South Coast Air Quality Management District
South Coast Air Quality Management District
BOARD MEETING DATE: September 15, 2000 AGENDA NO. 32
Amend Rule 431.2 - Sulfur Content of Liquid Fuels
SYNOPSIS:
Proposed amendments to Rule 431.2 will define low sulfur diesel fuel to have a sulfur content not in excess of 15 ppm (parts per million) by weight. Additionally, on or after June 1, 2004, the proposed amendments will prohibit refiners and importers from selling diesel fuel for use in the District that exceeds the proposed low sulfur diesel standard, unless an alternative compliance option is selected. Refiners and importers who choose the alternative compliance option must pay a mitigation fee, which will be used to provide for emission reductions from diesel equipment and vehicles. The proposed amendments are to apply to diesel fuel produced for both stationary and mobile sources, including RECLAIM sources but excluding ships and trains.
COMMITTEE:
Mobile Source and Stationary Source, August 25, 2000, Reviewed.
RECOMMENDED ACTION:
Adopt the attached resolution:
Barry R. Wallerstein, D.Env.
Executive Officer
Background
Rule 431.2- Sulfur Content of Liguid Fuels, specifies sulfur content of liquid fuels, including diesel fuel, for stationary source applications in the District. The California Air Resources Board (CARB) has recently identified diesel particulate matter (PM) as a Toxic Air Contaminant. PM is used as a surrogate to account for numerous cancer-causing substances in diesel exhaust. The SCAQMD MATES II study concluded that the average carcinogenic risk in the South Coast Air Basin is approximately 1,400 in one million due to air pollution and that approximately 70% of that risk is attributed to diesel PM emissions. The sulfur content in diesel fuel affects not only directly emitted SOx and PM10 emissions in the diesel exhaust, but also the control efficiency and durability of aftertreatment technologies designed to reduce NOx and PM10 emissions from diesel engines. In proposing the amendments, the SCAQMD is acting pursuant to its authority provided in Health and Safety Code 40447.6 to protect public health by lowering the sulfur content in diesel fuel for both stationary and mobile applications in the District. However, the rule is effective for motor vehicles only upon approval by CARB. In addition, the proposed amendments will help ensure timely attainment of health-based federal PM10 air quality standards by 2006 and make continued progress toward achieving the state PM10 standards.
The SCAQMD has met with the eight area refiners who produce or can potentially supply low sulfur diesel fuel for the District. Information supplied by the refiners indicates that to accomplish the proposed reductions in diesel sulfur, modifications to refinery desulfurization units will be required along with improved distribution protocols. This can be accomplished using existing and widely used technology at an average annualized cost to the refiner of one to two cents per gallon of diesel fuel.
The EPA has proposed a similar low sulfur diesel regulation for on-road mobile sources. The SCAQMD rule differs from the EPA effort primarily in that a more aggressive compliance schedule is employed and the applicability is broadened to include off-road and stationary source applications. The CARB staff also expressed its intent to adopt a statewide low sulfur diesel fuel regulation in 2001 for implementation between 2005 and 2006 for both on- and off-road applications. If the current USEPA or CARB’s low-sulfur fuel proposal is adopted, the benefits of PAR 431.2 would, in effect, be only associated with expediting the compliance schedule by one or two years.
The use of low sulfur diesel as specified in the proposed amendments will result in direct emission reductions of primary PM10 of 1.1 tons per day and primary SOx emissions of 2.7 tons per day. Atmospheric conversion of SO2 to particulate in the form of ammonium sulfate occurs readily in the South Coast Air Basin. As a result, up to 6.6 tons per year of PM10-equivalent emissions can be estimated. As a result of achieving these emission reduction benefits, PAR 431.2 will also likely result in reductions in toxic emissions from diesel engines. The availability of the low sulfur diesel fuel through PAR 431.2 will also encourage the effective use of catalyst and particulate trap emissions control technologies for trucks and other heavy-duty equipment which will result in yet further emissions benefits. The proposed amendments will also help expedite the commercialization of even more advanced NOx and PM control technology. Significantly improved diesel fuel quality, through the reduction in fuel sulfur content, is needed to ensure the effectiveness and durability of such advanced emission control technology. The maximum cost effectiveness of the proposed amendments is estimated at up to $10,900 per ton of PM10-equivalent emission reductions. It should be noted that the actual cost effectiveness is expected to be much lower, because no costs are attributed to the imminent USEPA or CARB regulation.
