Summary of Regional and State Clean Fuel Policies and Regulations

The pace of motor fuel regulatory change at the regional, state and local levels has accelerated sharply since the mid-1980s.

The State of California continues to exert substantial influence over the development of national motor fuel standards, especially with respect to environmental issues. However, the state's aggressive mobile source regulatory agenda has created occasional problems, as was the case with the required introduction of low sulfur/low aromatics diesel fuel in late 1993.

These reformulated gasoline regulations were approved by California Air Resources Board in 1991 and are designed to "achieve the maximum reductions in emissions of criteria pollutants and toxic air contaminants from gasoline-powered vehicles." Phase II reformulated gasoline specifications allow producers the option of meeting either "flat" or per gallon limits or "averaging" limits. These requirements are set forth in the table above. These requirements are as strict as federal Phase II reformulated gasoline regulations that do not take effect until 2000.

Northeastern States for Coordinated Air Use Management

Northeastern States for Coordinated Air Use Management member states are second only to California in proposing and implementing mobile source air quality regulations to take advantage of options available under the Clean Air Act Amendments of 1990. Including the clean vehicles program provided in the Act, the Northeastern states are taking separate action on reformulated gasoline.

Cities of New York, Philadelphia and Hartford are three of the nine cities in which the federal reformulated gasoline program was required for sale starting in 1995.

The states of Massachusetts, Maine, Rhode Island, Connecticut, New Hampshire, New York and New Jersey have joined the Mid-Atlantic states of Pennsylvania, Delaware, Maryland, the District of Columbia and Virginia in requiring the sale of reformulated gasoline in all or parts of each state beginning in 1995.

The Northeastern states' organization adopted policies through a series of workshops in 1992 involving air quality officials from across the region, especially in New York, New Jersey and Connecticut, to review issues associated with implementation of the oxygenated fuel program for New York City. All three states were involved because the New York City consolidated metropolitan statistical area includes 12 counties in northern New Jersey and parts of Connecticut.

Consideration of Low-Emission Vehicle Program

The Ozone Transport Commission, a group of Northeastern states whose membership overlaps that of the air management organization's, has made a recommendation to EPA that would require adoption of a low-emission vehicle program throughout the ozone transport region which encompasses an area from northern Virginia to Maine beginning in 1999.

Under the Clean Air Act, the Commission is established to develop region-wide recommendations for ozone control, including the authority to propose a low-emission vehicle program similar to that established in California, to EPA. In early 1994, the Commission members voted to approve the low-emission vehicle recommendation which must be approved by EPA before the states can legally adopt it. Since then, EPA has conducted several hearings, which culminated in the agency deciding to approve the recommendation in late 1994.

Earlier, U.S. automakers filed suit against the states of New York and Massachusetts challenging their virtually identical low-emission vehicle regulations which they had adopted. A U.S. District Court overturned the New York regulations, while the federal court in Massachusetts upheld that state's law, creating a conflict to be resolved in the U.S. Circuit Court of Appeals.

Studies mentioned in testimony presented to EPA suggest that the low-emission vehicle program will only address the region's increase in volatile organic compounds expected early in the next century when vehicle miles traveled are projected to increase in the region. However, the American Lung Association and others urged EPA to adopt the low-emission vehicle program quickly and more importantly, that EPA should move with more speed to tighten the ozone standard from 0.12 parts per million because of recent research that has shown permanent loss of lung function among many U.S. children with no history of tobacco smoking.

Evidence is also emerging that incidences of emphysema, previously associated only with smoking tobacco, are increasing in the non-smoking population exposed to high ozone levels.

In December 1994, the EPA approved the Commission's petition to adopt the low-emission vehicle program, giving the region another means of reducing ozone-forming volatile organic compounds in the region. How effective and when and for how much such a program will be remains very controversial.

Other State and Local Air Quality Actions

Enhanced Volatility Restrictions

The petroleum industry, mainly through the American Petroleum Institute , has been active in trying to persuade several states not to exercise their option to participate in the nation's reformulated gasoline program beginning as early as 1996. The only option to reformulated gasoline that is being suggested is the required use of lower volatility conventional gasoline in lieu of a reformulated gasoline requirement.

The first state to consider options other than reformulated gasoline was Michigan. In early 1993, a study commission recommended to Gov. John Engler that Michigan should reduce Reid vapor pressure instead of adopting the federal reformulated gasoline standards to lower volatile organic compounds and meet the Clean Air Act's state requirements. Other states such as Georgia, Missouri, Ohio and Indiana are considering similar moves.

