2. Summary of the U.S. Final Rule on Sulphur in On-road Diesel Fuel

The US rule4 reduces the current 500-ppm limit for sulphur in on-road diesel fuel to 15-ppm. The 15-ppm limit comes into effect on June 1, 2006 at refineries and points of import. To allow for the diesel fuel produced or imported just prior to this date to flow through the distribution system, the effective date is July 15, 2006 at diesel bulk storage terminals and September 1, 2006 at retail and wholesale facilities. The US rule exempts exports of diesel fuel and diesel fuel used in research and some military applications from the sulphur requirements. Diesel used in Guam, American Samoa, and the Northern Mariana Islands is also exempt.

The EPA's challenge in setting the diesel requirements was to ensure that 15-ppm diesel fuel will be widely available in all parts of the US while maintaining adequate overall supply of on-road diesel fuel. To this end, the EPA provided some flexibility for a small portion of the on-road diesel pool during a 3½ to 4 year transition period. In 2010, at the end of the transition period, all on-road diesel fuel must meet the 15 ppm limit.

The key flexibility provisions, the so-called "safety valve", allow a refiner or importer between June 2006 and December 2009 to have up to 20% of their annual on-road diesel pool with a sulphur level above 15 ppm during the transition period. (Such volumes must meet the current 500-ppm sulphur limit.) In addition, a refiner or importer may run up to a 5% deficit (e.g., produce up to 25% of its on-road diesel fuel with a sulphur level above 15 ppm) in a year but must make up the deficit the following year (e.g., by producing less than 15% of its on-road diesel fuel with a sulphur level above 15 ppm).

A regional banking and trading program for sulphur credits is an important complement to the EPA's "20%" provision. Between June 2006 and December 2009, refiners and importers can generate one sulphur credit for each gallon of 15-ppm on-road diesel fuel that is in excess of 80% of their on-road diesel pool. In addition to the above, sulphur credits can be generated between June 2005 and May 2006 for each gallon of 15-ppm diesel sold as 15-ppm diesel, and between June 2001 and May 2005, for each gallon of 15-ppm diesel used in an engine or vehicle meeting the 2007 emission requirements (this latter provision is very restrictive and unlikely to generate many credits).

Sulphur credits can be banked for later use or traded to other parties. Until December 2009, sulphur credits can be used to comply with the 80% pool requirement for 15-ppm diesel, including making up any deficit. Credits can also be used to extend production or importation of 500-ppm diesel fuel until May 2010. Credits can only be traded twice (so that the EPA can effectively track the credits) and are restricted to be used in the same PADD5 (petroleum supply) region of the US as they are generated in. All credits expire on June 1, 2010.

In addition to the safety valve provisions, the US rule includes a number of other flexibilities during the transitional period. These are primarily targeted at small refineries.

The US diesel rule, consistent with the US gasoline sulphur rule, defines small refining companies as those having less than 1500 employees corporate-wide and a corporate-wide crude oil processing capacity of less than 155 000 barrels per day. Refineries owned by a company meeting this definition have the option of:

Under the US gasoline sulphur rule (passed in December 1999), refineries in seven Rocky Mountain states were allowed extra time to meet the sulphur in gasoline requirements. Consequently, without special provisions in the new US diesel rule, these refiners would have had to reduce sulphur in both gasoline and diesel fuel at nearly the same time. The US diesel rule, therefore, allows Rocky Mountain refineries an extra two years to meet the US gasoline requirements provided that they produce 100% 15-ppm diesel starting June 2006.

It should be noted that Canadian requirements for sulphur in gasoline will be fully implemented by the end of 2004 and thus do not overlap with the 2006 implementation date for 15-ppm diesel fuel.

In Alaska, unlike other states, only a small amount (about 5%) of the total distillate pool is used in on-road diesel vehicles. Alaska is currently exempt from the federal limit of 500 ppm for sulphur in on-road diesel fuel.

Alaska will be subject to the new 15-ppm limit. However under the US rule, the Alaskan government may apply to be subject to a special state-developed program for the introduction of 15-ppm diesel. The provisions of the US federal diesel rule will apply in Alaska unless the state applies for a special program by April 2002 and the EPA approves the application.

