Review of EPA NRPM and Compliance Cost

Assessment

April 25, 2022

Prepared For:
Truck and Engine Manufacturers Associations

Project Team:
Mark Kuhn, Vice President, Ricardo Strategic Consulting

Piyush Bubna, Principal, Ricardo Strategic Consulting

Nikhil Nayak, Manager, Ricardo Strategic Consulting

Aravindh Ramakrishnan, Consultant, Ricardo Strategic Consulting

Anirudh Agarwal, Sr. Consultant, Ricardo Strategic Consulting

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Executive Summary
EPA has published a rulemaking proposal to adopt additional regulations to further
regulate the emissions from new heavy-duty engines, and has proposed two options,
each with unique standards and related requirements. EPA has requested comments and
feedback on its proposal from the industry stakeholders. EPA also has included an
estimate of the incremental costs associated with the technological changes necessary
to achieve compliance with the proposed regulations.
This report reviews EPA’s proposed regulations along with the Agency’s incremental
costs analysis methodology and compares it with Ricardo’s assessment of the impact
that the proposed regulations will have the cost of heavy heavy-duty diesel engines.
Ricardo’s cost assessment methodology utilizes inputs from various engine and vehicle
manufacturers, subject matter experts, internal costing frameworks and databases.
EPA and Ricardo use different methodologies to assess incremental costs, while focusing
on similar cost elements and categories of incremental costs (but different sub-categories
of costs). Both methodologies include direct cost elements such as engine hardware and
after-treatment system costs,and indirect costs such as warranty, R&D, profits, and other
costs, with explicit inclusions and exclusions for the differing sub-categories of costs.
Incremental operating costs, including DEF consumption, repair and maintenance, are
also included in both methodologies. To calculate the total incremental cost, operating
costs are added to the direct and indirect costs. To compare EPA’s assessment with
Ricardo’s, some cost elements have been realigned to different sub-categories. The
following figure explains both assessments' inclusions, exclusions, and differences.
Comparison of Cost Impact Analysis

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When compared on an assessed cost basis, EPA’s and Ricardo’s assessments differ
mainly due to three key cost elements – engine hardware, warranty, and extension of
useful life (including repair and maintenance). This study includes a detailed analysis of
those three key differences to specify and quantify the resulting difference in cost
predictions. In that regard, EPA’s engine hardware costs appear not to include all of the
additional OEM costs needed to integrate the component-supplier hardware into the base
engines. In addition, corroboration of warranty costs against field data shows that EPA’s
extended warranty costs are significantly under-stated because of fundamental
weaknesses in the Agency’s warranty estimation approach. Also, the difference in costs
for the proposed extension of useful life is driven by differing assessments of the resulting
need for part replacements, which is included in Ricardo’s cost-assessment method but
not in EPA’s.
Cost Impacts Summary – EPA vs. Ricardo

Key Observations

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In addition to comparing the direct and indirect cost impacts, this report also explores
other avenues of weaknesses in EPA’s estimations of the costs of the proposed
regulations. More specifically, EPA's pre-buy and low-buy considerations were reviewed
and compared with Ricardo’s pre-buy and low-buy analysis. There are significant
differences between the predicted pre-buy and low-buy volumes driven by the significant
differences in estimated cost impacts. Also, the learning curve considerations that EPA
assumed in its analysis were compared against Ricardo’s learning curve considerations.
Ricardo’s learning curve analysis includes operational nuances, such as the multi-year
purchasing agreements that OEMs have with their suppliers, which influence the learning
process upon new technology introduction. In addition to those comparisons and
analyses, this report provides qualitative comments on the weaknesses in EPA’s
proposed testing procedures and thresholds.

