November 11, 2 011

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API Critique of the AAM October 6, 2011 Letter to Lisa Jackson and AAM White Paper: Why EPA Tier 3 Market Gasoline Sulfur Limits Need to be Significantly

Lower, Especially for MY 2017+ Vehicles

According to AAM, reducing the Sulfur cap will improve fue l economy b y enabling Lean Burn GDI engine technology

W e question the assertion that a 10 ppm gasoline sulfur cap would have any significant impact
on the utilization of lean burn gasoline direct injection (GDI) engine technology

. In regions of
the world where 10 ppm sulfur in gasoline was mandated (i.e., Europe and Japan), the penetration of lean

- burn GDI peaked at 2% and has been declining thereafter. Data show that the AAM statement that “...Europe and Japan have been able to enjoy the benefits of lean burn gasoline over the past decade” is inaccurate. The real

- world efficiency benefits of lean

- burn GDI were found to be less than promised.

EPA, DOT and others have recognized that lean

- burn GDI is a strategy that the automakers are unlikely to adopt in large scale for compliance with the Corporate Average Fuel Economy and tailpipe greenhouse gas emissio ns standards currently in place. 1 A recent assessment of the
automakers’ technology introduction plans concluded that: (a) the opportunity for lean GDI i n the US is limited to 0

- 3% market penetration by 2020, and (b) 10 ppm max sulfur in gasoline will not result in lean burn engine production. 2

According to AAM, regulatory flexibility (similar to the Tier 2 phase

- in) should not be allowed for the refining industry

AAM states tha t sulfur “hot spots” have occurred in certain regions due to the flexibility granted by EPA to small refineries with respect to meeting the Tier 2 gasoline standard over an extended time frame. AAM barely acknowledges (and only in a footnote) that this regulatory flexibility ended a t the clo s e of 2010. The most recent AAM fuel survey data (for the winter of 2011) show no gasoline samples exceeding the 95 ppm sulfur cap at retail. In fact, according to this recent AAM data, 96% of US gasoline at the retail level now contains less than 50 ppm
sulfur. The adoption of a flexible “systems

- based” regulatory approach is what helped to assure the success of the Tier 2 program by giving the automakers 5 years to phase in the production of Tier 2 compliant vehicles and a nearly commensurate amount of time for certain
small refineries to comply with the fuel requirements

.

1 See, for example, the EPA/NHTSA Joint Technical Support Document for th e Final Rulemaking: Light

- Duty Vehicle Greenhouse Gas Emissions Standards and Corporate Average Fuel Economy Standards (published May 7, 2010) at: http://www.epa.gov/otaq/climate/reg ulations/420r10901.pdf . See also, the National Research Council report,

Assessment of Fuel Economy Technologies for Light Duty Vehicle s , 2011, at: http://www.nap.edu/openbook.php?record _id=12924&page=R1

2 McMahon, K.B., et al, The Martec Group, Lean GDI Technology Cost and Adoption Forecast: The Impact of Ultra

Low Sulfur Gasoline Standards, Society of Automotive Engineers, Paper # 2011

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- 1226, April 2011November 11, 2 011

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AAM states that a 10ppm cap is necessary for air quality needs

Emissions reductions from advanced technology vehicl es

– There is a n abundance of
information that characterizes the effects of reducing gasoline sulfur on the ex haust emissions
f r om many automotive technologies represented in the current on

- road fleet (e.g., up to and including Tier 2

- certified vehicles). T his extensive database shows that reducing sulfur lowers emissions of HC, CO and NOx , linear ly

. 3 However, as AAM correctly observes, test data on the effect of sulfur on very low emitting vehicles such as those certified to PZEV, SULEV and/or Tier 2/Bi n 2 emissions standards remains sparse

– an observation made all the more poignant by
the fact that the AAM White Paper could only point to one publi cation on these vehicle technologies: a study performed by D. B a ll et al, Umicore Autocat USA, Inc., that e valuated the emissions reductions associated with reducing sulfur from 33 ppm to 3 ppm. 4

Only one vehicle was tested by Ball et al : a 2009 model year vehicle certified to California’s partial zero emission vehicle (PZEV) standards. Aside from the fac t that a single vehicle is hardly representative of the range of automotive technologies currently in (or planned for) production, the study’s conclusion that the claimed 40% reduction in NOx was due solely to
differences in test fuel sulfur content is not well su pported . In particular, Ball et al provide no information on the properties of the two fuels tested other than stating the di fferences in
sulfur. This omission of information is critical. B ased on historical analyse s of fuels with label names (e .g., “CARB phase II certification fuel” and “EEE

- Lube certification fuel”) similar to those
described in the Ball et al paper, we believe that there were variations in other properties of the test fuels (especially oxygenate type/concentration and fuel dis tillation parameters 5 ), and these almost certainly would have confounded the results.

