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EPAct Section 1541(c)
Boutique Fuels Report to
Congress
EPA420-R-06-901
December 2006
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EPA420-R-06-901
December 2006
EPAct Section 1541(c)
Boutique Fuels Report to Congress
Office of Policy and International Affairs
U.S. Department of Energy
and
Office of Transportation and Air Quality
U.S. Environmental Protection Agency
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EPACT SECTION 1541 (C)
BOUTIQUE FUELS
REPORT TO CONGRESS
SUBMITTED TO THE COMMITTEE ON ENERGY AND COMMERCE OF THE
UNITED STATES HOUSE OF REPRESENTATIVES AND THE COMMITTEES ON
ENERGY AND NATURAL RESOURCES AND ON ENVIRONMENT AND PUBLIC
WORKS OF THE UNITED STATES SENATE
EXECUTIVE SUMMARY
In compliance with Section 1541(c) of the Energy Policy Act of 2005 (EPAct), the
Environmental Protection Agency (EPA) and the Department of Energy (DOE) are submitting to
Congress this report regarding the impact of state fuel programs (approved under the Clean Air Act
Amendments (CAAA) Section 211(c)(4)(c)) on air quality, the number of fuel blends, fuel
availability, and on fuel costs. This report fulfills one part of a broader EPAct requirement for EPA
and DOE to analyze the affects of boutique fuels, in addition to other unique fuels, on the nation's
fuel system. Because of the potential importance of these distinct fuel requirements on the nation's
fuel supplies, in the spring of 2006 President Bush established the Boutique Fuels Task Force to
gather information from numerous stakeholders including state officials, refiners, public health
officials and automakers. The Task Force issued a report in June 2006. This Report builds upon the
Task Force findings. It provides an overview of the status of state boutique fuel programs,
describes important regulatory and legislative changes that have or will soon change the landscape of
the broader transportation fuels market, summarizes other critical market factors that have had a
significant influence on the U.S. transportation fuels sector, revisits the Task Force
recommendations from affected parties, and provides a plan that EPA and DOE will follow for a
more comprehensive assessment of the impacts of boutique fuels and other varying transportation
fuels programs, as outlined in EPAct Section 1509 (the Fuel Harmonization Study).
Significant changes have occurred in the last five years that have affected the refining industry's
ability to make and distribute boutique and other distinct fuels. While some legislative and
regulatory changes were specifically directed at boutique fuels, others had important indirect effects
on the boutique fuels. Legislative and regulatory changes have also occurred that have an effect on
fuel supply and emissions beyond the boutique fuels authorized by CAAA Section 211 programs,
such as the emergence of state renewable fuel requirements. These changes have occurred during a
period in which increases in demand have outpaced increases in U.S. refining, distribution and
storage capacity. These changes make it very difficult to rely on past experience with boutique fuels
to predict what the impacts on fuel supply and price might be in the future from the continued use
of boutique and other distinct fuels.
Within the context of this changed environment, the Boutique Fuels Task Force revisited
stakeholder concerns. The key findings of the Task Force were:
The U.S. gasoline production and distribution system is able to provide adequate
quantities of boutique fuels, as long as there are no disruptions in the supply chain.
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If a disruption occurs (for example, due to unexpected refinery or distribution
problems), it becomes more difficult to move gasoline supplies around the country
because of the limitations imposed by the boutique fuel requirements. Existing
authorities have been used to temporarily waive boutique fuel requirements during
times of supply disruption.
The Energy Policy Act of 2005 includes provisions that will limit the future growth
of new boutique fuels allowable under CAAA Section 211(c) and provides additional
authority to EPA to waive boutique fuel requirements when necessary to help
alleviate unexpected supply disruptions.
State boutique fuel programs have provided significant, cost-effective air quality
improvements. Any additional policies affecting boutique fuels should be done in a
manner that at least maintains these air quality benefits and avoids restricting state's
authorities.
Future analyses of potential changes to the number and types of fuels should utilize
the most up-to-date data and analytical tools. The joint EPA DOE Fuel
Harmonization Study required under Section 1509 of EPAct should ensure that all
aspects, including the impacts of fuel requirement modifications on air quality,
vehicle components and performance, fuel fungibility, fuel supply and fuel cost, are
appropriately addressed.
As part of the analyses of future fuel options, careful consideration should be given
to the possibility of new legislative authority that would allow for the adoption of
regional clean fuel programs. A mechanism to require the same boutique fuel in
geographic areas that cross state boundaries merits further study.
Renewable fuels are an important part of the nation's plan to reduce our dependence
on foreign oil. States are undertaking a number of actions to promote the use of
such renewable fuels and the federal government is implementing programs, notably
the Renewable Fuels Program established by EPAct, to do the same. Additional
study would be beneficial to ensure these programs are working together and will not
create undue impacts on air quality, fuel fungibility, fuel supply and/or fuel cost.
DOE and EPA have concluded that further evaluation is required to determine whether
additional legislative changes affecting boutique fuels beyond those already provided in EPAct are
desirable. Accordingly, DOE and EPA propose to coordinate the EPAct Section 1541 boutique
fuels report with the EPAct Section 1509 Fuel Harmonization Study. The Fuel Harmonization
Study will require significant analysis and substantial resources in order to update existing models
and fill in major data gaps. This includes, for example: a multi-year program to generate and
analyze the impacts of numerous fuel properties on emissions from engines and vehicles; and the
collection and analysis of data from the pipeline and terminal industries regarding how different fuel
types impact fuel distribution. Additional stakeholder involvement, particularly from the states, will
also be critical. In the course of the Fuel Harmonization Study, EPA and DOE will continue to
actively engage and seek input from state participants, industry stakeholders and others.
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TABLE OF CONTENTS
EXECUTIVE SUMMARY 1
TABLE OF CONTENTS 3
I. INTRODUCTION 4
BACKGROUND 5
REPORT ORGANIZATION 9
II. PAST EPA BOUTIQUE FUEL STUDIES (OCTOBER 2001) 10
III. RELEVANT FUEL CHANGES THAT HAVE OCCURRED SINCE 2001 13
REGULATORY CHANGES 13
LEGISLATIVE CHANGES 14
STATE FACTORS 15
MARKET CHANGES 16
CHANGES IN DOMESTIC PRODUCTION AND DISTRIBUTION CAPACITY IN RELATION TO
DEMAND 16
CHANGES In Import Supplj 17
CHAPTER SUMMARY 18
IV. BOUTIQUE FUELS TASK FORCE REPORT (JUNE 2006) 19
V. WORK PLANNED FOR EPACT SECTION 1509 STUDY 21
REQUIREMENTS OF THE ACT 21
Emissions and Air Quality Analysis 25
fJELS SUPPLY and PrICE ANALYSIS 26
VI. LIST OF ACRONYMS 29
APPENDIX A 30
FIGURE 1. U.S. GASOLINE REQUIREMENTS 7
FIGURE 2. STATE BOUTIQUE FUEL PROGRAMS AS OF MAY 2006 8
FIGURE 3. SUMMER U.S. GASOLINE REQUIREMENTS IN 2001 12
FIGURE 4. CONCEPTUAL ANALYTICAL APPROACH TO THE FUELS
HARMONIZATION STUDY 23
FIGURE 5. CONCEPTUAL ANALYTICAL APPROACH TO THE EMISSIONS AND AIR
QUALITY ANALYSIS 23
FIGURE 6. CONCEPTUAL ANALYTICAL APPROACH TO THE SUPPLY/PRICE
ANALYSIS 24
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I. INTRODUCTION
Over the past few decades, the number of distinct petroleum fuels produced and distributed has
increased, largely due to the environmental benefits such fuels provide. This growth in both the
number and location of different fuel specifications has caused changes to fuel production and
distribution. To improve the understanding of the effects of these changes and provide guidance
for future policy and legislation, Congress directed the Environmental Protection Agency (EPA) and
the Department of Energy (DOE) to analyze the supply and environmental implications of a subset
of these distinct fuels, referred to as boutique fuels. Boutique fuels are motor fuels that are a part of
any clean fuel program designed and enforced under state authority to reduce motor vehicle
emissions and improve air quality; approved by the EPA under the authority of Section 211 (c)(4)(c)
of Clean Air Act Amendments (CAAA) of 1990; and included in an EPA-approved State
Implementation Plan (SIP).
