The Trouble with Tier 3

on March 07, 2014 at 10:00 AM

Beijing Enveloped In Heavy Smog

EPA’s new, stricter rule requiring refiners to remove the last bit of sulfur from gasoline very likely will impact consumers and put additional drag on the economy while providing, at best, negligible benefit. The agency’s Tier 3 rule is a prime example of an unreasonable regulatory reach – one that studies have shown will increase costs without appreciably helping the environment.

We discussed Tier 3’s impacts in a post last fall. Key points:

  • Reducing sulfur content from 30 parts per million (ppm) to 10 ppm would result in negligible gains in air quality, according to a study by ENVIRON. Tier 3 is being imposed rule despite the fact air quality would continue to improve at no additional cost under Tier 2, which reduces sulfur content from 300 ppm to 30 ppm.
  • Tier 3 could require $10 billion in capital costs, according to a study by Baker & O’Brian.
  • The annual compliance cost is $2.4 billion, which works out to a potential cost increase of between six cents and nine cents per gallon of gasoline

Bob Greco, API’s downstream group director:

“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. … Besides the enormous costs and negligible environmental benefit, we are also concerned about the timeline of EPA’s new rule. The rushed timeframe leaves little opportunity for refiners to design, engineer, permit, construct, start up, and integrate the new machinery required.  This accelerated implementation only adds costs and potentially limits our industry’s ability to supply gasoline to consumers”

Last fall, API Senior Fuels Policy Advisor Patrick Kelly addressed claims that Tier 3 would be cost effective:

“ENVIRON  looked at both ozone and particulate matter and found that the difference between the current Tier 2 standards and the improvement that we will see (under Tier 3) … will only yield negligible improvements in both ozone and PM. … On the cost side, they’re also using a flawed cost estimate. They always cite this penny a gallon (estimated Tier 3 cost), which focuses on the wrong statistic of average cost to refiners versus marginal cost to refiners. Economics 101 tells you that in commodity markets the marginal cost is much more relevant when determining what the impact to the market is”

The unfortunate reality is Tier 3 will likely impose unnecessary fuel costs that could ripple throughout the economy – unnecessary because our air is cleaner under Tier 2 and would continue to improve without a more restrictive rule. Under Tier 2 gasoline today contains one-tenth the sulfur of 10 years ago, resulting in lower tailpipe emissions. With more new cars and trucks that can use today’s advanced, cleaner-burning fuel joining the fleet and more vehicles that are being retired, tailpipe emissions would keep dropping under Tier 2. Ironically, Tier 3 will actually increase carbon dioxide emissions at U.S. refineries because of the energy-intensive hydro treating equipment needed to meet the new rule.

Everyone wants cleaner air. The air is cleaner under Tier 2 and would continue to improve. Tier 3 is an unforced error – offering no appreciable environmental improvement while increasing the cost of bringing Americans the energy they need.

By Mark Green

Originally posted March 4th, 2014

Energy Tomorrow is brought to you by the American Petroleum Institute (API), which is the only national trade association that represents all aspects of America’s oil and natural gas industry. Our more than 500 corporate members, from the largest major oil company to the smallest of independents, come from all segments of the industry. They are producers, refiners, suppliers, pipeline operators and marine transporters, as well as service and supply companies that support all segments of the industry