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In addition to the numerous other regulations affecting the transportation and energy industries, the Environmental Protection Agency (EPA) issues regulations governing tailpipe emissions from qualifying vehicles. In 1999 EPA announced its so-called Tier 2regulatory framework, which tightened emission standards for the first time not just to cars but to all passenger vehicles, including light-duty trucks and SUVs. The other innovation introduced in 1999 was to treat “vehicles and fuels as a system.” Because certain emission-reduction technologies work better with lower sulfur content in gasoline, the Tier 2 standards—which were ostensibly concerned with passenger vehicles—also placed costly mandates on refiners.

The EPA is currently moving ahead with its plans to implement the next level of controls, called Tier 3. Even though Tier 2 has already achieved significant improvements in several dimensions, EPA wants to significantly tighten the constraints on both the passenger vehicle and refining sectors once again. The best available study suggests that just a single component of the new Tier 3 proposal would impose upfront compliance costs of almost $10 billion on refiners, and cause a permanent increase in refining costs of 6 to 9 cents per gallon of gasoline. Although the effects have not been estimated, we can also expect the Tier 3 standards to raise vehicle costs.

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