In particular, Section 1541(c) of the Energy Policy Act of 2005 (EPAct or Act) directs EPA and
DOE to jointly undertake a study regarding the impact of state fuel programs (approved under the
CAAA Section 211(c)(4)(c)) on air quality, the number of fuel blends, fuel availability, and on fuel
costs. Congress directed EPA and DOE to determine how to develop a Federal fuels system that
addresses air quality requirements, maximizes motor fuel fungibility and supply, reduces motor fuel
price volatility, including that which has resulted from the increase in boutique fuels, and to
recommend to Congress such regulatory and legislative changes necessary to implement such a
system. Furthermore, Section 1541(c) directs EPA and DOE to consider the impacts on overall
energy supply, distribution and use due to any recommended legislative changes. It also directs EPA
and DOE to coordinate the report required by this section with other studies required by the Act.
In developing the report, EPA and DOE are to use sound science and objective science practices,
consider the best available science, use data collected by accepted means, and consider and include a
description of the weight of the scientific evidence.
As this report will highlight, the impact that the various state fuel programs have on the
transportation fuels market is complex. EPA and DOE have completed several boutique fuels
reports in the past five years that address many of the issues identified in Section 1541(c) of the Act.
The most recent report, published in June of this year, provides important information and insights
on the relevant issues under Section 1541(c), however, it also illustrates that boutique fuel issues are
only a part of the broader issue of distinct fuel types, including additional renewable, diesel, and
heating oil fuels. In order to develop appropriate legislative recommendations, the impacts on air
quality, fuel fungibility, availability and supply, cost, price, and other factors have to be fully
evaluated, taking into consideration supply and environmental issues beyond the boutique fuel
subset. Given the conclusions of the past boutique fuel studies, a broader evaluation, as described in
Section 1509 of the Act (the Fuel Harmonization Study), is required to develop recommendations
for a Federal fuels system or legislative changes. This Report will address the requirements of the
narrower in scope Section 1541(c) by providing an overview of the status of state boutique fuel
programs. Specifically, this report describes important regulatory and legislative changes that have
or will soon change the landscape of the broader transportation fuels market and summarizes other
critical market factors that have had a significant influence on the United States (U.S.) transportation
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fuels sector. Furthermore, it provides a plan that EPA and DOE will follow to conduct a more
comprehensive assessment of the impacts of varying transportation fuels programs.
BACKGROUND
Most of the increase in the variation of petroleum fuel types has been with gasoline, the major
light-duty (i.e., passenger cars and trucks) transportation fuel used in the United States. Prior to the
CAAA of 1990, types of gasoline differed primarily by octane grade. Gasoline grades were generally
the same nationwide and through the seasons with only gasoline volatility differing by region and by
season.
During the late 1980s and the 1990s, Congress, EPA, states and other stakeholders realized the
strong impact certain motor vehicle fuel properties have on air pollution. Furthermore, controlling
various fuel properties was considered a very cost-effective way to reduce vehicle emissions that
contribute to air pollution, while providing widespread and immediate benefits. In response to the
serious air quality problems, which were occurring across the U.S., Congress, EPA, and many states
took a number of actions, which have both resulted in large emission reductions as well as an
increase in the number of distinct motor fuels.
The gradual increase in the number of unique fuel types first began in the late 1980s, with the
emergence of both new federal and state standards. Beyond the phasing down of lead in gasoline,
which began in the mid 1970s, quality controls on gasoline at the federal level remained constant
until new volatility controls were first implemented beginning in 1989. In addition, some states
began to require oxygenated gasoline in the winter months to reduce carbon monoxide (CO)
pollution.
Congress included new federal and state programs in the CAAA of 1990 specifically designed to
address our nation's serious air quality issues and the contribution from the mobile source sector.
EPA was tasked with developing and implementing new gasoline and diesel programs that would
provide significant air quality benefits and support progress in attaining the National Ambient Air
Quality Standards (NAAQS). Over a 5-year period from 1990 to 1995, in accordance with the
directives in the CAAA, EPA set standards for diesel fuel and gasoline including a requirement for
states to introduce wintertime oxygenated fuel in 1992 in certain areas exceeding the CO standards.
In 1993, the nationwide low sulfur (500 parts per million) highway diesel fuel program began, which
was designed to reduce the emissions from the on-highway sector of the heavy-duty diesel truck and
bus fleet. In 1995, phase 1 of the federal reformulated gasoline (RFG) program went into effect,
which was designed to reduce ozone-forming emissions and control harmful air toxics in the nine
worst ozone non-attainment areas.
States, with support of stakeholders including the oil industry, began to investigate and consider
controls on fuels as a way to support attainment of the NAAQS. States began to evaluate both the
existing menu of fuels, including federal RFG, and other potential fuel options. While the CAAA
allowed states having ozone non-attainment areas that were not required to use RFG to opt-in to
the program, many states selected their own cleaner-burning fuels tailored to meet their emission
reduction targets, with most selecting low Reid vapor pressure (RVP) gasoline standards, stopping
short of requiring cleaner burning Federal RFG. These are the so-called boutique fuels.
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Figure 1, below, illustrates the different types of gasoline present in the marketplace today,
including both boutique fuels as well as other available gasoline fuel types. For example, several
RFG types are shown. California's RFG is required to meet a more stringent standard than federal
RFG and is therefore a unique blend. Ethanol blends are distinct and have properties that vary
compared to non-oxygenated or MTBE-blended RFG and therefore require different distribution
methods.
Figure 2, below, illustrates the seven distinct fuels included in State Implementation Plans and
defined as boutique fuels which are used in 15 different areas.
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AMN
Legend:
I I Conventional
H Northern RFG
I I Southern RFG
I | CA Cleaner Burning Gasoline
I I Fed/CARFG
^ Northern RFG w/Ethanol
fifis Southern RFG w/Ethanol
RVP of 7.0psi w/Sulfur Content I I AZ Cleaner Burning Gasoline
RVPof7.0psi
RVPof7.2psi
RVPof7.8psi
Oxy Fuel/Ethanol Mandate
Oxy Fuel/7.0 RVP
I I Oxy Fuel/7.8 RVP
| | NV Cleaner Burning Gasoline Winter Gasoline
I I Texas Low Emission Diesel Fuel & State RVP
Controls of 7.8psi
I I Texas Low Emission Diesel and Federal RFG
or RVP Control
Figure 1. U.S. Gasoline Requirements
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Legend:
RVP of 7.0psi w/Sulfur Content
RVPofT.Opsi
RVPof7.2psi
RVPof7.8psi
I I Cleaner Burning Gasoline
| | Winter Gasoline
I | Texas Low Emission Diesel Fuel & State RVP
Controls ofT/jfogi
I I Texas Low Emission Diesel and Federal RFG or
RVP Control
Figure 2. State Boutique Fuel Programs as of May 2006
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Some fuels are easier to produce and distribute than others. Consequently, boutique fuel
requirements can affect the decisions of individual companies to produce, distribute, and market
them and affect the sources of fuel for particular areas. In some situations one fuel producer may
choose to optimize their operations around the production of one fuel type (e.g., low-RVP gasoline),
while others optimize their operations to produce another fuel type (e.g., conventional gasoline). In
other situations, the addition of new fuel grades may require the delivery and storage system to make
adjustments to accommodate more fuels. Most petroleum-based transportation fuels travel from
refineries through pipelines to local distribution terminals, where tanker trucks move the products to
nearby retail outlets. Pipelines ship different products sequentially in batches. For example, a
pipeline might ship gasoline, diesel fuel, kerosene, jet fuel, kerosene and heating oil. Each grade of
each type of fuel must be shipped in separate batches. As more fuel types evolve, smaller batches
result, which may require changes to pipeline operations. Each fuel type must also be stored in
separate tanks. Terminal operators must either build more tanks or hold less volume of each
product to accommodate the increasing number of fuel types.