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Contents
Executive Summary ........................................................................................................ 2
1. Introduction ............................................................................................................... 9
2. Background .............................................................................................................. 9
3. Compliance Cost Analysis - EPA Methodology ...................................................... 11
3.1 Direct Manufacturing Costs .............................................................................. 11
3.2 Indirect Costs ................................................................................................... 15
3.3 Operating Costs ............................................................................................... 20
3.4 Summary of Total Cost .................................................................................... 22
4. Ricardo Cost Analysis ............................................................................................. 23
4.1 Direct Costs...................................................................................................... 25
4.2 Indirect Cost Elements ..................................................................................... 27
4.3 Operating Costs ............................................................................................... 30
4.4 Cost Summary ................................................................................................. 31
4.5 Comparison of EPA vs. Ricardo Cost Assessment .......................................... 32
5. Reconciliation of Inconsistencies in EPA Approach ................................................ 34
5.1 Engine Hardware ............................................................................................. 34
5.2 Warranty........................................................................................................... 36
5.3 Maintenance..................................................................................................... 39
5.4 R&D Costs ....................................................................................................... 41
5.5 Pre-buy/ Low-buy Analysis ............................................................................... 42
5.6 Learning Curve Difference ............................................................................... 43
5.7 Additional Comments ....................................................................................... 45
5.7.1 Qualitative feedback on the proposed options ........................................... 45
5.7.2 Hours in Operation Thresholds .................................................................. 47
6. Conclusion .............................................................................................................. 47
7. Acronyms and Abbreviations .................................................................................. 48

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List of Figures
Figure 1: EPA NPRM Regulations ................................................................................ 10
Figure 2: Cost Elements Included in the Study ............................................................. 24
Figure 3: EPA & Ricardo Approaches Provide a Direct Comparison of Incremental
Costs ............................................................................................................................. 25
Figure 4: Breakdown of EPA vs. Ricardo Cost Comparison.......................................... 33
Figure 5: Field Data on Warranty Behavior and Costs .................................................. 38
Figure 6: OEM Extended Warranty Costs ..................................................................... 39
Figure 7: Pre-buy Analysis ............................................................................................ 43
Figure 8: Learning Curve Differences - EPA Options & Ricardo ................................... 44
Figure 9: Emissions Certification Targets & Compliance Margins ................................. 45
Figure 10: Key Areas of Focus Highlighting Higher Cost Differences ........................... 48

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List of Tables
Table 1: EPA NPRM Regulations Summary ................................................................. 10
Table 2: Engine Hardware Cost Impact Assessment .................................................... 12
Table 3: Cylinder Deactivation Hardware & Associated Costs (2019 $) ........................ 14
Table 4: Cylinder Deactivation Cost Adjustment ........................................................... 14
Table 5: Aftertreatment System Cost Estimation ........................................................... 15
Table 6: Retail Price Equivalent Methodology ............................................................... 16
Table 7: Indirect Cost Estimation .................................................................................. 16
Table 8: Warranty Parameters ...................................................................................... 17
Table 9: Warranty Multiplication Scalars ....................................................................... 17
Table 10: Useful Life Parameters .................................................................................. 18
Table 11: R&D Cost Multiplication Scalars .................................................................... 18
Table 12: Warranty & R&D Cost Magnitudes ................................................................ 19
Table 13: Additional Indirect Costs ................................................................................ 19
Table 14: EPA Technology Cost Estimation Summary (2017 $) ................................... 20
Table 15: EPA DEF Costs in Respective Years ............................................................ 21
Table 16: EPA Estimate of Lifetime DEF Costs ............................................................ 21
Table 17: EPA Maintenance & Repair Costs in Respective Years ................................ 22
Table 18: EPA Estimate of Lifetime Maintenance & Repair Costs ................................ 22
Table 19: EPA Total Cost Estimation Summary (2017 $).............................................. 23
Table 20: Ricardo Estimate of Engine Hardware Costs (2021 $) .................................. 26
Table 21: Ricardo Estimate of Aftertreatment System Costs (2021 $) .......................... 27
Table 22: Ricardo Estimate of Extended Warranty Costs (2021 $) ............................... 28
Table 23: Ricardo Estimate of Extended Useful Life & Maintenance Costs (2021 $) .... 29
Table 24: Ricardo Estimate of Additional Allied Costs (2021 $) .................................... 30
Table 25: Ricardo Estimate of Lifetime DEF Costs (2017 $) ......................................... 31
Table 26: Ricardo Cost Incremental Cost Analysis Summary (adjusted to 2017 $) ...... 32
Table 27: EPA vs. Ricardo Incremental Cost Comparison ............................................ 33

