THE ECONOMIC IMPACTS OF NOx AND PARTICULATE MATTER EMISSIONS
REGULATIONS ON THE HEAVY-DUTY DIESEL ENGINE INDUSTRY
Prepared for:
U. S. Environmental Protection Agency
Washington, D.C.
September 30, 1984
SOBOTKA & COMPANY, INC.
2501 M Street, N.W.
Suite 550
Washington, D.C. 20037
(202) 887-0290
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EPA-420-R-84-101
TABLE OF CONTENTS
PAGE
1. INTRODUCTION 1
1*1 PROPOSED REGULATIONS 1
1.2 FINDINGS 2
1.3 METHODOLOGY 2
2.0 BACKGROUND ON THE HEAVY DUTY VEHICLE INDUSTRY 3
2.L VEHICLES 3
2.2 ENGINES . . 4
2.3 DIESEL ENGINE MANUFACTURERS 4
2.4 MARKET RELATIONSHIPS 5
2.5 CURRENT MARKET CONDITIONS 6
3.0 PROPOSED REGULATORY REGIMES AND THEIR TECHNOLOGICAL CONSEQUENCES . 6
3.1 REGULATORY REGIMES 6
3.2 ENGINE CHANGES LIKELY TO BE NEEDED FOR COMPLIANCE 7
4.0 RESULTS 11
4.1 REVENUE IMPACTS BY YEAR 11
4.2 REVENUE IMPACTS BY FIRM 14
4.3 TRUCK ASSEMBLY REVENUE REDUCTIONS 15
4.4 LOSSES TO ECONOMY 18
4.5 IMPACT ON DIESELIZATION 21
5.0 OUTLINE OF METHODOLOGY 21
5.1 TECHNOLOGICAL IMPACTS OF THE REGULATIONS 24
5.2 MARKET IMPACTS OF THE REDUCTIONS IN THE VALUE OF THE ENGINES . . 26
5.3 ILLUSTRATION OF CALCULATIONS 27
APPENDICES
A. PRICES OF ENGINES A-l
B. ASSIGNMENTS OF ENGINE FAMILIES TO TRUCK SIZE CLASSES B-l
C. COST PASS-THROUGH ASSUMPTIONS C-l
D. DEMAND ELASTICITIES FOR INDIVIDUAL ENGINES D-l
E. DEMAND ELASTICITIES FOR TRUCKS 1-1
F. FUEL CONSUMPTION IMPACTS OF NOx CONTROLS F-l
G. FUEL CONSUMPTION IMPACTS OF PARTICULATE MATTER CONTROL .... G-l
H. ENGINE FAMILIES CONSIDERED H-l
I. ANALYSIS OF DIESELIZATION 1-1
J. CAPITAL COSTS J"1
K. RELATIONSHIP OF HORSEPOWER TO VALUE K-l
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LIST OF EXHIBITS
PAGE
3.1 EMISSIONS STANDARDS BY REGIME 8
3.2 REGIMES COMPARED TO ESTIMATED ACHIEVABLE ENGINE-OUT EMISSIONS . . 10
3.3 ASSUMED TRAP USAGE UNDER DIFFERENT REGULATORY REGIMES .... 12
4.1 IMPACTS ON HDDE REVENUES—SIX YEAR TOTALS, BY REGIME 13
4.2 IMPACTS ON HDDE SALES—BY FIRM, SELECTED REGIMES 16
4.3 TRUCK SALES LOSSES BY COMPANY 17
4.4 ESTIMATE OF CHANGES IN NET REVENUES 19
4.5 FUEL USE IMPACTS 20
4.6 CHANGE IN VALUE OF PRODUCTS 22
4.7 IMPACTS ON CLASS 6 DIESELIZATION 23
E.l FUEL DISCOUNT RATES VS. ELASTICITY E-5
H.l ENGINE FAMILY DATA H-2
H.2 TECHNOLOGICAL STEPS ASSUMED TO BE TAKEN H-4
I.1 DIESELIZATION BY CLASS, HISTORICAL AND PROJECTED 1-5
K.l RELATIONSHIP OF POWER TO PRICE K-2
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1.0 INTRODUCTION
This report presents estimates of the magnitude of the economic Impacts
that could result from potential heavy-duty dlesel engine emissions regulations.
The emphasis is on the effects on the five largest domestic producers of heavy
duty dlesel engines (HDDE's)—Caterpillar, Mack, International Harvester, Detroit
Diesel-Allison, and Cummins—because these firms would be affected most directly.
Costs to the general public are also examined.
Three of the four sections numbered 2 through 5, that compose the body of
the report, are described briefly in this introductory section. Section 2
provides some background on the industry. Section 3 lists the provisions of
the sets of regulations that are analyzed In the report, and describes the
steps that manufacturers of engines would have to take in order to comply with
the regulations. Section A presents the results of the analysis, while Section
5 describes the methodology used In the study. These are followed by a set of
appendices that present data and detail on the derivation of some of the inputs
to the analysis.
1.1 Proposed Regulations
The proposed regulations applicable to heavy duty trucks would limit the
amount of soot or particulate matter (PM) that could be emitted by trucks in
excess of 8,500 lbs gross vehicle weight (GVW), and would tighten current limits
on emissions of oxides of nitrogen (N0X). The proposed limits of 0.6 grams of
PM per bhp-hour and 6.0 grams of N0X per bhp-hour would take effect in the 1987
model year. For EPA's preferred alternative, the limits would be tightened for
the 1990 model year to 0.25 g/bhp-hour for PM (except for the largest trucks,
for which the limit would be 0.40 g/bhp-hour) and 4.0 g/bhp-hr for NOx. The
analysis compares these requirements to a baseline under which no changes in
regulations would be made from the current, relatively lax standards. In addi-
tion, the report examines variants of the proposed regulatory package, under
which the standards would be tightened in different ways after 1989.
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1.2 Findings
The main findings of the study are as follows.
o Revenues from sales of HDDE's would be cut by a total of between $1.0
and $2.0 billion, depending on the stringency of the regulatory regime,
over the years 1989 through 1992. This loss of revenue is three to six
percent of the industry's baseline sales for that period. The loss is
due largely to slower sales of trucks induced by the fuel consumption
impacts of the regulations.
o Total resource costs to the economy would amount to between $3.5 and
$7.5 billion over the same period, again depending on the stringency of
the regime examined. The majority of this cost would be due to increased
fuel usage by trucks, and would be borne by consumers of goods shipped
by truck.
o The distribution of the impacts of the regulations among the HDDE
manufacturers would be quite unequal. International Harvester might
come close to breaking even, offsetting losses in truck sales with
Increased sales of its engines for use in the trucks of other manufac-
turers. Only Detroit Diesel-Allison, a division of General Motors,
would be likely to be hurt severely. That division could lose more
than twenty percent of its sales to its competitors.
o The shift from gasoline to diesel engines in smaller heavy duty trucks
could be slowed or even halted by the proposed regulations. (This shift
is virtually complete for the heaviest trucks.)
1.3 Me thodology
The Impacts of the regulations were assessed by estimating the hardware and
fuel consumption effects of the standards, and then calculating the marketplace
consequences of those changes.
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The hardware and fuel consumption implications of the standards were
determined largely on the basis of current emissions performance of the engine
families produced by the domestic HDDE manufacturers and the work of Energy and
Resource Consultants, Inc., a contractor for EPA, on the feasibility and effects
of potential N0X and PM regulations.
Market impacts of the hardware and fuel consumption changes Induced by the
regulations were estimated on the basis of empirically-derived measures of the
price and performance sensitivity of engines and trucks. The market impacts
methodology (and to a lesser extent the technological impacts methodology) is
based on an earlier study of the effects of proposed regulations on the diesel
truck industry written by Sobotka and Company, Inc.
2.0 BACKGROUND ON THE HEAVY DUTY VEHICLE INDUSTRY
This report may be understood more easily with some background know-
ledge of the heavy-duty engine and vehicle industry. This section addresses
very briefly the vehicle and engine types, manufacturers, market relationships
and current conditions for this Indus try .£/
2.1 Vehicles
This analysis focuses on the regulation of heavy duty diesel engines.
Most of these engines are used in vehicles of more than 19,500 pounds of gross
vehicle weight (GVW), and most of these vehicles are trucks used commercially
for the transport of freight (as opposed to personal transportation, a common
function of smaller trucks). Some buses are also in this vehicle weight
category.
Other sources provide more extensive background information in these
areasT See, for example, "The Effects of Potential EPA Regulation on the
Heavy-Duty Vehicle Industry, Part One: Description of the Industry" (Sobotki
and Company, Inc. for the U.S. EPA) (1982).
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Vehicles of greater than 19,500 pounds GVW are conventionally divided
Into three gross weight classes: those over 19,500 pounds but under 26,001
pounds fall into Class 6; those between 26,001 and 33,000 pounds are Class 7;
and the heaviest trucks are Class 8. At the lighter end of this continuum,
the typical vehicle is a single-unit truck (that is, the cargo compartment
and cab are permanently connected) used for intracity delivery, which travelB
about 100 to 200 miles a day. The heaviest trucks consist of a tractor com-
prising the engine and the cab, and a separate trailer {or trailers) for the
cargo. These combinations typically see very intensive intercity use.
2.2 Engines
Heavy-duty vehicles may be powered either by gasoline or diesel engines.
Each type's characteristic advantages and disadvantages suit it to particular
applications. The gasoline engine is light and inexpensive, suiting it to
smaller, less intensively used vehicles. The diesel engine is much more
expensive to purchase, but lasts considerably longer (up to 500,000 miles, with
an overhaul at some point) and uses less fuel—as little as 50X-70% as much as
a comparable gasoline engine. These advantages become more Important the more
heavily the vehicle is used, and the more costly fuel becomes. Diesels have
been the overwhelming choice for the largest trucks and have been spreading
among the lighter classes as fuel prices have risen.
2.3 Diesel Engine Manufacturers
The domestic producers of diesel engines for heavy-duty vehicles are—in
order of engine sales revenues—Cummins, Detroit Diesel-Allison (a subsidiary
of General Motors), Mack (substantially owned by Renault), Caterpillar, and
International Harvester. The financial conditions of these firms vary widely;
General Motors is financially robust, while International Harvester has been
kept from "bankruptcy by renegotiating its debts. The firmB also differ in
their relative degree of exposure in the market for engines. Caterpillar
produces heavy equipment In addition to engines. IH's diesel engines are a
small part of its business in comparison to its farm equipment and tr"*1-
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assembly operations, and It also builds gasoline engines for heavy-duty
vehicles. Mack builds trucks in addition to engines. Detroit Diesel Is part
of General Motors, which is of course a tremendous presence in the automotive
sector, participating in the markets for heavy-duty gasoline engines and
trucks among others. Only Cummins derives virtually all of its revenues from
the production of diesel engines.
2.4 Market Relationships
The heavy-duty vehicle industry has much in common with the light-duty
vehicle industry. Many of the same firms participate in each industry, and
the basic technologies embodied in products and used in production are similar.
But production is organized very differently in the heavy-duty vehicle indus-
try, where it is much more likely for firms to purchase major components from
each other than in the light-duty industry.