As Figure 1 illustrates, fuel types are distributed in geographic regions of various sizes. In some
cases, such as portions of the Midwest and the East Coast, product must travel several weeks from
refineries on the Gulf Coast. If a region runs short of its special fuel or there is a supply disruption
(e.g. pipeline rupture), it cannot borrow from its surrounding areas without a special waiver. Thus,
the speed with which new supplies can be brought into such an area can be affected by its use of a
special fuel.
REPORT ORGANIZATION
This report begins in Section II with a summary of the boutique fuel-related studies done in
2001. Much has changed since then. Section III provides an overview of the relevant legislative,
regulatory, and petroleum market changes that have occurred since the 2001 studies, setting the
stage for a discussion of boutique fuel issues today. Section IV focuses on the current boutique fuel
perspectives, including a summary of a recent Presidential task force report on boutique fuels. This
chapter illustrates the complex nature of the issues, and provides the rationale for the work planned
in the integrated fuel harmonization study required under Section 1509 of EPAct 2005. Section V
summarizes a coordinated plan to determine how to develop a federal fuels system, provided the
necessary resources are available, and to prepare the Fuel Harmonization Study as required by
Section 1509 of EPAct.
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II. PAST EPA BOUTIQUE FUEL STUDIES (OCTOBER 2001)
The Environmental Protection Agency wrote two studies in 2001 that contain direct and indirect
analyses of boutique fuels.1 The first study was performed in response to a directive of the
President's 2001 National Energy Policy Report. The second study EPA performed focused on
improving the transition from the winter grade to summer grade standard for RFG volatility. These
studies are no longer fully representative of today's market situation given the implementation of
new federal and state legislation and regulations over the past five years. However, many of the
major issues highlighted in those reports are still applicable today.
In response to the President's directive, EPA issued a "Study of Unique Gasoline Fuel Blends
("Boutique Fuels"), Effects on Fuel Supply and Distribution and Potential Improvements" on
October 23, 2001.2 This study examined the motivation and causes for state boutique fuels,
assessed the impact of these fuels on the fuel production and distribution systems, and analyzed
potential ways to mitigate the impact of disruptions (due to, for example, natural disasters or other
unforeseen circumstances) by allowing for a more fungible system. In preparing this study, the
Agency sought input from the U.S. Departments of Energy and Agriculture, and more than 40
stakeholders.3 Figure 3, below, illustrates the U.S. gasoline requirements that were in place in the
summer of 2001.
The report concluded that despite the number of state and local fuel programs, the gasoline
production and distribution system would be able to continue providing adequate quantities of
boutique fuels, as long as there were no disruptions in the supply chain. If a disruption were to
occur, it would become difficult to move gasoline supplies around the country because of
constraints caused by the boutique fuel requirements. In addition, at the time, fuel providers were
concerned that recently enacted state laws to ban the use of MTBE would increase the number of
boutique fuels and present new challenges to the country's fuel production and distribution system.
The underlying assumptions for the analysis done in the 2001 study (costs, legislation and
regulations, emergence of renewable fuels, and so forth) have changed considerably, requiring a new
assessment of the fuels situation. As discussed in Section IV of this report, EPA and DOE believe
it is appropriate that a new, comprehensive analysis be performed to fully assess today's situation, as
part of the Fuel Harmonization Study.
1 While this section focuses on the 2001 EPA study, the Energy Information Administration provided a Service
Report on the topic: Gasoline Type Proliferation and Price Volatility, September 2002,
http://www.eia.doe.gov/oiaf/servicerpt/fuel/gasoline.html
2 Study of Gasoline Fuel Blends ("Boutique Fuels"). Effects on Supply and Distribution and Potential Improvements, October 2001.
3 Stakeholder comments on the 2001 study are available for review in the EPA docket (EPA-HQ-OAR-2002-0003).
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In the second boutique fuels related report released by the Agency in 2001, EPA investigated
seasonal transition concerns that arise when summer grade gasoline replaces winter grade gasoline.4
In the 2001 fuel transition study, EPA identified a set of administrative and regulatory options as
near term actions that could better facilitate seasonal gasoline transition and reduce the incentives
for low inventories. Some of the options discussed in the 2001 study have since been implemented
to address these transitional issues. While these actions have not resulted in a reduction of the
number of boutique fuels, they have served to allow for greater flexibility in the supply and
distribution of these fuels, ultimately relieving some of the transitional issues that affected these
localized market areas.
4 It is important to note that industry would make this seasonal transition at some level to support vehicle performance
and operational issues, regardless of whether any environmental regulations are in place. However, the RVP
specifications established by industry for vehicle performance reasons are not as stringent as those established by
regulation for environmental protection purposes.
5 Study of boutique fuels and Issues Elating to Transition from Winter to Summer Gasoline, October 2001,
http://www.epa.gov/otaq/regs/fuels/r01051.pdf.
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Legend:
Northern RFC
Southern RFC
CACBG
Fed/CARFG
_ 7.0RVP, 150ppmS
B 7.0 RVP
I1 7.2 RVP
| | 7.8 RVP
Figure 3. Summer U.S. Gasoline Requirements in 2001
I J Oxy Fuel/Ethanol Mandate
H Northern RFC w/Edianol
, ] Convenlioiial
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III. RELEVANT FUEL CHANGES THAT HAVE OCCURRED
SINCE 2001
Since the release of the first EPA boutique fuel study in 2001, several significant regulatory,
legislative, and market changes have occurred that have influenced the U.S. fuels market situation.
These factors have resulted in a significantly different fuels market today than at the time the first
2001 study was released. These changes are important to take into consideration because they can
influence decisions of states interested in boutique fuels as well as the relative costs and benefits of
those boutique fuels. This section summarizes the most significant regulatory and legislative
changes that have occurred since 2001 and provides a brief overview of how these changes have
impacted both the boutique fuels situation and more broadly, the U.S. fuels market. The legislative
and regulatory factors coupled with the various market factors, further demonstrate the need and
rationale for conducting a more comprehensive evaluation prior to proposing any legislative or
regulatory recommendations.
REGULATORY CHANGES
Tier 2 Vehicle and Gasoline Sulfur Standards and Toxics Reduction: The Tier 2 vehicle
and low sulfur gasoline program (65 FR 6698, February 10, 2000), went into effect in 2004. This
program includes more stringent emission standards for light-duty vehicles enabled by low sulfur
gasoline. This comprehensive program reduces smog-forming emissions from motor vehicles by up
to 95 percent. The Tier 2 program began to phase-in in 2004 and ultimately requires all gasoline to
average 30 parts per million (ppm) sulfur (fully phased in by January 1, 2011), whereas previously
only RFG required additional sulfur control in order to meet the emission performance standards
for RFG.
EPA recently proposed making additional changes to national gasoline requirements in order to
reduce mobile source air toxics. The proposed Mobile Source Air Toxics (MSAT2) Rulemaking (71
FR 15804, March 29, 2006) proposes standards to significantly lower benzene emissions. With
respect to gasoline properties, the EPA proposal would lower the benzene content in gasoline. If
implemented as proposed in 2011, this MSAT2 benzene content standard will replace the separate
air toxics performance standards currently in place for RFG and conventional gasoline, resulting in
the same gasoline air toxics standards nationwide, with the exception of California.
