Issues Related to the Regulations: Comments and Reply

• Regulatory Policy
• Cost of Compliance With New Emission Standards
• Market Reaction to New Heavy-Duty Engines
• Impact of New Standards on Fuel Efficiency
• Impact of U.S. Consent Decrees on Emission Projections

CVMA and AIAMC stated:

• "CVMA and AIAMC member companies for several years have worked in partnership with the Federal Government and supported alignment with U.S. Federal vehicle emission standards and harmonization of emission systems as a basis for Canadian Policy. This does not mean government adoption of complete regulatory structures without demonstrated need or positive cost-benefit relationship. Utilizing U.S. Tier 2 cost and gasoline sulphur information as a basis to move forward in the Canadian context is in the industry's opinion, inappropriate. Canada's regulatory process and policy guidelines set out very specific steps to be followed regarding the development of regulation."
• "We are concerned that the development of the subject regulations fails to fully meet the requirements of the guidelines, as follows:
  1. Environment Canada must clearly demonstrate that a problem or risk exists, that requires federal government intervention and that regulation is the best alternative.
  2. Environment Canada must ensure that benefits outweigh the costs to Canadians, their governments, and businesses.
  3. Environment Canada must ensure that any adverse impacts on the capacity to generate growth and employment are minimized and no unnecessary regulatory burden is imposed.
  4. Environment Canada must ensure that parties proposing equivalent means to conform with the regulatory requirements are given positive consideration."

Ford stated:

• "It is our view that prior to adopting any regulatory requirements the government must demonstrate the need for such regulations and a positive cost-benefit relationship supporting such regulations".
• "Environment Canada does not appear to have followed government Regulatory Policy and Policy Compliance Guidelines which requires that specific steps be taken when examining a regulatory change or a new regulation prior to making a decision to regulate. Under this Regulatory Policy, senior management in government is required to:
  • Find evidence of a problem. Describe and analyse the problem and justify government intervention
  • Identify and review alternative solutions, consider equivalent proposals
  • Analyse benefits, costs and regulatory burden
  • Make a decision to regulate or not
  • Identify opportunities for inter-governmental co-ordination
  • Implement the best alternative
  • Communicate effectively
  • Prepare a regulatory impact analysis statement
• We do not believe that the first three steps were adequately followed - the decision to regulate appears to have been made without due process."

Reply:

The Regulations have been developed through extensive consultations with stakeholders. Regulatory policy recognizes that the complexity of cost and benefit analyses can vary and should be proportional to the significance and impact of the Regulations. In view of the highly integrated nature of the North American vehicle manufacturing industry and the fact that the Regulations continue to be aligned with those of the U.S., the Department believes that the RIAS appropriately justifies and supports the Regulations.

• CVMA and AIAMC stated: "The regulations are expensive; the costs will not be "very low". This is an incorrect conclusion in the RIAS. The incremental costs are substantial and are actually underestimated. No mention is made of the potential costs of any artificial product availability manipulation that may be necessary. Extrapolation of U.S. data which is non-comparative is a major problem."

CTA stated:

• "The financial cost of adopting Phase 1 and Phase 2 standards for heavy-duty engines will be substantially higher than claimed in the Gazette. CTA is concerned that if this is not corrected, shippers may not appreciate the extent to which carrier costs will have to rise, and resist efforts by carriers to charge rates sufficient to cover these additional cost outlays."
• "CTA is therefore requesting that Environment Canada revisit the cost estimates contained in the Gazette, as the EPA has done in the United States. In January 2002 the EPA produced a draft report, Non-conformance Penalties for 2004 Highway Heavy Duty Diesel Engines, which includes compliance cost estimates based on data provided by engine manufacturers, independent cost analyses , and the EPA's technical judgement. They are considerably higher than the EPA's first published figures as they include not only the manufacturer's cost but the operating cost of the new engines."