Individual States' Ethanol Production and Blending Incentives

At present, 16 states provide some form of incentive for ethanol production, use or sale. These incentives take the form of tax credits for different purposes sales or excise tax exemptions or direct producer payments. Several states combine producer incentives and tax exemptions for blended sales.
Summary of Regional and State Clean Fuel Policies and Regulations
The following is a summary of state provisions:

Alaska: The state provides an incentive for ethanol produced in Alaska from biomass resources available in the state.

Connecticut: The state exempts gasohol defined as "consisting of a blend of gasoline and a minimum of ten percent by volume of ethanol or methanol" from one cent per gallon of its motor fuel excise tax. This provision has no expiration date.

Hawaii: The state exempts "gasohol" from the four percent sales tax imposed on gasoline products containing "at least ten volume percent denatured biomass-derived ethanol."

Idaho: The state provides an excise tax exemption for the non-petroleum portion of gasoline or diesel sold in the state effective July 1, 1994. Thus, a ten percent by volume ethanol blend would receive a tax exemption of 2.1 cents per gallon. This incentive has no expiration date.

Illinois: Gasohol, defined for tax purposes as a "motor fuel containing at least ten percent alcohol which alcohol contains no more than 1.25 percent water by weight and is obtained from agricultural products or by-products," is taxed at the rate of four percent per gallon, or a two percent sales tax exemption, from the date of enactment of the new law through December 31, 1992. In 1991, a bill was enacted to extend this tax incentive until July 1, 1999, with modifications that include market penetration target requirements.

Iowa: "Motor fuel containing at least ten percent alcohol distilled from agricultural products grown in the United States" has been exempt from a portion of the motor fuel excise taxes. The exemption for "gasohol" from the above taxes is one cent per gallon, through June 30, 1999.

Kansas: Effective July 1, 1987, the state provided a maximum 20 cents per gallon incentive for qualified Kansas ethanol producers which is limited by state appropriations to about nine cents per gallon for current production in the state. In 1993, this incentive was extended for ethanol produced in the state.

Minnesota: In 1994, the Minnesota legislature revised the state's two cents per gallon tax excise tax exemption for ten percent ethanol blends, reducing it by one-half cent per gallon on October 1, 1994, through 1997, after which this incentive expires. Ethanol producers currently receive 20
cents per gallon of ethanol, which increases to 25 cents per gallon on July 1, 1995, through June 30, 2010, up to a maximum of $3.75 million per producer per year.

In addition, legislation adopted in 1993 establishes a minimum 2.7 percent by weight oxygen content in gasoline sold in carbon monoxide nonattainment areas during the wintertime control period starting October 1, 1993. In October 1, 1995, the oxygen content requirement was year-round in those areas. Finally, the requirement was extended statewide on October 1, 1997.

Missouri: The state established a 20 cents per gallon ethanol producer incentive, effective through December 31, 2000. The producer incentive will be paid to Missouri ethanol producers using Missouri-produced agricultural commodities. The tax exemption will only become effective upon Missouri receiving more than the 85 percent "minimum allocation" from the Federal Highway Revenue Trust Fund.

Montana: The state provides an "ethanol producer payment" of up to 30 cents per gallon of ethanol produced in the state from Montana agricultural products, if funding is available. In 1991, the incentive was extended until the year 2001. The incentive has a $6 million cap with a $1.5 million per company restriction. However, the $1.5 million per company cap is lifted if there are no other companies claiming the exemption. This allows the remaining funds to be passed on to ethanol producers until the $6 million limit, if available, is reached.

Nebraska: The state provides a 20 cents per gallon direct producer incentive for ethanol produced in the state "from cereal grains or domestic agricultural commodities" at facilities having a capacity of no more than 25 million gallons annually. The incentive program expires December 31, 2000. In 1992, the state extended the producer incentive through the year 2000 and added a 50 cents per gallon tax credit for ETBE made from ethanol produced in the state.