To the extent the MSAT2 program is finalized as proposed, then the combination of the Tier 2
and MSAT2 programs will have addressed two of the fuel parameters (sulfur and benzene) states
might otherwise have been interested in controlling in their own fuel programs.
Clean Diesel Programs: EPA's clean diesel programs require diesel fuel to meet a per-gallon
cap of 15 ppm sulfur (ULSD) beginning in 2006 for highway diesel fuel (66 FR 5002, January 18,
2001), in 2010 for nonroad diesel fuel (69 FR38958, June 29, 2004) and 2012 for locomotive and
marine diesel fuel. The new emissions standards established in these programs, coupled with new
cleaner diesel fuel, provide for significant reductions across both the on-highway and nonroad diesel
sectors. The phased introduction of these new diesel engines and fuels is intended to provide for a
smooth market transition. Specific flexibilities were included in the regulations to support and ease
any production and distribution issues that might arise. During the phase-in period for ULSD, some
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parts of the distribution system are choosing to accommodate two grades of on-road diesel fuel;
other parts of the distribution system are choosing to simply switch to ULSD. Ultimately, when
these programs are fully phased in, the entire transportation sector nationwide will be using one
diesel fuel. As with the Tier 2 and MSAT2 programs for gasoline, the federal action on diesel fuel
sulfur addresses a fuel parameter that states might otherwise have considered for control.
8-hour Ozone NAAQS: In 2004, EPA established a new 8-hour ozone NAAQS. These new
standards require states with areas that are not in attainment with the standard to submit a State
Implementation Plan to bring the ozone non-attainment areas into attainment. In some instances,
the geographic size of the new non-attainment areas may encompass only a few counties. As in the
past, some states may consider boutique fuels as a cost-effective solution to reduce air pollution and
help them to quickly come into attainment with the new ozone standard. The number of unique
fuels being used cannot increase due to the limitations on boutique fuels prescribed by EPAct 2005
and described below under Legislative Changes. However, the existing fuel programs may increase
in size or expand to new areas. The impact that the 8-hour ozone standard may have on states'
interests in boutique fuels and how this may affect the fuels market should be further explored and
understood prior to making any recommendations.
LEGISLATIVE CHANGES
EPAct Boutique Fuels List: The Energy Policy Act of 2005 included several provisions, which
specifically address boutique fuels. EPAct established a fixed limit on the number of boutique fuels
that EPA can approve. Specifically, Section 1541(b) required EPA to publish a boutique fuels list
based on fuels approved into SIPs as of September 1, 2004. On June 6, 2006, EPA published a
draft listing of boutique fuels for public comment (71 FR 32532). In EPA's proposed approach,
seven different fuel types used in 15 areas in 12 states were identified that have been implemented in
an EPA-approved boutique fuel program to support cost-effective attainment of the air quality
standards. Charts indicating the fuels contained under both interpretations of the statute are
included in the Appendices.
By publishing this list, the number and type of fuels, and to some extent geographical application
(by Petroleum Administration for Defense Districts (PADDs)) of these fuels in the U.S. market is
explicitly limited. EPA is permitted to approve state requests for fuel standards (waive the
preemption set for in CAAA Section 211(c)(4)(c)) only for fuels already on this list or by replacing
fuels on the list. Therefore, states seeking approval of new fuel programs generally would be limited
to fuel types already in existence within the PADD in which the state is located. The PADD
restrictions are a powerful constraint on the expansion of state fuel programs. It is important to
note that these restrictions apply in addition to the requirements set forth in CAAA Section
211(c)(4)(c), under which states must request approval for a program that is otherwise preempted
under the CAAA.
Removal Of The RFG Oxygen Content Standard: The CAAA required that RFG contain a
minimum content of oxygen. Refiners initially met this requirement primarily through the addition
of MTBE, a clean-burning fuel component. Until recently, MTBE was also used to increase octane,
and to reduce air toxic emissions. MTBE made up a significant amount of volume of the RFG
gasoline pool. In the late 1990s, concerns over the use of MTBE began to increase because of its
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potential for contaminating drinking water. Beginning in 2003, state MTBE bans resulted in a
substantial reduction in the use of MTBE and a subsequent increase in ethanol use to replace this
product.
In 2005, the enactment of EPAct subsequently removed the oxygen requirement for RFG. To
implement this change, EPA completed a rulemaking that took effect on May 5, 2006.6 This change
allows refiners and importers to produce or import RFG with or without oxygenate as long as the
gasoline meets all other RFG requirements. While removal of the oxygen standard provides
additional flexibility, enabling refiners and importers to produce and distribute RFG in the most
cost-effective manner, the industry's near-universal response has been to remove MTBE from the
market and replace its presence in RFG with ethanol. The result has been a movement toward one
type of RFG (ethanol blended) nationwide. However, the future economics of producing gasoline,
including the blending of ethanol, may be influenced by factors such as compliance with the federal
renewable fuels standard (RFS) program, the application of additional state renewable fuel program
requirements and incentives, and other such factors. The removal of the oxygen requirement in
Federal RFG enables refiners to produce either an oxygenated or un oxygenated RFG, however, as
in the past with MTBE-blended RFG, these two fuels are generally not fungible when ethanol is the
oxygenate of choice. The potential impact these factors have on the market should be further
explored and understood prior to making any recommendations.
Renewable Fuels Program: EPAct also set forth a new national renewable fuels program that
established renewable fuel volume requirements beginning in 2006. On September 6, 2006, EPA
proposed a regulation to implement the comprehensive program for 2007 and later. This important
new program is designed to help the U.S. reduce our reliance on foreign sources of energy. Ethanol
is expected to be the primary renewable fuel used to meet the requirement for the near future.
However, because ethanol must be transported and distributed separately due to its affinity to water
and the presence of water in the petroleum distribution system, the need to handle ethanol
separately will need to be taken into consideration. For example, the distribution system may need
to handle reformulated blendstock for oxygenate blending (RBOB) for ethanol, conventional
blendstock for oxygenate blending (CBOB), ethanol, and potentially non-oxygenated RFG
(discussed above). As with the other Federal and state legislation and regulations mentioned in this
section, closer evaluation of the current and future market dynamics, as well as how the RFS affects
air quality, will be necessary to support any recommendations.
STATE FACTORS
State Renewable Fuel Programs: Since 2000, several states have implemented renewable fuels
programs, and with the increases in petroleum prices in the past few years, more states are pursuing
renewable fuel requirements (Appendix A). While these state renewable programs are not boutique
6 Because California is treated differently under the Clean Air Act, EPA removed the oxygen content requirement for
California RFG through a separate action in April.
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fuels, they may play an increasingly important role in the nation's fuel system in the future.7 As with
the federal renewable fuels program, ethanol is likely to be the main renewable fuel used, at least for
a number of years, as other renewable fuels are less widely available and less economically aligned
with that of petroleum based fuels. While the federal renewable fuels standard includes a
requirement to establish a credit trading program to allow suppliers to use renewable fuels in the
most economic and efficient manner nationwide, state renewable fuel mandates could have an effect
of limiting some of this flexibility. Additional analysis is necessary to determine to what extent these
programs will affect the overall fuels markets.
MARKET CHANGES
In addition to new legislation and regulations, petroleum market changes have occurred that
could affect the supply system's ability to manage multiple, distinct fuel types, including boutique
fuels, in the future. These issues are discussed in more detail below.
CHANGES IN DOMESTIC PRODUCTION AND DISTRIBUTION CAPACITY IN
RELATION TO DEMAND
In recent years, petroleum demand growth has outpaced the growth in both refinery and
distribution capacity, reducing excess production and distribution capacity, which in turn, has
reduced supply flexibility to handle unexpected supply disruptions. Producing and distributing
boutique fuels and other fuel types is easier in an environment that has excess capacity than in one
where both production and distribution capacity are tight. At the same time, today's tight supply
environment is also resulting in plans for new investments to expand capacity. Increased
investments in capacity may work to relieve some of the supply and distribution pressures associated
with handling multiple fuel types in the future.