As indicated above, a one vehicle study is hardly statistically insignificant ; yet we know from the
extensive extant database that sulfur impacts and sulfur reversibi lity effects are highly dependent on several test parameters, including the vehicle and technology being evaluated
and the driving cycle being used. The results for this one particular test vehicle are especially difficult to fathom for they show the emis sions generated during fully warmed up driving operation to be higher than those generated when the engine is started cold . This is the opposite of what is generally expected for vehicles designed to meet extremely stringent
emissions standards such as tho se for the PZEV.

Finally, Ball et al found that the catalyst poisoning effect associated with the use of gasoline with 33 ppm S in a PZEV was clearly mitigated by vehicle operation between tests at the

3 Hochhauser, A.M, Review o f Prior Studies o

f Fuel Effects on Vehicle Emissions , CRC Project E

- 84, Final Report, August 2008, available at: http://www.crcao.org/reports/recentstudie s2008/E

- 84/E

84%20Report%20Final,%20Aug%2014.pdf

4 Ball, D., et al, Umicore Autocat USA Inc., Effects of Fuel Sulfur on FTP NOx Emissions from a PZEV 4 Cylinder Application , SAE Paper No. 2011

- 01

- 0300, April 2011

5 For instance, CARB Phase II Certifica tion gasoline contains 11 vol % MTBE while “EEE

- Lube certification fuel” contains no oxygenates of any type. Also, CARB Phase II Certification gasoline typically has a vapor pressure of 6.7

– 7.0 psi while that for the “EEE

- Lube certification gasoline is typically in the 9 psi range.November 11, 2 011

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different sulfur levels over a broader range of real

- world driving conditions (i.e., as embodied in
the US06 test cycle ) than found on the standard FTP cycle. The authors then infer that the need for such a cycle would be eliminated by reducing gasoline sulfur from 33 ppm to 3 ppm. Such reasoning is spe cious due to the fact that fuel parameters other than sulfur were allowed to vary, thus confounding any interpretation of the results.

EPA Certification Data

– AAM argues that 10 ppm sulfur is necessary for vehicles that will be designed to meet the Tier 3 emissions standards that are currently being considered, and those standards are essentially equivalent to today’s federal Tier 2 Bin 2 and California SULEV emissions levels (i.e., NMHC + NOx levels of 0.03 grams/mile). To check this assertion we

acces sed the Agency’s model year 2011 vehicle emissions certification database and found that there are at least 19 vehicle model configurations already in production that have been designed to meet eit her the Tier 2 Bin 2 or Califor nia SULEV with almost 50% ov er compliance while operating on federal Tier 2 sulfur compliant certification gasoline. 6 This suggests that the automakers already are successfully designing product s taking into consideration today’s gasoline sulfur levels. W e are not aware of any pub lished studies or anecdotal evidence that suggests that any of these vehicle models are experiencing issues while operating on gasoline that meets current federal sulfur requirements (e.g., 30 ppm refinery gate average/ 95 ppm
retail max).

The impact of h igher levels of ethanol in gasoline on NOx emissions

- AAM’s argument that lower levels of sulfur in gasoline are needed to counteract the NOx emissions impacts associated with expected higher future levels of ethanol in gasoline is unsupported. It ignore s the dilution effect associated with adding more ethanol to gasoline. W e know of no publicly available study that has quantified the emissions effects on modern vehicles associated with the systematic variation of both the sulfur and the ethanol content of gasoline.

Sulfur irreversibility

- AAM argues that the effects of higher sulfur excursions on the emissions performance of modern technology vehicles are reversible with a return to lower sulfur gasoline only under driving conditions that are more aggr essive than those represented by the EPA Federal Test Procedure (FTP) driving cycle

. Recent investigations, including the Ball et al PZEV study prominently figured in the AAM White Paper, appear to support this observation. 7

However, AAM ’s suggestion tha t the opportunity for high speed/high load driving is of limited availability to the inhabitants of ozone non

- attainment areas (i.e., urban locations) is
unsubstantiated. 8

6 See EPA ” Certified Vehicle Test Result Report Data ” for MY 2011 vehicles at: http://www.epa.gov/otaq/cert/veh

cert/cert

- tst/11actrr

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- 11.cs v
7 Hochhauser, A.M, Review of Prior Studies of Fuel Effects on Vehicle Emissions , CRC Project E

- 84, Final Report, August 2008, available at: http://ww w.crcao.org/reports/recentstudies2008/E

- 84/E

84%20Report%20Final,%20Aug%2014.pdf

8 See page 3 of the AAM White Paper: “EPA should consider that many consumers may drive in a manner not conducive to catalyst burn off...”November 11, 2 011

