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Page 1 of 74 EO12866_NonConformance Penalties for On highway Heavy Duty Diesel

Engines_2060
- AR51_FRM_2012072

EO12866_NCP 2060

- AR51FRM FRN_201272

- Review Draft .docx

ENVIRONMENTAL PROTECTION AGENCY 40 CFR Part 86 [AMS
- FRL
- 9716
- 5 ] Nonconformance Penalties for On
- highway Heavy
- Duty Diesel Engines AGENCY : Environmental Protection Agency (EPA). ACTION : Final Rule

. SUMMARY : EPA is taking final action to establish nonconformance penalties (NCPs) for manufacturers of heavy heavy

- duty diesel engines (HHDDE) in mod el years 2012 and later for emissions of oxides of nitrogen (NOx) because we have found the criteria for NCPs in 40 CFR 86.1103

- 87 and the Clean Air Act have been met . In general, NCP s allow a manufacturer of heavy

- duty engines (HDEs) whose engines do not confo rm to applicable emission standards, but do not exceed a designated upper limit, to be issued a certificate of conformity upon payment of a monetary penalty to the United States
Government . The upper limit associated with the se NCPs is 0 .5 0 grams of NOx per brake horsepower

- hour (g /bhp

- hr)

. This Final Rule specifies certain parameters that are entered into the preexisting penalty formulas along with the emissions of the engine and the incorporation of other factors to determine the amount a manufa cturer must pay. Key parameters that determine the NCP a manufacturer must pay are EPA’s estimated cost of compliance for a near** EO12866 Review

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Page 2 of 74 worst

- case engine and the degree to which the engine exceeds the emission standard (as measured from production engines). EPA p roposed NCPs for medium heavy duty diesel engines. However, EPA is not taking final action with regard to NCPs for these engines at this time because EPA has not completed its review of the data and comments regarding these engines.

DATES : This rule is e ffective [INSERT DATE OF PUBLICATION IN THE FEDERAL
REGISTER ].

ADDRESSES : EPA has established a docket for this action under Docket ID
EPA

- HQ

- OAR

- 2011

- 1000

. All documents in the docket are listed in the http://www.regulations.gov index. Although listed in the index, some information is not publicly available, e.g., confidential business information or other information whose disclosure is restricted by statute. Certain other material, such as copyrighted material, will be publicly available only i n hard copy in the docket. Publicly available docket materials are available either electronically in http://www.regulations.gov or in hard copy at the following location: EPA: EPA Docket Center, EPA/DC, EPA West, Room 3334, 1301 Constitution Ave., NW., Wa shington, DC. The Public Reading Room is open from 8:30 a.m. to 4:30 p.m., Monday through Friday, excluding legal holidays. The telephone number for the Air Docket is (202) 566

- 1742. FOR FURTHER INFORMATION CONTACT : Chuck Moulis, U.S. EPA, National Vehicle and Fuel Emissions Laboratory, 2000 Traverwood, Ann Arbor MI 48105;** EO12866 Review

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Page 3 of 74 Telephone (734) 214

- 4826 ; Email moulis.charles@epa.gov. SUPPLEMENTARY INFORMATION : Regulated Entities This action could affect you if you produce or import new heavy

- duty diesel engines w hich are intended for use in highway vehicles such as trucks and buses or heavy

- duty highway vehicles. The table below gives some examples of entities that may be affected by these regulations. However, because these are only examples, you should careful ly examine the regulations in 40 CFR part 86. If you have questions, call the person listed in the FOR FURTHER INFORMATION CONTACT section above.

Category NAICS a Codes Examples of potentially regulated entities

Industry 336112
336120 Engine and truck

manufacturers.

a North American Industry Classification System (NAICS).



## Table of Contents I. Overview and Background A. Overview B. Statutory Authority C. Background Regarding Nonconformance Penalty Rules D. 2007 and 2010 NOx Standards II. Previous Interim Final Rule III. NCP Eligibility** EO12866 Review

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Page 4 of 74 A. First criterion

- whether the MY2010 NOx standard is more stringent than the previous NOx standard B. Second criterion

- whether substantial work will be required to meet the MY2010 NOx standard C. Th ird criterion

– whether there is likel y to be a technological laggard D. Issues Raised by the DC Circuit Court of Appeals IV. Penalty Rates A. Upper Limit B. Cost Parameter Values C. Resulting Penalties D. Consideration of Other Methodologies V. Economic Impact VI. Environmental Impact VII. Emission Standards for Which We are Not Establishing NCPs in this Final Rule A. Medium Heavy Duty Diesel NOx Standards B. Light Heavy

- Duty Diesel NOx Standards C. Heavy

- Duty Gasoline Engine Standards D. Heavy

- duty Diese l Engine NMHC, CO, and PM Standards E. Heavy

- duty CO2 Standards VIII. Statutory and Executive Order Reviews A. Executive Order 12866: Regulatory Planning and Review and Executive Order 13563: Improving Regulation and Regulatory Review B. Paperwork Reductio n Act C. Regulatory Flexibility Act D. Unfunded Mandates Reform Act E. Executive Order 13132 (Federalism) F. Executive Order 13175 (Consultation and Coordination with Indian Tribal Governments) G. Executive Order 13045: Protection of Children from Environm ental Health Risks and Safety Risks H. Executive Order 13211 (Energy Effects) I. National Technology Transfer Advancement Act J. Executive Order 12898: Federal Actions to Address Environmental Justice in Minority Populations and Low

- Income Populations K. Congressional Review Act IX. Statutory Provisions and Legal Authority** EO12866 Review

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Page 5 of 74 

## I. Overview and Background

A. Overview
Section 206(g) of the Clean Air Act (the Act), 42 U.S.C. 7525(g), directs EPA to promulgate regulations permitting manufacturers of heavy

- duty engines (HDEs) or heavy

- duty vehicles (HDVs) to receive a certificate of conformity for HDEs or HDVs that exceed a F ederal emissions standard if the manufacturer pays a nonconformance penalty (NCP). Congress adopted section 206(g) in the Clean Air Act Amendments of 1977 as a response to a concern about manufacturers unable to comply with technology

- forcing emissions standards for heavy

- duty engines in the lead

- time provided for th e emissions standards . NCPs were intended to remedy this concern, while ensuring that conforming manufacturers would not suffer a competitive disadvantage compared to nonconforming manufact urers. The first NCP rule, sometimes referred to as the “generic” NCP rule, established three basic criteria for determining the emission standards for which nonconformance penalties would be established in any given model year

. 50 FR 35374 ( August 30, 1985). The first criterion is that 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. Third, EPA must find that it is likely that a manufacturer will be unable to comply by the end of the lead time provided for technological reasons (referred to in earlier rules as a** EO12866 Review

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Page 6 of 74 “technological laggard”). The first NCP rule also established the formula for determining the amount of an NCP. In su bsequent NCP rules, EPA made determinations about which emissions standards met the criteria for establishing NCPs, and specified the values for various parameters that are used in the formula to calculate the dollar value of a manufacturer’s NCP.
EPA proposed that these criteria had been met for the 0.20 g/bhp

- hr NOx emission standard for heavy heavy

- duty diesel engines

. 77 FR 4736 ( January 31, 2012). 1 Although we did not identify the technological laggard in the NPRM, we have since identified Navista r as the manufacturer that needs NCPs. We proposed to establish NCPs because Navistar was unable to achieve the 0.20 g/bhp

- hr NOx standard and did not have sufficie nt emission credits to cover the 2012 model year. At the time of the proposal, Navistar wa s attempting to meet the NOx emission standard with a technology that is different than the approach used by other engine manufacturers. However, Navistar recently announced that it would switch its approach to use the same general technology as the other engine
firm s

– a catalytic approach call e d selective catalytic reduction (SCR). As described in Section III. C. , we have determined that Navistar will be unable to apply this technology to all of i ts engine families sold in the U.S. to achieve 0.20 g/hp

- hr NOx for at least several months, and will need NCPs until it completes it transition to the new technology. We proposed to base the calculation of the NCPs on the existing regulatory framework, revising only the upper limit and the cost parameters. We also proposed to set the upper limit at 0.50 g /bh p - hr, which means that no manufacturer paying NCPs would be allowed to certify engines with NOx emissions above this limit. The proposed penalty for

1 EPA simultaneously published an Interim Final Rule establishing interim NCPs for heavy heavy

- duty engines (77 FR 4736, January 31, 2012).** EO12866 Review

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Page 7 of 74 HHDDEs at that limit was $1,919 for model year 2012. Consistent with the provisions of the existing regul ations, this value reflected our best estimate of the near - worst case cost difference between an engine with NOx emissions at the upper limit and a compliant engine. The regulations contain provisions to increase the penalties each year for later model ye ars , which we did not proposed to change

. The NCPs being finalized for HHDDE are approximately twice the values proposed. This difference is primarily because of new information received during the public comment period related to fuel and diesel exhaus t fluid (DEF) prices. The derivation of the final penalties is described in a support document titled “ Final Technical Support Document: Nonconformance Penalties for 2012 and later Highway Heavy

- Duty Diesel Engines” (Technical Support Document), which is available in the public docket for this rulemaking. It is important to note that the NCP parameters being finalized were developed using the same basic methodology described in the NPRM. As in all NCP rules, the final NCPs are based on the estimated dif ference in compliance costs for engines at the upper limit and engines at the standard. Thus, engines with emissions at the upper limit can be considered to be baseline engines for the analysis. These baseline engines also represent the engines against w hich complying engines could compete in the marketplace. As shown in Figure 1, a nonconforming manufacturer with engines at the upper NOx limit of 0.50 g /bhp

- hr would pay a penalty of $3,7 75 for each model year 2012 engine it produces. For later model years, this maximum penalty will increase by several hundred dollars per year. While the exact rate of increase will depend on the number of engines for which NCPs are used, the penalty for engines at the upper limit could be more** EO12866 Review

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Page 8 of 74 than $5,000 by 2015. M anufacturers would pay a lesser penalty if the NOx emission s of the nonconforming engine are lower . For example, the penalty for a 2012 engine with NOx emissions at 0.30 g /bhp

- hr would be $1,2 59

.

Figure 1

– Penalty level as a function of compliance level

We received numerous comments on our proposal to establish NCPs. Our detailed analysis of these comments is contained in the Response to Comments document for this rulemaking. The major comments are summarized briefly below.

Several commenters questioned whether the regulatory criteria for establishing NCPs had been met. These comments are addressed in Section III.** EO12866 Review

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Page 9 of 74 Several commenters addressed the level of the penalty, mostly claiming that the penalty needed to be higher to meet the statutory requirement to remove the competitive disadvantage for complying manufacturers. These comments are add ressed in Section IV. The few comments we received on the upper limit supported setting it at 0.50 g/bhp

- hr. These comments are addressed in Secti on IV. A. Comments on the methodology used to calculate costs addressed both our proposed methodology and alternative methodologies. Comments on o ur proposed methodology are discussed in Section IV. B. and comments on alternative methodologies are discussed in Section IV. D. NCPs have a small environmental impact. We expect relatively few engine families to be certified under these provisions. Any impacts should be short

- term in nature because the increase in the maximum penalty in later model years will likely limit the practical availability of NCPs in future years . T he structure of the penalties, by increasing over time, discourages use in later model years , a nd because the penalty figures are high enough such that use in later model years is unlikely to be a viable option for any manufacturer. NCPs generally also have minimal adverse economic impacts. Their u se is optional, and manufacturers have historically chosen to use NCPs only when they are otherwise unable to comply with emissions standards. Manufacturers that choose to make use of the NCPs will incur those costs, which are based on the cost of complying with the emission standards.** EO12866 Review

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Page 10 of 74 Section 553(d) of t he Administrative Procedure Act (APA), 5 U.S.C. chapter 5, generally provides that rules may not take effect earlier than 30 days after they are published in the Federal Register. APA section 553(d) excepts from this provision any action that grants or re cognizes an exemption or relieves a restriction. Since today’s action can be considered to relieve a restriction that would otherwise prevent a manufacturer from certifying, EPA is making this action effective immediately upon publication. T hus, t he NCPs promulgated in this Final Rule will apply for all engines introduced into commerce after [INSERT DATE OF PUBLICATION IN THE FEDERAL REGISTER ].