Proposal
The proposed amendments establish a 15 parts per million (ppm) by weight cap limit for diesel fuel defined as low sulfur diesel. The proposed amendments are to be achieved in two tiers. Under Tier I, a voluntary program is established for the marketing of low sulfur diesel so as to ensure a 15 ppm sulfur limit. Under Tier II of the amendments, on or after June 1, 2004, all diesel fuel produced or supplied by SCAQMD area refiners and importers must meet the low sulfur diesel standard. The proposed amendments provide for an alternative Tier II method of compliance where an appropriate mitigation fee can be paid by refiners and importers in lieu of meeting the 15 ppm limit. The fee is to be paid into a restricted fund managed by the District to seek to provide for emission reductions from diesel equipment and vehicles that would otherwise be achieved by the 15 ppm limit. Only if the fuel is voluntarily marketed as low sulfur diesel fuel will distributors or retailers of diesel fuel have to comply with the 15 ppm sulfur limit. Stationary sources, including RECLAIM sources, shall start purchasing low sulfur diesel fuel after June 1, 2004. There are no specific requirements for mobile source end use applications except that low sulfur diesel fuel will be potentially available within the District. There are other minor amendments to clarify the rule language, remove obsolete provisions, and add a newer test method for determining the lower 15 ppm limit.
Policy Issues
During the rule development process, a working group was established comprising refiners, terminal and pipeline operators, distributor / jobbers, and trucking firms, to obtain information and perspective on the issues associated with the proposed amendments. Several concerns were raised regarding potential adverse impacts of a regional fuel rule on fuel availability and price, product segregation, and local businesses. The following summarizes the issues raised and the steps taken by the Staff to address them:
Supply Reliability and Price Volatility
A major concern raised by the working group is that due to an inadequate lead-time for compliance and relatively significant financial investments, some area refiners may decide not to provide compliant diesel fuel to this region. In addition, should there be unplanned outages by one or two area refiners, diesel fuel from out-of-basin areas cannot be readily imported because it would not be able to meet the 15 ppm sulfur requirement. Both scenarios can potentially lead to short term supply shortages and price spikes. Staff has taken several measures to address this issue. First of all, the Tier II compliance date was postponed from its original July 1, 2003 date to June 1, 2004, to provide approximately a four-year lead time requested by refiners to complete the necessary plant modifications to meet the sulfur limit of 15 ppm. Secondly, a voluntary mitigation fee compliance alternative is offered for refiners who may choose to further delay refinery modifications until national or statewide sulfur limits become effective, or use the option as a short term measure to accommodate occasional need for off-specification diesel fuel. The monies collected will be used to achieve emission reductions from diesel sources. Staff believes that the extended compliance date in conjunction with the mitigation fee option should largely mitigate potential supply shortage or price spikes due to PAR431.2, while protecting public health.
Distribution Issues
One of the key elements of the diesel retail and wholesale distribution chain is the utilization of common, community terminal tanks which provide access to unbranded diesel fuel by independent fuel distributors. Inherent in this system is the unavoidable co-mingling of products. If distributors were required to segregate the low sulfur diesel product from the existing CARB diesel product, (which can range up to 500 ppm sulfur at present), substantial capital investment would be required to reconfigure the current infrastructure to avoid fuel contamination. In response to this issue, staff is now proposing that the 15 ppm sulfur limit applies only to those who market the low sulfur diesel fuel. As a result, conversion of the diesel distribution system to low sulfur diesel will be strictly market driven and rely on the contractual agreements between refiners and distributors. The distribution system envisioned under PAR431.2 is likely to be similar to that contemplated by refiners who voluntarily produce low sulfur diesel under Tier I requirements.