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Table 28: Engine Hardware - EPA vs. Ricardo ............................................................. 34
Table 29: Adjusting EPA Engine Hardware Cost with Additional Identified Factors ...... 36
Table 30: Warranty Costs - EPA vs. Ricardo ................................................................ 37
Table 31: Extended Useful Life Costs (including maintenance) - EPA vs. Ricardo ....... 41
Table 32: Predicted pre-buy volumes ............................................................................ 43
Table 33: NPRM Requirements - NOx Limits & Years of Compliance .......................... 46
Table 34: Warranty Parameter Adjustment Including Hours in Operation for Option 2 . 47

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1. Introduction
The Environmental Protection Agency (EPA) is proposing a major update to the
regulations applicable to the emissions from heavy-duty on-highway engines and
vehicles. EPA’s proposal includes significant reductions to the emission standards for the
various constituent criteria pollutants. To comply with those reduced emission standards,
the manufacturers of heavy-duty engines and vehicles are expected to introduce new
emission-control components and technologies. The introduction of those new
components and technologies will come at a cost, and accordingly, the cost to the
purchasers of new heavy-duty vehicles will increase. EPA has estimated the cost impact
of the proposed regulations on vehicle purchasers and has published the results of its
analysis in the Agency’s regulatory impacts analysis (RIA). EPA has requested feedback
and comments from the industry stakeholders on the approach, assumptions,
considerations, and all other aspects of EPA’s cost impact assessment as described in
the RIA. In addition, EPA is seeking comments on the feasibility of the envisioned
technological developments that will be required to enable the manufacturers of heavy-
duty engines and vehicles to meet the proposed regulatory options, and on the resultant
expected cost increase to the purchasers of those heavy-duty engines and vehicles.

2. Background
EPA is considering two options with different standards and implementation timelines for
the Agency’s proposed emission-control regulations. The most significant elements of the
Agency’s proposed options include the levels of reductions of the criteria pollutant
standards and the length of the proposed extensions of the mandated warranty and useful
life periods. EPA refers to these as Option 1 and Option 2. Option 1 has more stringent
emission standards than Option 2. Option 1 has a phased two-step implementation plan
where the first set of standards and related requirements are proposed for 2027, and a
second more stringent set of standards would take effect in 2031. EPA’s rulemaking
proposal is expected to be finalized by the end of 2022 to provide manufacturers with 4
years of lead-time (2023 – 2026) to develop their products for launch in 2027. That would
be followed by another 4 years in advance of the second step of standards (2027 to 2030)
to take effect in 2031. In contrast, Option 2 has one set of regulations that would take
effect in 2027. The Option 2 emission standards are not as stringent as Option 1. The
following table provides a summary of the various elements that are included in EPA’s
Option 1 and Option 2.

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 Table 1: EPA NPRM Regulations Summary

In addition to the proposed reductions of the criteria pollutant emission standards, EPA is
proposing to extend the applicable warranty and useful life periods in a very significant
way. The new regulations also call for updates to the compliance testing procedures. New
test cycles and in-use testing protocols are being proposed, as well as updates to current
test cycles. Low-load testing and standards are components of the proposed regulations.
Figure 1: EPA NPRM Regulations

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Alternatively, EPA also has requested feedback on potential alternate regulatory options
different from the two proposed options. This report does not include an assessment of
any potential alternate options, but is focused solely on the cost impacts of Options 1 and
2, and how Ricardo’s cost assessment and methodology differ from EPA’s assessment
approach. Accordingly, this report provides an evaluation of EPA’s cost analysis and
identifies the key differences between EPA’s and Ricardo’s cost studies to explain the
differing results.