### B. Statutory Authority
Section 206(g) of the Act, 42 U.S.C. 7525(g), directs EPA to promulgate regulations permitting manufacturers of heavy

- duty engines (HDEs) or heavy

- duty vehicles (HDVs) to receive a certificate of conformity for HDEs or HDVs that exceed a
F ederal emissions standard, but do not exceed an upper limit associated with that standard, if the manufacturer pays a nonconformance penalty ( NCP ) . Congress adopted section 206(g) in the Clean Air Act Amendments of 1977 as a response to a concern with requiring technology

- forcing emissions standards for heavy

- duty engines

. The concern was if strict technology

- forcing standards were promulgated , then some manufacturers might be unable to comply in the lead

- time provided for the emissions standards and would be forced out of the marketplace. NCPs were intended to remedy this con cern . The nonconforming manufacturers would have a temporary alternative that would permit them to receive a certificate of conformity by payment of a penalty , allowing the engines or vehicles to be introduced into commerce and sold . At the same time, co nforming manufacturers would** EO12866 Review

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Page 11 of 74 not suffer compared to nonconforming manufacturers, because the NCP s would remove the competitive disadvantage to them . NCPs would be based, in part, on money saved by the nonconforming manufacturer

. P roviding this relief facilitated EPA ’s authority to set technology forcing standards . Without this relief, EPA may have needed to be more cautious i n setting standards , given the possibility that a lagging manufacturer might not be able to meet the standards in the lead

- time provide d

. Under section 206(g)(1), NCPs may be offered for HDVs or HDEs. The penalty may vary by pollutant and by class or category of vehicle or engine. No NCP

- based certificate may be issued if the engine or vehicle exceeds the degree of reduction det ermined by the Administrator to be practicable. This emission level is identified in the
regu l ations as the upper limit. Section 206(g)(3) requires that NCPs:

Account for the degree of emission nonconformity; Increase periodically to provide incentive for nonconforming manufacturers to achieve the emission standards; and Remove the competitive disadvantage to conforming manufacturers. Section 206(g) authorizes EPA to require testing of production vehicles or engines in order to determine the emission level up on which the penalty is based. If the emission level of a vehicle or engine exceeds an 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 o f 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 wh o elects to pay the NCP is liable for vehicles or engines that exceed the** EO12866 Review

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Page 12 of 74 compliance level in use . The manufacturer does not have in

- use warranty or recall liability for emissions levels above the standard but below the compliance level.


### C. Background Regar ding Nonconformance Penalty Rules
Since the promulgation of the first NCP rule in 1985, subsequent NCP rules generally have been described as continuing “phases” of the initial NCP rule . The first NCP rule (Phase I), sometimes referred to as the “generic” NCP rule, established three basic criteria for determining the eligibility of emission standards for nonconformance penalties in any given model year

. 50 FR 35374 ( August 30, 1985). When adopted i n 1985, EPA intended to use the criteria of 40 CFR 86.1103

- 87 in determining whether to establish NCPs. They were included in the regulations to clarify that EPA 's obligation under the generic rule to establish NCPs only applied where these criteria were met. A s described in S ection IV. of this Final Rule, we have determined that these criteria have been met. 2
The f irst criterion is that the emissi on standard in question is a new emission standard or that the standard is an existing standard and become s 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 a nother emission standard that has become more stringent. Under the s econd criterion , EPA must find that substantial work is required in order to meet the emission standard. As described in §86.1103

- 87(b), 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

2 W e note that EPA may revise the criteria at any time through notice and comment rulemaking. Thus, these criteria do not constrain EPA from adopting NCPs in other circumstances, as long as the statutory criteria of section 206(g) are met.** EO12866 Review

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Page 13 of 74 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 that work. Third, EPA must find that a manufacturer is likely to be noncomplying for technological reasons (referred to in earlier rules as a “ tech nological laggard ” ). Prior NCP rules have considered such 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 th e marketplace. The criteria and methodologies established in the 1985 NCP rule have since been used to determine eligibility and to establish NCPs for a number of heavy

- duty emission standards. Phases II, III, IV, V, and VI published in the period from 1985 to 2002 , established NCPs that, in combination, cover the full range of heavy

- duty ; from heavy light

- duty trucks (6,000

- 8,500 pounds gross vehicle weight) to the largest diesel truck and urban bus engines. NCPs have been established for hydrocarbons (HC), carbon monoxide (CO), nitrogen oxides (NOx), and particulate matter (PM). The most recent NCP rule (6 7
FR 51464 , August 8, 2002 ) established NCPs for the 2004 and later model year NOx standard for heavy

- duty diesel engines (HDDEs). The NCP rulemaki ng phases are summarized in greater detail in the Technical Support Document for this rulemaking

. 

### D. 2007 and 2010 NOx Standards
The 0.20 g /bhp

- hr NOx standard that applies for current and future heavy

- duty engines was adopted January 18, 2001 (66 FR 5001), and first applied in the 2007 model** EO12866 Review

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Page 14 of 74 year. However, because of phase

- in provisions adopted in that rule and use of emission credits generated by manufacturers for early compliance, manufacturers have been able to continue to produce engines with NOx emissions greater than 0.20 g /bhp

- hr. Most engines during the phase

- in had NOx emissions near 1.2 g /bhp

- hr. The phase

- in provisions ended after model year 2009 so that the 0.20 g /bhp

- hr NOx standard was fully phased

- in for model year 2010. Equally important, the cap applicable to Family Emission Limits (FELs) 3 for credit

- using engine families was lowered to 0.50 g /bhp

- hr beginning in model year 2010. Because of these changes that occurred in model year 2010, the 0.2 0
g /bhp

- 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.


## II. Previous Interim Final Rule

On January 31, 2012 , EPA simultaneously published an Interim Final Rule establishing interim NCPs for heavy heavy

- duty engines and a parallel Notice of Proposed Rulemaking (NPRM). The NCPs in this Final Rule will supersede the NCPs that were promulgated in the Interim Final Rule as of [INSERT DATE OF PUBLICATION IN THE FEDERAL REGISTER ]. Several engine manufacturers petitioned EPA to rescind that Interim Final Rule. These petitions and EPA’s responses denying them have been placed into the Docket for this rule.

3 FELs are emission levels specified by the manufacturer that serve as the applicable emission standard for engines participating in the emission averaging program. The FEL cap is the highest FEL to which a manufacturer may certify an engine usi ng emission credits.** EO12866 Review

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Page 15 of 74 The se engine manufacturers also filed judicial challenge s to the Interim Final Rule. Mack Trucks, et al v. EPA, No. 12

- 1077 (D.C. Cir). They challenged EPA’s decision to establish NCPs in an interim final rule without going through notice and comment. They al so challenged our finding that the regulatory criteria had been met to promulgate NCPs for the 2010 NOx standard , as well as our conclusion that the interim NCP levels removed the competitive disadvantage for complying manufacturers. On June 12 , 2012 , the Court of Appeals for the D.C. Circuit issued an opinion holding that EPA violated the procedural requirements for rulemaking because EPA did not have good cause to issue the rule without providing notice an d opportunity for comment . Id., 2012 U.S. App. LE XIS 11851 (June 12, 2012). T he Court did not rule on the merits of EPA's finding s about the regulatory criteria or the level of the NCP. Nevertheless, it stated in dicta its concerns about these issues, w hich are discussed below in S ections III (NCP Eligibility) and IV (Penalty Rates)

. 

## III. N CP Eligibility

S ection I. C

. of this Final Rule notes that EPA regulations provide for three criteria
t o be met in order to determine that an NCP should be established in any given model year. As is described below, these three criteria address different aspects of the appropriateness of NCPs, and it is important to consider each criterion separately in it s own proper context. In general, the first two criteria address whether the standard in question created the possibility that a technological laggards could develop, while the third criterion addresses the likelihood that there will be a technological lag gard. For the 2010 NOx standard, we find that these criteria have been met for heavy heavy

- duty diesel engines, and it is** EO12866 Review

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Page 16 of 74 therefore appropriate to establish NCPs for this standard for the current model year and later.


### A. First criterion
- whether the MY2010 NOx stan da rd is more stringent than the previous NOx standard The first criterion requires that the emission standard in question must be more stringent than the previous standard. This is the case with the 20 10 NOx standar d. The previous emission standard for this category is a combined NMHC + NOx standard of 2.4
g /bhp

- hr , or optionally a 2.5 g /bhp

- hr NMHC + NOx with a limit of 0.5 g /bhp

- hr NMHC. 4
The 2010 (i.e., current ) standards are 0.20 g /bhp

- hr for NOx and 0.14 g /bhp

- hr for NMHC. Some commenters argued that this standard should no longer be considered a new standard because it went into full effect two model years ago. W e did not promulgate NCPs for the 2010 and 2011 model years because no manufacturer required suc h NCPs, as all manufacturers met the standard either directly or through application of credits. However, the fact that we did not promulgate NCPs for the first year a standard went into effect does not preclude us from promulgating NCPs for such standard at a later time, when it is determined the regulatory criteria have been met

. While it is not a path we have generally take n , n othing in the sta tute or in our regulations , which refer to new or revised standards, preclude s EPA from promulgating NCPs after the first year of a new or revised standard. See 50 FR 35374, 35376 ( August 30, 1985), and 50 FR 9204, 920 6 ( March 6, 1985).

4 NMHC stands for non

- methane hydrocarbons, which is a measure of total hydrocarbons with the methane emissions subtracted out. For typical on

- highway diesel fueled heavy

- duty engines, methane emissions are on the order of 10 percent of the total hydrocarbon emissions.** EO12866 Review

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Page 17 of 74 Th e first criterion, as with the other two criteria, reflects the key concepts underlying the NCP program

– NCPs are designed to address situations where technological laggards are likely to develop in response to the adoption of techno logy forcing emission standards for this sector under CAA section 202(a)(3)(A). One purpose of section 206(g) is to avoid, at least temporarily , the problem of technological laggards being driven out of the market because of their inability to meet technology forcing emission standards in the lead

- time provided. 50 FR 9204, 9205 (March 6, 1985) , 50 FR 35375 (August 30, 1985) ("The possibility of a technological laggard is a key concept in the NCP availability scheme."). The first criterion is direc tly linked to this

- " T his condition creates the possibility for a technological laggard to exist." 50 FR 9204, 9206 (March 6,1985). Given this purpose , the appropriate way to consider whether the new or revised standard is more stringent is to consider i t f rom the point of ad option of the standard , by comparing it to the prior standard

. It is at th e point that EPA has adopted a standard that may force technology changes , and it is the difference in stringency between the old and the new or revised standard , that raises the possibility of a technological laggard. The passage of time after adoption of the standard does not change the analysis of whether the new or revised standard is or is not more stringent than the previous standard . 50 FR 9204, 9 206 (March 6, 1985)

. Even i f EPA considers NCPs some model years after adoption of the standard the comparison under the first criterion is still between the new or revised standard and the prior standard, and their relative stringency. The first criteri on establishes one circumstance that must occur to establish NCPs under the generic rule : a new or revised standard must be more stringent than the previous** EO12866 Review

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Page 18 of 74 standard for the pollutant, or an existing standard must become more difficult to achieve

. The passage of time by itself , from MY2010 to MY2012 , does not change the fact that the
MY 2010 NOx s tandard was and co ntinues to be more stringent than the standard applicable to model years before 2010 , and this increase in stringency created the possibility for a technological laggard to exist . The first criterion is thus more in the nature of a static or historic fact, a threshold determination typically made based on the facts in existence at the time of adoption of the new or revised standard, a compariso n of the stringency of the previous and the new or revised standard. Based on this, EPA rejects commenters ’ arguments

. Even though the determination on the first criterion is not being made until some model years after adoption of the 2010 standard, the 2010 NOx standard has always been a new or revised standard compared to the prior standard, and the 2010 standard was and continues to be more stringent than the preexisting NOx standard. The passage of time does not change the fact that adoption of a more stringent standard for MY2010 created the possibility for a technological laggard to exist. The 2010 standard is certainly a new or rev ised standard and certainly is more stringent than the previous standard for NOx. The fact that we are now in MY2012 does not change this conclusion.



