The People of America's Oil and Natural Gas Indusry

The Tier 3 Game

Bob Greco

Bob Greco
Posted May 3, 2013

It’s one thing to have genuine differences over energy regulatory policy – as the oil and natural gas industry has with EPA’s proposed Tier 3 rule further lowering sulfur levels in gasoline. It’s quite another to see that the rulemaking process is being gamed.

Tier 3 Trouble

API highlighted substantive and procedural concerns about the Tier 3 proposal at recent public hearings. The rule would require refiners – who invested about $9 billion over the past decade to reduce sulfur in gasoline 90 percent (300 parts per million to 30 ppm) – to lower sulfur content another 6 percent, to 10 ppm. According to one study, the reduction would produce little environmental benefit, while another said it could add 6 to 9 cents per gallon to the cost of making gasoline. API Senior Policy Advisor Patrick Kelly, from EPA’s Tier 3 hearing this week in Chicago:

“API opposes this discretionary rulemaking as we have serious doubts as to the Agency’s justification for it. We have been insisting that EPA demonstrate a scientific justification for two and a half years. API commissioned research on the costs and benefits associated with further reductions in gasoline sulfur. We found some clear conclusions: The proposed standard will yield little immediate or longer term air quality benefits. And, reducing average sulfur from 30 parts per million to 10 parts per million will impose enormous costs. Further reducing gasoline sulfur is not necessary for meeting more stringent vehicle emissions standards, and automakers are unlikely to introduce vehicle emission technology that is enabled by the lower sulfur fuel.”

Kelly supplied additional detail in Chicago and at a second Tier 3 hearing last week in Philadelphia:

  • Research by Baker & O’Brien indicates further reductions in sulfur content could require $10 billion in capital costs.
  • Annual compliance cost is $2.4 billion – or 6 to 9 cents per gallon marginal cost in the making of gasoline, according to the same study.
  • EPA’s use of average cost in calculating the impact of the proposed rule ignores the important role marginal cost plays in gauging the market’s response to the regulation.
  • EPA’s proposed three-year time lead for Tier 3 implementation is “grossly inadequate” to design, permit, construct and startup the equipment needed to produce the fuel.
  • Air quality benefits under the current Tier 2 program are considerable and are still being realized. More than half the cars on the road today are pre-Tier 2, so benefits will keep accruing as the fleet turns over.
  • EPA’s proposal to make E15 the certification fuel (up to 15 percent ethanol content) is flawed because the vast majority of vehicles on the road weren’t designed to operate on fuels exceeding E10. E10 should be the certification fuel because that’s the fuel new vehicles are mostly likely going to use.

These are significant cost/benefit problems with the Tier 3 proposal – problems that undermine EPA’s ability to justify the new rule.  But the rulemaking process itself is flawed, with evidence EPA is trying to truncate the critical review period:

  • Under the Clean Air Act, rulemaking is supposed to begin when EPA publishes the proposed rule in the Federal Register. As of May 3, that has not occurred, yet EPA still held public hearings.
  • The Act also requires EPA to make available, when the proposed rule is published in the Federal Register, the data upon which the rule is based, the methodology used to obtain and analyze the data and the major legal interpretations and policy considerations underlying the proposal. More than 700 new documents were added to the docket last week, leaving no time for analysis before public hearings on the rule.

What’s happened here is that without detailing its justification for the Tier 3 proposal, including the supporting factual data, EPA started the clock on public comments. By narrowing the window for public discussion, EPA is distorting the process. Kelly:

“It is outrageous for EPA to hold public hearings as the docket continues to be populated with supporting information. It is invalid for EPA to hold these hearings in advance of the publishing the rule in the Federal Register. … EPA cannot set a deadline for public comments on a proposal that has not yet been published, and the supplemental publication that merely identifies the hearing dates and locations is a clear attempt to circumvent public participation in the rulemaking process.”

EPA should follow the law. Once the Tier 3 rule proposal is published in the Federal Register, the clock on the commenting period should be restarted. Another public hearing should be scheduled – after there’s been enough time for fair public review of all of EPA’s data and analyses.

The Tier 3 proposal has significant manufacturing cost impacts for marginal benefits. That’s what research shows. Meanwhile, the way EPA is advancing this proposal is limiting review – thereby limiting the agency’s accountability to the public. It’s improper and fundamentally unfair.