Some of the producers of diesel engines build diesel engines only; other
firms assemble trucks using their own components and components (including
engines) purchased from other firms. Still other firms engage in vehicle
assembly only, without manufacturing major components themselves. These market
relationships give truck purchasers a great deal of flexibility in engine
choice—a purchaser may generally specify within broad bounds whatever engine
by whichever manufacturer he favors, regardless of the truck manufacturer with
which he chooses to do business. (Historically, however, Mack engines have
been available only in Mack trucks.)
This market structure also means that it is possible to study the impact
of regulations that affect the engines largely by concentrating on the engine
builders. Assemblers of trucks will be able to avoid much of the cost of
complying with the regulations, as it is the engine manufacturers' responsibil-
ity to do the research and to make the changes needed to ensure compliance. If
any particular engine is affected more seriously than the rest, truck manufac-
turers will generally be able to substitute a competing model, as specified by
their customers.
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2.5 Current Market Conditions
The heavy-duty vehicle industry is highly cyclical, and firms in the in-
dustry are vulnerable to general economic downturns. The replacement of an
aging truck is an expensive proposition which can be postponed easily by an
owner if profits seem uncertain, credit becomes tight, or volumes of goods
needing shipment contract temporarily.
The industry is still recovering from a profound slump, which had cut sales
virtually in half from their previous peak. In addition to this cyclical Impact,
the industry's growth prospects may have dampened permanently with the matura-
tion of the industry, the completion of the interstate highway system, and
rising operating costs. At the same time that these problems have surfaced,
the firms in the industry have been spending heavily on the development of new
products, including both smaller and more fuel efficient diesels.
3.0 PROPOSED REGULATORY REGIMES AND THEIR TECHNOLOGICAL CONSEQUENCES
This section describes the regimes considered in the study and the changes
in engines expected to be made in order to comply with regulations.
3.1 Regulatory Regimes
Eight different regimes (or sets of standards) are compared in this report
to a no-further-action regime. The regimes follow closely the regulatory
options under consideration by EPA.
The regimes are identical for the years 1987, 1988, and 1989; standards
for those years are set at 0.6 grams per brake horsepower per hour (abbreviated
as grams or "g" henceforth) for PM, and 6.0 grams for N0X. (The standards are
set on the basis of emissions per unit of work produced because larger engines
naturally emit more than small engines.) These standards are moderate in
stringency; they would require on the order of twenty to forty percent reductions
from current emissions levels for most engines. /-
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One option would be to continue these levels for the standards beyond
1990. Other options would be to lower the N0X standard to 4.0 grams, or to
lower the PM standard to 0.4 or 0.25, or to combine these alternatives. The
eight regimes considered assume standards set at the following levels:
Exhibit 3.1
EMISSIONS STANDARDS BY REGIME
REGIME STANDARDS FOR 1990 AND BEYOND
1 (no change in current standards; baseline for comparison)
2 0.6 g for PM, 6.0 g for NOx
V 0.6 g for PM, 4.0 g for N0X
3 0.4 g for PM, 6.0 g for N0X
3' 0.4 g for PM, 4.0 g for N0X
4a 0.25 g for PM, 6.0 g for NOx
4a' 0.25 g for PM, 4.0 g for N0X
4c 0.25 g for PM for medium-heavy trucks;
0.4 g for PM for large, line-haul trucks; 6.0 g for N0X for all
4c' 0.25 g for PM for medium-heavy trucks;
0.4 g for PM for large, line-haul trucks; 4.0 g for N0X for all
3.2 Engine Changes Likely to be Needed for Compliance
3.21 Steps to Control N0X Emissions
Manufacturers have Indicated that the following steps might have to be
taken to comply with N0X standards at levels in the range of those examined in
this report:
o Changes in injection timing;
o Exhaust gas recirculation (EGR);
o Electronic control units (ECUs) (to control EGR systems, and/or to reduce
fuel use impacts of timing retardation by allowing the timing to vary);
o Combustion chamber redesign;
o Changes In fuel Injectors;
o Turbocharging;
o Charge air aftercoollng or intercooling; and
o Improvements in aftercoollng or intercooling.
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Of these, exhaust gas recirculation (EGR) is likely to be avoided unless
N0X standards were particularly strict, because of its tendency to raise PM
emissions and fears that it may damage the engine. Electronic control units
(ECU's) and trap-oxidizers (traps) are not likely to be generally available
until the 1990's. In the near term, primary control techniques will probably
be improvements in input air cooling for turbocharged engines, and retardation
of timing.
For this study, it has been assumed that all turbocharged engines will be
fitted with advanced charge coolers in the near term, for reasons apart from
the regulations, but not with EGR or ECUs. It is assumed that ECUs will be
added to all engines in the intermediate term, again independent of the regula-
tions. EGR, it is assumed, will be applied to all engines if NOx regulations
are sufficiently striDgent. A few other specific assumptions are made, on the
basis of conversations with the manufacturers. The nost significant of these is
that Caterpillar'b naturally aspirated 3208 model will disappear, leaving only a
turbocharged version of the same basic engine. This change is treated In the
study as though a turbocharger were added to the naturally aspirated 3208,
increasing its power and cost but helping to lower its emissions. The changes
for the individual engine families in the near and intermediate terms are
summarized in Exhibit H.2.
3.22 Use of Trap-Oxidizers for PM Control
Some engines are inherently low enough in PM emissions to meet the less
stringent PM standards without any add-on emissions reduction hardware—that
is, their "engine-out" particulate levels may already be below some of the
proposed standards. Others will need careful matching of turbochargers to
engines, and modifications in their fuel injection systems and combustion
chambers to reduce their engine-out PM levels.
For each engine there exists some set of standards that cannot be met by
reducing engine-out levels alone. To meet that set of standards, an add-on
device would have to be used to reduce emissions still further. Trap-oxidi7"**°
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Bhow potential for being able to remove fifty to sixty percent—and perhaps up
to ninety percent—of the engine-out PM. These devices are muffler-like filters
for the exhaust stream, designed to catch the soot-like PM and burn it away.
It is not expected, however, that these devices will be ready for application
to heavy duty trucks until the 1990's.
The tighter PM and N0X standards proposed for the post-1989 period are
likely to require some or all engines to employ trap oxidizers. The N0X standard
is important because of the tendency of PM emissions to increase as N0X emissions
are forced down.
Predictions as to the need for some or all engines to have traps fitted to
them under the various regimes were made on the basis of estimates made by
Christopher Weaver of ERC, Inc. of the average PM and NOx levels achievable
without traps by HDDEs in the time frame 1990-1991. Exhibit 3.2 shows ERC's
estimates of the achievable PM emissions without traps in the intermediate term
at different N0X levels, compared to the levels mandated by the regimes.
ERC's analysis indicates that only the least stringent regime would be
achievable without the use of traps by many engine families, if each engine of
each engine family were required to meet the standards. The averaging of
emissions across families within firms would allow firms to comply with consi-
derably tighter standards.
It was assumed for this report that intra-firm averaging of PM emission
would be allowed in each regime. If averaging were not permitted, trap usage
would be much more widespread under some regimes, and some engines might be
Impossible to bring into compliance even assuming that fairly efficient ttaps
were available.
For some regimes, no traps would be needed to assure that the standards
were met on average. Under other regimes, all engines might have to be fitted
with traps. For a number of other regimes, however, the situation 1b not
clear-cut. The average engine's PM emissions might have to be reduced by c-"1"
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Exhibit 3.2
REGIMES COMPARED TO ESTIMATED ACHIEVABLE ENGINE-OUT EMISSIONS
Engine-out
(non-trap)
PM Emissions
(g/bhp-hr)
Estimated Achievable Intermediate-Terra Engine-Out Emissions Standards and
Fleet-Average New-Engine Emissions Levels, Compared to Regimes (Relationship
of PM to N0X Taken from ERC Report by Weaver et al.)
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about 30%—a reduction that could easily be surpassed by a moderately efficient
trap. This means that, in these in-between cases, some fraction of trucks could
be left without traps. The actual fraction of engines that would need traps in
cases like this is uncertain, and depends on potential engine-out particulate
levels and on the efficiency of traps not yet in service. Because no reliable
information was available on these factors, a figure of 50% was selected for
the percentage engines of that would need traps in the in-between cases—and it
was assumed that this percentage would be the same for all engine families.
(Some engines have considerably higher smoke emissions, and 6moke emissions
bear some relation to measured PM emissions. It was beyond the scope of this
study, however, to attempt to draw implications from smoke levels to the need
for traps.)
4.0 RESULTS
The impacts of the proposed regulations may be examined in a number of ways.
The regulations, by increasing the costs of purchasing and operating heavy duty
diesel trucks, would reduce (or at the very least postpone) the sales of trucks;
this would reduce the revenues of engine builders and truck assemblers. To the
extent that costs of compliance could not be passed on to engine and truck pur-
chasers, the costs of the engine manufacturers would be increased. (This is
expected to occur to a negligible extent). Increases in first costs, reductions
in power, and increases in fuel consumption would reduce the value of the engines
—thereby increasing transportation costs, and reducing the net value of the
economy's output. Increases in the costs of buying and operating diesel engines
could also result in slower adoption of dlesels in the size class in which diesel
and gasoline engines are expected to compete most Intensely—Class 6. These
Impacts are considered in turn in this chapter.
4.1 Revenue Impacts by Year
Exhibit 4.1 presents the industry-level engine revenue reductions, compared
to the projected baseline, that would be incurred by all five large domestic
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Exhibit 3.3 summarizes the trap-use percentages assumed for the regimes.
Exhibit 3*3
ASSUMED TRAP USAGE UNDER DIFFERENT REGULATORY REGIMES
(Intermediate term)
REGIME
2 2' 3 3' 4a 4a' 4c 4c*
(g/bhp-hr)
NOx STANDARD 6.0 4.0 6.0 4.0 6.0 4.0 6.0 4.0
NOx TARGET 5.4 3.5 5.4 3.5 5.4 3.5 5.4 3.5
NON-LINE HAUL 0.6 0.6 0.4 0.4 0.25 0.25 0.25 0.25
PARTICULATE
STANDARD
PERCENTAGE 0% 0% 0% 50% 50% 100% 50% 100%
OF NON-LINE HAUL
TRUCKS NEEDING
TRAP OXIDIZERS
LINE HAUL 0.6 0.6 0.4 0.4 0.25 0.25 0.40 0.40
PARTICULATE
STANDARD
PERCENTAGE 0% 0% 0% 50% 50% 100% 0% 50%
OF LINE HAUL
TRUCKS NEEDING
TRAP OXIDIZERS
Note: All regimes assume averaging of PM emissions. Even so, Regime
4a' is of borderline achievability, as it would require good engine-out
performance and traps providing high removal efficiencies.
All regimes assume standards of 6.0 and 0.6 grams/bhp-hr for the
period 1987 through 1989, with no need for trap-oxidizers.