North Dakota: The state provides a 40 cents per gallon incentive for state producers of ethanol if it is derived from agricultural products. This incentive, passed in 1989, was originally effective July 1, 1989, through December 31, 1992. Funding for the incentive has been extended through July 1, 1997. ed anhydrous ethanol derived from agricultural or forest products, or the wastes of such pro
Clean Fuels
Ohio: Since July 1, 1981, Ohio had provided a tax credit for ethanol or methanol not produced from natural gas or petroleum. It restricts the credit to ethanol produced at a facility which is coal-fired or has a capacity of less than two million gallons per year from "wood or the grain of a cereal grass." The tax credit reduction is based on a formula which adjusts the credit inversely with the federal motor fuel tax exemption. This incentive was reduced to 10 cents per gallon through September 2000.

Oregon: State law currently provides a five year, fifty percent property tax exemption for new fuel ethanol production facilities. The incentive is in effect through July 2008.

South Dakota: The state exempts "gasohol," if the ethanol component is 98 percent pure and is derived from cereal grains, from two cents of the motor fuel taxes otherwise imposed. In addition, a direct payment of 20 cents per gallon is paid to in-state ethanol producers for ethanol produced from cereal grain and blended with gasoline, if the ethanol was produced at a plant constructed after July, 1986.

Wyoming: Effective July 1, 1989, the state enacted legislation reestablishing a four cents per gallon tax incentive for ten percent ethanol-blended fuels. This incentive is in effect through July 2000.

Low-Emission Vehicle Programs

On December 9, 1993, EPA published final requirements for states to revise their state implementation plans to include clean-fuel fleet program requirements in those areas which the Clean Air Act Amendments of 1990 required fleet use of cleaner-burning fuels beginning with 1998 model year vehicles. This regulation establishes definitions for such terms as "covered fleet operator," "centrally-fueled," and "capable of being centrally-fueled" which EPA suggested are "pivotal in determining which vehicles and ultimately which fleets will be covered by the fleet program." Under the Clean Air Act, states may require the sale of clean fuel fleet vehicles as another strategy to reduce emissions of volatile organic compounds and carbon monoxide.

As discussed above, the states of the Ozone Transport Commission plan to adopt the program throughout the Mid-Atlantic and Northeast region. The states of New York,
Maine and Massachusetts have adopted the requirement and it has been provisionally adopted in Maryland.

The regulation defines "covered fleet operator" as a person who operates a fleet of at least ten covered vehicles which is operated in a single "covered area, even if the covered fleet is garaged outside of it." Regarding the meaning of "centrally-fueled" vehicles, EPA defines the term as "that part of a fleet consisting of vehicles that are fueled 100 percent of the time at a location that is owned, operated, or controlled . . ., or is under contract with the covered fleet operator."

The term "capable of being centrally fueled" means all or part of a fleet "that could be refueled 100 percent of the time at a location that is owned, operated, or controlled . . . or is under contract with the covered fleet operator," according to the EPA regulatory definition.

Under the Clean Air Act, the clean fuel fleet vehicle provisions may be delayed by states if such vehicles are not offered for sale in California by 1998. EPA said it expects that "vehicles meeting the clean fuel fleet vehicle standards will be offered for sale in California" by 1998.

The state implementation plan revisions required under this provision were to be submitted by states on or before May 15, 1994. The regulation became final on January 10, 1995.

Clean Fuel Fleet Credit/Trading Program

Sections 246 and 247 of the Clean Air Act require EPA to develop and implement a program for states that includes the conversion of fleets to clean fuel-powered vehicles used in serious, extreme or severe ozone or carbon monoxide nonattainment areas with populations of 250,000 or more. EPA has identified 22 areas that are covered under this program.

EPA has developed regulations governing the program, including definitions and general provisions, credit program regulations, exemptions from transportation control measures, emissions standards and vehicle conversion rules. Then, EPA must review the revised state implementation plan submissions by the affected states to ensure compliance with the regulations, as well as state petitions to become involved in the program. States must revise their state implementation plans to include this program, if required.

This program is being developed in conjunction with the "Clean Cities" initiative launched on September 9, 1993. In conjunction with the implementation of the Energy Policy Act, the program is to encourage the most efficient development and use of alterative fuels as part of these policies and priorities. By improving the vehicle refueling infrastructure available to public and private fleets, the program seeks to enhance use of alternate fuel vehicles in a given area including, but not limited to, the cities on page 5.

Fleet owners may earn transferrable credits if they purchase clean fuel vehicles earlier, in greater numbers, or that meet more stringent emissions standards than those set forth in the Act. The requirements for such purchases are indicated below.