Reply:

The Department recognizes that the Regulations will result in some incremental administrative costs for industry, notably in label design to accommodate the national emissions mark and in reporting related to the fleet average NO_x emissions standards. However, the CVMA or AIAMC did not provide any quantification of these costs to substantiate that they will be considerable.

In August 2002, the U.S. EPA published the final rule regarding non-conformance penalties (NCPs) for 2004 and later model year heavy-duty diesel engines¹. In the final rule, the U.S. EPAestimates for the average lifetime incremental cost of compliance for 2004 model year heavy-duty diesel engines were considerably higher than those presented in the original standard-setting rulemaking. However, it is important to note that the two estimates of costs are not directly comparable for a number of reasons. The most important difference is the emission characteristics of the baseline engine used in the two analyses. The second major reason is that NCPs are intended to protect complying manufacturers and thus it is important in associated analyses to avoid underestimating reasonably projected costs. Accordingly, the U.S. EPA's cost analysis for the NCPs focuses solely on the compliance costs associated with the first year of production. On the other hand, cost analyses for regulatory actions to establish new emission standards are carried out with a longer term view and take into account factors that tend to reduce compliance costs over time, resulting in lower average costs. These issues are described in greater detail in the U.S. EPA's final rule.

In view of the above, the Department has not changed the cost estimates that were used to support the proposed Regulations. The cost estimates continue to be based on those used by the EPA in support of corresponding rules.

CTA stated:

• "The announcement of the financial and fuel cost implications of the October 2002 truck engine standards has caused a pre-buying phenomenon in the new truck market."
• "CTA would expect this preorder experience to be duplicated, if not intensified in 2006 as the 2007 truck is expected be substantially more expensive."
• "CTA was encouraged by Environment Canada's position in the December 2001 Gazette notice pertaining to the use of economic instruments for the faster introduction of ultra low sulphur diesel fuel. CTA would ask that Environment Canada consider taking a similar position regarding the use of economic instruments for the faster introduction of 2004 and 2007 into the marketplace."
• "One way to encourage the faster introduction of these engines into the marketplace, and to prevent a 2006 preorder situation, is to change the definition of renewable energy and energy efficiency equipment under Class 43.1 of the Income Tax Regulations. Originally Class 43.1 was designed to encourage taxpayers who either generate and sell electricity or use energy in other industrial sectors to make efficient use of fossil fuels and increase their use of both alternate and renewable energies. The Department of Finance is now seeking views on possible ways to accommodate emerging technologies that are not currently part of Class 43.1 but that are in keeping with the broad criteria for this CCA class. Technologies meeting the definition requirements of 43.1 receive a capital cost allowance (CCA) rate of 30 per cent. This 30 per cent CCArate would be a significant improvement to current rates available to the trucking sector --- 20%, 32%, 19.2%, and 11.5% for years one to four respectively... CTA will be responding to the public consultation the Department of Finance has initiated. We would strongly urge Environment Canada to do likewise."

Reply:

The Cleaner Transportation Working Group (CTWG) under the National Round Table on the Environment and the Economy explored opportunities to apply fiscal instruments to encourage the purchase of cleaner heavy-duty engines in advance of, or in greater numbers than, regulated phase-in requirements. While such programs may offer some potential, the CTWG noted that implementing such tools would require substantial administrative investment for a relatively short program duration and uncertain program success. Furthermore, it was suggested that such programs would require substantial additional research, including investigation of whether future cleaner heavy-duty engines can logistically/technologically be supplied earlier than mandated deadlines.

One of the key considerations identified by the CTWG was that unless there is ability to supply market ready engines early, no fiscal instrument would work. Sufficient time is required for manufacturers to develop and test new technologies prior to their road application and the availability of heavy-duty engines with advanced the emission control technology meeting the Phase II emission standards prior to 2007 remains unclear.

The Department believes that the Regulations represent an appropriate instrument to ensure that heavy-duty engines marketed in Canada comply with the same stringent emission standards as in the U.S.