During the first half of the 1990s, refinery capacity in the U.S. changed very little. In the early
1990s, a recession held down demand growth, but capacity utilization still increased from 87 percent
in 1990 to 92.6 percent in 1994. By the second half of the 1990s, the U.S. was running its refineries
near capacity during the peak summer months. Demand continued to grow, but U.S. refining
capacity was growing as well. U.S. capacity growth seemed to keep up with demand increases, and
utilization remained around 93 percent. Since 2000, the refinery capacity/demand balance again
shifted. Demand growth continued, with demand for products from refineries increasing over one
million bpd from 2000 to 2005, but capacity increases slowed to grow only 0.6 million barrels per
day (bpd), with increasing imports making up most of the balance.
Another significant change has been that financial incentives for investments have improved
since 2000, and the industry is announcing plans for substantial capacity increases over the next five
years. Capacity expansion plans and estimates for capacity creep indicate U.S. refineries could
7 Boutique fuels are motor fuels that are a part of any clean fuel program designed and enforced under state authority
to reduce motor vehicle emissions and improve air quality; approved by the EPA under the authority of Section 211
(c)(4)(c) of CAAA of 1990; and included in an EPA-approved SIP.
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expand 1.7 million bpd from 2005 to 2010, which is grater than the Energy Information
Administrations^ projected demand increase for refinery products.
The growth in demand has also affected the distribution infrastructure. Several significant
pipeline changes have occurred. The Centennial Pipeline opened in 2002, which helped to ease a
critical transportation bottleneck in moving product from the Gulf Coast to the Midwest. This
pipeline had been a natural gas pipeline. Converting from a natural gas pipeline to a petroleum
product pipeline reduced many of the issues that arise when trying to construct a grass-roots
pipeline. At about the same time, the Explorer pipeline, which also moves product from the Gulf
Coast to the Midwest, expanded. Another major addition was the Longhorn pipeline, which began
operations in 2005. Initially a crude oil pipeline, it was extended and converted to handle light
petroleum products. The Longhorn pipeline moves products from refineries on the Gulf Coast to
West Texas. From there, shippers may use other pipelines to move product to New Mexico and
Arizona. Thus, this pipeline served to connect many Gulf Coast refineries to rapidly growing
markets in Arizona and Nevada. While we have not seen widespread public announcements in the
past year as with the refining industry, recently, Colonial Pipeline announced a planned expansion
from the Gulf Coast to the Southeast.
CHANGES IN IMPORT SUPPLY
Motor gasoline imports are a critical component of U.S East Cost supply, accounting for
approximately 25 percent of the East Coast market. Since 2000, U.S. gasoline imports have
increased 71 percent or about 500,000 bpd, to average almost 1.1 million bpd in 2005. In 2005, 41
percent of those volumes came from Western Europe, 26 percent came from Canada and the Virgin
Islands, and 12 percent from Eastern Europe. These regions were also the areas supplying the
largest growth volumes. Western Europe accounted for 62 percent of the growth, Eastern Europe
22 percent, and Canada and the Virgin Islands 13 percent.
As U.S. fuel quality specifications have become more stringent, some sources of imported
product have chosen not to invest to comply. Gasoline volumes from Brazil, for example, have
declined significantly in recent years, though this situation could reverse in the future. At the same
time, other sources of imported product that could meet U.S. specifications have shifted more
products to the U.S. In total, there has been a net increase in gasoline imports. Western Europe is
an area that has been able to supply a growing volume of high quality fuels, since the European
Union fuel specifications are similar to U.S. specifications, and since European demand for gasoline
is declining, freeing up more volume for export. The U.S. now depends on fewer import suppliers,
which may reduce flexibility to respond to unexpected changes in supply or demand.
Multiple fuel types also can have an impact on how importers respond to changes in the market.
Importers must determine which fuel types are needed before they can begin assembling cargoes.
Traders have adapted to these issues in various ways. Some are storing blending components that
can be used to produce RBOB or conventional gasoline as needed, to be able to respond to market
changes more quickly. While this can help traders meet specific fuel needs through more flexibly, it
can require the use of more tanks for the different blending components than if storing simply
RBOB and finished conventional gasoline, and total inventory volumes stored may be less.
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CHAPTER SUMMARY
In summary, since 2001, significant legislative, regulatory, and market changes have occurred
that affect boutique fuel incentives and industry's ability to handle these products. While some
legislative and regulatory changes were specifically directed at boutique fuel issues, many affected
boutique fuel incentives indirectly. Furthermore, some of the changes that have occurred may
increase the incentive for states to use boutique fuels, while others may decrease the incentive.
Legislative and regulatory changes have also taken place that could have an effect on fuel supply and
emissions beyond state boutique fuels, such as the emergence of state renewable fuel requirements
and the beginning of the ULSD program. Meanwhile, the petroleum market has experienced
shrinking excess capacity in the areas of refining, distribution and storage, and diminished sources of
product imports. At the same time, changing financial incentives are encouraging capacity
expansion. Additional analysis is needed to assess these many different and competing impacts on
the fuels markets.
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IV. BOUTIQUE FUELS TASK FORCE REPORT (JUNE 2006)
On April 25, 2006, President Bush directed the EPA Administrator to convene a Task Force of
States to review the variety of regulatory requirements related to fuels. The Task Force on Boutique
Fuels (Task Force), which included states, EPA, DOE, and the United States Department of
Agriculture (USDA), concluded with EPA issuing its most recent report on June 23, 2006.
The Task Force was charged with identifying opportunities to increase cooperation among the
federal government and states on gasoline supply decisions and to reduce the number of boutique
fuels. In addition, critical stakeholders, including those in the refining, marketing and fuel
distribution sectors, were provided with an opportunity to present their views and opinions to the
Task Force for evaluation and consideration.
The Task Force was specifically charged with reviewing the current boutique fuels situation in
the U.S., any actions taken since EPA last investigated and reported on the boutique fuels situation,
and the relevant provisions in EPAct. The process provided for stakeholder input prior to reporting
on any options, recommendations or further informational needs necessary to effectively address the
impact boutique fuels have on the U.S. fuels market.
Boutique fuels, as defined in the Task Force report (as in the 2001 study) are:
Fuels that are a part of any clean fuel program designed and enforced under state
authority to reduce motor vehicle emissions and improve air quality; and,
Approved by the EPA under the authority of Section 211 (c)(4)(c) of the CAAA of
1990; and,
Included in an EPA-approved SIP.
The Task Force gathered relevant information related to boutique fuels from participants
and stakeholders. Based on the information collected from the participants and stakeholders, EPA
prepared a Report8 to the President on potential actions and next steps to simplify the U.S. fuel
system, increase fuel supply, improve fuel fungibility, and encourage cooperation among the states
on fuel supply decisions. Specifically, the Report to the President noted the following conclusions
and recommendations:
The U.S. gasoline production and distribution system is able to provide adequate
quantities of boutique fuels, as long as there are no disruptions in the supply chain.
If a disruption occurs (for example, due to a natural disaster), it becomes more
difficult to move gasoline supplies around the country because of the limitations
8 Report to the President Boutique Fuels Task Force, June 2006,
http://www.epa.gov/otaQ/boutiQue/resources/bftf62306fmakeport.pdf.
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imposed by the boutique fuel requirements. EPA has used existing authorities to
waive boutique fuel requirements temporarily during such times of supply disruption.
