Trucks handled more than two-thirds of all freight commodities shipped in 2002, according to a recent report for the American Trucking Associations (ATA), an organization representing the majority of freight-hauling companies. Trucking companies that shipped freight earned revenues of about $585 billion, or 87 percent, of the total transportation revenues that year. The total volume of goods shipped by trucks is expected to rise to 10 billion tons by 2008, with trucking companies’ revenues increasing to about $745 billion, according to the ATA report. The majority of trucks transporting freight are powered by diesel engines, primarily because they are 25 percent to 35 percent more energy efficient and more durable and reliable than gasoline-powered engines. Furthermore, diesel fuels generally are less volatile and, therefore, safer to store and handle than gasoline. On the other hand, diesel engines also have an adverse impact on air quality through their harmful exhaust emissions. Diesel exhaust is composed of several toxic components, including nitrogen oxides, fine particles (particulate matter), and numerous other known harmful chemicals. EPA estimates that exhaust from heavy-duty trucks and buses accounts for about one-third of the nitrogen oxide emissions and one-quarter of the particulate emissions from all mobile sources. EPA’s 2002 comprehensive review of the potential health effects from exposure to diesel engine exhaust found that short-term exposure to diesel emissions can cause respiratory irritation and inflammation and exacerbate existing allergies and asthma symptoms. Long-term exposure may cause lung damage and pose a cancer hazard to humans. The harmful components of diesel exhaust can also damage crops, forests, building materials, and statues. The exhaust also impairs visibility in many parts of the country. Although diesel exhaust is harmful, both EPA and engine manufacturers have successfully reduced the level of emissions from highway diesel engines over the past two decades. Since 1984, EPA has progressively implemented more and more stringent diesel emissions standards, for example, reducing the level of allowable nitrogen oxide emissions from diesel engines from 10.7 grams per unit of work in 1988 to 2.5 grams in 2004 (see fig. 1). To meet these standards, engine manufacturers should have made increasingly cleaner engines so that their nitrogen oxide emissions gradually declined to mandated levels. However, EPA determined that, from 1987 to 1998, seven of the nation’s largest diesel engine manufacturers sold 1.3 million heavy-duty diesel engines with computer software that altered the engines' pollution control equipment under highway driving conditions. The Clean Air Act prohibits manufacturers from selling or installing motor vehicle engines or components equipped with devices that bypass, defeat, or render inoperative the engine's emission control system. These devices altered the engines' fuel injection timing and, while this improved fuel economy, it also increased nitrogen oxide emissions by two to three times the existing regulatory limits. In response, EPA undertook what it called “the largest Clean Air Act enforcement action in history” against the manufacturers. To settle these cases, in 1998, EPA, the U.S. Department of Justice, and the engine manufacturers agreed to be bound by consent decrees. In the decrees, the manufacturers agreed to, among other things, (1) pay civil penalties of about $83 million, the largest civil penalty for an environmental violation as of that date; and (2) collectively invest $109.5 million towards research and development and other projects to lower nitrogen oxide emissions. Table 1 includes information on the number of engines that each manufacturer subject to the decrees produced that violated the emissions standards, the amount of nitrogen oxide emissions these engines produced in excess of the amounts allowed by the standards in effect at the time, the amount of penalties each company paid, and the amount of funds each company committed to invest in environmental projects. The manufacturers also agreed to collectively spend $850 million or more to produce significantly cleaner engines by October 1, 2002. The nitrogen oxide emissions from the new engines were not to exceed 2.5 grams. Without the decrees, the engines would not have been required to meet this standard until January 1, 2004, 15 months later. The excess emissions caused by the defeat devices were of concern, especially for states and localities with areas that already had air quality problems (meaning that the areas did not meet at least one of the health- based air quality standards). Every state must devise a plan, called a state implementation plan, that indicates what actions they will take to maintain or come into compliance with the standards. In devising these plans, states and localities estimate future emissions and design actions to reduce them as necessary. If the states and localities do not comply, they face certain sanctions, including the loss of access to federal transportation funds. But the use of the pollution control defeat devices that increased engine emissions jeopardized state air quality improvement plans and posed public health risks. To ease compliance with the accelerated schedule, manufacturers could continue to sell