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Exhibit 4.1
IMPACTS ON HDDE REVENUES
Six Year Totals, by Regime
4A 4C 2' 3' 4A'
(% of Total Revenues Shown Above Bara)
TOTAL REVENUE LOSSES BY HDDE PRODUCERS
(Millions)
SHORT TERM
1987 1988 1989
TOTAL
SUM OF SHORT AND
INTERMEDIATE TERM
All
Regimes
$188 $220 $248
$657
TERM
1990
1991
1992
TOTAL
2
$156
$156
$159
$470
$1,127
2'
$360
$387
$413
$1,159
$1,816
3
$156
$156
$159
$470
$1,127
3'
$415
$452
$488
$1,355
$2,012
4a
$208
$216
$225
$650
$1,307
4a*
$471
$518
$563
$1,552
$2,209
4c
$152
$153
$155
$460
$1,117
4c1
$419
$448
$477
$1,344
$2,001
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firms in each of the six years covered by the etudy.^/ Because the regimes do not
differ for the short term, the figures are not broken down by regime for the years
1987, 1988, and 1989. The total for this period is about two-thirds of a billion
dollars, or about four-and-one-half percent of the total projected engine revenues.
In absolute numbers, about 16,000 fewer engines and trucks would be sold each
year compared to levels that are otherwise projected to occur.
In the Intermediate term, the costs range from about a sixth to a half bil-
lion dollars per year, for a total of half to one-and-a-half billion dollars over
three years. The high end of this rate of loss (again, compared with baseline
EPA projections) approaches ten percent of engine revenues, equivalent to about
40,000 fewer trucks and engines per year. In terms of employment, according to a
very rough calculation (assuming $150,000 in value of shipments per production
worker) a revenue reduction of a half billion per year would be associated with a
loss of about 3,300 jobs.
Lowering N0X standards from 6.0 to 4.0 grams Increases revenue losses more
significantly than lowering PM standards. This is because tighter N0X standards
in and of themselves increase fuel consumption more rapidly than do tighter
PM standards, and also because a tighter NOx standard tightens the effective PM
standard—thereby increasing the need for traps.
4.2 Revenue Impacts by Firm
It Is somewhat hazardous to try to project which firms would be hurt moet
by the regulations, because (among other reasons) the most stringent standards
would not even take effect for several years, and there will be changes in markets
!/ The revenue reductions listed for the engine manufacturers overstate to
some degree the dollar magnitude of the reductions borne by the manufacturers.
Because the revenue reductions are based on changes in unit sales multiplied by
approximate retail prices, they include the revenue reductions that would be
suffered by vehicle assemblers and dealers. The reported percentage reductions
in revenues are not affected by this factor.
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and technologies taking place in the interim. However, based on current emis-
sions levels and technologies, it seems likely that one company, Detroit Diesel-
Allison, would be affected to a significantly greater extent than the others.
Exhibit 4.2 shows the total engine revenue losses over the six years broken
down by firm for each of the regimes. In fact, DD-A's engine revenue losses
are between fifty and one-hundred percent of the total, with IH and Cummins
gaining in some cases. In comparison to DD-A's projected revenues, its losses
are in the range of a fifth to a quarter of the total. In absolute numbers,
DD-A's losses might average between 12,000 and 16,000 fewer sales of engines
per year.
International Harvester would be likely to gain engine revenues of a few
percent, due to the fact that its engines are relatively new and clean. As
described below, however, these gains in engine revenues would be likely to be
offset—or more than offset—by losses in truck revenues. Cummins might gain
in some cases, but only marginally, and under other regimes it would lose reve-
nues.
4.3 Truck Assembly Revenue Reductions
Three of the HDDE manufacturers are also Important assemblers of completed
trucks. These firms, International, Mack, and GM (the parent company of DD-A)
would lose revenues due to reduced truck sales as well as because of reduced
engine sales. Exhibit 4.3 shows the six-year total revenue reductions for the
three firms. To avoid double-counting of losses from engine sales, the figures
in the table are for truck revenues net of engine values.
Translation of the revenue losses into reductions in profits is not easily
done with precision. When unit sales fall, revenue reductions are partly offset
by reductions in the total costs of production, as the use of labor, materials,
and other inputs is reduced. An analysis of the relationship of Cummins'
profits to its capacity utilization showed that prices are roughly twenty
percent above marginal costs. Of each dollar and twenty cents of revenues
lost, therefore, that company could reduce its costs by about one dollar
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Exhibit 4.2
IMPACTS ON HDDE SALES
By Firm, Selected Regime
£
-30%
—r~
IH
m
!
CUMMINS
£&& 4e'
CAT
!Z7n 2.3
RACK
prv
DD-A
2'
4a'
rrs-
4c
CHANGES IN ENGINE MANUFACTURER REVENUES UNDER DIFFERENT REGULATORY REGIMES
(Millions and Percent of Total)
REGIME:
4a
4a'
4c
4c'
CAT
($518)
-8.2%
($572)
-9.0%
($518)
-8.2%
($620)
-9.8%
($516)
-8.1%
($670)
-10.6%
($522)
-8.2%
($646)
-10.2%
MACK
($129)
-3.1%
($236)
-5.8%
($129)
-3.1%
($214)
-5.2%
($107)
-2.6%
($191)
-4.7%
($342)
-8.3%
($565)
-13.8%
IH
$129
3.4%
$150
4.0%
$129
3.4%
$133
3.6%
$77
2.1%
$115
3.1%
$345
9.2%
$395
10.5%
DDA
($1,200)
-21.1%
($1,283)
-22.5%
($1,200)
-21.1%
($1,270)
-22.3%
($1,190)
-20.9%
($1,255)
-22.1%
($1,357)
-23.8%
($1,525)
-26.8%
CUMMINS
$591
3.5%
$125
0.7%
$591
3.5%
($41)
-0.2%
$430
2.5%
($207)
-1.2%
$706
4.1%
$287
1.7%
TOTALS ($1,127) ($1,816) ($1,127) ($2,012) ($1,307) ($2,208) ($1,170) ($2,054)
-3.0% -4.9* -3.OX -5.4% -3.5% -6.0% -3.2% -5.6%
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17
Exhibit 4.3
TRUCK SALES LOSSES BY COMPANY
(Millions)
FIRM: MACK IH GM
REGIME
2 $150 $270 $162
2' $258 $474 $294
3 $258 $474 $294
3* $294 $540 $330
4a $186 $336 $188
4a1 $324 $606 $372
4c $132 $246 $156
4c' $270 $522 $330
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18
would suffer a reduction in profits of about twenty cents. Because this split
between profits and costs might not hold at different times and for different
firms, the reductions in net revenues shown in Exhibit 4.4 are given only
approximately, for a range of markups over marginal costs from ten to thirty
cents over marginal costs.
Manufacturers might also lose net revenues if they are forced to take
steps to reduce emissions that increase production costs more for their products
than for competing products (including, most likely, potential competitors as
well as existing competitors). These costs probably could not be recovered in
higher prices without counter-productive reductions in sales volume. The need
to add traps to an unusually large number of engines would be an important
Instance of this; other possible Instances would be less significant.
Unfortunately, it was not feasible to identify with any accruacy which engine
families would be particularly likely to need traps within the scope of this
project.
4.4 Losses to Economy
The revenue losses to the HDDE manufacturers would be among the most
dramatic impacts of the regulations, partly because they would be concentrated
on one relatively small sector of the economy. The economy as a whole would
also be affected. While the Impact on the national economy would be smaller in
percentage terms than the impact on the HDDE industry, the total dollar impact
would be much greater. Increases in fuel consumption resulting from the effects
of the N0X standards would be by far the most Important source of the co6ts
imposed on the economy. Fuel consumption losses due to traps, and due to the
substitution of less efficient gasoline engines for diesels in some small trucks
would also contribute to increased use of fuel. The total number of additional
gallons of fuel used by trucks sold in the years 1987 through 1990 as a conse-
quence of the regulations are shown in Exhibit A.5. The exhibit also shows the
breakdown of the total by the source of the consumption penalty. The magnitude
of increased fuel usage, from just over three to over seven billion gallons in
six years, may be compared to total Imports of fuel: 3.33 millions barrels
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19
Exhibit 4.4
ESTIMATE OF CHANGES IN NET REVENUES
(estimated to be between 10% and 30% of changes in gross revenues)
REGIMES: 2 2J 3 3J 4a 4a^ 4c 4c'
(in millions of dollars, over six years;losses shown in parentheses;
first and second line for each firm equal ten and thirty percent of changes
in revenues, respectively)
FIRMS
CAT (67) (83) (67) (91) (70) (100) (65) (92)
(210) (249) (210) (274) (210) (299) (196) (275)
MACK (40) (71) (40) (76) (44) (80) (59) (109)
(120) (214) (120) (227) (133) (239) (177) (326)
IH (3) (14) (3) (20) (12) (26) 19 7
(10) (42) (10) (59) (37) (77) 56 20
DD-A/GM (120) (128) (120) (127) (119) (126) (136) (152)
(360) (385) (360) (381) (357) (377) (407) (457)
CUMMINS 59 13 59 (4) 43 (21) 71 29
177 38 177 (12) 129 (62) 212 86
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20
«
C
o
^4
*
0
Sa
0
«
c
0
B
Exhibit 4.5
FUEL USE IMPACTS
Over Six Years, By Source cf Penalty
Z23 nox
(XM Fewer Diesels
Z777X PM
FUEL USE IMPACTS
(In Billions of
Gallons,
Over 6 Years)
REGIME:
2
2*
3
3'
4a
4a'
4c
4c*
SOURCE OF IMPACT
NOx REGULATION
3.11
6.79
3.11
6.74
3.10
6.68
3.13
6.71
SLOWER DIESELIZATION
0.15
0.21
0.15
0.24
0.17
0.27
0.17
0.27
TRAPS
0
0
0
0.27
0.25
0.54
0.10
0.38
TOTALS
3.26
7.00
3.26
7.25
3.52
7.49
3.40
7.36
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21
crude per day In 1983 V» which is 1.22 billion barrels per year, or about 51
billion gallons for that year. Six year's imports at that rate would amount to
about 300 billion gallons, so the regulations could add between one and two-and-
a-half percent to domestic demand for imported oil.
The sum of monetized fuel consumption increases, first cost increases, and
monetized performance penalties are shown in Exhibit 4.6. (Fuel cost increases
have been discounted at 15 percent annually to allow for the fact that costs
incurred in the future are less of a burden to society than are costs incurred
In the present.) This sum, combined with the net revenue losses to firms,
represent the real resource cost of the regulations. These cost Increases are
less than a tenth of a percent of GNP, and so would have an insignificant
effect on the price level even if passed through into consumer prices.
4.5 Impact on Dieselization
The increased costs of using diesel engines is predicted to slow down the
long-term trend away from using gasoline engines In trucks. With or without
the regulations, larger trucks (Classes 7 and B) are projected to be powered
almost exclusively by dlesel engines by the end of the period examined. The
advantages of diesels for Class 6 trucks, which are smaller and leBS intensively
used, are not as clear-cut. The projected shift toward the use of diesels in
this class is projected to be slowed down moderately or even severely by reduc-
tions in the diesel's fuel economy edge. The projections are shown for different
regimes in Exhibit 4.7.
5.0 OUTLINE OF METHODOLOGY
This section describes the steps taken in calculating the Impacts of the
regulatory regimes, and provides an example of the implementation of this
methodology for one engine family. More detail on the derivation of some of
the inputs to the calculations are provided in appendices.