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A study of driving patterns in Baltimore, MD in the early 1990s observed speeds r anging up to 95 mph, vehicle accelerations of up to 15 mph/second and maximum specific power events of 558 mph 2 /sec that were significantly higher than the comparable values for the relatively mild EPA FTP driving cycle (56.7 mph, 3.3 mph/sec, and 192 mph 2 /sec, respectively). About 18% of the sample of the measured vehicle speed/acceleration events in this Baltimore study fell outside of the bounds of those represented by (i.e., were more aggressive than) the EPA FTP. 9
In addition, data from the US Federal Highway Administration show that nearly 46% of the average daily vehicle miles of travel at posted speeds of 60 mph or higher occurs on urban
roads. 10 Clearly, a not insubstantial fraction of urban dwellers engage in aggressive driving.
When considered i n conjunction with the decades

- old trends of rising posted speed limits 11 and increasing vehicle performance 12 , then arguably the conditions are in place and available to allow urban consumers to continue to engage in the type of aggressive driving deemed

ne cessary to reverse the emissions effects of higher sulfur gasoline in advanced technology
vehicles.

AAM contends that “*t+he reversibility of the *sulfur+ poisoning, especially over time, in a vehicle chronically exposed to higher sulfur retail gasoline , is an important issue.” We are not aware of any studies, especially of vehicles with emission approaching those being considered for Tier 3, which have addressed long term effects associated with sulfur reversibility. The
studies in the literature which have examined the reversibility of sulfur impacts on emissions have only measured short term effects, and it is not clear that one batch of higher sulfur fuel
will increase emissions for the vehicle’s entire lifetime. If AAM believes that the reversibil ity of sulfur poisoning over the lifetime of a Tier 3

- like vehicle is an important issue, then it should provide data which clearly demonstrates the magnitude of the long term emissions effect. It also should provide data on the proportion of the vehicle fleet that is “chronically exposed to higher sulfur retail gasoline” to support its contention in this regard. We are not aware of any published or publicly available data on either topic.

Sulfur oxide emissions

- The AAM letter claims that a 10 ppm sulf ur cap would “...immediately reduce emissions of vehicle sulfur oxides...by an estimated 15,626 tons per year.” To focus on the sulfur oxide reduction benefits of a 10 ppm sulfur cap is misleading and irrelevant when
taken out of context . EPA’s national emis sions inventory data show that the contribution of the

on

- road mobile sources to the total SO 2 emissions inventory is dwarfed by other sources (e.g.,

9 US Environmental Protection Agency

, Federal Test Procedure Review Project: Preliminary Technical Report , May 1993, available at: http://www.epa.gov/oms/regs/ld

- hwy/ftp

- rev/ftp

- tech.pdf

10 See US Department of Transpor tation, Federal Highway Administration, Highway Information Quarterly
Newsletter , April 2002, Posted Speed Limits by Functional System at: http://www.fhwa.dot.gov/ohim/hiq/hiqapr02.htm#top icA

11 See, for example, a table of “Maximum Posted Speed Limits,” published by the Insurance Institute for Highway Safety, Highway Loss Data Institute ( http://www.iihs.org/laws/SpeedLimits.aspx ) which shows that as of today, ~35 states had posted speed limits of 65 mph or higher on their urban interstate highways.

12 US Environmental Protection Agency , Light

- Duty Automotive Technology, Carbon Dioxide Emissions, and Fuel Economy Trends: 1975 Through 2010 , EPA

- 420

- R

- 10

- 023, November 2010, available at: http://www.epa.gov/otaq/fetrends.htmNovember 11, 2 011

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in 2008 the contribution of electric utilities to the nationwide SO 2 emissions inventory was 183
times lar ger than that of the on

- road mobile source sector) , leading one to question the cost

effectiveness of gasoline sulfur reduction for this purpose

. 13

According to AAM
, an unspecified reduction in gasoline vapor pressure and an unspecified
increase in octane number will be needed

.

AAM supports a gasoline vapor pressure reduction by stating that it will decrease evaporative emissions. However, AAM does not acknowledge, as it does for sulfur, that the fuel and the vehicle need to work as a system, and that on b oard vehicle controls could also achieve this goal , perhaps at a lower cost

.

AAM also states that increases in the octane number of gasoline are necessary to help the automakers to design vehicles that achieve higher fuel economy. This is yet another

un substantiated argument. For decades, the petroleum industry has been offering the motoring public a choice to purchase gasoline with higher octane numbers. That gasoline is generally called “premium unleaded” and it is available for sale at most retail g asoline outlets.

It is noteworthy that the AAM letter appears to be inconsistent with the AAM statement on page 7 of Appendix 2 of the White Paper which reads “The Alliance believes it is acceptable for premium gasoline to be defined as having a minimum 91 octane ((R+M)/2).”

