Beginning in 2017, all gasoline sold in the US must contain less than 10 parts per million sulfur, the US Environmental Protection Agency announced Monday, dismissing oil industry arguments that the new standard is unnecessary and could lead to fuel shortages or major rises in prices.
The long-delayed Tier 3 rule, which the EPA had originally intended to finalize in 2012, lowers the allowable level of sulfur from the current 30 ppm, along with ordering other reductions in harmful tailpipe emissions.
Sulfur, a naturally occurring element in crude oil, can reduce the effectiveness of vehicle catalytic converters, which eliminate smog-producing emissions linked to asthma and lung disease.
Environmental and public health groups had supported the change, and the EPA said the sulfur reduction would provide "critical air quality and health benefits" and prevent up to 2,000 premature deaths annually by 2030, while saving auto owners $8,000 in fuel costs over a vehicle's lifetime by 2025 due to the mileage-boosting emissions control technologies that will be required.
"These standards are a win for public health, a win for our environment, and a win for our pocketbooks," EPA Administrator Gina McCarthy said. "By working with the auto industry, health groups and other stakeholders, we're continuing to build on the Obama administration's broader clean fuels and vehicles efforts that cut carbon pollution, clean the air we breathe, and save families money at the pump."
Automakers also had supported the new standard, as it will match California's emissions limits and enable car manufacturers to install the same catalytic converters and other emissions controls in vehicles sold nationwide.
The oil industry, however, has said the regulation would provide little improvement to air quality, while actually causing carbon dioxide emissions at refineries to increase because of the energy-intensive hydro treating equipment that would be needed.
'UNREALISTIC' COMPLIANCE DATE
The American Petroleum Institute estimates that the refinery upgrades will cost $10 billion, while compliance with the rule will cost $2.4 billion annually. Gasoline prices will rise 6-9 cents/gal, the API added.
"This rule's biggest impact is to increase the cost of delivering energy to Americans, making it a threat to consumers, jobs and the economy," said API Downstream Group Director Bob Greco. "But it will provide negligible, if any, environmental benefits. In fact, air quality would continue to improve with the existing standard and without additional costs."
US refiners trade group American Fuel and Petrochemical Manufacturers said the 2017 compliance date was "unrealistic" and does not provide refiners with adequate time to complete necessary upgrades.
In meetings with the White House Office of Management and Budget, which reviewed the rule before it was finalized, the oil industry sought a two-year delay in the regulation to 2019.
"Tier 3 not only adds to uncertainty in the market and to potential supply problems, but actually increases greenhouse gas emissions," AFPM President Charles Drevna said in a statement.
The Obama administration did not offer that extension, and McCarthy brushed off industry complaints, saying they were based on estimates from last year, when the agency first unveiled its proposal to lower the sulfur limits to 10 ppm.
Since then, she said on a conference call with reporters, the EPA has tweaked the rule to provide more flexibility, including credits for early compliance and potential waivers for small refiners, among other measures.
The agency estimates that the rule will cause gasoline prices to rise by less than a penny per gallon.
"Frankly, the estimate that API and others are relying on is an outdated estimate of what they thought we might be composing," McCarthy said. "In 2017 when this cleaner fuel is available, people will see immediate benefits."
Traders had a skeptical reaction to the EPA's claims that price impacts would be negligible.
"We shall see if the market can adapt. The refineries are going to have to install new desulfurization hardware," one Lower Atlantic refined products broker told Platts.
RFS SIGNAL?
In addition to the sulfur reductions, the Tier 3 rule also sets a 10% blend of ethanol with gasoline as the required certification fuel for compliance, rather than a 15% ethanol blend, as it had first proposed a year ago.
In doing so, the EPA said its decision to use the 10% ethanol blend, called E10, "reflects the ethanol content of in-use fuel currently and in the foreseeable future."
That language hews closely to the EPA's proposed 2014 Renewable Fuel Standard, in which the agency cited the inability of US fueling infrastructure to absorb higher ethanol blends than E10, amid limited retail availability of E15 and E85, in proposing for the first time a cut to the biofuels blending mandate.
Kevin Book, an analyst with ClearView Energy Partners, said in a note to clients that the EPA appears to be signaling that it will indeed keep the required biofuel blending volumes for 2014 to below 10% of projected US gasoline consumption, when it finalizes the RFS, despite heavy lobbying from the biofuels industry to raise the mandate.
The EPA has said it will finalize the 2014 RFS by the end of spring.
"We maintain our call that EPA is likely to set a total ethanol target that can be met by E10 blending and use of carryover RINs [the bankable credits used to demonstrate compliance each year]," Book wrote. "In other words, the target would be very close to 10% and require little, if any, E85 blending."