1 Monthly Energy Review, May 1984, p. 40.
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22
Exhibit 4.6
CHANGE IN VALUE OF PRODUCTS
(Millions)
SHORT TERM
1987 1988 1989 TOTAL
All $790 $815 $848 $2,453
Regimes
INTERMEDIATE TERM
1990 1991 1992 TOTAL
2
$322
$336
$354
$1,011
2'
$1,240
$1,295
$1,367
$3,901
3
$322
$336
$354
$1,011
3'
$1,533
$1,601
51,690
$4,823
4a
$608
$635
$670
$1,913
4a'
$1,825
$1,906
$2,012
$5,744
4c
$447
$469
$496
$1,412
4c*
$1,657
$1,737
$1,838
$5,232
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23
Exhibit 4.7
IMPACTS ON CLASS 6 DIESELIZATION
mz -j
9sr. -
96% -
ft
»
94% -
m
»
•H
Q
92K -
T
90% -
6
S8%-
rt
0
R
862 -
B
B4% -
0
?
B2% -
u
b
eofs -
K
75% -
76% -
74% -
1967
am
1989
mo
mi
1992
CLASS 6 DIESELIZATION PERCENTAGES
2
2'
3
3<
4a
4a'
4c
4c'
1987
77.6
77.6
77.6
77.6
77.6
77.6
77.6
77.6
1988
81.7
81.7
81.7
81.7
81.7
81.7
81.7
81.7
1989
85.2
85.2
85.2
85.2
85.2
85.2
85.2
85.2
1990
89.4
87.7
89.4
87.0
8B.7
86.2
88.7
86.2
1991
92.6
es.fi
92.6
38.6
91.5
67.2
91.5
87.2
1992
94.9
91.6
94.9
90.0
93.7
88.1
93.7
88.1
CHANGES FROM
BASELIKE
1987
-2.48
-2.46
-2.48
-2.48
-2.45
-2.*8
-2.43
-2.4S
1988
-4.20
-4.20
-4.20
-4.20
-4.20
-4.20
-4.20
-4.20
1989
-5.12
-5.12
-5.12
-5.12
-5.12
-5.12
-5.12
-5.12
1990
-4.09
-5.80
-4.09
-6.53
-4.76
-7.26
-4.76
-7.26
1991
-3.14
-5.88
-3.14
-7.17
-4.18
-8.52
-4.18
-8.52
1992
-2.34
-5.58
-2.34
-7.26
-3.50
-9.13
-3.50
-9.13
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24
One of the basic aims of the analysis was to relate particular regulatory
regimes (sets of numerical standards for N0X and PM) to changes in revenues
for each HDDE manufacturer. (Other quantities of interest, such as changes in
fuel consumption and truck revenues were derived at various points in the
process of calculated engine revenue changes.) The chain of analytical steps
leading from the regimes to revenue changes may be broken down into two main
parts: the technological impacts of the regulations on the engines and their
performance, and the market Impacts of these changes in the engines.
5.1 Technological Impacts of the Regulations
The analysis of the technological implications of the regulations may also
be divided into two parts: deciding what changes would be likely to be made in
the engines in order to meet the standards, and then calculating the likely
effects of these changes on the engines' performance characteristics—their
power and fuel economy.
5.11 Changes Likely to be Made in Engines
A range of sources was used to construct a balanced picture of the probable
changes that would be made by the engine manufacturers In order to meet the
different regulatory regimes. The main reference was work done by ERC on the
feasibility and costs of N0X and PM regulations, supplemented by assessments of
EPA, the National Research Council of the AAAS, and informal discussions with the
manufacturers concerning changes specific to individual product lines needed to
meet particularly stringent regulations.
The various sources used were broadly consistent: traps and ECUs were
considered very Important elements in strategies to meet tight standards, but
were not expected to be available in the near term; EGR would be avoided unless
absolutely necessary; turbocharglng, charge-air cooling, and improvements In
charge air cooling would all be used where possible to lower emissions without
losing too much in the way of efficiency. The marginal N0X reduction technique,
Injection timing retardation, would be used sparingly because of its negatJ~~
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25
impacts on fuel efficiency. The precise assumptions made on the steps taken
for each engine family are reported in Exhibit H.2.
5.12 Fuel Consumption and Performance Impacts of the Changes
Estimates of the impacts of the engine changes on fuel efficiency are
among the most crucial steps in the analysis, because of the large increases in
costs that stem from even relatively small percentage changes in fuel consump-
tion. The method used to project changes in consumption, engine family by
engine family, started with a general relationship between N0X emissions targets
based on research by NRC and quantified by Sobotka and Co. for an earlier Btudy
of the effects of the regulation of HDDEs. This relationship was then shifted
in the direction of higher or lower fuel consumption penalties according to the
baseline N0X emissions level of the engine family considered, end the hardware
changes assumed to be made in it. The overall results of the procedure, in
terms of the average industry-wide fuel consumption increase projected for
various regimes and time frames are close to those estimated by ERC and other
observers. The projected increases In fuel consumption are higher than those
estimated by EPA largely because EPA uses current fuel consumption levels as
its baseline, rather than using consumption levels in the future in the absence
of controls as a baseline. The difference arises from the fact that progress
is expected in fuel efficiency both with and without further regulations.
Because of this, fuel efficiency might not drop much from one point in time to
another as regulations are phased in. The Impacts of the regulations should be
measured as the drop from what consumption could have been at the later time to
what it would be Including the regulations, and the indications are that the
impacts measured in this way are likely to be significant.
The addition of traps would be likely to add a small increment to fuel
consumption—on the order of 0.75% to 1.5% or 2.0%—due to slight increases in
back pressure on the engines and the probability that extra fuel will be needed
to regenerate the trapB periodically. The most promising designs for traps
should be able to keep this penalty to a minimum, and It has been assumed for
this report that the most promising designs will be used.
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26
The addition of traps is also expected to cut power output slightly—by
about the same amount as the reduction in efficiency. While it has been said
that this reduction probably would not be noticeable, it has been assumed for
this report that the loss of horsepower caused by the traps would be valued by
potential users of the engines at the same rate (in dollars per HP lost) as the
market values horsepower generally. More powerful engines sell at proportion-
ately higher prices, indicating that a one percent loss of power should be
valued as, roughly, a one percent drop in the market value of the engine:
buyers are assumed to act as though a $15,000 engine that loses 1% of its power
output has had its price raised by 1%, or $150 dollars.
The three types of penalties—N0X standard-induced fuel consumption
increase, trap-induced fuel consumption increase, and trap-induced performance
penalty, are combined into a single value by translating the fuel consumption
increases into dollar amounts. This is done by multiplying the percentage
changes in fuel consumption by an estimate of the total number of gallons used
by typical trucks in different size classes, multiplying by an estimate of the
price of dlesel fuel per gallon, and discounting the added fuel costs back to
the time of purchase of the truck to account for the fact that future cost
Increases are valued less highly than those in the present.
5.2 Market Impacts of the Reductions in the Value of the Engines
Sales of a particular engine family are assumed to be affected in three
ways by changes in their value (whether due to increased fuel consumption,
reduced power, or increases in costs of equipment like EGR or traps that would
not otherwise have been added). First, an engine family that Is affected more
seriously than competing engines (those similar in horsepower and/or price
range) is assumed to lose sales to other families even If the total number of
engines sold stays the same. The degree to which sales are lost by one engine
family is calculated using an estimate for the family-by-family price elasticity
of demand for engines, the magnitude of the cost implications of the regulation
relative to those facing competing engines, and the estimated price of the
engine.
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27
Second, even an engine that Is burdened no more heavily than the average
engine is assumed to lose some portion of its sales because the increases in
the costs of buying and operating trucks will depress the sales of trucks.
Slower truck sales will mean slower engine sales, with the degree of reduction
calculated using the average prices of trucks of different classes, the average
increase In the costs of buying and operating the trucks due to the regulations'
impact on the engines, and a measure of the demand elasticity for trucks.
Finally, even if the same number of trucks were sold, the number of diesel
engines could fall if more buyers chose competing gasoline engines instead of
more seriously affected diesels. This impact was estimated by comparing the
rate of diesellzation (shift from gasoline to diesel engines) with and without
the regulations. The model used to project changes in the use of diesels is a
straightforward logistic diffusion model (one that assumes that the spread of a
new, superior technique starts slowly, accelerates, and then tapers off as satur-
ation is reached) using the relative advantage of diesel engines as a parameter
determining the speed of the process. The model was calibrated using data on
the effects of fuel price increases—which increase the attractiveness of the
highly fuel-efficient diesel—on diesel usage rates.
Once the percentage changes in sales shares of each of the thirty-two
engine families in the study were calculated, they were multiplied by the
estimated retail price of the engines to yield changes in revenues for the
engine manufacturers, truck assemblers and dealers combined.
5.3 Illustration of Calculations
To illustrate the mechanics of the model used to calculate the effects of
the regulations, a typical engine family will be followed through the analysis.
The engine family used as an example is the Detroit Diesel-Allison V8-8.2, and
the year 1992 for Regime 4a' was chosen for the calculations.
The model makes use of a number of facts, taken from various sources or
calculated, about the engine family, the market, and the requirements of *"l"~
-------
28
regulatory regime. The V8-8.2 is a low-priced (about $8,000 retail equivalent),
low-powered engine, and has therefore been assumed to compete only with other
engine families used in Class 6 trucks. Changes assumed to be made in the
engine are based on the emissions standards of the regulatory regime. Regime
4a* requires N0X levels to be below 4.0 grams; this means that manufacturers
would have to aim at a target about a half of a gram lower to provide a safety
margin. PM levels would have to average 0.25, which would require traps on
virtually all engines (especially given the low N0X targets of this regime).
Thus, a trap is assumed to be added to the V8-8.2. EGR would probably be used
to some extent to meet the N0X target, and an ECU would, by 1992, be used on
this engine. This engine is not turbocharged, and so no cooling of the intake
air would be required.
In order to determine the impacts on truck sales, a truck demand elasticity
estimated to be -0.46, and an engine family demand elasticity of -5.0 are
entered. (See Appendices D and E.) From an estimate of yearly mileage and the
cost of fuel, total discounted fuel costs over the life of the truck are deter-
mined; $14,134 for a typical truck using engines the size of the V8-8.2. (Fuel
use for less-lntenslvely used Class 6 trucks—"light 6's" below—might cost
only $10,400. This distinction is important In calculating Impacts on the choice
of dlesel versus gasoline engines, since the competition between these two
types of engines is most intense for smaller and less-intensively used vehicles.)
The V8-8.2's projected share of the market in the absence of tighter regu-
lations, about 1.3% of a projected 434,000 heavy truck sales in 1992, is entered
to provide a basis for comparison.
The calculations take into account the impact of the regulations on the
V8-8.2 In comparison to the impact on competing families to estimate how the
baseline sales would change.