3. Compliance Cost Analysis - EPA Methodology

Through the RIA, EPA has outlined a methodology by which the per-vehicle cost impacts
of the new proposed regulations are assessed for the consumer. In this section of the
report, the methodology followed by EPA is reviewed and recreated for heavy-duty diesel
engines and vehicles. EPA has not explicitly broken down and illustrated the actual costs
for all the cost elements in the RIA and NPRM (although the methods are clearly defined).
Ricardo uses the EPA procedure to estimate the cost components, which are then used
to compare the EPA-derived costs against the cost impact assessment by Ricardo in the
later sections of this report. This section explains the cost estimation approach that EPA
followed, and the corresponding individual cost component numbers that Ricardo has
derived using the EPA approach.
EPA has classified the cost impacts of the proposed regulations into three different cost
categories and has identified procedures to estimate those costs. The direct
manufacturing costs (DMC) involve the cost of materials and additional components that
are perceived to be necessary to meet the proposed regulations. Indirect costs include
the other costs associated with the commercialization of the new technologies. They
consist of the warranty costs, the R&D costs associated with developing the new
technologies, and the profit margins that the OEMs add before selling those new vehicle
products to purchasers. It is important to note that all the costs estimated with this
approach represent the cost to the ultimate consumer. Direct manufacturing costs and
indirect costs together represent the technology costs overall. Under EPA’s approach, the
third cost category is the operational cost impact of the complete technology package
over the vehicle’s life. In the following sub-sections, this report will delve into the methods
and cost estimations. Later in the report, comments on the feasibility of these costs will
be analyzed.

3.1 Direct Manufacturing Costs

EPA’s approach to estimating the direct cost impacts of the proposed regulations involves
estimating baseline costs and then the incremental costs of additional components
needed to meet the proposed regulations. EPA estimates absolute emissions component
costs for the base case scenarios and for Options 1 and 2, and then estimates the
difference between those costs to calculate the incremental costs associated with the new

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regulations. In this analysis, EPA has assumed that the same additional emission-control
hardware will be needed for both Options 1 and 2.
The cost of the base engine was estimated in reliance on a study conducted by ICCT.
ICCT has evaluated the additional emission-control components needed to comply with
the various steps of emissions standards. The incremental hardware evaluated by ICCT
includes upgrades to fuel systems, variable geometry turbochargers (VGT), exhaust gas
recirculation (EGR), and EGR cooling systems. The ICCT study was performed using a
12L engine, and accordingly, for heavy-duty diesel engines consistent with EPA’s study
(13L), the costs calculated need to be adjusted to reflect the different engine capacity.
The inherent assumption by EPA in this method is that linear scaling of the ICCT costs
provides a reasonable estimate for costs corresponding to a 13L engine. Neither EPA nor
Ricardo has validated that assumption. Nevertheless, for simplicity, that scaling method
is assumed to provide the best estimate. The ICCT study was performed in 2015, and
hence, all the costs estimations made were developed in US dollars, equivalent to 2015.
A GDP-based deflator was then used to adjust those values to the 2017 US dollar
equivalent.
Table 2: Engine Hardware Cost Impact Assessment

Additional hardware beyond that listed above is projected to be necessary to comply with
the proposed regulations. Valvetrain improvements, additional engine hardware, and
additional after-treatment systems are identified as being necessary. Valvetrain
improvements primarily include cylinder deactivation systems (CDA) and associated
component upgrades. Aftertreatment systems include diesel oxidation catalysts, a diesel
particulate filter, selective catalyst reduction systems, canning and dosing systems.
Closed crankcase ventilation systems are also part of the proposed incremental

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technologies to comply with the proposed regulations. EPA estimates the hardware costs
for those additional incremental systems in its cost impact analysis. The overall system
and incremental costs are calculated accordingly.
To estimate the cylinder deactivation (CDA) system costs, EPA has used a “teardown
study” and commissioned an external contractor to perform that study. The teardown
study was performed on a modified Cummins X15 engine to incorporate a cylinder
deactivation system with integrated exhaust braking. The additional hardware systems
necessary to add the CDA feature onto the X15 engine were included. The teardown
study was performed, and the bottom-up cost estimate of the cylinder deactivation system
components was developed. CDA components were added to a base engine, and the
component cost of the system was estimated. EPA’s RIA directly incorporates that
teardown cost study. EPA did not include in the RIA an explanation of why the Agency
believes it is justified in using the teardown study without any adjustments. Importantly,
the teardown study appears to reflect the cost to component suppliers in the supply chain,
without including the supplier profit included in the price charged to the OEMs who
purchase the components at issue from those suppliers and then integrate those
components into their engines. Notwithstanding that important difference, EPA is using
the estimated component-supplier cost as the OEM cost, and then is adding indirect costs
to determine the costs to the consumer. The investigation to ensure the accuracy of that
inherent assumption of equivalent cost is not included in EPA NPRM.