Consumer Impacts
Concern has been raised regarding possible adverse economic impacts on independent and small truckers and fuel dispensing outlets due to increased diesel fuel costs. The increased production costs to refiners and importers, when spread over their diesel fuel production volume, amounts to an average of 2 cents per gallon. Fuel prices, on the other hand, can reflect much more than the costs of supplying fuel. One area refiner indicated a 5 cent per gallon increase in fuel price for low sulfur diesel. There are numerous factors affecting retail diesel fuel prices. For example, recent increased crude price, increased fuel demand due to economic growth, declined inventory storage capacity, and unplanned outages at refineries all contribute to the price volatility in the diesel market. Furthermore, simple market anxiety or speculation over future supply conditions can cause short-term market price fluctuations in the absence of PAR431.2. Monthly variation in diesel fuel prices has exceeded 25 cents per gallon this year. Thus, the underlying volatility of the market is far greater than the fuel cost impacts associated with the proposed amendments.
In actual terms, the cost per truck of a 2 to 5 cent increase in diesel fuel cost ranges from $122 to $306 per year. While any increase in operating costs is of concern to small businesses, the magnitude of the cost, which can reasonably be attributed to this rule, is relatively small. In comparison, a stationary source with a 300-hp diesel internal combustion engine will have to pay significantly higher regulatory costs estimated to be approximately $12,000 per engine. These costs include annual permit renewal fees, emission fees, controls costs under existing AQMD regulations (i.e, BACT or BARCT requirements), and other monitoring, recordkeeping, and reporting requirements. PAR431.2 will require a diesel mobile source to contribute to its fair share of pollution abatement costs.
With respect to truck stops, concerns were raised that increased fuel price will create competitive disadvantages that they will lose their business to out-of-district fuel dispensing outlets. The staff investigation shows that current EPA diesel fuel prices across the Nevada and Arizona border are approximately 20 cents per gallon lower than CARB diesel. Within the AQMD 4-county area and across the District boundaries, the diesel price varies up to 15 cents per gallon. The 2 to 5-cent increases in diesel fuel price are well within the price variation occurring under the existing market. Nonetheless, this issue should be monitored during rule implementation and follow-up action taken as appropriate.
A recent proposal by the Texas Natural Resources Conservation Commission, if enacted, will also help mitigate interstate fuel price effects. The Commission has proposed that starting in May 1, 2004, all on-road diesel fuel must meet a sulfur limit of 30 ppm. Directionally, this will move Texas refineries to produce cleaner diesel fuel earlier than proposed by the USEPA, and provide a source of diesel fuel in markets adjoining California. In addition, a 15 ppm limit is proposed for 2006.
Notwithstanding the analysis presented above, District staff is proposing as part of the PAR431.2 adoption resolution, to explore ways to further minimize economic impacts on consumers. For example, staff could seek legislative relief from a portion of the state’s excise tax on diesel fuel. In addition, staff will work with California Energy Commission to develop sound energy polices to ensure reliable, long-term diesel supply without sacrificing public health and to urge CARB to expedite the implementation of a statewide low sulfur diesel regulation to compliment the AQMD regulation.
AQMP, Legal Mandates, and Authority
Health and Safety Code Section 40447.6 authorizes the AQMD to adopt regulations that specify the composition of diesel fuel manufactured for sale in the District, subject to CARB’s approval. The staff analysis has shown that the proposed low sulfur diesel will significantly reduce emissions of sulfur oxides and particulates from diesel engines that will protect public health and assist in improving ambient air quality and visibility. Furthermore, it is determined that the proposed low sulfur diesel is technologically feasible and cost-effective to produce, and is necessary for use with the vehicle/engine after treatment technologies. The proposed amendments are consistent with the policy direction reflected in the control measure AT-MBL-01 of An Air Toxic Control Plan for the Next Ten Years presented to the AQMD Governing Board on March 17, 2000.