CTA stated:

• "The regulation will have a dramatic impact regarding the reduction of NO_x emissions from heavy-duty diesel trucks. Unfortunately, as suggested above the technology to reduce NO_x emissions from trucks will have negative impact on fuel efficiency."
• "Poorer fuel consumption is expected to be a significant cost component of the cost of compliance towards October 2002 HDDT engines. The principle technology used by the majority of engine manufacturers to achieve the October 2002 NO_x emission levels is Cooled Exhaust Gas Recirculation (EGR)."
• "The EPA estimates that fuel consumption will increase 2.5 per cent because of EGR introduction. Some engine manufacturers are warning of a possible 4.5 per cent increase in fuel usage."

Reply:

Under the Regulations, heavy-duty diesel vehicles and engines will be required to meet increasingly more stringent emission standards in two steps, beginning in the 2004 and 2007 model years. In order to meet the future emission standards heavy-duty vehicle and engine manufacturers will use new advanced emission control technologies. While some vehicles may experience small increases in fuel consumption in the short term, it is expected that engine manufacturers will be able to fully optimize new technologies and engine systems to provide large reductions in smog-forming emissions without compromising fuel efficiency.

For the 2004 model year standards, the U.S. EPA has suggested that for large heavy-duty engines of the type used in line-haul trucks some engine manufacturers are predicting no change in fuel consumption while others are predicting fuel consumption increases ranging from 2% to 5%, which are expected to be short term.. In the case of the 2007 model year emission standards, the U.S.EPA has estimated that there will be no fuel consumption increase associated with compliance.

• CPPI stated: "We believe that the emission reduction forecasts in the RIAS include the assumption that the consent decree requirements are being implemented but there is no requirement for engine makers to do this in Canada. We urge Environment Canada to pursue an agreement with the engine makers to ensure that Canada benefits from the same corrective measures as the USA. A statement to this effect in the RIAS would be helpful. Again, this would provide useful direction to emission modelers to ensure that future forecasts of vehicle fleet emissions are based on full and accurate information."

• Shell stated: "Shell also noted that the emission modelling results presented in the RIAS reflected the implementation of the USA Consent Decree related to the so-called "defeat device". The proposed Canadian Regulations do not reflect an advancement of the 2004 HDV standards to 2002 and there is no indication that the heavy-duty vehicles will be retro-fitted with a kit supplied by the engine manufacturers to correct the higher NO_x emissions when the engines are rebuilt. We understand that these USA requirements are not entrenched in USA regulations, but are in fact a result of a court settlement. Shell asks Environment Canada to clarify how similar NO_x reduction requirements related to the Consent Decree for HDV will eventually be implemented in Canada."

Reply:

Engine manufacturers have indicated that they will provide Phase I engines to Canada in the same time frame as committed to in the U.S. under the Consent Decrees. Also, low NO_x rebuild kits will be made available in Canada at the same time as the U.S. Accordingly, for the purpose of conducting an emissions forecast from on-road vehicles, it is appropriate to assume that cleaner new heavy-duty engines will be introduced into Canada on the same schedule as in the U.S. However, the extent to which a NO_x rebuild program will be carried out in Canada is uncertain at this time and, to be conservative, it is believed that the effects of such a program should not be included in the Canadian emission forecasts.

The effects of the NO_x rebuild program were, however, inadvertently included in the Canadian emission forecasts conducted by SENES Consultants Ltd. At Environment Canada's request, SENES recalculated the forecasts and provided an erratum to their report. The effect of having included a NO_x rebuild program resulted in a relatively minor underestimation of NO_xemissions from on-road vehicles, which in the year 2020 resulted in a 1% difference. Emissions other than NO_x from heavy-duty vehicles were not affected. The emission forecasts used in the final RIAS are based on the revised NO_x emission forecasts provided by SENES.

¹U.S. EPA, Final Rule, Non-conformance Penalties for 2004 and Later Model Year Emission Standards for Heavy Duty Diesel Engines and Heavy-Duty Diesel Vehicles, Federal Register, August 8, 2002.