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 Table 3: Cylinder Deactivation Hardware & Associated Costs (2019 $)

The teardown study’s costs are estimated based on the 2019 Cummins engine.
Accordingly, the costs estimated in the study are adjusted to 2017 US dollars for
alignment with the rest of the analysis.
Table 4: Cylinder Deactivation Cost Adjustment

EPA also has used academic research material combined with engine manufacturers’
technical descriptions of exhaust after-treatment system (EAS) components submitted as
part of engine certification packages to estimate the incremental costs of exhaust after-

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treatment systems. The costs estimated from those sources were then adjusted to reflect
2017 US dollar equivalents.
Table 5: Aftertreatment System Cost Estimation

3.2 Indirect Costs

The objective of EPA’s cost impacts analysis is to estimate the impact of the proposed
regulations on the ultimate purchaser. Accordingly, in addition to the estimated costs of
additional engine hardware and components, the other elements of increased incremental
costs are included in EPA’s indirect cost category. That category includes the warranty
for the additional components, the R&D effort it takes to design and build the new
hardware and components, various other additional costs, and profit markups that the
OEMs may charge as a part of their pricing strategy. Indirect costs are generally
recovered by allocating a share of the indirect costs to each unit of goods sold.
EPA uses a unique approach to estimate the indirect costs from the direct material costs
– the elements of indirect costs are predicted as a fraction of direct material costs. The
“retail price equivalent” (RPE) approach uses retail prices to break down the long-term
prices of components to their individual building blocks and then uses those prices to
estimate the indirect cost for the incremental components and base components. To
follow that approach in this case, EPA has relied on publicly available data related to the
long-term retail prices for several engine and engine/truck manufacturers, as derived from
filings with Securities and Exchange Commission. The RPE approach, which is based on
historical data of component prices, may work well for existing components that undergo
incremental product upgrades. However, its accuracy in estimating costs for new
technology products is questionable and represents a weakness in the EPA methodology.

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 Table 6: Retail Price Equivalent Methodology

Historical data for heavy-duty trucks predicts that an additional 42% cost on top of the
estimated direct costs is a reasonable estimate of the indirect costs for the necessary
emissions-related components. But again, that is largely based on the RPE approach,
and so could represent an underprediction of the actual indirect costs for the new
emissions-control technologies and components required to comply with EPA’s proposed
regulations.
For the baseline direct cost estimates, EPA’s RIA includes details on the approach and
calculation that EPA used. However, the RIA does not provide details on individual cost
numbers in each of the above categories for indirect costs. Thus, Ricardo has attempted
to recreate EPA’s calculations for Class 8 heavy-duty diesel engines using the EPA
methodology.
Table 7: Indirect Cost Estimation

The indirect cost impacts of EPA’s proposed Options 1 and 2 are then calculated based
on the updated hardware costs, including the additional components while accounting for
the significantly extended warranty and useful life requirements for Options 1 and 2
relative to today’s warranty and useful life requirements. To account for that, EPA has
used multipliers that are referred to as “scalars” to correspondingly increase the warranty
and R&D cost allocations for the two options. As noted, Option 1 is more stringent than

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Option 2 and is implemented in two steps. Consequently, the resulting warranty costs for
Options 1 and 2 are not identical.
Table 8: Warranty Parameters

For Option 1, the MY2027 – 2030 warranty is proposed to be extended out to 7 years or
450,000 miles from 2027 – 2030, and in the next step, it extends further out to 10 years
and 600,000 miles. EPA applies a multiplier (scalar) to the estimated warranty costs so
that the warranty costs are linearly scaled-up based on the increase in warranty mileage
coverage. For Option 1, step 1, the warranty scalar is a ratio of 450,000 miles (step 1
warranty coverage) to 100,000 miles (base case). And similarly, for Option 1, step 2, the
warranty scalar is the ratio between 600,000 miles to 100,000 miles. The warranty scalars
are applied to warranty cost estimates included in the estimated indirect costs (3% of
direct material costs for the base case). Similarly, for Option 2, the warranty scalar is the
ratio of 350,000 to 100,000 miles, and that is applied to the indirect cost estimation. The
linear scaling-up of warranty costs, as utilized in EPA’s approach, may not represent the
actual cost impacts of the proposed emissions-warranty extensions. Further discussion
on this topic is included in the later sections of this report.
Table 9: Warranty Multiplication Scalars