### B. Second criterion
- whether substantial work w ill be required to meet the MY2010 NOx standard Under t he second criterion , substantial work must be required to meet the standard. When we first established the 2010 NOx standard, we considered it to be a technology

- forcing standard and subsequent history has shown that substantial work h as been required to mee t this emission standard. More importantly , all heavy heavy

- duty** EO12866 Review

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Page 19 of 74 diesel engines currently certified to the 0.20 g /bhp

- hr standard without using credits are using new aftertreatment systems (that were generally not used in 2009) to meet this standard. 5 Indeed, even Navistar substantially redesigned its emission control system in its attempt to achieve lower emissions with out NOx af ter treatment

. This work clearly
meets the definition of substantial work, as it involves the use of either : new catalytic

co ntrols and related technology not previously used in these engines , or the significant modification of existing EGR and related technology

. None of the complying manufacturers dispute that they have done substantial work to achieve the 0.20 g/bhp

- hr
NOx s tandard. In fact, they emphasized in their comments how much work they have done to meet the standard. The second criterion builds on the first criterion , as it involves an evaluation of the nature and degree of the technological challenge of the new or revised standard . If the new or revised standard increases the stringency to such a degree that it cannot be met by simple modifications to existing technology (i.e., that substantial work will be required to comply ) , then this criterion is sat isfied

. Like the first criterion, the second criterion reflects the key concern with the issue of a technological laggard

- “When manufacturers must perform substantial work, it is possible that at least one will be unsuccessful and will become a laggard. ” 50 FR 9204, 9206 (March 6,1985) . Like the first criterion , it is a determination of circumstances that establish a threshold or baseline for setting NCPs

5 For this Final Rule , EPA describes those manufacturers that have achieved the 0.20 g/hp

- hr emission standard as “conforming”, “compliant” or “complying” manufacturers, and those that have not as the “nonconforming”, “ noncompliant” or “noncomplying” manufacturers. However, it is important to clarify that manufacturers certifying above the 0.20 g/hp

- hr NOx emission standard using emission credits are in compliance with regulations as long as they have enough emission cr edits to offset their total NOx emission s above the standard

.** EO12866 Review

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Page 20 of 74 under the generic rule. It identifies circumstances that mean there is a possibility that a lagga rd may exist. Given this purpose, the appropriate way to consider the second criterion is to evaluate all of the work that must be accomplished to move from compliance with the previous standard to compliance with the new or revised standard. The possib ility of a technological laggard is created by this entire amount of work that must be done, not any one subset or increment of the work. Thus, if EPA evaluates this criterion at some point after adoption of the new or revised standard, EPA still consider s all of the work to go from the previous to the new or revised standard, and not just the work remaining as of the date the determinations are made about compliance with the criteria under the generic NCP rule. While c ommenters did not dispute that subst antial work was required to meet the 2010 standard, some commenters claim it is no longer true that substantial work is required because some manufacturers have met the standard

. Some commented that these determinations must be based on the factual circumstances at the time of the NCP rulemaking and not the time the revised standard was issued. We disagree with these claims for two reasons. First, this criterion is to be evaluated based on the total amount of work needed to go from meeting the prev i ous standard to meeting the current standard, regardless of the timing of such changes

. Indeed, the commenters’ approach would seem to be directly contrary to the purpose of the statute . The NCP program is designed to allow technological laggards to be able to certify engines even if other manufacturers have met the standard. There is a clear expectation that some manufacturers might be technological** EO12866 Review

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Page 21 of 74 laggards. 50 FR 9204, 9206 (March 6 ,1985) (“When manufacturers must perform substantial work, it is possible that at least one will be unsuccessful and will become a laggard.”) Where there is a technological laggard, it is the typical situation that other manufacturers have already complie d or will comply on time

. The fact that some manufacturers have surpassed the technological hurdles and achieved compliance with the new or revised standard does not in any way show that there is or cannot be a technological laggard who at least temporarily has not surpassed the te chnological hurdles. Refusing to establish NCPs solely because some manufacturers comply at the time NCPs are established would frustrate Congress ’ purpose by preventing establishment of NCPs when there is a technological laggard w ho temporarily can not c omply with the standards and
cannot certify engines without the NCP program . Thus , EPA bases the determination of substantial work on the total amount of work to go from compliance with the prior standard to compliance with the new standard, even if
at the time of the NCP rulemaking some manufacturers have already completed some or all of such work. Under this criterion, the important question is whether manufacturers who were using technology that met the previous standard would need to conduct signific ant work to develop new technology or to build upon / change the old technology to meet the revised standard. Questions about work that still needs to be done at the point EPA begins an NCP rulemaking are relevant only in the context of the third criterion, whether there is likely to be a technological laggard. To avoid this confusion for future NCPs, we are clarifying in the regulatory text that this criterion is to be evaluated based on the need for new or modified technology or design to meet the new or revised standard regardless of the timing for such changes.** EO12866 Review

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Page 22 of 74 Second, even under the current circumstances, we find that Navistar has need ed to do substantial work to meet the standard

. This is the case whether one consider s the total amount of work to go from the previous standard to the MY2010 NOx standard, or whether

one only consider s the amount of work to go from the current status of its technology to compliance with the MY2010 standard. See the discussion below concer ning the work conducted by Navistar to date and expected in the future. We informed engine manufacturers in 2010 that we believed the first two criteria had been met. 6 We note that the commenters now questioning whether these criteria have been met did n ot dispute our earlier view that we could have set NCPs at that time had we determined that a technological laggard was likely to develop. At that point , EPA was clear that the reason we were not establishing NCPs at that time was because we had not deter mined that a technological laggard was likely to develop.


### C. Third criterion

– whether there is likely to be a technological laggard.

Under the third criterion, EPA considers all of the circumstances to determine whether there is likely to be a technologi cal laggard. In the 1985 generic rule EPA indicated that : Third, EPA must find that there is likely to be a technological laggard. Even when a standard becomes more stringent (or there is an adverse effect on a previously attainable standard), and even when manufacturers must perform substantial work, all manufacturers may still be able to meet the more stringent standard. For instance, compliance with a standard may involve merely the transference of technology from a similar application. Thus, EPA must make a determination whether the circumstances will likely give rise to a laggard. 50 FR 9204, 9206 (March 6,1985)

.
6 “Nonconformance Penalties for Heavy

- Duty Diesel Engines in 2010 Model Year”, Letter from Karl J. Simon, Director, EPA Compliance and Innovative Strategies Division, February 22, 2010.** EO12866 Review

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Page 23 of 74 One of the concept s underlying a technological laggard is that a manufacturer faced with a new or revised standard, especially one that is technology forcing, will direct substantial resources and effort to develop and employ technology aimed at achieving compliance with the more stringent standard. Whether the manufacturer develop s and employ s the same or different technology than other manufacturers, there is a possibility that such a manufacturer will be temporarily un able to achieve the emissions standard in the lead tim e provided based on technological reasons. Instead of refusing to certify the manufacturer's engines, and driving them ou t of the market, the NCP program is specifically designed to provide a temporary path for certification until the remaining technologi cal issues are resolved and the manufacturer achieves the standard. 50 FR 9204 (March 6,1985) . The third criterion is designed to implement this concept, based on EPA ’ s evaluation of all of th e circumstances

. In this case, all of the circumstances ind icate that there is more than a likelihood that there is an engine manufacturer that has not yet achieved the MY2010 NOx standard for technological reasons

- we have determined that Navistar is in fact such a manufacturer

. Unlike the rest of the industry, Navistar attempted to comply without SCR to reduce NOx emissions. 7 However, to date Navistar has not succeeded in reaching the 0.20 g/bhp

- hr emission level. At this time, the only engine families Navistar has certified since the MY2010 standard too k effect have used advanced EGR technology , and have been certified based on either banked emission credits or on Navistar’s payment of the interim
NCPs

. Navistar does not have sufficient credits to cover its entire model year 2012 production without NCPs . Navistar has acknowledged in its public comments on this rule

7 This t echnology is based on internal engine controls and advanced exhaust gas recirculation technology.** EO12866 Review

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Page 24 of 74 that it is effectively a technological laggard. On July 6, 2012 , Navistar announced that it has begun the process of redesigning its trucks to use SCR engines in addition to their
in

- cylinder emission control technology . Navistar expect s the SCR engines to be available beginning in early 2013 . We have determined that Navistar will need access to NCPs to lawfully produce engines during this multi

- month transition process.
S everal commenters no ted that Navistar cannot be a technological laggard as it has applied for certification of an engine family using this technology , seeking a certificate for a 0.20 g/bhp

- hr engine that complies without the use of credits

. However, Navistar has withdrawn that application based on EPA concerns that the engine design (with its current hardware) does not meet the 0.20 g/bhp

- hr NOx standard.

While Navistar has announced that it will switch to SCR

- based emission controls, we have determined that the work n eeded for Navistar to redesign all of its U.S. engines and vehicles for its announced alternate compliance path based on SCR cannot be completed immediately. Thus, Navistar will need NCPs during this transition period. These limitations are technological rather than economic in nature, and no amount of money could be spent by Navistar to bring all its engines into compliance for this model
year. Among the steps Navistar must complete, it must:

Select an SCR system design Make arrangements with component suppliers Validate components Recalibrate its engine to work with the SCR system Redesign it trucks to fit the SCR hardware Complete its emission testing and durability testing for certification Obtain EPA approval for the new engine

- SCR system** EO12866 Review

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Page 25 of 74 W e do not have a precise estimate of how long this will take for Navistar ’s entire U.S. production of heavy heavy

- duty diesel engines and associated vehicles. However, based on our experience and knowledge of this industry, this type of technology introduction is

n ot finished in a one or two month period. Navistar has acknowledged as much in their July 6, 2012 announcement, which stated they will begin making the new technology products available in early 2013. Several commenters argued Navistar voluntarily chose a different technology path than other manufacturers, and could have complied in the lead time provided i f it had developed and employed SCR technology from the beginning . Since Navistar chose what the commenters consider to be the wrong technology path, they argue it is a laggard based on its own business decision and not technological limitations. They stated that NCPs should not be established under these circumstances. We generally would agree with
commenters ’ assertion s that Navistar presumably coul d have chosen the same SCR technology path as other manufacturers some time ago , and presumably could have already achieved compliance with the MY2010 standard in the same time frame they did. If that had occurred, there would be no basis for establishing NCPs

. However , we disagree with
commenters ’ conclusions that NCPs should not be established based on this difference in choice of technology pathway. Navistar made a decision to attempt to meet the emission standard using a different technology path , without SCR. As with most of EPA’s mobile source emissions standards , t he MY2010 emission standard is a performance standard, and does not specify what technology must be used or require that all manufacturers use the same technology.
Commenters ’ approach would penalize a manufacture who attempts to innovate and** EO12866 Review

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Page 26 of 74 develop a technology pathway different from its competitors. This would effectively discourage technological innovation by requiring all manufacturers to use the same technology once one manufacturer has met the standard using that technology

. Otherwise they would risk being driven from the market as no NCPs would be established. Such an interpretation would undercut the purpose of technology forcing standards

– to adopt standards where manufacturers may have to develop advanced technology or technology that is at the cutting edge of emissions control. This interpret ation would
suppress technological innovation out of fear that a wrong technological choice will lead to having to leave a market without the temporary benefit of NCPs. This approach would also ignore the premise of promulgating NCPs, which is that they are appropriate when one

or more manufacturer s ha ve not met the standard , while one or more others have

. Whether the laggard is not a ble to achieve compliance because of a technological hurdle in developing the same or different technology as their competitors, the result is the same

– they risk being removed from the market based on technological issues, if NCPs are not established. EPA does not see a valid basis for drawing such a distinction between technology pathways in deciding whether there is likely to be a technological laggard.
As discussed later, in S ection IV on the penalty rate, the provision of NCPs is only a temporary solution for the noncomplying technological laggard. The first

- year penalty rate is designed to remove the economic disadvantage for the complying manufacturers, preventing harm to the competitors. The NCP rate also increases over time, such that in a short period of time the noncomplying manufacturer needs to achieve compliance or the increasing penalty rate will in effect drive it from the market. Since the NCP protects a complying manufacturer from a co mpetitive disadvantage irrespective of the technology** EO12866 Review

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Page 27 of 74 path chosen by its competitor , it is appropriate that EPA not draw a distinction based on whether the technological laggard chose the same or a different technology path than the complying manufacturers . This helps to preserve the nature of EPA’s standards as technology forcing performance standards that promote technological innovation across this sector of industry. Having made its decision to pursue a non - SCR technology to meet the standards, Navi star has not been able to produce engines that have been certified to meet the 0.020 standard without credits. T he evidence is clear that Navistar chose to develop a different technological solution than other manufacturers, and that technological issues concerning this solution have delayed Navistar’s ability to meet the standard. It is for this technological reason that Navistar cannot meet the standard, not because it has made an economic decision not to try.