The V8-8.2 will have three added "costs" associated with Its purchase that
could affect its sales. First, its need for a trap and EGR will raise produc-
tion costs for the engine and the trucks in which it is used. Manufactur
-------
29
will have a tendency to pass these costs along if, as is likely to be the case,
all competing engines face similar added costs. The ECU assumed to be added to
the V8-8.2 by 1992 would probably have been added whether or not the regulations
forced the issue, for advantages divorced from emissions control. Thus, the
ECU's cost (and some of the fuel economy benefits that it would bring) are not
included in this assessment of the effect of the regulations. Second, the trap
is likely to cut its power output by about one percent, which would reduce the
engine's value by about $80. Third, and most significant, the trap and the more
stringent NOx standards will increase fuel consumption and therefore increase
fuel costs. The fuel penalty attributable to the trap is one percent of total
fuel usage, which would amount to about $140. The penalty attributable to the
N0X standards would be ten times as great, at about $1400. This penalty was
calculated by taking the baseline NOx level for this engine, subtracting almost
two grams to allow for the beneficial effects of a moderate degree of EGR, and
then estimating the fuel consumption increase that would be incurred in bringing
emissions down to the standard by changes in Injection timing. This procedure
generated a penalty of 10.9%; the ECU unit is assumed to be able to reduce this
penalty by one percentage point to 9.9%, and multiplying this factor by the
anticipated discounted fuel costs for typical Class 6 trucks of $14,134 yields
about $1,400.
The sum of the increased hardware costs, the two fuel penalties, and the
small loss in value due to the reduction in power equals $2,083. The impact of
this regulation-induced burden on the engine's sales depends largely on how it
compares to other engines in its class. Similar calculations for competing
engines show that the V8-8.2 is hurt somewhat more than average: the sales
share weighted average of regulatory burdens for engines in the price and power
range of the V8-8.2 yield an estimate of $1,845, or about $240 lower. Applying
an elasticity of -5.0 to this roughly three percent relative change in value
drops the sales of the V8-8.2 by about fifteen percent.V
V The loss is closer to eighteen percent after a normalization to ensure
that the sum of the sales gained by one group of engine families equals those
lost by the others, when total sales are held constant.
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30
The V8-8.2 sustains further sales losses as truck sales contract. For this
calculation, the average regulatory burden for Class 6-size engines is compared
to the average price of a Class 6 truck—about $29,000. The average burden of
$1,845 amounts to about six percent of $29,000, and the application of an esti-
mated elasticity for trucks of -0.46 implies that sales of Class 6 trucks would
fall by about three percent. Sales of the V8-8.2 are assumed to fall propor-
tionately.
Finally, the V8-8.2 is expected to lose even more sales because Class 6
trucks would install more gasoline engines and fewer diesels. The regulatory
burden falling on small diesels over the years 1987 through 1992 to reduce sales
of diesel for use in Class 6 trucks by about nine percentage points: sales in
the class might be 88 percent diesel in 1992 instead of the 97 percent projected
in the absence of further changes in regulations. Again, sales of the V8-8.2
are assumed to fall in proportion to the reduced 6ales of Class 6 diesels.
Overall, the sales of the V8-8.2 would be lower by about 28 percent.
Working from a baseline projection of its share of the market without the
regulations, and the revenues the industry receives per sale, this reduction in
sales translates into a loss of $13 million for the year. Similar calculations
for the other 31 engine families examined were used to estimate the overall
revenue changes for each of the five manufacturers of HDDEs.
-------
>?'
c^-
¦
fvSStf
a***8.
go«*
C$£
-------
A-l
Appendix A
PRICES OF ENGINES
Engine prices are not published, but it is possible to approximate them
closely enough to more than meet the requirements of this study. The Truck
Blue Book*/ lists the differences in trade-in value of diesel-powered trucks with
particular engines other than the standard engine, and these data can be used
to compute the approximate relative retail prices of the engines.
A. 1 Development of Relative Value Estimates
The 1983 edition of Truck Blue Book compares the values of one-year-old
1982 trucks with differing engines. Because diesel engines depreciate slowly,
(about ten percent per year for the engines shown) the differentials are likely
to be close to, though somewhat less than, the differences in prices of new 1982
trucks. These differentials for one-year-old engines, measured in 1982 dollars,
are taken to be close to the differentials for new engines measured in the 1980
dollars used in the study.
A.2 Transformation of Relative Value Estimates into Absolute Value Estimates
The Truck Blue Book comparisons provide only a set of comparative engine
values, not the absolute prices themselves. To find the prices, the difference
in price between identically equipped new gasoline and diesel trucks has been
used to find the difference between diesel and gas engines. The fact that gas-
oline engines cost roughly a third as much as comparable diesel engines^/ was
used to find the approximate price of gasoline engines, and this was in turn
2/ Truck Blue Book, National Market Reports, Inc., January, 1983.
£/ Regulatory Analysis and Environmental Impact of Final Emission Regula-
tions for 1984 and Later Model Year Heavy-Duty Engines, U.S. EPA Office of
Mobile Source Air Pollution Control, 1979, p. 22.
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A-2
used to fix the value of the lowest-priced heavy-duty diesel engines (those
that compete with heavy-duty gasoline engines) at 1.5 times the difference
between them and the price of gasoline engines. The estimated prices are shown
in Exhibit H.1.
A conversation with a representative of one of the firms, who did not wish
to be quoted, confirmed that this method generated a reasonably accurate range
for list prices of engines, but that discounts available to fleets could result
in some engines being sold for considerably less that these prices.
-------
B-l
Appendix B
ASSIGNMENTS OF ENGINE FAMILIES TO TRUCK SIZE CLASSES
It was important for the purposes of the study to be able to match engine
families with truck classes. A judgment as to which class or classes of trucks
an engine is likely to be used in helps to determine how intensively it will be
used, and hence the dollar impact of a given percentage increase in its fuel
consumption. It also suggests which other engine families it will be competing
with most directly.
Engines are not rated as being Class 6 or Class 8, but the standard engines
for trucks of various classes fall into reasonably consistent horsepower ranges:
engines over 230 horsepower, for example, are almost always found in Class 8
trucks, while engines under 200 horsepower are associated 'With Class 6 trucks.
This pattern guided the process of assigning engine families to classes: in
general, engines under 200 horsepower were assumed to be installed in Class 6
trucks. Those up to about 230 were assumed to be used in Class 7 trucks, and
the most powerful were assigned to Class 8. Those on the borderline between
classes (in horsepower, or in cost—since more expensive engines are likely to
be better suited to heavier-duty use) were assumed to compete about equally for
use in Classes 6 and 7, or Classes 7 and 8. Exhibit H.l shows the assumptions
made for the engine families used in the study.
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C-l
Appendix C
COST PASS-THROUGH ASSUMPTIONS
It is assumed for the purposes of projecting the impact of the regulations
that the manufacturers pass hardware costs along to purchasers under two condi-
tions. First, if the increases are no greater than the increases the firm's
competitors would have to make in response to the regulations, the costs will
be passed along even if the hardware added does not improve the product.
Second, if the added hardware adds value to the product in addition to helping
to control emissions, the cost increases will be passed along even if the added
costs are higher than those of other firms. These assumptions are based on the
proposition that pricing decisions must meet long-term competitive pressures.
It is not assumed, however, that the firms attempt to'fcushion their custo-
mers from increases in operating costs by cutting prices—even if their products
are more seriously affected by the regulations. It may be somewhat unrealistic
to assume that an engine that is noticeably less efficient will not be discoun-
ted in comparison to other models. However, the assumption that prices will
not be adjusted to account for differences in fuel efficiency is unlikely to
affect projections of the firms1 financial positions: so long as the firms set
prices and outputs so as to maximize their profits, minor price and output
differences will not change total profits appreciably. Discounts for relatively
less efficient engine families could eliminate sales changes, but total revenues
and net revenues would still be lower due to the price reduction.
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D-l
Appendix D
DEMAND ELASTICITIES FOR INDIVIDUAL ENGINES
It was not considered practical to try to estimate the demand elasticities
of each individual engine line of each manufacturer. Instead, a representative
value for a typical engine line was used, based on an indirect measure of demand
elasticity as seen by an engine manufacturer.
D.1 Basis for Calculation
The methodology is based on the fact that firms can maximize profits (acting
independently) by choosing their markup over marginal costs to be equal to the
inverse of their demand elasticity minus one: a price-taking firm seeing virtually
infinite elasticity has no markup, but sets output such that price is equal to
marginal co6t; while the markup increases without limit as elasticity approaches
one. To compare prices to marginal costs it is necessary to find the variable
component in engine manufacturers' costs, and to compare this to average revenues
from engine production. Because Cummins is the only truck engine manufacturer to
derive almost all of its income from engine production, the calculations were
performed for Cummins and generalized to the other producers—which is a close
approximation so long as Cummins' products are not seen as being any more or less
unique than the products of other manufacturers.
D.2 Indirect Calculation of Firm-Specific Elasticity
Calculations^/ showed that Cummins' prices allowed for a markup of only about
20 percent over marginal costs. This Implies that in Cummins' view, the demand
2/ Regression analysis of data on Cummins' costs, profits, and output over
the years 1964 through 1979 from Moody's showed that net earnings as a percentage
of total revenues rose by 0.13 percentage points for each 1% increase in output.
(Changes in real output were measured from an exponentially growing trend line,
which fit the data extremely well.) For Instance, from 2.4% of revenues at a
normal level of output (as measured by the trend in output) net earnings rose to
2.53% of output at sales equal to 101% of normal levels. Total profits, then,
increased by (2.53% * 101% - 2.4% * 100%), or (2.56% - 2.4%), or 0.16% of
(continued
-------
D-2
for its products is not inelastic enough to allow large markups without unaccept-
able losses of market share: for each one percent increase in its prices (assum-
ing the increase does not relate to an increase in quality) Cummins might expect
a five percent drop in sales. Elasticities in this range might well apply for
other manufacturers, whose demand elasticities could not be observed even in
this indirect fashion.
D.3 Relationship of Firm-specific to Engine-line Specific Elasticity
This calculation relates strictly to increases in the prices of all of a
company's products at once. Increases in the prices of one engine line out of
the several sold by each company might be expected to result in even greater
reductions in sales in that one line if different lines produced by the same
company were close enough substitutes for each other to compete directly. How-
ever, because each company produces engine families in various power and duty
ratings, which might not be close substitutes in particular uses, it seems
likely that most of the competition for a particular engine family comes from
similarlyrated engines made by other companies. Because of this, the measure
of the elasticity of all engines produced by a firm can also serve as an approx-
imate measure of the demand elasticity for individual engine families.
D.4 Possibility of Collusive Pricing
It could be argued that the firms do not try to maximize profits in a non-
collusive way, but rather collude to raise prices above the level that would
give the highest profits without colluding. It may be noted, however, that the
rather low markup employed by Cummins, a leading engine producer, testifies to
the unlikelihood that these prices are supported by collusion. In addition,
the possibilities for entry Into the dlesel truck engine market by other domes-
tic diesel engine makers, domestic gasoline truck engine manufacturers, and
(footnote continued)
revenues as revenues rose by 1Z, Of each added dollar of sales, then, 16 cents
are added to profits, while the remaining 84 cents represent recovery of added
costs. The addition to costs Is, of course, the marginal cost per dollar of
output, and the markup over marginal cost Is 16 cents on 84 cents, or about 19%
-------
D-3
foreign diesel truck engine manufacturers, would dampen the long-term attrac
tions of collusive behavior.