State boutique fuel programs have provided significant, cost-effective air quality
improvements. Any actions to modify the slate of existing boutique fuels or limit a
state's ability to adopt fuel specifications should be done in a manner that at least
maintains the air quality benefits and avoids unnecessarily restricting state authority.
Any future analysis of potential changes to the number and types of fuels must
utilize the most up-to-date data and analytical tools. In particular, the 2008
EPA/DOE Fuel Harmonization Study should ensure that the impacts of fuel
requirement modifications on air quality, vehicle components and performance, fuel
fungibility, fuel supply and fuel cost, are appropriately addressed.
As part of the analyses of future fuel options, careful consideration should be given
to the possibility of new legislative authority that would allow for the adoption of
regional clean fuel programs. Cleaner burning fuels used in geographic areas broader
than states merit further study as an additional option for addressing fuel supply and
fungibility concerns.
Renewable fuels are an important part of the Administration's plan to reduce U.S.
dependence on foreign oil. States are undertaking a number of actions to promote
the use of such renewable fuels and the federal government is implementing
programs, notably the Renewable Fuels Program established by EPAct, to do the
same. Additional study is necessary to ensure these programs are working together
and will not create undue adverse impacts on air quality, fuel fungibility, fuel supply
and/or fuel cost.
The Task Force Report is the first step of a comprehensive effort to reassess issues related to the
nation's fuel supply. It is a key part of the broader process in which EPA and DOE, in response to
EPAct requirements, will be analyzing the affects of boutique fuels, in addition to other unique
fuels, on the nation's fuel system.
The observations and recommendations resulting from the Task Force Report have provided
useful input into developing the plan described in Section V of this report, regarding the future Fuel
Harmonization Study. The report also serves as a foundation for developing this report. Additional
stakeholder involvement, particularly from the states, on this plan will also be critical. In the course
of the Fuel Harmonization Study, EPA and DOE will continue to actively engage and seek input
from interested state participants from the Task Force as well as other interested stakeholders.
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V. WORK PLANNED FOR EPACT SECTION 1509 STUDY
REQUIREMENTS OF THE ACT
In addition to the Boutique Fuels study required under section 1541 of EPAct, section 1509 of
EPAct further requires EPA and DOE to submit a joint report to Congress on the results of a Fuel
System Requirements Harmonization Study by June 1, 2008. When completed, the Fuel
Harmonization report may contain recommendations for legislative and administrative actions that
reflect the following principles: improve air quality, reduce fuel costs to consumers and producers,
and increase fuel supply liquidity. The recommendations shall take into account the need to provide
advance notice of required modifications to refinery and fuel distribution systems in order to ensure
an adequate supply of motor vehicle fuel in all states. In developing the report, EPA and DOE shall
consult with the Governors of the States, automobile manufacturers, state and local air pollution
control regulators, public health experts, motor vehicle fuel producers and distributors, and the
public.
The Fuel Harmonization Study is required to cover standards relating to RFG, volatility
(measured in RVP), oxygenated fuel, diesel fuel, and any other requirements that vary from state to
state, region to region, or locality to locality. The study must assess the effect the variety of these
fuel standards have on the following:
Supply, quality, and price of motor vehicle fuels available to the consumer;
Achievement of national, regional, and local air quality standards and goals and
related environmental and public health protection standards and goals (including
the protection of children, pregnant women, minority or low-income communities,
and other sensitive populations);
Domestic refiners, the fuel distribution system; and industry investment in new
capacity;
Emissions from vehicles, refiners, and fuel handling facilities;
The feasibility of developing national or regional motor vehicle fuel slates for the 48
contiguous states that, while protecting and improving air quality at the national,
regional, and local levels, could enhance flexibility in the fuel distribution
infrastructure and improve fuel fungibility; reduce price volatility and costs to
consumers and producers; provide increased liquidity to the gasoline market; and
enhance fuel quality, consistency, and supply;
The feasibility of providing incentives, and the need for the development of national
standards necessary, to promote cleaner burning motor vehicle fuel; and
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The extent to which improvements in air quality and any increases or decreases in
the price of motor fuel can be projected to result from the following programs, rules,
and requirements:
o EPA's Tier 2/Gasoline Sulfur requirements for conventional
gasoline and vehicle emission systems,
o EPA's on-road and off-road diesel rules,
o The RFG program,
o The renewable fuels program established under section 1501 of
EPAct,
o State programs regarding gasoline volatility, and
o Any other requirements imposed by the federal government, states
or localities affecting the composition of motor fuel.
OVERVIEW OF PLANNED APPROACH TO THE 1509 STUDY
The Fuel Harmonization Study is much broader in scope than the 1541 study, including
analysis of more distinct fuel programs and requirements. It also requires a comprehensive
evaluation of fuel supply, cost, and emission impacts associated with these distinct fuel programs
and, in particular, how these impacts might change under possible legislative or administrative
changes.
Figure 4 illustrates the conceptual analytical approach, which will be used for the Fuel
Harmonization Study and some of the key interrelationships in the fuel system. As illustrated,
two major areas for analysis are interrelated: (1) Emissions and Air Quality and (2) Supply and
Price. Potential scenarios to be evaluated generally would be directed towards affecting either
fuel characteristics or supply, with accompanying impacts on both emissions and price. For
example, a scenario could be evaluated that requires a single very clean fuel, which might have
the largest improvement on air quality and the lowest price volatility, but might have the highest
increase in costs for the consumer. Scenarios will be developed to explore the implications of a
range of potential options and other factors. However, as Figure 5 (Emissions and Air Quality
Analysis) and Figure 6 (Supply and Price Analysis) begin to illustrate, these scenarios are
complex.
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Scenario Definitions
/\
Fuel Characteristics
i
Impacts on:
Emissions
Air Quality
Health/Welfare
Supply
i
Impact on Price:
Level & Volatility
Figure 4. Conceptual Analytical Approach to the Fuel Harmonization Study
State Initiatives
Fuel Specifications
Number of Fuel Types
Size & Location of
Geographic Fuel Islands
Fuel Characteristics
Impacts on:
Emissions
Air Quality
Health/Welfare
Figure 5. Conceptual Analytical Approach to the Emissions and Air Quality Analysis
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Figure 5, while still a simplified diagram, expands further the Emissions and Air Quality
Impacts Analysis, which will estimate the air quality impacts and the impacts on health and
welfare. Some of the information generated for each individual scenario analysis will also be
needed as an input for the Supply and Price Analysis. As described in more detail below, in
order to generate the emission outcomes, significant testing and analysis must be done to
develop the relevant vehicle and engine emission information. Work must also be done to
develop various fuel types and volume for future situations in enough detail to capture the
potential fuel specifications and geographic use of those fuels. The Emissions and Air Quality
work will also require estimates regarding what will occur in the area of state fuel initiatives,
whether they are boutique driven, renewable or other.
Fuel specifications
Number of fuel types
Size & location of
geographic islands
Other factors such as
demand, crude price,
State initiatives.
Supply
Impact on Price:
Level & Volatility
Figure 6. Conceptual Analytical Approach to the Supply'/Price Analysis
Figure 6 expands the Supply and Price Analysis in a similar fashion, illustrating the input
information required in order to ultimately evaluate the supply and price implications. The
focus of this area (in red) is to generate refinery and distribution capacity and cost impacts for
various scenarios, and determine the corresponding changes in factors that would ultimately
impact availability or reliability of supply. The diagram shows that, dependent upon the scenario
being analyzed, state initiatives may be an input into the analysis along with other supply
assumptions such as demand growth, and crude and product prices. It also shows the
information needed for and generated from the Emission and Air Quality Analysis supporting
the Supply and Price Analysis.
The number of scenarios to be analyzed for the Fuel Harmonization Study must be limited
due to the complexity of the analysis. EPA and DOE will attempt to identify the most
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important variables for consideration, and structure a set of scenarios to capture a range of
policy options and potential impacts in order to provide meaningful policy recommendations.