EPA’s calculation of R&D costs uses a slightly different approach. The R&D costs
estimated by the RPE method are assumed to be directly proportional to the regulated
useful life requirements. For warranty costs, the scalar was applied to all years of the
vehicle sales. However, for R&D costs, the scalar adjustment (of 5% of new component
direct costs) is applied only for the first three years following the introduction of the new
regulations.

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 Table 10: Useful Life Parameters

For Option 1, there are 2 steps, and so a scalar is applied for 2027 – 2029 and then a
different scalar for 2031 – 2033. For Option 2, the scalar is applied only from 2027 – 2029.
Also, there is a difference in how the scalar is determined for R&D costs as opposed to
emission warranty costs. For R&D costs, a vehicle useful life factor is used to determine
the relevant scalar. For Option 1, step 1, the useful life is to be increased from 435,000
miles to 600,000 miles, and hence the scalar for the corresponding years is the ratio
between those numbers (600,000/ 435,000). For step 2 of Option 1, the useful miles are
to be increased from 600,000 miles to 800,000. Thus, for the corresponding years, the
new scalar is the ratio between 800,000 and 600,000. For Option 2, the scalar is the ratio
between 650,000 miles to 435,000 miles and is applied from 2027 – 2029.
The introduction of any new technology involves significant R&D efforts and activities.
R&D costs are usually estimated with a breakdown of product development activities,
efforts, and fixed R&D costs such as testing, validation, etc. EPA’s analysis does not
include an estimate of any of those details to ensure that the Agency’s cost calculations
are in line with the expected R&D efforts and costs as estimated with reference to those
fundamental product development activities and principles. That too is a weakness in
EPA’s approach.
Table 11: R&D Cost Multiplication Scalars

Under EPA’s RPE approach, the identified scalars are used to scale-up in a linear manner
the warranty and R&D costs estimates for the new standards; the calculated scalers are
applied to the RPE-based indirect manufacturing costs to derive the corresponding
warranty and R&D costs. For the base case, the direct manufacturing costs are derived
from the emissions-related components for the current engine. For Options 1 and 2, the
sum of base costs and the incremental hardware costs is used as the basis for EPA’s
cost estimation.

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 Table 12: Warranty & R&D Cost Magnitudes

With the R&D costs, and warranty costs derived for Options 1 and 2, EPA’s calculations
for profits and other costs are relatively straightforward. They are determined as a direct
percentage of the updated direct manufacturing costs (base costs + increments) and
applied to all model years. They are similar for both Options 1 and 2 as their direct
manufacturing costs are the same.
Table 13: Additional Indirect Costs

Table 14 provides an overview of all the technology costs (direct and indirect costs) for
the base case and for EPA’s proposed Options 1 and 2, as assessed using EPA’s
methodology. Phases in the table 14 represents the implementation stages. For example,
for option 1 warranty costs, the phases 1 and 2 represent the 2 stages of implementation
corresponding to the 2 regulation changes. Similarly for R&D costs for option 1, the cost
is unique for MY 2027 – 2029, MY 2031 – 2033 and beyond and these are represented
in the table as phases 1, 2 and 3.

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 Table 14: EPA Technology Cost Estimation Summary (2017 $)

3.3 Operating Costs

The proposed stringent emission standards are expected to increase diesel exhaust fluid
(DEF) dosing rates in heavy-duty vehicles, thereby increasing overall DEF consumption.
Also, the repair and maintenance costs of heavy-duty vehicles can be expected to
increase with the introduction of new emissions-control technologies and components.
The empirical relationship between DEF consumption and NOx reduction is used by EPA
to estimate the increased DEF consumption costs. Using the known relationships
between DEF consumption and NOx reduction, the cost of DEF per unit, and the overall
costs of DEF for the baseline, and for Options 1 and 2 are estimated in relation to per-
mile operation of a vehicle. The cost evolution of DEF fluid in the upcoming years are
considered and used in EPA’s cost estimates. Accordingly, considering the DEF fluid cist
evolution over the years, EPA have developed estimates for DEF costs on a per-mile
basis for various model years.