### D. Issues Raised by the DC Circuit Court of A ppeals As noted above, in Mack Trucks, et al v. EPA, No. 12

- 1077 (D.C. Cir), the court included comments in its op inion, in dicta, concerning the appropriateness of NCPs under the circumstances presented in the Interim Final Rule. The court stated that: We do recognize the pending final rule means our vacatur of the IFR on these procedural grounds will be of limited practical impact. Before the ink is dry on that final rule, we offer two observations about the parameters of this rulemaking. First, NCPs are meant to be a temporary bridge to compliance for manufacturers that have “made every effort to comply.” United States v. Caterpillar, Inc., 227 F. Supp. 2d 73, 88 (D.D.C. 2002). As EPA itself has explained, NCPs are not designed to bail out manufactur ers that voluntarily choose, for whatever reason, not to adopt an existing, compliant technology. See 77 Fed. Reg. 4,736, 4,739 (Jan. 31, 2012) (“NCPs have always been intended for manufacturers that cannot meet an emission standard for technological reas ons rather than manufacturers choosing not to comply.”); 50 Fed. Reg. 35,402, 35,403 (Aug. 30, 1985) (stating that NCPs are inappropriate “if many manufacturers’ vehicles/engines were already meeting the revised standard or could do so with relatively mino r calibration changes or** EO12866 Review

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Page 28 of 74 modifications”). Based solely on what EPA has offered in the IFR, it at least appears to us that NCPs are likely inappropriate in this case. 8

The c ourt noted that NCPs are intended to be a temporary bridge to compliance for

m anufacturers who have “made every effort to comply” and are not designed for manufacturers that voluntarily choose, for whatever reason, not to adopt an existing, compliant technology. EPA agrees with these general concepts, but they do not apply in this case. T he c ourt’s comment s concern the issue of whether substantial work is needed to achieve compliance with the MY2010 NOx standard, and whether Navistar is properly considered likely to be a technological laggard in achieving compliance with this stand ard in light of the technology pathway it chose . Based on all of the circumstances before EPA, it is reasonable to determine that Navistar has made every effort to comply, for the technology pathway it chose

. T he need for NCPs is based on the failure to achieve the emissions standards using this technology

. This failure is based on technological reasons, and not other reasons. The c ourt’s statement that NCPs were intended for manufacturers that “made every effort to comply” ( United States v. Caterpillar , Inc. , 227 F. Supp. 2d 73, 88 (D.D.C. 2002)) was made in a different context and does not apply here

. This comment was in response to a suggestion from Caterpillar in that earlier case that the consent decree at issue should have be en interpreted in a certain way ( or modified ) as EPA failed to issue an NCP rule with enough lead time

. Caterpillar argued that it was harmed by t his delay because the purpose of the NCPs was to allow a manufacturer to weigh the costs of compliance against the costs of paying NCPs. The c ourt rejected this view, as it would allow “engine

8 Id., slip op. at 15.** EO12866 Review

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Page 29 of 74 manufacturers ... to calibrate the intensity of their compliance efforts to the NCP for each new standard, allowing them to opt for noncompliance when compliance becomes more expensive than the NCP. This kind of second

- guessing, however, was clearly not Congress' intent in providing for NCPs.” 227 F.Supp. at 88. The court noted that “ [i] nstead, NCPs were intended to give a manufacturer that has made every effort to comply, bu t has been unable to achieve compliance, a chance to continue to participate in the market. Thus, NCPs serve their purpose even if promulgated after a company has made its engine design decisions, since those decisions should be based on whether compliance can be achieved, not on whether compliance is less expensive than paying NCPs.” Id. at 88

- 89. In that context, it is clear that the c ourt’s prior statement addressed the claim that a manufacturer should be able to bas e their engine design decisions on t he availability of
NCPs , weighing which cost s more and deciding based on this whether to pursu e a technology pathway to compliance or pay NCPs. The court made clear that providing thi s kind of economic choice on compliance is not the purpose of an NCP

. T he court specifically noted that NCPs are appropriate in a case where the failure to achieve compliance is based on technological concerns encountered along the path to achieving compliance

– that is, in circumstances like those in this current rulemaking,

. T he court’s statement was not related to whether, evaluating in retrospect at the point an NCP is established , a manufacturer had made every effort to comply prior to adoption of the NCPs . Navistar chose to pursue a n engine emissions control design that is

non - SCR based several years before NCPs were proposed

. NCPs would be used by Navistar while it address es the technology

- based hurdles it now face s in switching to SCR controls. It faces these technology hurdles now as a result of the techn ology pathway it** EO12866 Review

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Page 30 of 74 chose years before the NCP was adopted . The NCPs would not be used, as Caterpillar asked the court to allow in the earlier case , to decide what technology path to follow and how hard to pursue it based on the economics of the cost of NCPs. In this case , Navistar made considerable efforts to develop and employ th e non - SCR technology . Its choice of technological pathway to compliance was not based on weighing the costs of compliance with the cost of NCPs. The court’s concerns in Cater pillar are not applicable to the facts in this NCP rulemaking

. The court also quoted from the generic 1985 rulemaking, noting that NCPs would not be appropriate if “many manufacturers were already meeting the standard, or could do so with relatively min or calibration changes or modifications.” This language from the 1985 rulemaking refers to the second criterion, whether substantial work is required to achieve compliance with the more stringent new or revised standard. As discussed above , this is based on all of the work that must be done to move from the previous standard to the

more stringent new or revised standard. This criterion is to be evaluated based on actual work needed to go from meeting the previous standard to meeting the current standard, regardless of the timing of such changes. Based on this, the amount of work remaining to be done when the NCP rulemaking occurs is not relevant to the second criterion

. Likewise, w hether some manufacturers have already achieved compliance at the time of the NCP rulemaking is also not relevant to determining whether the second criterion has been met. As noted above, it is not unexpected that at the time of this NCP rulemaking that “many manufacturers’ vehicles/engines were already meeting the revised sta ndard or could do so with relatively minor calibration changes or modifications

. ” However ,

r ejecting NCPs solely because some manufacturers have achieved or are on a path to** EO12866 Review

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Page 31 of 74 achieve compliance, while one or more other manufacturers are not in the same pos ition, would prevent lagging manufacturers from certifying in exactly those circumstances Congress contemplated providing for NCPs

– some manufacturers are able to achieve compliance in the lead time provided, but for technological reasons others are not. NCPs are designed to address just this situation, to temporarily avoid driving these manufactories out of the market. 50 FR 35374 (August 30,1985)

. Clearly, in this case, substantial work was required to meet the 0.20 g/bhp

- hr standard. Every manufactu rer has included (or will soon include) for the first time NOx aftertreatment (selective catalytic reduction), on their engines to meet the standard . Prior to deciding to change its technology appr oach , Navistar also greatly modified i ts exhaust gas recir culation (EGR) system to reduce NOx emissions and would likely have need ed to do significant ly more work to further reduce its NOx emissions to meet the standard. These are substantial changes to the emission control systems of these engines. While

sever al manufacturer s are currently using SCR systems, they were not doing so until they were required to meet the 2010 NOx standard. Therefore, it is clear that substantial work was needed to go from the previous standard to achieve compliance with the 2010 NOx standard, and the second criterion is satisfied. The court also noted that NCPs are not intended in a situation where the failure to achieve compliance is not related to technological reasons, but to a manufacturer ’ s choosing to not employ an available complying technolog y. As discussed above, EPA agrees that the basis for establishing NCPs must be a technological based laggard. The reasons for not achieving the emissions standard in the lead time provided must be based on a technological failure in developing and employ ing the chosen technology pathway

.** EO12866 Review

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Page 32 of 74 T he court refers to a statement made by EPA when discussing the relationship between
NCPs for the 2010 NOx standard and credits for the CO2 emissions standards adopted for heavy

- duty engines and trucks

. 9 77 FR 4739 (Jan uary 31, 2012)

. EPA stated it was not providing NCPs for the new CO2 emissions standard as it was not in a position to determine that a technological laggard was likely to develop for that CO2 standard. In that context, EPA also determined that an engin e that was certified to the 2010 N O x standard using NCPs should not be able to generate credits at the same time under the CO2 emissions standards. EPA recognized that there was an interplay between N O x control and CO2 control, such that higher levels of N O x could lead to lower levels of CO2 emissions. Under those circumstances, providing credits for the CO2 program c ould provide an incentive for a manufacturer to increase NOx emissions but still certify an engine using NCPs, where they could otherwise ac hieve the NOx standard without NCPs

. That manufacturer could then generate credits under the CO2 program for the decrease in CO2 emissions resulting from the increase in NOx emissions

. Thus, the manufacturer would be choosing to not comply with a standard for which it was technologically capable of complying, and would be doing so to generate emission credits that would provide it some advantage in the future. This would not be consistent with either the purpose of the
CO2 cr edit program (to provide an incentive for manufacturers to take technological and other efforts to over comply with the CO2 standard) or the purpose of the NCP program (to provide relief to manufacturers that fail to achieve the standard on time for techno logical reasons, not for other reasons such as the economic benefit of generating CO2 credits by voluntarily increasing emissions of NOx).

9 EPA stated “NCPs have always been intended for manufacturers that cannot meet an emission standard for technological reasons rather than manufacturers choosing not to comply.”** EO12866 Review

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Page 33 of 74 EPA’s observation in the proposal confirmed that the basic purpose of NCPs is to provid e relief where there is a lagg ard for technological reasons, not other reasons. The concerns raised regarding CO2 credits and N O x NCPs are not related to our finding that Navistar is a technological laggard

. No one argues that Navistar has failed to achieve a technological solution b ecause of a decision to generate credits or reap economic benefits elsewhere. Instead Navistar's failure to achieve the standard as of this date is based on technological and not other reasons . This is similar to the circumstances in 2002 when Caterpill ar developed its “ACERT” technology rather than use cooled EGR technology , which it had been developing until 2001. It needed to use NCPs because of delays in developing ACERT

. In that case, Caterpillar did not dispute that cooled

- EGR would achieve the n ecessary emission reductions; rather it chose to attempt to meet the standard using what it believed to be a superior technology. The court also noted its concern with the level of the penalty in the Interim Final Rule, and whether it adequately removed th e economic disadvantage to conforming manufacturers. That issue is addressed in Section IV below.


## IV. Penalty Rates
This rulemaking is the most recent in a series of NCP rulemakings. These are referred to as Phases and are referenced below. 10 The discussion s of penalty rates and related reports and analyses in those rulemakings are incorporated by reference. This section briefly reviews the penalty rate formula originally promulgat ed in the Phase I rule

10 The previous NCP rules include: the Phase VI rulemaking (67 FR 51464, August 8, 2002), Phase IV rulemaking (58 FR 68532, December 28, 1993), Phase III rulemaking (55 FR 46622, November 5, 1990), the Phase II ru lemaking (50 FR 53454, December 31, 1985) as well as the Phase I rulemaking (50 FR 35374, August 30, 1985).** EO12866 Review

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Page 34 of 74 (currently found at 40 CFR 86 .1113

- 87 ) and discusses how EPA arrived at the penalty rates in this Fi nal R ule. The penalty rates being established in this rule rely on the existing NCP regulatory
structure. O nly a few changes are b eing made to the regulations . As proposed, we are setting of the upper limit at 0.50 g/hp

- hr and are clarifying in §86.1104

- 91 that EPA may set the upper limit at: (1) a level below the previous standard if we determine that the lower level is achievable by all engines, or (2) a level above the previous standard if we determine that the standard is not achievable by all engines. We also proposed cost parameters to reflect the complianc e costs for the 2010 standards and are finalizing these cost parameters , after revising them based on comments. Finally, in response to comments, we are

c larifying that the second NCP criteri on is to be evaluated without regard to the specific timing of the NCP rule

. We received many comments supporting higher or lower penalties for a variety of reasons. However, the most important criteria in evaluating the penalties are how they conform to the statutory requirements and how they conform to the regulatory requirements. With respect to the statutory requirements for th e penalties in the first year, we note that the purpose of adopting NCPs is to allow a noncompliant manufacturer to continue selling its engines , provided it pays the penalty . However, s ection 206(g) of the Act directs EPA to set the NCPs at a level that will “remove any competitive disadvantage” to complying manufacturers. Contrary, to what some commenters suggested, this first year penalty level is not intended to punish the noncomplying manufacturer beyond the level needed to remove any competitive dis advantage for complying manufacturers.
EPA has also set regulatory requirements for penalty levels. Most significantly,** EO12866 Review