Before performing these analyses, we must better understand the current situation, which
will require significant work to collect and update data in a number of areas, such as vehicle and
engine emissions and performance data. We also will need to evaluate past market behavior as
fuel types increased, such as in the area of supply distribution, in order to help understand
potential future market responses.
In overview, to analyze how policy options may affect air quality and consumer prices, the
Fuel Harmonization Study will explore:
Changes in the nature, size, number, and location of distinct fuel-type areas
The potential changes to refining and distribution system capacity resulting from such
modifications to the fuel system
The potential local and nationwide impacts on the costs of producing and distributing fuel
resulting from such modifications to the fuel system
The impact such fuel system modifications may have on the reliability of production and
distribution capability during times of disruption
The local and nationwide impacts on emissions and air quality resulting from such
modifications to the fuel system
The sensitivity of these impacts to various critical assumptions, including future expansion
of the fuel production and distribution infrastructure, changes in future fuel demand, and
changes in future crude oil costs.
The tradeoffs among the impacts for different scenarios
The subsections that follow describe in detail those things that EPA and DOE believe are the
most important to analyze as part of the Fuel Harmonization Study. They also describe the nature
of the data and information that will need to be collected in order to carry out these analyses.
EMISSIONS AND AIR QUALITY ANALYSIS
To ultimately assess the air quality and associated fuel supply and price impacts of future
strategies, new vehicle and engine emission factors that represent the current fleet must first be
established. Today's vehicle fleet is much different from the fleet used to establish current estimated
relationships between fuel specifications/properties and emissions.
Following the 1990 CAAA, fuel effects were well characterized for passenger vehicles utilizing
model year 1990 technology. Under Section 211(k) of the CAAA, RFG was required to result in
reduced emissions relative to emissions from baseline or representative model year 1990 vehicles. In
support of the RFG rulemaking, EPA developed the "Complex Model" to predict emissions based
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on fuel properties (such as sulfur, benzene, aromatics, olefins and RVP) that are readily measurable
and technologically feasible to control. The data gathering effort necessary to develop this model
was enormous, involving both the auto and oil industries and costing approximately $35 million.
Since the development of the Complex Model, with the exception of studies on the effects of
gasoline and diesel fuel sulfur (in which EPA, DOE, and industry collectively spent roughly $10
million), only very limited data collection or analysis efforts have been undertaken to examine the
effects of fuel properties on vehicle emissions.
Looking back to the 1990 model year, vehicle technology has changed dramatically. Auto and
engine manufacturers have used a combination of higher catalyst precious metal loading, improved
catalyst durability, close-coupled catalysts for faster catalyst light off, and electronic controls to
greatly improve air-to-fuel ratio control (for achieving hydrocarbon (HC), CO, and oxides of
Nitrogen (NOx) exhaust emission reductions). Evaporative emissions have also been reduced since
1990 by the use of electronic controls versus earlier vacuum-controlled designs. Additionally,
evaporative emissions have been reduced by better canister designs, the use of less permeable
materials in vapor control lines, and the addition of a system to collect refueling emissions. Another
significant change between 1990 and today's vehicles has been the implementation of an electronic
onboard diagnostic control system to monitor the performance of critical emission control
components. This system detects failures in individual components and, above prescribed
thresholds, indicates an increase in emissions and the need for service to repair components.
As the Complex Model only covered light-duty gasoline, Tier 0 (model year 1990 technology)
vehicles under summertime conditions, a significant amount of additional data will be needed on
light-duty as well as heavy-duty vehicles and nonroad applications for current engine technology
(both gasoline and diesel). Furthermore, a significant amount of data will be needed under summer
and winter conditions to form a sound data foundation on which analysis can be performed and
conclusions drawn. A comprehensive test program, likely of similar magnitude to that which went
into developing the Complex Model (e.g., $35 million), is necessary to fill these data gaps. Such a
comprehensive test program will require substantial resources as requested in the President's 2007
Budget. The test program must assess the impacts of fuel parameters directly affected by the
current distinct fuel types (e.g., RVP, sulfur, ethanol content, and biodiesel content), as well as fuel
parameters which are impacted indirectly (e.g., benzene, aromatics, olefins, and distillation) in order
to allow for an assessment of the cause and effect relationships on emissions.
Once these cause and effect relationships are established, then models can be developed to allow
assessments to be performed of a range of possible changes to the current slate of distinct fuel types
across the country. Using these emission impacts, air quality modeling can then be performed to
evaluate their impact on future ozone and PM (particulate matter) air quality. Outputs from air
quality models can also be used to consider the impact of various fuel scenarios on human health
and welfare.
FUELS SUPPLY AND PRICE ANALYSIS
The fuel Supply and Price Analysis requires work in several areas: refining, distribution, and
import supply. As shown in Figure 6 in red, for each scenario, the work will be focused on
projecting distribution system and refinery costs and capacity impacts, import supply availability and
basic changes to supply reliability, which will be the basis for estimating price and price volatility
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impacts. Basic scenario inputs for this part of the analysis will include information from the
Emission and Air Quality Analysis, such as the fuel specifications, number of fuel types, and the
location and size of various fuel type geographic areas. The underlying petroleum market conditions
such as demand and crude price will also be needed. It will be critical to separate the external
market factor impacts on cost, reliability, and price from the impacts of the distinct fuel types being
evaluated. For example, product prices are a function of a number of factors, including worldwide
supply and demand for crude oil and the local, national, and even worldwide supply and demand
balance for refined products.
Cost, Capacity and Import Availability
Similar to the Emission and Air Quality Analysis, the first step in the Supply/Price Analysis will
be to analyze current conditions and the relationships among the various elements of the petroleum
supply system as they relates to boutique and other distinct fuels.
The impacts of multiple fuel types on transportation, distribution, and storage must be studied
thoroughly. This is true not only in the case of individual distinct fuel specifications, but also in the
case of how a unique fuel specification might affect the distribution of other products. Before any
recommendations can be made on changes to the slate of fuels, a much better understanding is
required of how changes in the number of fuels and in the number and size of fuel-type geographic
regions may affect the cost and ability to move and store product, and thus affect overall
distribution costs and capacity.
Quantifying delivery and storage system issues will require working with pipeline and terminal
operators and marketers on a local and regional basis to assess their experience with how a changing
slate of fuels has historically and in the future would likely affect their capacity, flexibility, and costs.
As changes to their marketing agreements and practices are also a viable response to a change in fuel
slates, it will be important to review past industry responses as a means of projecting into the future.
For example, the response of the distribution system may result in "over-compliance" on the part of
the fuel producers. Over-compliance can occur when distribution and storage infrastructure do not
accommodate a full fuel spectrum. In such a case, suppliers may provide all customers with the
cleanest fuel required because of the lack of storage space for multiple fuels.
To assess refinery production cost impacts, refining models and cost databases will be updated
to include the current number, type, and volume of motor vehicle fuels produced, the current and
planned production capacity and other assumptions concerning feedstocks supply. This will require
incorporation of cost information associated with the newest technologies and equipment changes
to meet the latest processing requirements, as well as updated information on refinery operational
changes, such as changes in purchasing materials from outside of the refinery to meet product
specifications, including renewable fuel components. Unlike many historical refinery production
analyses, the Fuel Harmonization study will require looking at impacts on different types of
refineries rather than an aggregate production analysis, in order to consider both the policy
implications and marginal cost changes that affect price. Again, data and models will need to be
adjusted to deal with different refinery types.