AAM recognizes the high octane properties of ethanol, notes the prospect for greater volumes
of ethanol to be blended into the gasoline pool to meet the RFS mandates, and argues that
refiners should not be allowed to reduce the oct ane number of hydrocarbon base stocks used for blending with ethanol. Such a prohibition would significantly reduce refining flexibility with consequential impacts on product supply and costs. F rom the refiner’s perspective, the ability
to offer blendst ocks for oxygenate blending (CBOB & RBOB) provides for a more cost effective final product when ethanol is added. Furthermore, requiring the vast majority of vehicles to use gasoline with an octane rating higher than for which they are designed is a misus e of

resources.

It also is important to note that consideration for changes to both vapor pressure and octane number cannot occur in a vacuum or independently of one another. It needs to be based on an evaluation of all impacts on refining and distributi on. (For instance, to reduce vapor pressure, refiners would likely need to curtail the amount of butane blended into the gasoline pool, but butane is a high octane blendstock, so this strategy cannot be considered alone).

Furthermore, any analysis of incr eased octane should include the entire pathway (well

- to

wheels). Studies by MathPro and JCAP II (which we shared with your staff on

13 US EPA, 2008 National Emissions Inventory, http://www.epa.gov/cgi

bin/broker?_service=data&_debug=0&_program=dataprog.national_1.sas&polchoice=SO2November 11, 2 011

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March 17, 2011) have shown that refinery greenhouse gases will increase with refinery operational changes to increase octa ne. Any benefits from vehicle engine efficiency need to be substantial to overcome the refinery GHG increases.

AAM underestimates the refining c osts of lowering gasoline sulfur and vapor pressure

The cost estimates ( prepared by MathPro) which appear in an appendix to the AAM White Paper are based on the use of linear programming (LP) for four “notional” refineries to

r epresent all of PADDs 1, 2 and 3 and California . LP modeling with notional refineries treats the entire PADD as one large refinery, and i mplies that adding required refining capacity can occur
at the same rate and economies of scale across all refineries within the PADD. This results in over optimization and underestimat ion of co mpliance costs by a factor of 4 relative to a similar study p erformed by Baker & O’Brien under API sponsorship. (See the table below.) 14 The Baker & O’Brien study examined the refining costs associated with lower ing sulfur and vapor pressure in gasoline to levels in several scenarios comparable to those under consid eration for Tier 3 and one of which also is comparable, albeit less severe, to the case MathPro modeled

. 15

In contrast to the MathPro approach, t he Baker & O’Brien report includes a refinery

- by

- refinery analysis and is based on a mass balanced model that accounts for all hydro

- carbon molecules. The refinery

- by

- refinery analysis takes into account characteristics unique to specific refineries
and considers each refinery’s compliance option and required investments. Unlike the limited geographic scope use d by MathPro, the Baker & O’Brien modeling approach includes refineries
in all 5 PADDs.

Total Compliance Costs Comparison ($2009 billion)

Refinery

Investment Refinery Operation

(Annual)

MathPro 4.4 3.6

Baker & O’Brien 17.3 13.2

As mentioned abov e, researchers at Baker & O’Brien have evaluated several Tier 3 scenarios and have concluded that the costs of reducing gasoline sulfur and volatility are significant:

14 The refinery cost study relied upon by AAM was updated in late October 2011 under the sponsorshi p of the International Council for Clean Transportation. We have obtained a copy of this updated effort and will likely offer detailed comments after completing an evaluation of it. However, while the magnitude of the results from this revised study may have changed, the underlying methodology did not, and therein lies our major concern.

15 Tamm, D.C. et al, Baker & O’Brien, Potential Supply and Cost Impacts of Lower Sulfur, Lower RVP Gasoline, prepared for the American Petroleum Institute, July 2011, ava ilable at: http://www.bakerobrien.com/documents/Letter%20API%20Report%20

- %20New%20Format%20

- %20Sept%202011.pdfNovember 11, 2 011

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 7% to 14% reduction in gasoline supply: The new standard will prevent refiners
from bei ng able to utilize clean, higher vapor pressure gasoline, and reduce the amount of fuel they can produce.

 1% to 2.3% increase in refinery CO2 emissions: More energy intensive refining processes will be needed to meet the new fuel specifications, resulti ng in more refinery greenhouse gas emissions.

 Significantly increased costs: Up

- front capital costs are projected between $10 billion and $17 billion. Recurring operating costs , including capital charge, to the refining industry are projected between $5 billion and $13 billion annually.

 Gasoline manufacturing cost impacts of 12 cents to 25 cents per gallon: H igher manufacturing costs could negatively impact the marketplace.

 Between 4 and 7 refinery closures: When coupled with EPA initiatives to reduce

g reenhouse gas emissions from refineries and other EPA regulatory programs, U.S

. refineries will be put at a competitive disadvantage, potentially resulting in more refinery closures.