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Page 35 of 74 the regulations state that we must set penalties based on total incremental costs of compliance relative to engines at the upper limit , which we have done

. In th e first NCP rule, it was determined that compliance cost differences between engines at the upper limit and engines at the standard w ould be appropriate measures of the competitive disadvantage for complying manufacturers. 11 W e believe that the final NCPs being established conform to both the regulatory requirements and the statutory requirements.
The NCP rates being adopted in this FRM are specified for model year 2012. As required by section 206(g) of the Act, the existing re gulations include a formula that increases (or “escalates”) the penalty rates with each new model year. The purpose of the escalator is to provide an incentive for manufacturers who use NCPs for more than one model year to achieve compliance quickly rathe r than continuing to use NCPs for multiple model years. As proposed, we will apply this annual adjustment formula to the NCPs by setting the 2012 model year as year number one. This is consistent with the existing regulatory text that states that year o ne is the first year that NCPs are available (see 40 CFR §1113

- 87(a)(4)). Traditionally, when NCPs are adopted, they are available the first model year the new or revised emission standard applies and there is no question about which model year should be year one for purposes of the annual escalator. However, this is less straightforward for this NCP rule. First, the 0.20 g/bhp

- hr first applied beginning in the 2007 model year, as part of a phase

- in, but did not take full effect until MY2010. In additio n, we are adopting NCPs more than two model years later. While we received

11 W hile we have followed the regulatory formula for determining penalties for this rule , i t should be noted that if we were to find that conforming to the regulatory requirements would not conform to the statutory requirements, we would need to revise the regulatory requirements through rulemaking.** EO12866 Review

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Page 36 of 74 comments supporting setting 2010 as the base year, we continue to believe the 2012 model year is the correct year for the first year of the escalator calculation. A s discussed fur ther in the Response to Comments document, we are not revising the regulatory text that specifies that year one is the first year that NCPs are available . U sing the first year of
NCP availability as the first year for the escalator calculation, the initia l NCPs (i.e., NCPs during the first model year of availability) remove the disadvantage for the complying manufacturers, as Congress intended. Under this approach, the escalator would apply staring in MY2013, the earliest that any manufacturers could be u sing NCPs for more than one model year. This ties the initiation of the escalator, and the start of the economic incentive it provides, to the first year in which circumstances that call for such an incentive can exist

– the second year of availability. MY2013 is the first year any manufacturer could use this NCP for multiple years. Adding an extra penalty equivalent to two years of escalation is contrary to the intent for this escalation. No manufacturer had access to NCPs prior to 2012, and requiring an escalator based on the two previous years of the standard would treat a manufacturer who uses NCPs in either 2012 or 2013 as if they had already used NCPs for several more years than the actual usage. The additional escalator and related additional in centive is more than is needed to meet the objective of the escalator provision, and therefore is consistent with the purpose of the escalator provision.
W e are specifying the NCP formula using the normal NCP parameters: COC 50 , COC 90 , MC 50 , F, and UL. The NCP formula is the same as that promulgated in the Phase I rule. As was don e in previous NCP rules, we consider additional manufacturer costs and additional owner costs (for complying engines relative to the upper limit) , but do not consider certifi cation costs because both complying and noncomplying manufacturers** EO12866 Review

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Page 37 of 74 must incur certification costs. COC 50 is an estimate of the industry

- wide average incremental cost per engine (references to engines are intended to include vehicles as well) associated wi th meeting the standard for which an NCP is established , compared with meeting the upper limit. COC 90 is an estimate of the 90th percentile incremental cost per engine associated with meeting the standard for which an NCP is established , compared with mee ting the associated upper limit. Conceptually, COC 50 represents costs for a typical or average manufacturer, while COC 90 represents costs for the manufacturers with the highest compliance costs.
MC 50 is an estimate of the industry

- wide average marginal cost of compliance per unit of reduced pollutant associated with the least cost effective emission control technology installed to meet the new standard. MC 50 is measured in dollars per g /bhp

- hr for heavy

- duty engines . F is a factor used to derive MC 90 , the 90th percentile marginal cost of compliance with the NCP standard for engines in the NCP category. MC 90 defines the slope of the penalty rate curve near the standard and is equal to MC 50 multiplied by F. UL is the upper limit above which no engine m ay be certified. The derivation of the cost parameters is described in a support document titled

“ Technical Support Document : Nonconformance Penalties for 2012 and later Highway Heavy

- Duty Diesel Engines” ( Technical Support Document ), which is available in the public docket for this rulemaking. All costs are presented in 20 1 1 dollars. The Technical Support Document also includes alternative cost analyses that were considered.


### A. Upper Limit
The upper limit (UL) is the emission level established by regulation above which NCPs are not available. A heavy duty engine cannot use NCPs to be certified for a level** EO12866 Review

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Page 38 of 74 above the upper limit. CAA section 206(g)(2) refers to the upper limit as a percentage above the emission standard, set b y 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 may be certified using NCPs, but it is also a critical component of the cost analysis used to develop the penalty rates. The regulations specify that the relevant costs for determining the
COC 50 and the COC 90 factors are the difference between an engine at the upper limit and one that me ets the applicable standards (see 40 CFR 86.1113

- 87). The regulatory approach adopted under the prior NCP rules sets the upper limit at the prior emission standard when a prior emission standard exists and is then changed to become more stringent. EPA concluded that this upper limit should be reasonably achievable by all manufacturers with engines or vehicles in the relevant class. It should be within reach of all manufacturers of HDEs or HDVs that are currently allowed so that they can continue to se ll their engines and vehicles while finishing their development of fully 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 becom es more stringent. The prior emissions standard generally meets these goals because manufactures have already certified their vehicles to that standard. In the NPRM, we proposed to revise the regulations in §86.1104

- 91 to clarify that EPA may set the up per limit at a level below the previous standard if we determine that the lower level is achievable by all engines or vehicles in the relevant subclass. That provision of the regulations was not opposed by any commenters and is included in this final rule . We are also finalizing the upper limit at 0.50 g/bhp

- hr, which was widely** EO12866 Review

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Page 39 of 74 supported by commenters. For this rule, all manufacturers are currently certifying all of their engines at or below the 0.50 g/bhp

- hr FEL cap, providing clear evidence that this level can be met by all manufacturers. The reason EPA has rejected past suggestions that the upper limit should be more stringent than the prior emission standard does not apply here, as there is no difficulty in this case in identifying a limit that coul d be met by all manufacturers. See 50 FR 35377 (August 30, 1985) . Thus, setting the upper limit for this NCP rule at 0.50 g/bhp

- hr NOx conforms to the purpose of the upper limit in setting
NCPs. As proposed, we are also specifying that EPA could set th e upper limit at a level above the previous standard in unusual circumstances, such as where a new standard for a different pollutant or other requirement effectively increases the stringency of the standard for which NCPs would apply. This occurred for h eavy heavy

- duty engines with the 2004 standards. While this change would not apply for this current NCP rulemaking, we proposed to add this clarification to make the regulations consistent with past practices.


### B. Cost Parameter Values
The regulations being adopted specify that the value s in Table 1 be used in the NCP formula for the 2012 and later model year NOx standard of 0.20 g /bhp

- hr for heavy heavy

- duty diesel engines. The basis is summarized here. The complete derivation of these parameters and a discussion of other approaches that were considered are described in the Technical Support Document for this rulemaking.** EO12866 Review

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Page 40 of 74 Table 1: NCP Calculation Parameters

Parameter Heavy Heavy - Duty Diesel Engines

COC 50 3,2 19

COC 90 $3,7 75

MC 50 $10,7 29 per g /bhp

- hr

F 1.17 3

UL 0.50 g /bhp

- hr

Some commenters argued that EPA should not deviate from prior precedents for calculating costs. However, EPA has not use d the same methodology in calculating costs in each of the previous NCP rules . 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** EO12866 Review

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Page 41 of 74 co nsidered 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. In determin ing how to calculate costs of compliance, EPA considers not only what data are available, but also the extent to which each cost element may affect the competitive balance of the market.

The NCP parameters being finalized were developed using the same bas ic methodology described in the NPRM. As in all NCP rules, the final NCPs are based on the estimated difference in compliance costs for engines at the upper limit and engines at the standard. Thus , engines with emissions at the upper limit can be considered to be baseline engines for the analysis. These baseline engines also represent the engines against which complying engines could compete in the marketplace. In this analysis, the most important baseline engine is the engine used as the baseline for calculating the nominally worst case compliance costs (COC90). As is described later, because the penalty curve being finalized in this NCP rule is a straight line, the value of COC50 does not affect the penalty curve.

T he cost parameters being finalized are higher than the values proposed. These change s reflect new information received during the public comment period , most notably

new updated information about fuel and DEF prices that was not avai lable at the time we completed the cost analysis for the proposal

. EPA also received comments suggesting that the effectiveness of the heavy heavy

- duty NCPs in meeting the statutory requirement to remove competitive disadvantage for complying manufacturer needs to be evaluated** EO12866 Review

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Page 42 of 74 relative to engines that could be developed in the near term (such as a reoptimized SCR engine). In response to these comments and the new information received , EPA is revising the COC90 baseline engine because we believe that the r evised baseline engine better represents an optimized engine than the baseline engine used for the proposal.

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. Thus, the NCPs must be high enough to protect complying manufacturers from a competitive disadva ntage relative both to SCR engines that are optimized to emit NOx at a level of 0.50 g /bhp

- hr and to engines without
SCR that emit at that level

. We considered several methodologies for estimating the incremental compliance costs between the upper limit a nd the standard and selected the approach that best re moves the potential competitive disadvantage for complying manufacturers. See Section IV. D. for additional discussion of these alternate approaches

. It is important to note that while we received comments stating that the level of our proposed NCP was not high enough to remove the competitive advantage Navistar has selling non

- SCR engines, none o f the commenters provided evidence that this was the case (such as evidence of increased market share or increased profits for Navistar) . None of the commenters provided any method by which the value of Navistar’s actual competitive advantage could be cal cu l ated. Nevertheless, we have determined based on the information available to us that Navistar’s competitive advantage is not greater than the** EO12866 Review

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Page 43 of 74 competitive advantage based on compliance costs that we calculated relative to the reoptimized SCR baseline e ngine we have used as the basis of our COC90 costs

. (1) General Methodology Our approach to estimating compliance costs differs slightly from that used in recent NCP rules, where EPA based the NCPs directly on the actual compliance cost increases associated with meeting the standard for complying manufacturers (borne by the complying manufacturers and the operator s who purchase their compliant engines) , whether provided by the manufacturers or estimated by EPA. This was appropriate in those prior rules becau se each of the manufacturers had actually produced engines at the upper limit (which was usually the previous emission standard) and had reengineered those engines to meet the new or revised standard, so the costs associated with that change were straightf orward to calculate. We determined that t he manufacturers’ input accurately reflected the manufacturers’ actual costs because the costs were derived directly from
actual in

- production engine information. In the case of this NCP rule, however, compliant

m anufacturers have generally not designed and optimized their in

- production engines for the U.S. market at 0.50 g /bhp

- hr NOx (the upper limit) and then reengineered their engines to meet the 0.20 g /bhp

- hr standard. 12 Thus, a compliance cost estimate based d irectly on actual experience for the full range of in

- production engines was not available for this NCP rule.

12 Note that Cummins is using emission credits to certify one medium heavy

- duty engine family with a NOx FEL at 0.50 g/hp

- hr. While costs associated with this medium heavy

- duty engine cannot be used directly for heavy heavy

- duty engines, as described in the Final TSD, related confidential cost information provided by Cummins was used to significantly inform our cost analysis.** EO12866 Review

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Page 44 of 74 Instead of averaging actual cost increases relative to the upper limit (because none were available), the NCP penalty formulas for this rule ar e based primarily on EPA’s estimate of the cost difference between a hypothetical engine emitting at the upper limit (the “baseline engine”) and one emitting at the standard (the “compliant engine”). We received compliance cost information from several en gine manufacturers, both before the proposal and during the comment period, and used that information to inform our own analysis of compliance costs, as described in the Technical Support Document.

It is worth noting that each of the engine manufactur ers that provided cost information before the proposal considered baseline engines with different technology packages. However in their comments on the proposal, complying manufacturers based their compliance costs on either a baseline engine equipped wit h similar hardware as
EPA ’s revised baseline engine , or based on a pre

- 2010 non

- SCR engine with NOx emissions near 1.2 g /bhp

- hr. See Section IV. D. of this notice for a discussion of why using the 1.2 g /bhp

- hr baseline engine is not appropriate.