California Environmental Quality Act (CEQA)
In accordance with the California Environmental Quality Act (CEQA), the AQMD, as the Lead Agency, has reviewed the proposed fleet vehicle rules and related rule amendments, which includes PAR 431.2. Pursuant to state CEQA Guidelines §§15252 and 15168, the AQMD prepared a Draft Program Environmental Assessment (PEA) for the proposed project which was released on March 10, 2000 for a 45-day public review and comment period. The Draft PEA analyzed potential adverse environmental impacts that are comprised primarily of cross-media impacts, including air quality, water resources, transportation, energy, hazards, public services and solid/hazardous waste, from refinery modifications to produce low sulfur fuel and construction of alternative fuel refueling stations. The analysis concluded that short-term construction-related air quality impacts were significant. Significant adverse construction air quality impacts were related primarily to refinery modifications to implement the proposed amendments to Rule 431.2. All comments received on the Draft PEA were addressed and incorporated into the Final PEA for the proposed fleet vehicle rules including PAR 431.2.
The Final PEA for the proposed fleet vehicle rules and PAR 431.2 was certified by the SCAQMD Governing Board at the June 16, 2000 Public Hearing. CEQA Guidelines §15168(c) states, "Subsequent activities in the program must be examined in the light of the program [EA] to determine whether an additional environmental document must be prepared." CEQA Guidelines §15168(c)(2) states further, "If the agency finds that pursuant to Section 15162, no new effects could occur or no new mitigation measures would be required, the agency can approve the activity as being within the scope of the project covered by the program [EA], and no new environmental document would be required." The Final PEA analyzes potential adverse environmental effects of the overall fleet vehicle rule program as specifically and comprehensively as possible, given the level of detail of the program. The environmental analysis in the Final PEA provides sufficient detail of the potential adverse environmental impacts generated by the proposed fleet vehicle rule program in general. Further, the environmental effects of implementing PAR 431.2 are considered to be within the scope of the Final PEA. Therefore, no further environmental documentation is required (CEQA Guidelines §§15168(c)(2) & (c)(5)).
Socioeconomic Analysis
The June 2000 socioeconomic analysis for all of the Fleet Vehicle Rules included a retrofit strategy where, it was assumed, half of the affected fleets in Proposed Rules 1195, 1196, and 1186.1 would install particulate traps and use low sulfur diesel fuel to reduce PM emissions. It was also assured that all the refineries would install modifications to procedure in low sulfur diesel. The analysis of the retrofit strategy, among others, included an estimated average annual cost of PAR 431.2 at $69.7 million for the eight refineries and a $0.05 per gallon increase in the price of low sulfur diesel beyond the current diesel. The job impacts for the retrofit strategy ranged from an average annual 247 jobs forgone to 728 jobs created between 2001 and 2015. Based on more specific cost estimates a refined analysis was performed. It is expected that the proposed amendments to Rule 431.2, by itself with the refined cost lower than what was estimated previously, will result in much smaller job impacts than previously estimated.
Implementation Plan
The proposed amendments will affect the area refineries and importers. The compliance status report and implementation status report processes are proposed to monitor the progress of the proposed amendments. Staff will efficiently process permits needed to produce 15 ppm diesel. Staff has been working with these affected facilities and will continue to be available should a need for assistance arise during implementation.
Resource Impacts
Implementation of the proposed amendments is not expected to have an impact on AQMD fiscal resources. It will, however, increase staff's workload in making compliance determinations, and can be coordinated with CARB when a national or statewide diesel fuel regulation is in place. In addition, staff resources are needed in issuing permits for new or modified desulfurization units and hydrogen plants that would otherwise be required when the national or statewide low sulfur diesel fuel regulation becomes effective. It is anticipated that the workload increase can be addressed with the existing level of staffing.
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