-------
E—1
Appendix E
DEMAND ELASTICITIES FOR TRUCKS
The price elasticity of demand for heavy-duty trucks used for this report
is 0.46.^/ The use of this value is based on an econometric analysis of changes
in heavy-duty truck prices, sales, and other factors. This analysis is described
below.
E.l Choice of Source of Estimate
Measurement of the elasticity of demand for trucks Is problematic for a
number of reasonB, including the fact that quality and product nix changes are
often confounded with price changes and that prices have not varied over a wide
enough range to allow their Impacts to be seen distinctly. Two alternatives to
a direct statistical measurement were exploredi an estimate based on the demand
for trucking services—from which the demand for trucks is derived—and the
reliance on an estimate used by EPA for an earlier regulatory impact analysis
(on truck noise regulations). Neither of these alternatives seemed appropriate
for this study. The previous EPA study employed a range of 0.5 to 0.9 which
seemed to be an overestimate, made to ensure that sales impacts of the noise
regulations under consideration had not been underestimated. The derived
demand approach, on the other hand, led to a very snail estimate of demand for
trucks that seemed to be an underestimate because it neglected the possibility
of using fewer trucks nore intensively to transport the same loads If the price
of trucks were to rise. An independent attempt to measure elasticity, on the
other hand, had the advantage that it allowed the effects of changes in GNP and
fuel prices on sales to be measured in the same framework.
E»2 Independent Variables
Yearly data from 1971 through 1981 on three factors expected to affect
truck sales were used.
}j Price elasticities of demand are virtually always negative, If define^" fl ]
in the same way that other elasticities are defined. It la customary, though,^-
to report them without the ainus sign, since there can be no confusion as t<
the actual sign of the effect of Increases In prices on sales.
-------
E-2
E.2.1 Prices of Trucks
Truck prices, which affect the capital costs of truck ownership, were
taken from a U.S. Department of Transportation document.^/ These data were
adjusted for inflation, as well as for changes in the mix of truck classes
sold. This last adjustment was necessary because there were wide swings in the
proportions of trucks of different sizes, and hence different price ranges, sold
during the 1970s, and the published data did not account for these changes.
Therefore, the published data would show an increase in the prices of trucks
sold if more Class 8s and fewer Class 6s were purchased, even if no individual
truck had changed in price. The analysis used a series of price changes weighted
by sales of classes having class-wide average prices taken from the same DOT
publication.
E.2.2 Fuel Costs
The cost of fuel affects the operating costs of trucks, thereby affecting
the profitability of the trucking industry and hence the demand for trucks.
Fuel prices were taken from Monthly Energy Review. Because diesel and gasoline
prices moved roughly together in the time period considered, and because gasoline
prices were more easily obtained in a continuous and consistent series, gasoline
prices (adjusted for inflation) were used for the analysis though both fuels
are theoretically Important in explaining truck sales over the period.
E.2.3 Business Cycles
General business conditions might be expected to influence the demand for
trucks both by changing the expectations of business volumes (and thus the
demand for trucking services) over the near term, and also by placing a premium
on liquidity, thereby discouraging expenditures on long-lived capital assets
like trucks. The data series used In the analysis was the real GNP series pro-
vided by the Department of Commerce, lagged by one year. It was found that GNP
£/ Transportation System Descriptors Used in Forecasting Federal Highway
Revenues, Federal Highway Administration, U.S. Department of Transportation
1981.
-------
E-3
lagged one year fit the data better than current GNP, which i6 understandable
given the facts that drops in business activity take some time to be noticed
and confirmed, plans take some time to be changed, and there is often a con-
siderable lag between the ordering and delivery of heavy trucks. This last
circumstance may be explained by the fact that the range of specifications open
to truck purchasers is large enough to make it impractical for most truck
assemblers to have finished trucks available for delivery; instead, trucks are
assembled only after they have been ordered.
E.3 Dependent Variable
The dependent variable was the sum of heavy truck registrations for Classes
6,7, and 8, for the years 1971 through 1981.
E.4 Results of Demand Analysis
The estimated regression equation was:
S - 550.9 - 1.33 Ff - 1.58 Pt + 15.6 ^GNP n - 11 R2 - .84
where S = Annual Sales, Classes 6,7, and 8, in thousands; mean ¦ 309
Pf * Real fuel price index mean *110
Pt * Real truck price index,
adjusted for changes in class mix mean ¦ 88.9
^GNP * Lagged percentage changes in real GNP
A high proportion of the variation was explained, as indicated by the of 0.84.
E.5 Interpretation of Truck Demand Results
The strong cyclical nature of truck sales is highlighted by these results.
In the range of the variables studied, a 1% drop in GNP is seen to produce a 5%
drop In sales of trucks In the following year. Fuel costs were also seen to
influence truck sales in the expected direction: with each one cent change In
-------
E-4
the price of fuel, sales dropped by 0.46%. This may be translated into its
equivalent price elasticity if a discount rate is chosen and if the lifetime
distribution of fuel expenses for trucks, compared with the prices of trucks,
are known. At a 10% discount rate this impact is the equivalent of a first-cost
demand elasticity of 0.4; for higher discount rates (closer to internal rates of
return and the cost of capital) such as 25%, the elasticity i6 a higher 0.6.
This relationship is shown in Exhibit E.l.
Given the information shown in Exhibit E.l, and a reliable estimate of the
price elasticity of demand for trucks, It would be possible to calculate the
discount rate applied to fuel costs by marginal truck consumers—those most
sensitive to changes in fuel costs. The regression analysis shows an ela ticity
of approximately 0.46, which would imply a discount rate of about 15% per year.
While no t-statistic was computed for the coefficient on which this was based,
it should be said that its sensitivity to small changes in the specification of
the regression equation suggested that a wide confidence band be employed with
the estimate.
Alternatively, by choosing a reasonable estimate of the discount rate
applied to operating costs, some light may be shed on the price elasticity
of demand for trucks using the information on the impact of changes in fuel
costs on truck sales. Such an approach would suggest that the elasticity
of demand is well below unity, but greater than 0.3. These calculations are
consistent both with the estimate from the analysis done for this study, and
with the estimates used previously by EPA.
It should also be noted that the changes in operating costs found in this
analysis affected the entire truck fleet because they resulted from increases
in the costs of fuels. The cost Increases Important for this study, however,
affect only new trucks. To some extent, therefore, the short-term elasticity
of demand will be greater for the operating cost changes considered in this
study, as repairs done on older trucks will be substituted for purchases of new
trucks with cleaner but less efficient engines.
-------
Exhibit E.l
FUEL DISCOUNT RATES VS. ELASTICITY
tL7
e
£ DJB
S>
t olb
BC
£ OJ3B
D
i 015
«
Q 0^45
k
° cu
E
5 0J33
t-
R
3 CL3
H
0.25
or. sr. lor. isx 20% sor.
DISCOUNT RATBS FOR PUBL COSTS
-------
Exhibit 1.1
It
0
1007.
DIESELIZATION BY CUSS
Historical (to 19B1) and Projected
t—i—i—f—i—i—i—r
72 74 76 78
i—i—i—i—i—i—i—i—i—i—r
B2 84 66 68 90 92
~ CLASS 6 + CLASS 7 « CLASS 6
-------
F-l
Appendix F
FUEL CONSUMPTION IMPACTS OF NOx CONTROLS
F.l Source of Estimate of Penalty at Varying N0V Standards
The actual magnitude of the consumption penalties resulting from various N0X
standards is unknown, and controversial. This report bases its estimate of the
magnitude on a National Academy of Science Report, N0Y Emission Controls for
Heavy Duty Vehicles: Toward Meeting a_ 1986 S tandard, V and work done by ERC for
EPA on the feasibility and costs of N0X and PM regulations for trucks. The for-
mer source was used to estimate the fuel economy impacts that the regulations
would have on engines if only relatively unsophisticated N0X control techniques
were used, while the work done by ERC was used to factot in the beneficial
effects of more modern techniques such as advanced charge-air cooling and
electronic control units.
In the NRC study, it was reported that an engine that would show no fuel
consumption increase in order to reach an emissions level of 8 grams (one having
baseline emissions of 8 grams) would suffer a 2.5% to 4% increase if its emis-
sions were forced to 6 grams; 7% to 12% at 4 grams, and 15% to 20% for a target
of 2 grams. The upper part of the range of fuel consumption increases would be
more likely to be seen if less sophisticated emissions reduction techniques
were used. For this analysis, we fit a function to approximate the relationship
between the target and the fuel consumption penalty for an engine with uncon-
trolled emissions of 8 grams. This "8 gram" formula takes the following form.
p ¦ a + b In (e/(2*t))
where p Is the Increase In fuel consumption in percent;
a Is equal to 17.9;
b is equal to 17.3;
]j NO,, Emission Controls for Heavy Duty Vehicles; Toward Meeting £ 1986
Standard, Motor Vehicle Nitrogen Oxides Standard Committee, Assembly of~Engi
neering, National Research Council, National Academy of Science, 1981.
-------
F-2
e is the base of natural logs; and
t is the target for N0X emissions in grams per brake horsepower-hour.
This function closely approximates the upper bound on the NAS relationship,
at least in the range of potential N0X targets, and thus represents the NOx/fuel
economy tradeoff for an engine with typical baseline emissions if no advanced
emissions control techniques were available. Estimates of changes in fuel con-
sumption for particular engines families, each with an individual combination
of baseline emissions and control techniques, were made by shifting the function
described above toward higher or lower fuel consumption penalties at given N0X
targets.
Influences of Baseline Emissions and Advanced Technologies on Changes in Fuel
Consumption
The increases in fuel consumption at various NQX emissions targets predic-
ted by the function described above can be expected to be less serious for
engine families that were lower—than-average emitters before the imposition of
stringent standards, and can also be expected to be lower for engines that
adopt advanced control technologies that are able to cut emissions to some
degree without increasing fuel consumption.
F.2 Method of Relating Baseline N0V Emissions to N0V Penalties
For this report, it is assumed that 49-state engines^/ that had lower N0X
emissions when tested in 1982 will also have lower regulation-induced fuel con-
sumption penalties. This assumption is supported by EPA in Ann Arbor.^/ These
engines are likely to be inherently cleaner, and, for a given N0X target, have
lower excess emissions to eliminate. If a given engine has baseline emissions
of only 6 grans, It will suffer no fuel penalty at a N0X target of 6 grans—since
no changes will have to be made in its design or operation to meet the standard.
£/ Engines certified for sale In California, which have already been
modified to meet stringent N0X standards, are not assumed to fit into the a—~
relationship.
2/ Conversation with Tim Cox, U.S. EPA Ann Arbor.
-------
F-3
An engine with a higher baseline emissions level—8 grams for example—will
suffer increased fuel consumption of about A percent according to the function
described above. Thus, the "6-gram baseline engine" would hold a four percent-
age point advantage over an "8-gram baseline engine" at a target of 6 grams.