As noted earlier, with NCPs available, a complying manufacturer could compete against not only EGR

- equipped engines, but also against SCR

- equipped engin es that could be re optimized to emit at 0.5 0 g/ hr

- hr. Since engine manufacturers are not currently producing SCR

- equipped heavy heavy

- duty engines at the upper limit, such engines must be considered based on our best estimate of how such an engine would b e manufactured

. Based on our review of the various hypothetical baseline engine designs, we proposed to

use as a baseline engine our best estimate of an optimized SCR engine , because we** EO12866 Review

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Page 45 of 74 believed it would be the most competitive 0.50 g /bhp

- hr engine. Information available at that time projected little difference in fuel and DEF prices, so for the proposal we assumed the baseline engine would have been optimized to use less DEF compared to 0.20 g/bhp

- hr engines but had the same fuel consumption rates. We did not believe there would be a significant difference in costs using a baseline engine optimized for better fuel consumption, because we projected that fuel savings would have been offset by increased DEF costs. As is described in the Technical Suppo rt Document, for the proposal we also believed estimating costs by this approach was the least speculative method to determine compliance costs, and we did not believe there were competing designs that were substantially more competitive based on the compl iance cost inputs we used.

Based on new information and comments we received, we are revising our baseline engine for the heavy heavy

- duty service class. Specifically, we are revising the COC90 baseline engine to be more optimized for low fuel consumpt ion at 0.50 g /bhp

- hr NOx than

was assumed for the proposal. For the proposal, we estimated that reducing NOx emission s from 0.50 g /bhp

- hr to 0.20 g /bhp

- hr would require an increase in DEF consumption but would not change fuel consumption because we projec ted that there would be little price difference between DEF and fuel. However, we now have new information indicating that fuel prices will likely be at least one dollar per gallon higher than DEF prices for the foreseeable future. We agree with commente rs that engine manufacturers designing engines for 0.50 g /bhp

- hr NOx would have responded (and could still respond) to this price difference by optimizing the ir existing 0.20 g/bhp

- hr SCR engine design s to have slightly higher engine

- out NOx , which would r educe fuel consumption ,** EO12866 Review

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Page 46 of 74 and reduce the excess NOx by increasing DEF consumption. Thus compared to this revised baseline engine, a compliant engine would have higher fuel consumption but lower DEF consumption.

We are now projecting that DEF prices will be at least one dollar less per gallon than diesel fuel prices for the foreseeable future (as shown in Figure 2), and the appropriate baseline engine is one that would have been designed to take advantage of this price difference. We have updated our fuel price projections using the Energy Information Administration’s (EIA) Annual Energy Outlook 2012 (AEO2012) to project fuel prices through 2035. EIA is now projecting diesel fuel prices will be about fifty cents more per gallon than was projected in 2011. We have also revised our projection of DEF prices based on information from Integer Research provide by commenters

. While we proposed using a constant DEF price through 2042, we are now projecting that DEF pric es will fall for the next few years, and then increase as the price of natural gas increases (using AEO2012 projections)

. 13

13 Natural gas is used in the production of urea , a primary component of DEF

.** EO12866 Review

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Page 47 of 74 Figure 2 Proposed and Final Fuel and DEF Price Projections

The current baseline engine is s imilar , but not identical, to what we proposed with respect to hardware

. As proposed, t he baseline engine tec h nology package would employ the same basic emission controls used to meet the 2007 NOx and PM emission standards (e.g. cooled exhaust gas recirculation (EGR ), optimized turbo

- charg ing, optimized fuel injection, diesel particulate filters), plus liquid urea based s elective c atalytic r eduction (SCR) NOx emissions control technology with an appropriately sized tank for the liquid urea (also known as diesel emission fluid or “DEF” ). Ho wever, we now believe the baseline engine could have used less expensive hardware than we proposed. We continue to believe that manufacturers could reduce the size of the SCR catalyst if they were allowed to have higher NOx emissions. In addition, we now believe that they could also reduce** EO12866 Review

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Page 48 of 74 the precious metal loading of the diesel oxidation catalyst (DOC), and lower the cost of the turbocharger. Thus , the hardware component of the compliance costs has gone up from what we proposed (i.e., the cost of the h ardware on the baseline engine has gone down)

. Further details are provided in this rule’s Technical Support Document

.

(a) Calculated Values
The most significant of the NCP parameters is the 90th percentile costs of compliance , COC 90 , which defines the pe nalty for engines emitting at the upper limit. The value of COC 50 is important only when EPA estimates that marginal compliance costs change as the compliance level approaches the standard. In such cases, COC 50 defines that point on the curve at which the slope changes. However, for this NCP rule we believe that because of the narrow emission range between the upper limit and the standard (0.20 to 0.50 g /bhp

- hr), it is appropriate to assume that marginal compliance costs are constant. Thus, we are not summarizing our derivation of COC50 in this preamble since its value does not affect the penalty amounts. See the Technical Support Document for a discussion of COC50.

We estimated COC 90 by assuming the baseline engine would have been an SCR equipped en gine with tailpipe NOx emissions at 0.50 g /bhp

- hr and that it would have look ed very similar to an engine with tailpipe NOx emissions at 0.20 g /bhp

- hr. However, as noted above, the higher NOx emissions of the baseline engine would allow the use of** EO12866 Review

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Page 49 of 74 less expensive hardware and would be calibrated to minimize the combined consumption of fuel and DEF . As described in more detail in the Technical Support Document , we estimated reasonable worst case costs associated with bringing such a baseli ne engine into full compliance with the 0.20 g /bhp

- hr NOx emission standard

. 14 We note that the average costs associated with SCR may well be lower than the costs presented here.

We estimate that the SCR hardware used by a complying manufacturer (i.e., an SCR system that would achieve 0.20 g /bhp

- hr NOx) cost the manufacturer $5,522 per engine for the 90th percentile engine compared to an engine emitting at 1.2 g/bhp

- hr

. We estimate that the baseline hardware (i.e., an engine and SCR system that would achieve 0.50 but not 0.20 g/bhp

- hr NOx) for the 90th percentile engine would have cost the manufacturers only $4,4 41 (including R&D, warranty, and other overhead costs) after hardware savings assoc iated with the D OC and turbocharger are deducted

. Therefore , the manufacturers would have to spend $1,0 81 more in hardware, R &D, warranty and other overhead costs to produce a 0.20 g /bhp

- hr engine than it would have cost to produce a 0.50
g /bhp

- hr engine. We calculated the difference in operating costs the same w ay.

These COC90 costs are summarized in the T able 2

. The values in the tables are the costs that would be incurred by a manufacturer or operator for a model year 2012 0.20
g /bhp

- hr engine relative to a 0.50 g/bhp

- hr baseline engine. All operating costs are

14 The Act requires that we remove competitive disadvantage for complying manufacturers. We recognize that there is uncertainty in our estimates

. To ensure t hat we protect the complying manufacturer our overall approach is somewhat conservative. See the Technical Support Document for additional discussion of how we addressed uncertainty in our estimates.** EO12866 Review

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Page 50 of 74 present ed as net present value (NPV) relative to 2012 using a 7 percent discount rate

. 15 For example, we estimate that the NPV of the lifetime fuel cost of a 0.20 g /bhp

- hr engine would be $8, 8 33 higher than the fuel cost for a baseline engine, but the NPV of DEF costs would be $6, 1 91 lower.

Table 2: COC90 Dollar
- per - Engine † Costs (2011 Dollars) FRM COC90 NPRM

COC90
Lifetime Fuel Costs $8,833 $0 Lifetime DEF Costs (Savings) ($6,191) $1,374
Hardware Costs $927 $474 Research and Development Cost $19 $9 Warranty and Other Manufacturer Costs $135 $62 Operator Repair Costs $52 $0
Total Cost $3,775 $1,919
† Although penalties are accessed per engine, costs include vehicle costs.

We estimated the marginal costs of compliance as being equal to the total incremental costs of compliance divided by 0.30 g /bhp

- hr (the difference between the upper limit and the standard). This assumes that the cost to reduce emissions from 0.30
g /bhp

- hr to 0.20 g /bhp

- hr is not significantly different from the cost to reduce emissions from 0.50 g /bhp

- hr to 0.40 g /bhp

- hr. This results in a penalty curve that is a straight line ,

15 Penalties are calculated based on costs for a model y ear 2012 engine. The regulations include separate provisions to increase penalties for later model years.** EO12866 Review

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Page 51 of 74 which in turn makes our estimate of the average cost of compliance irrelevant to t he calculation of the penalty . In other words, the COC 50 point lies directly between zero cost at 0.20 g /bhp

- hr and COC 90 at the Upper Limit of 0.50 g /bhp

- hr NOx . The penalty paid for engines at any compliance level between the standard and the upper lim it would be equal to EPA’s estimate of the highest marginal cost paid by a complying manufacturer for the same emission range.



### C. Resulting Penalties

The calculation parameters listed in Table 1are used to calculate the penalty rate. These parameters are used in the penalty rate formulas which are defined in the existing NCP regulations (See 40 CFR 86.1113(a)(1) and (2)). Using the parameters in Table 1, and the equations in the existing NCP regulations, we have plotted penalt y rates versus compliance levels in Figure 1 above

. Th i s penalty curve is for the first year of use of the
NCPs (i.e. , the annual adjustment factors specified in the existing NCP regulations have been set equal to one )

. The maximum first year penalty is equal to COC90, which is $3,7 75

.

The Clean Air Act NCP provisions require that the penalty be set at such a level that it removes competitive dis advantage for a complying manufacturer. For the reasons described in the Technical Support Document , we believe that the NCPs being established in this rulemaking fulfill s this requirement

.** EO12866 Review

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Page 52 of 74 

### D. Consideration of Other Methodologies

We received comments suggesting how we should revise our estimated costs, if we continued to use the proposed methodology. Where appropriate, we incorporated these concepts into our final cost methodology. We also received comments arguing that we should c hange our methodology. However, as described in the Technical Support Document, we determined that the other methodologies were not appropriate.

Our primary methodology estimates the difference in lifetime compliance costs between a compliant 0.20 g /bhp

- hr engine and a 0.50 g /bhp

- hr engine that we believe would have the greatest competitive advantage over the compliant engine. As noted earlier, we believe that an SCR engine optimized for 0.50 g/bhp

- hr would have the greatest competitive advantage over co mpliant engines. Two of the other approaches we considered would have involved using non

- SCR engines as the baseline engines , as suggested by some commenters . However, as described below, we determined that these approaches would not sufficiently remove the potential competitive advantage of an optimized SCR engine.** EO12866 Review

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Page 53 of 74 In the first approach we considered using a 0.50 g /bhp

- hr EGR engine (such as the engines Navistar is currently selling ) as the baseline engine. This option was supported by one manufactur er during preproposal discussion, but was not supported in any comments on the NPRM. Nevertheless, we evaluated this approach to ensure that our methodology is the most appropriate one. Specifically, w e estimated the hardware and operating costs associat ed with adding SCR to a non

- SCR engine to meet the 0.20 g /bhp

- hr standard. As is described in the Technical Support Document , we estimated that there would be significant hardware costs to add SCR plus significant operating costs for DEF consumption. How ever, these would be mostly offset by the fuel savings associated with SCR engines , plus hardware savings from down

- sizing the EGR system. The combined effect would be to make the costs of going from the EGR engine to the compliant engine lower than the c osts of going from the baseline SCR engine to the compliant engine. Put another way, this means that the cost savings of changing from a compliant engine to an
EGR

- only engine are smaller than the cost savings of changing from a compliant engine to the ba seline SCR engine, indicating that an EGR engine at 0.50 g /bhp

- hr would have a smaller competitive advantage than the baseline engine we used to develop the final NCPs. Moreover, this means that NCPs based on this approach would not remove the competitive disadvantage to complying manufacturers, where manufacturers of optimized SCR engines could pay the lower NCP and still have a competitive advantage over compliant engines.** EO12866 Review

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Page 54 of 74 In the second approach , we considered setting an upper limit at 1.2 g /bhp

- hr and including the full cost of SCR as the compliance cost. A s was true for the previous approach , we estimated that most of the hardware and DEF costs would be offset by the fuel savings, making the NCP at 0.50 g /bhp

- hr lower than our estimate of the competit ive advantage for SCR engines optimized for 0.50 g /bhp

- hr

. This means that setting the upper limit at 1.2 and calculating costs in this way would not remove the competitive disadvantage for complying manufacturers compared to a manufacturer who optimized its SCR engine for 0.50 g/bhp

- hr NOx. Note that while we evaluated this approach with respect to costs and competitive disadvantage, we think that there are other reasons why it would not be appropriate to set the upper limit at 1.2 g/bhp

- hr. In particul ar, the upper limit may not be set at a level that is higher than the level that EPA determines is practicable, which would be no higher than 0.50 g/bhp

- hr

.