An increasingly important factor in assessing impacts on fuel supply in the U.S. is having a
proper understanding of the import and export market. As U.S. demand has continued to grow
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beyond domestic refining capacity, the ability of imports of finished gasoline and diesel fuel to
supply the U.S. market has become more critical. The result is that changes in gasoline and diesel
fuel demand around the world have a much more direct impact on overall U.S. supply. A
consequence is that changes in fuel specifications in the U.S. and abroad can cause significant
changes in the import and export market; creating new markets for some and closing down markets
for others. Incorporating these changes into our analysis will allow a better understanding of what
might happen to import availability in the future under different fuel scenarios and whether further
legislative changes would affect our sources of supply.
Reliability of Supply
Reliability of the U.S. supply system can be evaluated with probabilistic techniques which can
incorporate variables associated with events or changes at the refinery, in the distribution system,
and even from the availability of imports.
At the refinery, a better understanding is required of how producing one high quality fuel versus
an array of gasoline types affects production reliability. For example, if one refinery process unit
goes down, what is the projected impact on production.
Reliability of the distribution system involves a variety of dimensions that must be explored to
assess how reliability changes among different fuel scenarios. For example, pipelines move product
in batches. The evolution of increasing the number of distinct fuels serving smaller demand areas
means many pipelines now carry more products. Smaller volumes of each product are potentially
stored in the different demand regions. Under these conditions, to maintain reasonable inventory
levels and prevent inventory outages, tank turnovers may occur more often, which means the time
intervals between product shipment arrivals may be smaller. Scheduling becomes more complex,
and even without major disruptions, there is the potential for increasing probability of outages. In
the past, this may not have reached critical constraints. In some cases, suppliers working with
pipelines and terminal operators found various means to solve critical pinch points in the system
with operating changes such as using product exchanges to allow one terminal to carry one product,
while another terminal carries the second product. In-line blending was added to allow terminals to
drop mid-grade gasoline and blend it as needed from conventional and premium gasoline at the
retail pump. As we look ahead, understanding the distribution capacity, efficiency, constraints, and
ultimately probability of outage will help us determine how fuel harmonization issues may affect
distribution system reliability.
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LIST OF ACRONYMS
bpd
CAA
CAAA
CBOB
CO
DOE
EPA
EPAct
HC
MSAT
MTBE
NAAQS
NOx
PADD
PM
ppm
RBOB
RFC
RFS
RVP
SIP
ULSD
USDA
VOC
barrels per day
Clean Air Act
Clean Air Act Amendments
conventional blendstocks for oxygenate
blending
carbon monoxide
Department of Energy
Environmental Protection Agency
Energy Policy Act of 2005
hydrocarbons
mobile source air toxics
methyl tertiary-butyl ether
National Ambient Air Quality Standards
oxides of nitrogen
Petroleum Administration for Defense District
particulate matter
parts per million
reformulated blendstocks for oxygenate
blending
reformulated gasoline
renewable fuels standard
Reid Vapor Pressure
State Implementation Plan
ultra-low sulfur diesel
U.S. Department of Agriculture
volatile organic compounds
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APPENDIX A
Table 1. State Biofuel Standards Enacted
State
Hawaii
Iowa
Louisiana
Minnesota
Legislation Status
Legislation Enacted mid-
1990s; Administrative
Rule Signed 9/14/04
Enacted 5/31/06
Enacted 6/13/06
Enacted in 1997;
revision 5/12/05
Enabling Statute(s)
Title 15. Chapter 35.
Para. 15.35.3
Governor's Press Release
HF2754
HB685
SF4
Biofuels
Included
Ethanol
Ethanol;
Biodiesel
Ethanol;
Biodiesel;
Alternative
Renewable
Fuel
Ethanol;
Biodiesel
Content Requirement & Effective Date
85% of all gasoline must contain at least
10Vol% ethanol by 4/2/06. Exemption if
(a) competitively-price ethanol not
i 11 /L\ _J 1 J 1 '
available or (b) undue hardship.
All motor fuel (gasoline + diesel) contain
10Vol% biofuel (ethanol + biodiesel) by
1/1/09, increasing acording to an annual
schedule to 25Vol% by 1/1/20.
2Vol% total gasoline contain ethanol after
rate of 50 MMGY ethanol production in
state; 2Vol% total diesel contain biodiesel
after rate of 10 MMGY biodiesel
production in state; 2Vol% total motor fuel
to be alternate renewable after rate of 20
MMGY production in state. All 3 take
effect 6 months after production targets
reached.
All gasoline contain ethanol at least
9.2Vol% and not more than 10Vol%. If all
gasoline by 12/31/10 is less than 20Vol%,
subject to Federal approval of E20, all
gasoline must contain ethanol between
18.4Vol% and 20Vol% by 8/30/13.
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State
Missouri
Montana
Washington
Legislation Status
Enacted 7/10/06
Enacted
Enacted 3/30/06
Enabling Statute(s)
HB1270
Governor's Press Release
SB293
(Summary only)
SB6508
Biofuels
Included
Ethanol
Ethanol
Ethanol;
Biodiesel
Content Requirement & Effective Date
All gasoline contain 10Vol% ethanol by
1/1/08. Exemption (a) for premium grade
gasoline and (b) if ethanol more expensive
than oil-based gasoline.
All gasoline contain ethanol at 10Vol%
after state's ethanol production reaches
rate of 40 MMGY level.
All gasoline contain 2Vol% ethanol by
12/1/08 ramping up to 10Vol% by 2012.
All diesel contain 2Vol% by 12/1/08
ramping up to 5Vol% by 2012.
Table 2. Standards Pending Final Approval
State
California
Colorado
Idaho
Illinois
Legislation Status
Executive Order
(Target vs. Standard)
Passed Legislature;
vetoed by Governor
Passed by Senate;
pending in House
Passed by Senate;
pending in House
Enabling Statute(s)
Biofuels
Included
Ethanol;
Biodiesel
Ethanol
Ethanol
Ethanol;
Biodiesel
Content Requirement & Effective Date
Targets to produce and all gasoline contain
biofuels at minimum of 20Vol% by 2010,
40Vol% by 2020, and 75Vol% by 2050.
75Vol% of all gasoline contain ethanol at
10Vol% by 1/1/07.
All gasoline contain ethanol at 10Vol% by
60 days after state ethanol production
reaches rate of 30 MMGY.
All gasoline contain 10% ethanol by
volume by 1/1/08 increasing to 15% by
1/1/12
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State
Indiana
Kansas
New Mexico
Pennsylvania
Virginia
Wisconsin
Legislation Status
Enacted (Study
vs Standard)
Not passed
Not passed
Proposed by Governor;
to be taken up by
Legislature
Proposed by Governor;
rejected by Legislature
Passed by House;
amendment pending in
Senate
Enabling Statute(s)
AB15
Biofuels
Included
Renewable
Fuels
Ethanol;
Biodiesel
Ethanol;
Biodiesel
Ethanol;
Biodiesel
Ethanol
Ethanol
Content Requirement & Effective Date
Study committee created to find most
effective way to implement RFS under
EPACT 2005
All gasoline contain 10Vol% ethanol and
all diesel fuel contain 2Vol% biodiesel by
1/1/10.
All gasoline contain 10Vol% ethanol and
all diesel fuel contain 2Vol% biodiesel by
1/1/09.
All gasoline contains ethanol at a 'certain
percentage' and all diesel contain biodiesel
at a 'certain percentage' by unspecified
target date.
All gasoline contain ethanol at 10Vol% 12
months after state's ethanol production
reaches rate of 300 MMGY level for at
least 3 months.
All gasoline contain ethanol at 10Vol% by
10/1/07. Standard would be suspended if
E10 mandate "contributes to or will
contribute to a violation of federal ambient
air quality or visibility standards."
Last update: 7/13/06.
Source: Special Report: United States State Renewable Content Standards, International Fuel
Quality Center, Hart, June 6,2006; STATUS; 2006. State by State Ethanol Handbook
American Coalition for Ethanol, 1/06; Renewable Fuel News and World Refining &Nem Today, Hart.
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