State Alternative Fuel Programs

In 1991, the California Air Resources Board adopted the nation's strictest regulations to phase-in vehicle and fuels requirements which has served as a model for other states as well as the clean fuel requirements of the Clean Air Act Amendments of 1990. The plan establishes exhaust emission standards in four progressively more stringent categories:

• Transitional Low-Emission Vehicles
• Low-Emission Vehicles
• Ultra-Low-Emission Vehicles and
• Zero-Emission Vehicles.

The hydrocarbon emission standards, expressed as non-methane organic gases, include non-methane hydrocarbons, aldehydes, ketones and alcohols.

In the light-duty vehicle category, starting with the 1994 model year, vehicle manufacturers must meet a fleet average non-methane organic gases standard. Manufacturers could certify any combination of transitional low-emission vehicles, low-emission vehicles, ultra-low-emission vehicles, zero-emission vehicles and conventional vehicles as long as the sales-weighted non-methane organic gases emissions do not exceed fleet average non-methane organic gases standards.

A system for earning marketable credits to comply with the fleet average standard will also be established. Credits could be earned by having a sales-weighted emission average lower than the fleet average standard and would be discounted if not used in the next model year.

Although the light-duty vehicles phase-in schedule is based on non-methane organic gases emissions, the transitional low-emission vehicle, low-emission vehicle and ultra-low-emission vehicle standards categories would also have emission standards for nitrogen oxide, carbon monoxide, formaldehyde and particulate matter ten microns or greater.

Zero-emission vehicles are defined as vehicles that have no exhaust or evaporative emissions of any pollutant. For the 1998 model year, two percent of a manufacturer's production would have to be zero-emission vehicles. The percentage increases in successive years, reaching ten percent in 2003. Small volume manufacturers are not subject to this requirement and intermediate volume manufacturers would not have to meet it until 2003.

The regulations provide for intermediate in-use standards which are up to 30 percent less stringent than the corresponding certification standards for transitional, low and ultra-low emission vehicles. These in-use standards would be applicable for only two model-years after the introduction date of each vehicle emission category. Compliance with full useful life standards or 100,000 miles for light-duty vehicles would be suspended for the initial two years as well. Fuels that could be used to meet these standards include ethanol, methanol, propane, compressed natural gas, hydrogen and electricity.

Other State Activities

The Northeast States for Coordinated Air Use Management, an eight-state air quality advisory organization that develops policies to improve the air quality of the region, is second only to California in proposing and implementing mobile source air quality regulations. Including the clean vehicles program provided in the Act, the eight states are taking separate action on a broad range of clean fuels programs.

Many other states, Arizona for example, are also developing new alternative fuel programs and incentives.

State Options For Attainment of Ambient Ozone Standards

The states have a pivotal role to play in improving air quality in the United States. This role was significantly increased as a result of the passage of the Clean Air Act Amendments of 1990. Led by California, Colorado, Iowa, Massachusetts, Minnesota, Nebraska, New York, Texas and Wisconsin, state efforts have made the alternative fuels provisions of the Clean Air Act a reality.

The role of the states is a continuing and indispensable part of the Clean Air Act's regulatory development and implementation process. The states are provided aggressive new timetables to achieve attainment of ozone and carbon monoxide attainment standards and new means at their discretion to meet the deadlines set forth in the Act. Cleaner-burning transportation fuels are an important element of state planning strategies that are required under the Act.

In their state implementation plans, states are required to submit detailed air quality plans that demonstrate how they will attain federal standards within the applicable deadlines set forth under Title I of the Act (Section 182). Under the Act, these plan revisions were to have been
submitted to EPA no later than November 15, 1993. Many states are still in the process of revising their state implementation plans, with almost all expected to finalized by 1998.

In addition, states are free to adopt legislation or regulations that are stricter than federal requirements for motor fuels as necessary to maintain attainment of these standards. Among the steps that could be taken by the states in the control of mobile source emissions include, but are not limited to:

1. Implementing state fleet vehicle and fuels programs, both public and private, to include alternative fuels;
2. Increasing oxygen content requirements in reformulated gasoline programs;
3. Acting to increase the number of areas that will "opt-in" to the federal reformulated gasoline program;
4. Requiring the use of enhanced vehicle inspection and maintenance programs;
5. Expanding carbon monoxide control periods as a means of lowering air toxics and expanding regional economic development and making cleaner-burning fuels more widely available; and
6. Developing programs to reduce overall vehicle miles traveled and other transportation control measures.