Tier 3 Regulation compliance cost on refiners $10 billion & refinery costs 6 to 9 cents per gallon.

Although the general public hasn’t heard much about it, the EPA is preparing to issue so-called “Tier 3” regulations on automakers and refiners, which are even more stringent than the “Tier 2” standards announced in 1999 and fully implemented in 2006. As usual, EPA hasn’t given a satisfactory justification for the tightening of the standards. One study conservatively estimates Tier 3 would impose an upfront compliance cost on refiners of almost $10 billion, and would permanently raise refinery costs 6 to 9 cents per gallon.

Background

In addition to the numerous other regulations affecting the transportation and energy industries, the Environmental Protection Agency (EPA) issues regulations governing tailpipe emissions from qualifying vehicles. In 1999 EPA announced its so-called Tier 2 regulatory framework, which tightened emission standards for the first time not just to cars but to all passenger vehicles, including light-duty trucks and SUVs. The other innovation introduced in 1999 was to treat “vehicles and fuels as a system.” Because certain emission-reduction technologies work better with lower sulfur content in gasoline, the Tier 2 standards—which were ostensibly concerned with passenger vehicles—also placed costly mandates on refiners.

The EPA is currently moving ahead with its plans to implement the next level of controls, called Tier 3. Even though Tier 2 has already achieved significant improvements in several dimensions, EPA wants to significantly tighten the constraints on both the passenger vehicle and refining sectors once again. The best available study suggests that just a single component of the new Tier 3 proposal would impose upfront compliance costs of almost $10 billion on refiners, and cause a permanent increase in refining costs of 6 to 9 cents per gallon of gasoline. Although the effects have not been estimated, we can also expect the Tier 3 standards to raise vehicle costs.

Worst of all, the increased costs that Tier 3 would impose on vehicle manufacturers and refiners would come with little if any added benefit to the environment. Under the existing Tier 2 standards, the EPA has already achieved significant gains across several criteria, with further progress becoming exponentially more difficult. EPA’s own statements indicate that with existing regulations, these improvements would continue for years into the future, as new cars (compliant with Tier 2) replaced older vehicles on the road.

Tier 2 Was Tight; Tier 3 Would Be Even Tighter

In 1999 EPA issued its Tier 2 regulatory framework, and proudly announced how drastic the measures were: “These new standards require passenger vehicles to be 77 to 95 percent cleaner than those on the road today and reduce the sulfur content of gasoline by up to 90 percent.” Specifically, here is their discussion of the sharp reduction in permissible sulfur concentrations:

Beginning in 2004, the nation’s refiners and importers of gasoline will have the flexibility to manufacture gasoline with a range of sulfur levels as long as all of their production is capped at 300 parts per million (ppm) and their annual corporate average sulfur levels are 120 ppm. In 2005, the refinery average will be set at 30 ppm, with a corporate average of 90 ppm and a cap of 300 ppm….Finally, in 2006, refiners will meet a 30 ppm average sulfur level with a maximum cap of 80 ppm.

Yet even though the Tier 2 standard has already reduced gasoline sulfur content some 90 percent, down to an average level of 30 parts per million (ppm), EPA wants to ratchet up the standard yet again. Although it hasn’t explicitly announced the specific standard in its Tier 3 regulations as of this writing, EPA officials (e.g. Margo Oge in late January 2012) have publicly stated that the standard will probably be 10 ppm. That is to say, on top of the 90 percent reduction in sulfur content that Tier 2 involved, the move to Tier 3 (if Oge is correct in her statement) would require a further reduction of 67 percent from the Tier 2 baseline.