Finally, we considered other scenarios in which the baseline engine would have been an SCR engine that was fundamentally redesigned to have NOx emissions at 0.50
g /bhp

- 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 /bhp

- hr without coole d EGR. This could result in significant saving s for hardware and warranty costs. We determined that ,while it may well be technologically possible to redesign current SCR engines to meet 0.50 g /bhp

- hr NOx with significantly lower hardware costs, there is no business scenario in which such savings would justify paying an NCP. Fundamentally redesigning an engine would take a minimum of two years and involve substantial capital
costs . So a manufacturer that began redesigning its engines today could not exp ect to** EO12866 Review

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Page 55 of 74 have the new engine ready for production before model year 2015. At that point, the annual adjustments to the NCPs would have increa sed the penalty substantially. Moreover, using NCPs in model year 2015 and later would result in a rapidly increasi ng penalty due to the annual adjustment factors , so a manufacturer would need to recover all of its investments within one or two model years. However, this would require the manufacturer to raise its prices so much that it would make its engines uncompet itive in the marketplace.** EO12866 Review

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Page 56 of 74 

## V. Economic Impact
B ecause the use of NCPs is optional, manufacturers have the flexibility and will likely choose whether or not to use NCPs based on their ability to comply with emissions standards. If no manufacturer elects to use NCPs, these manufacturers and the users of their products will not incur any additional costs related to NCPs. NCPs remedy the potential problem of having a manufacturer forced out of the marketplace due to that manufactur er's inability to conform to new, strict emission standards in a timely manner. Without NCPs, a manufacturer which has difficulty certifying HDEs in conformance with emission standards or whose engines fail a Selective Enforcement Audit ( SEA ) has only two alternatives: fix the nonconforming engines, perhaps at a prohibitive cost, or prevent their introduction into commerce. The availability of NCPs provides manufacturers with a third alternative: continue production and introduce into commerc e upon payment of a penalty an engine that exceeds the standard until an emission conformance technique is developed. Therefore, NCPs represent a regulatory mechanism that allows affected manufacturers to have increased flexibility. A decision to use NC Ps may be a manufacturer's only way to continue to introduce its products into commerce.


## VI. Environmental Impact

When evaluating the environmental impact of this rule, one must keep in mind that, under the Act, NCPs are a co nsequence of enacting new, more stringent emissions requirements for heavy duty engines. Emission standards are set at a level that most, but not necessarily all, manufacturers can achieve by the model year in which the standard becomes effective. Follo wing International Harvester v. Ruckelshaus, 478 F. 2d 615** EO12866 Review

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Page 57 of 74 (D.C. Cir. 1973), Congress realized the dilemma that technology

- forcing standards could potentially cause, and allowed manufacturers of heavy

- duty engines to certify nonconforming vehicles/engines upon the payment of an NCP, under certain terms and conditions. This mechanism was intended to allow manufacturer(s) who cannot meet technology

- forcing standards immediately to continue to manufacture nonconforming engines while they tackle the technolog ical problems associated with meeting new emission standard(s). Thus, as part of the statutory structure to force technological improvements without driving manufacturers or individual engine models out of the market, NCPs provide a flexibility that foste rs long

- term emissions improvement through the setting of lower emission standards at an earlier date than could otherwise be feasible

. Because NCPs are designed to increase with time, manufacturers using NCPs are likely to reduce emission levels to meet the standard as quickly as possible , which minimizes the environmental impact

. As is always the case with NCPs, the potential exists for there to be more extensive use of NCPs beyond what is projected at this time, where we project use by one manufacturer s for a limited number of model years. For example, depending upon the penalty rate and other factors , some otherwise fully compliant manufacturers could elect to pay the NCP in order to reconfigure their 0.20 g /bhp

- hr NOx compliant engines to emit up
to 0.50 g /bhp

- hr so that they can re - optimize engine hardware and vehicle operating costs. This potential action is not without R&D and other financial costs to the manufacturer and thus is not a decision which would be taken lightly . Furthermore, we believe that any such impacts would be short

- term and self

- limiting in nature because the NCP annual adjustment factor , established via prior NCP rules, increases the levels of the penalties over** EO12866 Review

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Page 58 of 74 time and based on the extent of the use of NCPs by all ma nufacturers

. In other words t he NCP program is structured such that the incentives to produce engines that meet the standard increase year

- by

- yea r and increase upon NCP use . The practical impact of this adjustment factor is that the NCPs will rapidly bec ome an undesirable option for all manufacturers that may elect to use them . However, while we expect their use to be limited, we have no way of predicting at this time how many manufacturers will make use of the NCPs, or how many engine families would be subject to the NCP program. Because of these uncertainties we are unable to accurately quantify the potential impact the NCPs might have on emission inventories, although, as stated above, any impacts are expected to be short

- term and self

- limiting in nat ure.


## VII. Emission Standards for Which We are Not Establishing NCPs in this Final Rule This section identifies the emission standards for which we are not establishing NCPs in t his Final Rule.


### A. Medium Heavy Duty Diesel NOx Standards EPA proposed to find that the criteria for providing NCPs had been met for medium heavy duty diesel engines, and we proposed NCPs for these engines. However, EPA is not taking final action with regar d to NCPs for these engines at this time because EPA has not completed its review of the comments and the technical data regarding establishing NCPs for these engines. A full discussion of compliance costs for medium heavy

- duty engine s is contained in App endix C of the TSD for this rule. Parties may provide comments regarding these estimates by submitting comments to the docket for this rule.** EO12866 Review

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Page 59 of 74 

### B. Light Heavy
- Duty Diesel NOx Standards EPA believes that the first two NCP criteria have been met for the 2010 NOx standard for light heavy

- duty diesel engines. However, we have not determined that there is likely to be a technological laggard. We are unaware of any manufacturer that will be unable to either achieve 0.20 g/bhp

- hr for the 2012 and 2013 model year or will not have sufficient NOx emission credits to continue certifying light heavy

- duty engines for the foreseeable future

. 

### C. Heavy
- Duty Gasoline Engine Standards In a final rule published on January 18, 2001 (66 FR 5001), EPA established more stringent emission standards for all heavy

- duty gasoline (or “Otto

- cycle”) vehicles and engines. These standards took two forms: a chassis

- based set o f standards for complete vehicles under 14,000 pounds GVWR (the chassis

- based program), and an engine

- based set of standards for all other Otto

- cycle heavy

- duty engines (the engine

- based program). Each of the two programs has an associated averaging, bank ing, and trading (ABT) program. The new standards generally took effect starting with the 2008 model year, and since all manufacturers are in compliance with them, the criteria for establishing NCPs has not been met and we are not establishing NCPs for ga soline engines or vehicles.


### D. Heavy
- duty Diesel Engine NMHC, CO, and PM Standards EPA adopted new NMHC and PM for model year 2007 and later heavy

- duty engines in the same rule that set the 2010 NOx emission stand ard (66 FR 5001, January 18, 2001). The CO standard was not changed. We are not establishing NCPs for any of these other stand ards because all manufacturers are already fully compliant with them.** EO12866 Review

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Page 60 of 74 

### E. Heavy
- duty CO2 Standards In a final rule published on September 15, 2011 (76 FR 57106), EPA established new CO2 emission standards for all heavy

- duty vehicles and engines. We are not considering NCPs for any of these standards at this time because we currentl y do not have a basis to conclude that a technological laggard is likely to develop. As proposed, we are adding a new regulatory provision related to these CO2 emission standards. The provision prohibits generating emission credits for CO2 or any other po llutant from engines paying NCPs for NOx. Given the general tradeoff between CO2 and NOx emissions, we were concerned that a manufacturer capable of meeting the 0.20 g/bhp

- hr NOx emission standard could choose to pay an NCP in order to generate CO2 credit s by recalibrating its engines for higher NOx emissions and lower CO2. There are two reasons this would be inappropriate. It would not be consistent with either the purpose of the CO2 credit program (to provide an incentive for manufacturers to take tech nological and other efforts to over comply with the CO2 standard) and would not be consistent with the purpose of the NCP program (to provide relief to manufacturers that fail to achieve the standard on time for technological reasons, not for other reasons such as the economic benefit of generating CO2 credits by voluntarily increasing emissions of NOx).** EO12866 Review

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Page 61 of 74 

## VIII. Statutory and Executive Order Reviews

A. Executive Order 12866: Regulatory Planning and Review and Executive Order 13563: Improving Regulation and Regulatory Review

Under Execu tive Order 12866 (58 FR 51735, October 4, 1993), this action is a "significant regulatory action” because it raises novel legal and policy issues. Accordingly, EPA submitted this action to the Office of Management and Budge t (OMB) for review under Executive Orders 12866 and 13563 (76 FR 3821, January 21, 2011) and any changes made in response to OMB recommendations have been documented in the docket for this action.


### B. Paperwo rk Reduction Act
This action does not impose any new information collection burden. It only update s the penalty amounts to correspond to the current emission standards. However, the Office of Management and Budget (OMB) has previously approved the inform ation collection requirements contained in the existing regulations 40 CFR part 86, subpart L under the provisions of the Paperwork Reduction Act, 44 U.S.C. 3501 et seq. and has assigned OMB control number 2060

- 0132. The OMB control numbers for EPA's
regu lations in 40 CFR are listed in 40 CFR part 9.** EO12866 Review

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Page 62 of 74 

### C. Regulatory Flexibility Act
(1) Overview The Regulatory Flexibility Act generally requires an agency to prepare a regulatory flexibility analysis of any rule subject to notice and comment rulemaking requirements under the Administrative Procedure Act or any other statute , unless the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities. Small entities include small businesses, small organizations, an d small governmental jurisdictions. For purposes of assessing the impacts of these rules on small entities, small entity is defined as: (1) a small business as defined by SBA regulations at 13 CFR 121.201; (2) a small governmental jurisdiction that is a g overnment of a city, county, town, school district or special district with a population of less than 50,000; and (3) a small organization that is any not

- for

- profit enterprise which is independently owned and operated and is not dominant in its field. (2) Sum mary of Potentially Affected Small Entities After considering the economic impacts of this rule on small entities, I certify that this action will not have a significant impact on a substantial number of small entities. When these emission standards were established, the final rulemaking ( 66 FR 5001, January 18, 2001 ) noted that we were not aware of “any manufacturers of heavy

- duty engines that meet SBA’s definition of a small business.” Based on an updated assessment, EPA has identified a total of about 1 4 manufacturers that produce diesel cycle heavy

- duty motor vehicle engines . Of these, none of these are small businesses that are** EO12866 Review

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Page 63 of 74 producing engines with NOx emissions above 0.20 g /bhp

- hr

. B ased on this, we are certifying that this rule will not have a significant economic impact on a substantial number of small entities. (3) Conclusions I therefore certify that this Final Rule will not have a significant economic impact on a substantial number of small entities.


### D. Unfunded Mandates Reform Ac t
This rule does not contain a Federal mandate that may result in expenditures of $100 million or more for State, local, and tribal governments, in the aggregate, or the private sector in any one year. The agency has determined that this action does not co ntain a Federal mandate that may result in expenditures of $100 million or more for the private sector in any one year. Because the use of NCPs is optional, manufacturers have the flexibility and will likely choose whether or not to use NCPs based on thei r ability to comply with emissions standards. The availability of NCPs provides manufacturers with a third alternative: to continue production and introduce into commerce upon payment of a penalty an engine that exceeds the standard until an emission conf ormance technique is developed. Therefore, NCPs represent a regulatory mechanism that allows affected manufacturers to have increased flexibility. Thus, this action is not subject to the requirements of sections 202 or 205 of the UMRA. This action is also not subject to the requirements of section 203 of the UMRA because it contains no regulatory requirements that might significantly or uniquely affect small governments.** EO12866 Review

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Page 64 of 74 

### E. Executive Order 13132 (Federalism)
Executive Order 13132, entitled “Federalism” (64 FR 43255, August 10, 1999), requires EPA to develop an accountable process to ensure “meaningful and timely input by State and local officials in the development of regulatory policies that have federalism implications.” “Policies that have federalism imp lications” is defined in the Executive Order to include regulations that have “substantial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the vari ous levels of government.”