Under the US rule, any refiner claiming that it would suffer extreme finance hardship because of the requirements on sulphur in diesel fuel can apply to the EPA for additional flexibility during the transition period. In such applications, refiners must open their financial books to the EPA. If the EPA approves an application, the refiner can delay meeting the 15-ppm diesel fuel requirement until the date approved by the EPA, which can be no later than June 2010. The EPA expects that less than 1% of the US on-road diesel pool would be covered by this provision.

The table below summarizes the dates associated with the various flexibility provisions during the transition period:

Period Safety Valve Other Flexibilities
June 2001 to May 2005
  • Early credits for use of 15-ppm diesel in MY2007-type engines
  • April 2002 - deadline for Alaska to apply for special program
June 2005 to May 2006
  • Early credits for sales of 15-ppm diesel
June 2006 to Dec. 2009
  • 15-ppm diesel comes into effect
  • 20% 500-ppm diesel may be produced and imported
  • Credits for 15-ppm diesel in excess of 80% of on-road diesel pool
  • Banking and trading of credits allowed
  • 100% 15-ppm diesel for small refining companies and GPA refineries opting to delay gasoline requirements
  • Special program for Alaska, if granted, would commence
Jan. 2010 to May 2010
  • No further creation of credits
  • Trading of credits allowed
  • Credits can be used to continue to produce and import 500-ppm diesel
June 2010 and thereafter
  • 100% 15-ppm diesel
  • All credits expire
  • 15-ppm diesel for small refining companies
  • Latest date for 15-ppm diesel for "hardship" refineries

In addition to the above provisions which apply only during the transitional period, the US diesel rule also provides for temporary, short-term exemptions for unforeseen circumstances (i.e., Acts of God). A refiner granted such an exemption must make-up any air quality deficit and pay back to the government any economic benefits derived as a result of the waiver. Similar waiver provisions are also included in the EPA's rule on sulphur in gasoline.

The economic component that is part of the US waiver provisions is important in preventing potential abuses by companies and consequently affecting the competitive balance in the market. California did not include any economic penalties in its waiver provisions when it introduced 500-ppm diesel in 1993, and it found that the provisions were misused. Subsequently, California included a penalty of 15 US cents per gallon for gasoline produced under a waiver in its 1996 regulations for Phase 2 gasoline. To date, the one refiner that was granted a waiver (or "variance" as it is called in California) did not use it, because the refiner found other ways to supply gasoline and thus avoid the financial penalty.

The EPA regulations will result in two grades of on-road diesel fuel (i.e., 15 ppm and 500 ppm) coexisting in the US marketplace during the transitional period. The 15 ppm diesel fuel must be used in new (i.e. post-2007 model year) vehicles. Consequently, the US rule includes numerous and complex requirements to prevent vehicle misfuelling and contamination of 15 ppm diesel fuel. The US rule requires segregation of the two grades and tracking (through Product Transfer Documents) of each batch of diesel through the fuel distribution system.

The US rule includes provisions to handle contamination of 15-ppm diesel fuel that may occur in the diesel distribution system. The rule allows "downgrading" in the distribution system of 15-ppm diesel fuel to 500-ppm diesel fuel through re-designation of a batch in its accompanying documentation. Under the US rule, a person may downgrade up to 20% of the volume of diesel fuel that the person handles in a year. There is also a 2 ppm measurement tolerance that is allowed at points downstream of the refinery and point of import.

To reduce potential incidents of misfuelling new vehicles with high sulphur diesel fuel, the rule also specifies (in some detail) labeling requirements for dispensing pumps. All pumps must correctly identify the grade of diesel fuel as one of low-sulphur, high-sulphur or off-road diesel. The EPA decided not to require nozzle size restrictions, fuel dying or other "refueling" requirements (at least at this time). Instead, the EPA decided to rely on misfuelling disincentives for vehicle operators (e.g., damage to equipment, warranty issues, liabilities, costs) to minimize misfuelling.

Overall, by allowing an extra grade of diesel fuel to exist in the on-road diesel market during the transitional period, the US rule necessarily became complex and lengthy in order to handle downstream issues.


4 The US rule and supporting documents can be accessed at: www.epa.gov/otaq/diesel.htm
5 Petroleum Administrative Defense Districts: 1 - East Coast, 2 - Midwest, 3 - Gulf Coast, 4 - Rocky Mountains, 5 - West Coast.

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