REFORMULATED FUEL REGULATIONS COSTLY

Last September the National Petroleum Council estimated that compliance with environmental laws and regulations during the 1990s would cost refiners $36.5 billion. The figure exceeds the industry's estimated book value by $5.5 billion.

Much of the spending relates to the Clean Air Act (CAA) amendments of 1990. Some of it is warranted. If the U.S. is to take its last, most difficult steps toward meeting air quality goals, it must change fuel chemistry, vehicle design, or both. In the area of fuel chemistry, the CAA amendments go too far. They require, for example, that gasoline contain oxygen in regions which don't need oxygenated fuels. They mix fuel performance standards and content requirements in often contradictory ways. But they are the law.

ADDING TO THE BURDEN

Starting, as it must, with a law that imposes excessive costs and requirements, the Environmental Protection Agency should not add to the burden as it writes implementing regulations. The objective is to reduce the amount of air pollution from vehicle fuels, not to make it ever more costly and difficult to produce and use them. In some ways, EPA's massive final regulations on reformulated gasoline stray from that standard (see story, p. 16).

One large problem relates to fungibility of reformulated gasoline able to meet emissions criteria under what is known as the complex model, which applies to all reformulated gasoline starting in 1998. In the 3 years before then, reformulated gasoline can be tested against the so called simple model, which covers fewer gasoline components than the complex model does. Some refiners, including many large ones on the Gulf Coast, plan to start with the complex model and have retooled their facilities accordingly.

Unintentionally, EPA's final regulations penalize these efforts. They limit the ability of complex model reformulated gasoline from one source to replace like product from another. They say the product is interchangeable, or fungible, only for refineries with identical baselines for conventional gasoline. Baselines are product descriptions designed to keep refiners from shifting components removed in the reformulation process into conventional gasoline. Until 1998, when all reformulated gasoline will have to meet complex model standards and a statutory baseline will apply, refiners will have discrete baselines, few of them identical. So little complex model gasoline made before 1998 is likely to be fungible.

This will make distribution of complex-model gasoline difficult and costly. It will hurt refiners that have invested money for long term regulatory compliance. To the extent it encourages production of simple-model reformulated gasoline at the expense of complex model product, it can be assumed to delay progress toward air quality goals. This, in turn, might trigger tighter and costlier regulation.

PATTERN OF RISING COSTS

The fungibility problem didn't arise in EPA's final regulation. It just didn't get solved there. Industry sources say it was worse in early drafts. A solution might have been to apply a statutory gasoline baseline in 1995 instead of waiting until 1998. The EPA chose not to do so. So for 3 years refiners ready to make complex model reformulated gasoline will have to make costly compromises in facility utilization and distribution. And to the extent complex model fuel is environmentally superior to the simple model stepping stone, the nation compromises its air quality goals.

This is the way things have gone with the CAA amendments: too often too strict for too little environmental gain. And the costs rise each time.