This action does not have federalism implications. It will not have substantial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of
governm ent, as specified in Executive Order 13132. These rules will apply to manufacturers of on

- highway engines and not to state or local governments. Thus, Executive Order 13132 does not apply to this action

.


### F. Executive Order 13175 (Consultation and Coordinat ion with Indian Tribal Governments)

This Final Rule does not have tribal implications, as specified in Executive Order 13175 (65 FR 67249, November 9, 2000). This rule will be implemented at the Federal level and impose compliance costs only on engine man ufacturers who elect to use the NCP regulatory flexibility to comply with emissions standards . Tribal governments would be** EO12866 Review

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Page 65 of 74 affected only to the extent they purchase and use engines and vehicles to which an NCP has been applied . Thus, Executive Order 1317 5 does not apply to th i s rule.


### G. Executive Order 13045: Protection of Children from Environmental Health Risks and Safety Risks

Executive Order 13045: Protection of Children from Environmental Health Risks and Safety Risks (62 FR 19885, April 23, 1997) applies to any rule that: (1) is determined to be "economically significant" as defined under Executive Order 12866, and (2) concerns an environmental health or safety risk that EPA has reason to believe may have a disproportionate effect on children. If t he regulatory action meets both criteria, the agency must evaluate the environmental health or safety effects of the planned rule on children, and explain why the planned regulation is preferable to other potentially effective and reasonably feasible alter natives considered by the agency.
EPA interprets Executive Order 13045 as applying only to those regulatory actions that are based on health or safety risks, such that the analysis required under section 5

- 501 of the Order has the potential to influence th e regulation. This rule is not subject to Executive Order 13045 because it does not establish an environmental standard intended to mitigate health or safety risks.



### H. Executive Order 13211 (Energy Effects)
This action is not a “significant energy action” as defined in Executive Order 13211 (66 FR 28355 (May 22, 2001)), because it is not likely to have a significant adverse effect** EO12866 Review

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Page 66 of 74 on the supply, distribution, or use of energy. We have concluded that any energy impacts of this rule will be small because:

The N CPs will be used for a limited duration.
This rule will affect a small number of heavy duty vehicles relative to the total in

- use fleet.

The per - vehicle impact of this rule will be small.



### I. National Technology Transfer Advancement Act
Section 12(d) of the National Technology Transfer and Advancement Act of 1995 (“NTTAA”), Public Law No. 104

- 113, 12(d) (15 U.S.C. 272 note) directs the agencies to use voluntary consensus standards in its regulatory activities unless to do so would be inconsistent with applic able law or otherwise impractical. Voluntary consensus standards are technical standards ( e.g. , materials, specifications, test methods, sampling procedures, and business practices) that are developed or adopted by voluntary consensus standards bodies. NT TAA directs EPA to provide Congress, through OMB, explanations when the EPA decides not to use available and applicable voluntary consensus standards.

This rule does not involve technical standards. Therefore, EPA is not considering the use of any voluntar y consensus standards.** EO12866 Review

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Page 67 of 74 

### J. Executive Order 12898: Federal Actions to Address Environmental Justice in Minority Populations and Low
- Income Populations
Executive Order 12898 (59 FR 7629, February 16, 1994) establishes federal executive policy on environmenta l justice. Its main provision directs federal agencies, to the greatest extent practicable and permitted by law, to make environmental justice part of their mission by identifying and addressing, as appropriate, disproportionately high and adverse human h ealth or environmental effects of their programs, policies, and activities on minority populations and low

- income populations in the United States.

EPA has determined that this action w ill not have disproportionately high and adverse human health or envi ronmental effects on minority or low

- income populations. The overall environmental impacts of this action are expected to be small and of limited duration. Moreover, there is no reason to believe that trucks using NCP engines will be more likely to opera te near any minority or low

- income populations than other trucks.



### K. Congressional Review Act
The Congressional Review Act, 5 U.S.C. §801 et seq., as added by the Small Business Regulatory Enforcement Fairness Act of 1996, generally provides that before a rule may take effect, the agency promulgating the rule must submit a rule report, which includes a copy of the rule, to each House of the Congress and to the Comptroller General of the United States. EPA will submit a report containing this rule and othe r required information to the U.S. Senate, the U.S. House of Representatives, and the Comptroller General of the United States prior to publication of the rule in the Federal Register. A** EO12866 Review

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Page 68 of 74 Major rule cannot take effect until 60 days after it is published in the Federal Register. This action is not a “major rule” as defined by 5 U.S.C. §804(2). This rule will be effective [INSERT DATE OF PUBLICATION IN THE FEDERAL REGISTER ]

. 

## IX. Statutory Provisions and Legal Authority

Statutory authority for the vehicle cont rols in these rules is found in CAA section s 202 and 20 6 ( g ), of the CAA, 42 U.S.C. 7521 and 7525 (g)

. 

### List of Subjects in
40 CFR p art 86 Administrative practice and procedure, Confidential business information, Motor vehicle pollution, Reporting and recordkeeping requirements.

Date:_____________________________

_________________________________ Lisa P. Jackson , Administrator** EO12866 Review

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Page 69 of 74 For the reasons set forth in the preamble, the Environmental Protection Agency is amend ing 40 CFR chapter I of the Code of Federal Regulations as follows:

PART 86
-- CONTROL OF EMISSIONS FROM NEW AND IN
- USE HIGHWAY VEHICLES AND ENGINES

1. The authority citation for part 86 continues to read as follows: Authority: 42 U.S.C. 7401

- 7671q.

Subpart L

— [Amended] 2. Section 86.1103

- 87 is amended to read as follows:

§ 86.1103

- 87 Criteria for availability of nonconformance penalties. (a) EPA shall establish for each subclass of heavy

- duty engines and heavy

- duty vehicles (other than motorcycles), an NCP for a motor vehicle po llutant, when any new or revised emission standard is more stringent than the previous standard for the pollutant, or when an existing standard for that pollutant becomes more difficult to achieve because of a new or revised standard, provided that EPA fin ds: (1) That for such subclass of engines or vehicles, substantial work is required to meet the standard for which the NCP is offered, and (2) That there is likely to be a technological laggard. (b) Substantial work, as used in paragraph (a)(1) of this section, means the application of technology that was not generally used in an engine or vehicle class or subclass to meet** EO12866 Review

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Page 70 of 74 standards prior to the implementation of the new or revised standard, or th e significant modification of existing technology or design parameters, needed to bring the vehicle or engine into compliance with either the more stringent new or revised standard or an existing standard which becomes more difficult to achieve because of a new or revised standard. Substantial work is determined by the total amount of work required to meet the standard for which the NCP is offered, compared to the previous standard, irrespective of when EPA establishes the NCP.

3 . Section 86.110 4

- 91 is a mended to read as follows:

§ 86.1104
- 91 Determination of upper limits. EPA shall set a separate upper limit for each phase of NCPs and for each service class. (a) Except as provided in paragraphs (b), (c) and (d) of this section, the upper limit shall be set as follows: (1) The upper limit applicable to a pollutant emission standard for a subclass of heavy

- duty engines or heavy

- duty vehicles for which an NCP is established in accordance with §86.1103

– 87, shall be the previous pollutant emission stand ard for that subclass. (2) If a manufacturer participates in any of the emissions averaging, trading, or banking programs, and carries over certification of an engine family from the prior model year, the upper limit for that engine family shall be the fam ily emission limit of the prior model year, unless the family emission limit is less than the upper limit determined in paragraph (a) of this section.** EO12866 Review

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Page 71 of 74 (b) If no previous standard existed for the pollutant under paragraph (a) of this section, the
upper limit will be developed by EPA during rulemaking. (c) EPA may set the upper limit during rulemaking at a level below the level specified in paragraph (a) of this section if we determine that a lower level is achievable by all engines or vehicles in that s ubclass. (d) EPA may set the upper limit at a level above the level specified in paragraph (a) of this section if we determine that the such level will not be achievable by all engines or vehicles in that subclass.

4 . Section 86.1105

- 87 is amended by revising paragraph (e) and adding paragraph (j) to read as follows:

§ 86.1105
- 87 Emission standards for which nonconformance penalties are available.

* * * * * (e) The values of COC50, COC90, and MC50 in paragraphs (a) and (b) of this section are
expre ssed in December 1984 dollars. The values of COC50, COC90, and MC50 in paragraphs (c) and (d) of this section are expressed in December 1989 dollars. The values of COC50, COC90, and MC50 in paragraph (f) of this section are expressed in December 1991 dolla rs. The values of COC50 , COC90, and MC50 in paragraphs (g) and (h) of this section are expressed in December 1994 dollars. The values of COC50, COC90, and MC50 in paragraph (i) of this section are expressed in December 2001 dollars. The values** EO12866 Review

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Page 72 of 74 of COC50, C OC90, and MC50 in paragraph (j) of this section are expressed in December 2011 dollars. These values shall be adjusted for inflation to dollars as of January of the calendar year preceding the model year in which the NCP is first available by using the ch ange in the overall Consumer Price Index, and rounded to the nearest whole dollar in accordance with ASTM E29

– 67 (reapproved 1980), Standard Recommended Practice for Indicating Which Places of Figures are to be Considered Significant in Specified Limiting Values. This method was approved by the Director of the Federal Register in accordance with 5 U.S.C. 552(a) and 1 CFR part 51. This document is available from ASTM International, 100 Barr Harbor Drive, P.O. Box C700, West Conshohocken, PA 19428

– 2959, and i s also available for inspection as part of Docket A

– 91

– 06, located at the U.S. EPA, Air and Radiation Docket and Information Center, 1301 Constitution Ave., NW., Room 3334, EPA West Building, Washington, DC 20004, (202) 202

– 1744 or at the National Archives and Records Administration (NARA). For information on the availability of this material at NARA, call 202

– 741

– 6030, or go to: http://www.archives.gov/federal

- register/cfr/ibr

- locations.html . This incorporation by reference was a pproved by the Director of the Federal Register on January 13, 1992. These materials are incorporated as they exist on the date of the approval and a notice of any change in these materials will be published in the Federal Register.

* * * * * (j) Effective in the 20 12 and later model year s , NCPs will be available for the following emission standard: (1) Diesel heavy

- duty engine oxides of nitrogen standard of 0.20 grams per brake horsepower

- hour in §86.00 7

– 11(a)(1)(i).** EO12866 Review

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Page 73 of 74 (i) [Reserved]. (ii) For heavy heavy

- du ty diesel engines: (A) The following values shall be used to calculate an NCP in accordance with §86.1113

– 87(a): ( 1 ) COC50: $ 3, 2 19

. ( 2 ) COC90: $ 3, 7 75

. ( 3 ) MC50: $ 10, 7 29 per gram per brake horsepower

- hour NOx

. ( 4 ) F: 1. 1 7 3

. ( 5 ) UL: 0.5 0 grams per brake horsepower

- hour NOx

. (B) The following factor shall be used to calculate the engineering and development component of the NCP for the standard set forth in §86.00 7

– 11(a)(1)(i) in accordance with §86.1113

– 87(h): 0. 005

.

(2) Manufacturers ma y not generate emission credits for any pollutant from engines for which the manufacturer pays an NCP for the NOx standard identified in paragraph (j) (1) of this section

. (3) The penalty shall be adjusted annually as specified in §86.1113

- 87 with 2012 as t he first year. Note that this means AAF 2012 is equal to 1.

5. Section 86.1113

- 87 is amended by revising paragraph (g)(1) to read as follows: § 86.1113

- 87 Calculation and payment of penalty.

* * * * *** EO12866 Review

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Page 74 of 74 (g)(1) Except as provided in paragraph (g)(2) of th is section, the nonconformance penalty or penalties assessed under this subpart must be paid as follows: (i) By the quarterly due dates, i.e., within 30 days of the end of each calendar quarter (March 31, June 30, September 30 and December 31), or accordin g to such other payment schedule as the Administrator may approve pursuant to a manufacturer's request, for all nonconforming engines or vehicles produced by a manufacturer in accordance with paragraph (b) of this section and distributed into commerce for that quarter. (ii) The penalty shall be payable to U.S. Environmental Protection Agency, NCP Fund, Motor Vehicle and Engine Compliance Program, P.O. Box 979032 St. Louis, MO 63197

- 9000. Note on the check and supporting information that this is an NCP paym ent.

* * * * *