In this report, the assumption is made that this A percentage point advantage
holds at other N0X targets as well. Thus, the effect of the lower baseline
emissions is to 6hift the function relating fuel consumption Increases to the
target downward by a constant amount.
Treatment of Advanced Emissions Control Techniques
Some techniques of emissions control are able tc reduce emissions without
adversely affecting fuel consumption. These techniques include turbocharging,
charge air cooling, advanced charge air cooling, EGR, and the use of ECUs. It
has been assumed for this study that the first four of these techniques effec-
tively lower the baseline emissions of the engine families to which they are
added, and that the ECU directly lowers the fuel consumption by an amount
dependent on the stringency of the target. The degrees to which each technique
Is assumed to change emissions, and the bases for the assumptions, are presented
below.
Turbocharging: One engine family, the Caterpillar 3208, is expected to be
replaced by a turbocharged version of the same engine as a result of the regula-
tions. A comparison of the emissions of the turbocharged and non-turbocharged
engines was the basis of the assumption that the turbocharger could reduce N0X
emissions by about 5 percent.
Charge air cooling: Comparisons among several similar engine families with and
without lntercoollng or aftercoollng led to the assumption that, on average,
charge cooling reduces baseline N0X levels by about 6 percent.
Improved Charge air cooling: ERC's Christopher Weaver's report on the effects
of N0X regulations was the source of the assumption that improvements In lnter-
coollng (using a circuit of cooling water or air separate from the engin-'-
-------
F-4
radiator, to lower the temperature of the charge further) would reduce baseline
emissions by fifteen percent (though even greater reduction might be possible)
EGR: Comparisons show that quite substantial reductions in N0X emissions—in
the range of 40%—can be achieved using EGR to a sufficient degree. According
to Weaver's report, and other sources, the use of EGR would be kept moderate to
reduce some of its anticipated problems. For this report, it has been assumed
that this moderate use of EGR would reduce baseline emissions by 20 percent.
ECU: Comparisons of the tradeoff between N0X emissions and fuel consumption
for a number of experimental engines with and without electronic control units,
reported by Weaver, provided the basis for an assumption about the ECU's influ-
ence on the tradeoff. It is assumed that the addition of these units would
shift the emissions/fuel tradeoff curve down by 3 percentage points if the N0X
target were about 6.0 grams, but only 1 percentage point if' the N0X target were
at or below 4.0 grams.
Average Fuel Consumption Increases
The application of the methodology described above, in which a general
emissions/fuel consumption tradeoff curve is shifted according to the character-
istic? of each engine family considered, resulted in fairly close agreement
with independent assessments of the near- and intermediate-term fuel economy
effect of the regulations. The table below compares the calculates fleet-wide
average increase in fuel consumption that would result from N0X regulations to
estimates by ERC:
FUEL CONSUMPTION INCREASE .
TIME FRAME N0X STANDARD
SCI
ERC
Near
Near
Intermediate
Intermediate
6.0
6.0
4.0
4.0
12.0%
7.1%
4.5%
1.5%
3.5% to 5.5%
0% to 1.5%
10% to 15%
4% to 8%
-------
F-5
F.3 Adjustment for the Difference Between the Standard and the Target
The estimation procedure described above is couched in terms of the target
for N0X emissions, not the standard. Because manufacturers will have to aim
below the standard in order to ensure that a high proportion of their engines
will meet the standards (in the absence of an averaging provision for N0X emis-
sions) it has been assumed that the target for 4.0 gram N0X standard will be
3.5 grams, and that the target for the 6.0 gram standard will be 5.4.
-------
G-l
Appendix G
FUEL CONSUMPTION IMPACTS OF PARTICULATE MATTER CONTROL
It may be that traps will hurt fuel consumption in engines with high base-
line emissions more than in those with low emissions, because of the need to
use a larger trap (causing more back-pressure on the engines) or the need to
burn off the accumulated soot more often (using more fuel for that purpose).
However, for this report, we relied on estimates made by Weaver of ERC that the
most promising trap technology would increase fuel consumption by 0.75 percent
for the largest trucks, and by 1.0 percent for smaller trucks.
-------
H-I
Appendix H
ENGINE FAMILIES CONSIDERED
Exhibit H.l shows the engine families analyzed, and the data concerning
them as used in the study. Shown are the baseline N0X values, calculated fuel
consumption penalties, estimated relative prices, approximate baseline share of
unit sales, and class assignments. Notes following the table describe some
assumptions made in assembling the data.
Exhibit H. 2 summarizes the changes in the engines that are assumed to be
made in the near and the intermediate term in order to comply with the standards.
-------
H-2
Exhibit H.1
ENGINE FAMILY DATA
ENGINE FAMILY HP Assigned N0X Estimated Estimated
Range^/ Class^*/ Level^/ PriceV Market Share^/
Caterpillar
3208
160-210
6,7
8.39
$10335
13.5
3208 T
175-250
7
8.14
$11785®/
1.8
3306
270
7,8
8.06
$16322'
0.2
3406
325
8
8.49
$18588
0.8
3406
350-400
8
8.23
$22442
3.5
3408
450
8
6.53£/
$26010
0.5
20.3%
Mack^/
10 (EM9-400)
392-450
8
7.8
$215956/
0.04
11 (EM6-237)
235
7,8
8.4
$17220'
4.4
12 (E6-350)2/
285-350
8
8.6
$20505
4.7
13 (E6-350)7/
300-350
8
7.4
$215956/
0.1
9.24%
DT-466B
180-210
6,7
8.16
$ 8130
16.8
9.0 liter
165-180
6
7.75
$ 8130
1.7
DTI-466B
210
6,7
7.66
$ 86301/
1.1
19,6%
DD-A (GM)
V8-8.2
130-165
6
8.20
$ 8130
1.39
V8-8.2 T
160-205
6,7
8.17
$ 9590
1.29
4L-53T
170
6
7.67
$ 8130
1.3
6V-53T
225
7
8.46
$11435
1.0
6L-7IN
260-275
7,8
8.26
$14770
1.9
8V-71N
245-316
7,8
7.73
$15960
0.9
6V-92TA
325
8
9.88
$15800
3.9
8V-71TA
305-318
8
8.16
$18355
1.1
8V-92TA
355
8
9.62
$21635
2.1
6V-71TA
210-250
7,8
8.32
$16840
0.9
6L-71T
260-275
7,8
9.61
$16840
0.8
16.52
Cununins
091
220
7
8.22
$15160
0.2
092A
293
8
8.28
$17555
12.1
092E
400
8
8.71
$23755
20.0
172C
350
8
7.37
$16660
0.3
192B
450
8
8.12
$25900
0.03
193
600
8
9.7
$32085
0.7
221
216
6,7
8.81
$ 8130
0.03
222
225
7
7.58
$11430
1.1
34.46%
-------
H-3
±/
EPA engine family designations.
£/
Includes EM6-285 engines.
2/
Includes EM6-250,275, and 300 engines.
*/
Method for generating price estimates is
described in Appendix
£/
The low value for this engine suggests that
it may have been set up
pass California emissions standards, in which case it would not be a valid base-
line emissions level for this study.
6/ Values for these particular low-volume engines wa6 unavailable. Values
used are those for highest value Mack engines provided; these are likely to be
underes timates.
Increased value of intercooler for this engine was not clear from data
In Truck Blue Book. Estimated premium of $500 was based on EPA's estimate of the
cost of charge cooling, with a mark-up added for overhead and profit.
£/ Increased value of turbocharger for this engine was not clear from data
in Truck Blue Book. Estimated premium of $1460 was based on difference between
DD-A's V8-8.2 and V8-8.2 T engines.
£/ These models were introduced since market share data was collected and
published. Estimate of share was made with some guidance from EPA, Ann Arbor.
*0/ Horsepower ranges shown are the ranges of horsepower among the models
tested.
1 J
i Baseline N0X levels for the engines are taken from Federal Certifica-
tion Test Results for 1982 Model Year. Values used are straight averages of N0X
levels for various engines tested within a given family, excluding engines with
N0X levels below 6.0 grams. These were excluded because of the very high like-
lihood, according to Tim Cox of EPA, Ann Arbor, that they were set up to pass
California emissions standards. Because this means that they were already
subjected to N0X controls, they do not represent accurately the baseline (uncon-
trolled) N0X emissions levelB of the engine family.
Market shares are based on Summary and Analysis of Comments on Pro-
posed Heavy-Duty Engine Emission Regulations, p. 220, for shares within firms
and data rrom the Motor Vehicles Manufacturers Association for manufacturer
shares. These were adjusted for expected gains in the dlesel share of smaller
trucks, resulting in greater sales for smaller engines. Changes in model
designations and availability, in addition to changes in consumer needs and
tastes render these estimates only approximate.
-------
H-4
Exhibit H.2
TECHNOLOGICAL STEPS ASSUMED TO BE TAKEN
Improved Moder-
ENGINE FAMILY Turbo- New Charge Charge ate Injector Small Large
Charger Piston Cooler Cooler EGR ECU Changes Trap Trap
Caterpillar
3208
n,i
n,i
n,i
i i
i
3208 T
n,i
n,i
1 i
i
3306
i i
i
3406
n,i
n,i
i i
i
3406
i i
i
3408
i i
i
Mack
10 (EM9-400)
n,i
n,i
i i n, i
i
11 (EM6-237)
n,i
n,i
i i n,i
i
12 (E6-350)
n,i
n,i
i i n,i
i
13 (E6-350)
n,i
n,i
i i n, i
i
IH
DT-466B
n,i
n,i
i i
i
9.0 liter
n,i
i i
i
DTI-466B
n,i
i i
1
DD-A (GM)
V8-8.2
I i
i
V8-8.2 T
n»i
n,i
i i
i
4L-53T
n,i
u,l
i i
i
6V-53T
n»i
n,i
i i
i
6L-71N
i i
i
8V-7IN
i i
i
6V-92TA
n,i
i i
1
8V-71TA
n,i
i i
i
8V-92TA
n,i
1 i
i
6V-71TA
n»i
i i
i
6L-71T
n,i
n,i
i i
i
Cummins
091
i i
i
092A
n,i
n,i
i 1
i
092E
n, i
i i
i
172C
n,i
n,i
i i
i
192B
n,i
n,i
I i
i
193
n,i
i i
i
221
i i
i
222
n,i
n,i
i i
i
Assumed Cost£/
$900 $5
$134
$82
$20 $202 $50
$445
$1618
"n" indicates UBe in the near term—1987 through 1989.
"i" indicates use in the intermediate term—1990 through 1992.
-------
H-5
*/ Costs were taken from EPA reports on compliance with regulations
Involving HC, CO, N0X, and particulate matter including Regulatory Analysis and
Environ mental Impact of Final Emission Regulations for 1984 and Later Model
Year Heavy-Duty Engines, Draft Regulatory Analysis, Environmental Impact State-
ment, and N0y Pollutant Specific Study for Proposed Gaseous Emission Regulations
for 1985 and Later Model Year Light Duty Trucks and 1986 and Later Model Year
Heavy Duty Engines, RIA to October 15 1984 Proposed Rulemaking re: Gaseous
Emissions Regulations for 1987 and Later Model Year Light-Duty Vehicles, Light-
Duty Trucks, and Heavy-Duty Engines; Particulate Emission Regulations for 1987
and Later Model Year Heavy-Duty Diesel Engines; and Particulate Control Technol-
ogies and Particulate Emissions Standards for Heavy Duty Diesel Engines (Draft),
Energy and Resource Consultants Inc., February, 1984 for costs of partuculate
traps (markup for dealers was subtracted).
