 6-2. The baseline fuel efficiency for HHD is 20.3 gal/100 mile and vocational diesel vehicles equal 10.3 gal/100 mile.

36 U.S. Department of Labor, Bureau of Labor Statistics. Consumer Price Index. Table 1A, All Urban Consumers (CPI-U), U.S. City Average, all items. Last accessed on April 18, 2012. The base years for the CPI are 1982-1984 (where the CPI=100) per BLS.

37 U.S. Environmental Protection Agency and National Highway Traffic Safety Administration. Draft Joint Technical Support Document: Proposed Rulemaking for 2017-2025 Light-Duty Vehicle Greenhouse Gas Emission Standards and Corporate Average Fuel Economy. Page 3-96. Last viewed on April 25, 2012 at http://www.epa.gov/otaq/climate/documents/420d11901.pdf . The SCR and DOC costs are built into the Advanced Diesel costs.

38 RTI International. Heavy-duty Truck Retail Price Equivalent and Indirect Cost Multipliers. July 2010.

39 NewGMParts.com. NOx sensor for a 6.6L diesel engine for a GM 3500 HD Pickup truck retailed for $221. Last accessed on 12/5/2011 at http://www.newgmparts.com/partlocator/index.cfm?action=getJointLocator&siteid=213815&chapter=§ioni ds=2,2496&groupid=2497&subgroupid=104139&make=6&model=Silverado%203500HD&year=2011&catalog id=2&displayCatalogid=0

40 RTI International. Heavy-duty Truck Retail Price Equivalent and Indirect Cost Multipliers. Table 4-8. July 2010.

41 Last viewed on April 25, 2012 at http://www.bulletproofdiesel.com/BulletProof_EGR_Cooler_Square_p/nt

egrc-1.htm
, http://www.ocdiesel.com/Bullet-Proof-Diesel-EGR-Cooler-Horizontal-p/bpd%206700001.htm
, http://www.ocdiesel.com/Bullet-Proof-Diesel-EGR-Cooler-Vertical-p/bpd%206700002.htm
, http://www.napaonline.com/Catalog/CatalogItemDetail.aspx?R=BK_6003561_0359565975

42 ICF International. Investigation of Costs for Strategies to Reduce Greenhouse Gas Emissions for Heavy-Duty On-Road Vehicles. July 20, 2010. Page 83.

43 U.S. Environmental Protection Agency and National Highway Traffic Safety Administration. Draft Joint Technical Support Document: Proposed Rulemaking for 2017-2025 Light-Duty Vehicle Greenhouse Gas Emission Standards and Corporate Average Fuel Economy. Page 3-96. Last viewed on April 25, 2012 at http://www.epa.gov/otaq/climate/documents/420d11901.pdf . The SCR and DOC costs are built into the Advanced Diesel costs.

44 RTI International. Heavy-duty Truck Retail Price Equivalent and Indirect Cost Multipliers. July 2010.

8545 NewGMParts.com. NOx sensor for a 6.6L diesel engine for a GM 3500 HD Pickup truck retailed for $221. Last accessed on 12/5/2011 at http://www.newgmparts.com/partlocator/index.cfm?action=getJointLocator&siteid=213815&chapter=§ioni ds=2,2496&groupid=2497&subgroupid=104139&make=6&model=Silverado%203500HD&year=2011&catalog id=2&displayCatalogid=0

46 RTI International. Heavy-duty Truck Retail Price Equivalent and Indirect Cost Multipliers. Table 4-8. July 2010.

47 Last viewed on April 25, 2012 at http://www.bulletproofdiesel.com/BulletProof_EGR_Cooler_Square_p/nt

egrc-1.htm
, http://www.ocdiesel.com/Bullet-Proof-Diesel-EGR-Cooler-Horizontal-p/bpd%206700001.htm
, http://www.ocdiesel.com/Bullet-Proof-Diesel-EGR-Cooler-Vertical-p/bpd%206700002.htm
, http://www.napaonline.com/Catalog/CatalogItemDetail.aspx?R=BK_6003561_0359565975

48 ICF International. Investigation of Costs for Strategies to Reduce Greenhouse Gas Emissions for Heavy-Duty On-Road Vehicles. July 20, 2010. Page 83.

49 U.S.EPA. Final Rulemaking to Establish Greenhouse Gas Emissions Standards and Fuel Efficiency Standards for Medium- and Heavy-Duty Engines and Vehicles – Regulatory Impact Analysis. Page 6-2. The baseline fuel efficiency for HHD is 20.3 gal/100 mile and vocational diesel vehicles equal 10.3 gal/100 mile.

50 U.S. Environmental Protection Agency and National Highway Traffic Safety Administration. Draft Joint Technical Support Document: Proposed Rulemaking for 2017-2025 Light-Duty Vehicle Greenhouse Gas Emission Standards and Corporate Average Fuel Economy. Page 3-96. Last viewed on April 25, 2012 at http://www.epa.gov/otaq/climate/documents/420d11901.pdf . The SCR and DOC costs are built into the Advanced Diesel costs.

51 RTI International. Heavy-duty Truck Retail Price Equivalent and Indirect Cost Multipliers. Table 4-8. July 2010.

52 U.S. Environmental Protection Agency and National Highway Traffic Safety Administration. Draft Joint Technical Support Document: Proposed Rulemaking for 2017-2025 Light-Duty Vehicle Greenhouse Gas Emission Standards and Corporate Average Fuel Economy. Page 3-96. Last viewed on April 25, 2012 at http://www.epa.gov/otaq/climate/documents/420d11901.pdf . The SCR and DOC costs are built into the Advanced Diesel costs.

53 RTI International. Heavy-duty Truck Retail Price Equivalent and Indirect Cost Multipliers. Table 4-8. July 2010.

54 RTI International. Heavy-duty Truck Retail Price Equivalent and Indirect Cost Multipliers. July 2010.

55 NewGMParts.com. NOx sensor for a 6.6L diesel engine for a GM 3500 HD Pickup truck retailed for $221. Last accessed on 12/5/2011 at http://www.newgmparts.com/partlocator/index.cfm?action=getJointLocator&siteid=213815&chapter=§ioni ds=2,2496&groupid=2497&subgroupid=104139&make=6&model=Silverado%203500HD&year=2011&catalog id=2&displayCatalogid=0

86