their old engines until October 2002. If manufacturers were not able to, or chose not to, meet the deadline, they could continue to sell engines that did not meet the standards through three actions (1) paying nonconformance penalties, equal to the cost of engines that met the standards, to maintain a “level playing field” between the noncomplying companies and those manufacturers who met the deadline; (2) using a provision that allowed manufacturers to sell noncomplying engines after October 2002 if they sold an equal number of the cleaner engines before that date; and (3) using emissions averaging, banking, and trading to generate emissions credits towards compliance by reducing emissions in other areas. As the next step in its efforts to address diesel emissions, EPA, in January 2001, finalized a rule—herein referred to as the 2007 rule--establishing new emissions standards that heavy-duty engines and vehicles must generally meet beginning in 2007. These standards, unlike the consent decrees established as the result of an enforcement action, were developed through a public rulemaking process that gave stakeholders from across the industry sectors the opportunity to provide input to EPA for consideration. Also in contrast to the consent decrees, the 2007 standards gave industry 6 to 10 years to develop technologies to meet the rule’s requirements. The 2007 rule limits fine particle and nitrogen oxide emissions from heavy-duty diesel engines to 0.01 grams and 0.20 grams, respectively, a significant decrease compared to the consent decrees and 2004 standards. While the fine particle standard is effective in 2007, the nitrogen oxide standard will be phased in based on engine production: 50 percent of the engines sold between 2007 and 2009 and 100 percent of those sold beginning in 2010 must meet the nitrogen oxide emissions standard. EPA estimates that the new standards will reduce emissions of fine particles and nitrogen oxides by 90 percent and 95 percent, respectively, from 2000 levels. Also in the 2007 rule, EPA regulates both heavy-duty vehicles and their fuel as a single system. To meet the standards, engines must include advanced emission control devices. Because these devices are damaged by sulfur, the rule establishes a mid-2006 deadline for reducing the sulfur allowed in highway diesel fuel. Under the rule, refiners are required to start producing diesel fuel with a sulfur content of no more than 15 parts per million (compared to current diesel fuel, which can contain up to 500 parts per million—a 97 percent reduction) beginning June 1, 2006. All diesel-powered highway vehicles produced in 2007 or later must use the low-sulfur fuel. Under certain conditions, and generally only until 2010, the rule allows refiners to continue producing and selling some diesel fuel with a sulfur content greater than 15 parts per million, but not exceeding 500 parts per million. However, the two fuels must be segregated in the distribution system so that the low-sulfur fuel is not contaminated. The fuel with the higher sulfur content may only be used in heavy-duty vehicles built before 2007 because it will damage emissions control devices on newer engines. When developing the 2007 rule, EPA had to give appropriate consideration to the rule’s costs. The agency projected that the rule’s benefits would exceed its costs by a factor of 16 to 1. According to EPA, the new standards will result in significant annual reductions in harmful emissions, with total benefits as of 2030 estimated at about $70 billion. In addition, by 2030, the reduced emissions will prevent 8,300 premature deaths, more than 9,500 hospitalizations, and 1.5 million workdays lost, according to EPA. The agency estimated that these benefits will come at an average cost increase of about $2,000 to $3,200 per new vehicle in the near term and about $1,200 to $1,900 per new vehicle in the long term, depending on the vehicle size. This is relatively small compared to new vehicles whose base cost is about $96,000 for a new heavy heavy-duty truck to $250,000 for a new bus. Furthermore, EPA estimated that, when fully implemented, the sulfur reduction requirement would increase the cost of producing and distributing diesel fuel by about 4.5 to 5 cents per gallon, an increase of about 3 percent over average U.S. diesel fuel prices as of late November 2003. In part because trucking companies did not have what they considered to be sufficient time to adequately road test 2002 prototype engines, they had concerns about the price and reliability of the new engines. Representatives of four of the ten trucking companies we contacted said their companies, among other things, bought more new heavy-duty trucks equipped with older engine technology than planned before October 2002. This adversely affected their operations, at least in the short term, according to company officials. Our analysis of Class 8 truck production data also indicates that trucking companies may have pre-bought these trucks in 2002. To meet the increased demand for trucks with older engines, the major engine manufacturers increased production of new trucks with older engines before October, but had to decrease production when demand subsequently dropped until about early 2003, with detrimental effects, according to representatives of the engine manufacturers we contacted.