Costs for charge coolers, Improved charge coolers, exhaust gas recircula-
tion, and electronic control units may be unreasonably low. This is not a
serious problem, however, since all of these technologies except EGR are likely
to be adopted for reasons other than emissions control in any case. Even if
actual costs for EGR are many times the most recent EPA estimate of $20 (an
earlier EPA document used $100) the hardware costs attributable to the regula-
tions are not likely to be significant.
EGR and traps are assumed to be used only in the intermediate term, and
only under some regimes. EGR would be used only if a stringent N0X standard
were set, and traps would be used only to the extent described in Exhibit 3.3.
-------
1-1
Appendix I
ANALYSIS OF DIESELIZATION
For the purposes of the report, it was necessary to project diesel pene-
tration in the absence of the regulations and to discern the impact on these
baseline projections that would result from changes in the advantages of dlesel
engines.
I.1 Diesel Penetration as a Diffusion Process
Diesel penetration among the three classes of trucks in the study was—like
diesel penetration among locomotives, and other new types of equipment—modeled
as a diffusion process. Students of these processes have found that the spread
of innovations, even those with marked advantages over thei* competitors, can be
slow: the economic system appears to adjust to improved techniques over a period
of years. The pattern of cumulative adoptions has been seen to approximate a
logistic function, a curve which rises slowly at first, accelerates, and then
begins to rise more slowly at it approaches an asymptote or saturation point.
The inherent advantages of the innovation in the eyes of its potential users
influences both the rate at which the degree of penetration of the innovation
proceeds along the diffusion curve, and the level of acceptance it can ultimately
reach.
It may be predicted that the magnitude of the economic advantages of the
diesel truck engine over the gasoline engines will influence the progress of its
diffusion. Analysis of past changes In dieselization rates In comparison with
economic factors allows the strength of the relationship between economic factors
and penetration to be estimated. This estimate in turn makes it possible to
project the Impacts of regulatory changes on future degrees of penetration.
Economic factors might influence both the ultimate degree to which diesels
penetrate the heavy-duty truck market and the speed with which this occurs. For
this study the simplifying assumption was made that diesels would ultimately be
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the overwhelming choice for all heavy-duty trucks.£/ The method for exploring
the effect of economic factors on the rate of approach to complete dieselization
is described below.
1.2 Model Used to Forecast Diesel Penetration
The model used to project diesel penetration over time has the following
form:
where
p ¦ diesel penetration—proportion of purchasers specifying diesel engines;
n « net economic advantage of diesel; and
a ¦ speed-of-adoption parameter.
That is, the penetration (or proportion of users buying diesels) at any time
is equal to the sum (or integral) of all changes in that penetration in the
past; and the changes are proportional to the net economic advantage of diesels
(counting their fuel economy advantages, and their initial cost and other disad-
vantages); times a parameter that determines how quickly penetration occurs,
all other things equal; times p*(l-p). The factor p*(l-p) accounts for the
fact that diffusion of an innovation takes place more slowly both at firBt (when
p is near zero) and also as the Innovation's saturation level Is reached (when
1-p Is near zero, since In this analysis the saturation level is assumed to be
100%). The parameter "a" —the slope parameter—was estimated by examining the
effects of past changes In the economic advantages of diesel on changes In
diesel penetration. The one factor that has changed dramatically enough In
£/ This assumption was based on analyses by Volvo and International
Harvester showing that pay-back periodB for diesels even in smaller heavy-duty
trucks, even if regulatory impacts were significant, would be very rapid. These
studies are presented on page C-l of The Effects of Potential EPA Regulations on
the Heavy Duty Vehicle Industry, Sobotka and Company for U.S. EPA, May, 15*82.
dt
1"1
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the past to allow an estimate to be made of its impact on diesel penetration is
the real cost of fuel. Accordingly, changes in the degree of diesel penetration
for the three largest classes of trucks over the years 1971 to 1981 were re-
gressed against the reel cost of motor vehicle fuel. Regressions showed that
the fuel cost variable explained a significant proportion of yearly variations
In diesel penetration (with less than a two percent chance that the results
occurred by chance, using a one-tailed t-test).
Translating this estimate of the effect of fuel costs on diesel penetration
into an estimate of the effect of more general changes in the economic advantage
of diesels on penetration involved calculating the dollar changes in the net
economic advantage of diesels caused by a given change in the cost of fuel.
This in turn required estimates of the number of gallons of fuel used by trucks
of various classes over their useful lives, discounted to account for the fact
that fuel savings in the future are not weighted as heavily as expenses in the
present. The results of these calculations allowed the specification of the
following formula for yearly changes in diesel penetration:
Change in p ¦ (p*p-l)*n*.506
where n ¦ d - changes in diesel costs due to regulations; and
d » $ 1987 for Class 6;
$ 3751 for Class 7; and
$ 5647 for Class 8.
These figures have taken into account the reduction in the advantages of
diesels caused by the erosion In the price advantage previously held by diesel
fuel. No attempt was made, however, to place dollar values on any possible
changes in diesel engine performance or durability In the future.
I,3 Baseline Projection of Dlesellzation
This formula allowed a projection of the degree of dlesellzation for the/^--—v
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1-4
that the formula projects virtually complete dlesel penetration for the largest
classes by the time the regulations go into effect, indicating that any major
changes in dieselizatlon caused by the regulations would fall on manufacturers
of Class 6 engines.
Actual figures for 1983, the most recent available, show that the method
for projecting dlesel pentratlon worked well for Class 6 trucks: the actual
figure for that year was 40 percent, as compared to the predicted 46 percent.
Diesel penetration among Class 7 trucks, however, was significantly lower in
1983 than was projected on the basis of data through 1981: 60 percent compared
to a projected 82 percent. This slowing of the dieselizatlon process may be
reversed in the future. If it is not, however, it would mean that gasoline
engines will be more competitive with diesel engines in larger trucks than they
seemed a few years ago. The regulations could then have A greater impact on
diesel penetration than is indicated by this report. Even in that case, however,
the impact on the rate of Class 7 dieselizatlon is not likely to be greater
than the impact on Class 6 dieselizatlon, described In Section 4.5.
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Appendix J
CAPITAL COSTS
Some of the costs associated with compliance with the regulations are fixed
in that they do not depend on the number of engines manufactured. These costs
Include research and development and certification expenditures. Differences
in these costs between manufacturers and engine families are not likely to be
reflected in prices of products (since marginal costs are not affected by
changes in fixed costs), and have therefore been left out of the study's analy-
sis of the relative impacts of regulations on the sales of the HDDE manufac-
turers.
The magnitude of these expenses are likely to be small on a per-unit basis.
Total costs were estimated by EPA £/ to be $107.2 million' for the years 1985
through 1992. This amounts to 13.4 million per year, over an average of more
than a third of a million units per year (by EPA's estimate^/). On a per unit
basis, then, the fixed costs amount to only about $40 per engine or truck.
Even if engine producers were forced to absorb all of these costs, then, they
would not be affected noticeably. Economic theory suggests that, to the extent
that these costs affect the average total cost of production of engines by an
efficient producer, they will be passed on to purchasers of engines and trucks.
The financial position of the Industry as whole would not, therefore, be affec-
ted at all except to the very small degree that truck sales were depressed by
the slight (less than a tenth of a percent) increase in prices.
*/ Near-term cost of NO^ and PM regulations were estimated to be $9.3 and
$19.7~"million, respectively; intermediate-tern (after 1989) costs for controlling
these pollutants were estimated at $28.7 and $49.5 million. These figures total
$107.2 million. These estimates, and estimates of truck Bales, were taken from
the RIA to October 15 1984 Proposed Rulemaking re: Gaseous Emissions Regulations
for 1987 and Later Model Year Light-Duty Vehicles, Light-Duty Trucks, and
Heavy-Duty Engines; Particulate Emission Regulations for 1987 and Later Model
Year Heavy-Duty Diesel Engines.
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Appendix K
ASSESSMENT OF MARKET VALUATION OF CHANGES IN HORSEPOWER
The analysis of the impacts of PM regulations attempted to account for
the effects that traps are likely to have on the power output of the engines
installed along with the traps. The traps absorb a small amount of the engine's
power, since their filtering action partially blocks off the exhaust stream.
Weaver of ERC surmised that the reduction in power would be about as large as
the reduction in fuel efficiency caused by the traps—between 0.752 and 2.02,
depending on the type of trap and its application. Weaver noted that this
reduction in horsepower would be too small to be noticeable. So long as truck
purchasers knew of the reduction in power, however, we see no reason why It
would not reduce their assessment of the value of the engine affected. We
assumed that the horsepower loss due to the trapB would be valued at the same
rate as the horsepower is valued generally, and began to investigate the market
relationship between horsepower and engine prices.
A simple regression analysis provided convincing evidence that engine
prices are roughly proportional to rated horsepower. The fitted equation,
illustrated in Exhibit K.l along with the data points, Is show below:
P - -$370,781 + 57.723 * HP
(-0.323) (15.319)
n « 32 ¦ 0.885 t-statistic in parentheses
where P " estimated retail price, derived as described In Appendix A, and
HP ¦ midpoint of advertised range of rated horsepower.
The regression shows that horsepower differences explain a high proportion of
price differences. This analysis was used as the basis of the assumption used
In the study that a one percent decrease in horsepower is equivalent to a one^ » \
percent decrease in the value of the engine, a relationship that closely appronP^~7
xlmateB the fitted relationship.
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Exhibit K.l
RELATIONSHIP OF POWER TO PRICE
»35
I®
«
0
Ki
C t20
a i!
8«
bf
*
eh
B
H flO
to
0 200 400 600
HORSEPOWER
— RBGRBSSDN BQUIIDN
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K-3
This relationship was used not only for estimating the effects of traps on
performance! but also for one significant special case. The Caterpillar 3208
is likely to be dropped due to the regulations, leaving only the 3208 T, the
turbocharged version of the engine, at the lower end of Caterpillar's line.
This situation has been treated analytically as though a turbocharger is being
added to the naturally-aspirated 3208 in order to reduce emissions. Since
competing engines will not have to add turbochargers, it would be difficult for
Caterpillar to pass the costs of this added hardware along to its customers if
the sole value of the turbocharger were that it could reduce emissions.
The turbocharger adds power as well, however, and this added power is
likely to have some value to purchasers. Current users of the 3208 engine
probably do not value increased horsepower to the same degree as most HDDE
users, it can be argued, since they have chosen not to pay extra for added
power. It has been assumed, for lack of more specific information, that the
Increased horsepower of the turbocharged version is worth half as much, per
horsepower, as the $57.72 per horsepower measured for the market as a whole.
The Increased value of the engine, estimated to be about $717, Is assumed to
permit Caterpillar to pass along the increased costs of producing the 3208 with
a turbocharger without significant losses of sales.
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