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 Table 15: EPA DEF Costs in Respective Years

To estimate the total per-vehicle impact of the increased DEF consumption required
under the proposed regulations, the per-mile costs as estimated above are reconciled
with the total vehicle useful life for the respective scenarios. A simple average of the DEF
costs is used for this calculation. Average DEF costs over the years of total useful life
gives the total DEF fluid costs for the various scenarios, which are then used to determine
the incremental DEF costs.
Table 16: EPA Estimate of Lifetime DEF Costs

EPA’s estimation of incremental repair and maintenance costs is more nuanced. There is
an increased chance that a longer duration warranty would result in lower owner/operator-
incurred repair costs, since those costs would be borne by the manufacturer, and there
is the possibility that higher-cost emission control systems may result in higher repair
costs if and when repairs are needed. To model the incremental repair and maintenance
costs, EPA relies on published material from the Fleet Advantage and American
Transportation Research Institute. Those published materials include maintenance costs
in cents per mile for the various years that a vehicle remains in operation. The Fleet
Advantage data includes the maintenance costs for the full vehicle, (not only the
emissions related components alone). To isolate the maintenance costs for emissions-
related components, a breakdown of the maintenance data is used. The percentage of
total repair and maintenance costs attributable to different vehicle systems is determined
by EPA. Emissions related share is determined to be 10.8% of the total repair and
maintenance costs. That adjustment factor is then applied. Annual mileage

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considerations are assumed to determine and isolate the portion of repair costs covered
under the proposed extended warranties. However, only a portion of the incremental
warranty costs needs to be included in the cost increment assessment (the other portion
will be covered by the OEM’s factory warranty). Adjusting the emissions-related portion
of the extended warranty costs in this manner, EPA estimates the overall resultant repair
and maintenance costs for the different vehicle categories.
Table 17: EPA Maintenance & Repair Costs in Respective Years

While cost per mile data is explicitly included in EPA’s analysis, the actual maintenance
cost per vehicle is not included in the RIA or NPRM. Accordingly, Ricardo utilizes the cost
per mile figures and extends the analysis to determine the overall repair and maintenance
costs per-vehicle through the proposed extended useful life periods. Total useful life for
the baseline and the two options are used for this calculation. Table 18 summarizes the
total repair and maintenance costs projected on a per-vehicle basis using EPA’s data.
Table 18: EPA Estimate of Lifetime Maintenance & Repair Costs

3.4 Summary of Total Cost

Using EPA’s methodology as detailed above, Ricardo has calculated the total incremental
cost per vehicle for the base case and for EPA’s Options 1 and 2. The total costs are a
sum of direct manufacturing costs, indirect costs, and the operating costs listed in the
previous sections. Table 19 summarizes and breaks down the total and allocated costs
associated with Options 1 and 2 as estimated using EPA’s procedure.

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 Table 19: EPA Total Cost Estimation Summary (2017 $)

4. Ricardo Cost Analysis

In addition to deriving a full per-vehicle cost estimate using EPA’s methodology and
analysis, Ricardo conducted an independent, comprehensive incremental cost analysis
to assess the impacts of EPA’s proposed Options 1 and 2 on the cost of heavy-duty
engines and vehicles. Like EPA, Ricardo’s analysis aims to establish the incremental
costs associated with implementing new emission-control technologies to meet the new
regulatory requirements. Unlike EPA’s RPE methodology for estimating indirect costs,
however, Ricardo’s methodology identified specific cost drivers and then worked with
industry subject matter experts and with engine and vehicle manufacturers to quantify
those costs, followed by independent validation. The HHDDE platform assessed in
Ricardo’s study focused on diesel engines in the 12-13L range and intended for use in

23
Class 8 vehicles. The study assumes that Southwest Research Institute’s (SwRI) “Stage
3” Prototype Technology Package would be sufficient to comply with the new low-NOx
emission targets and related requirements. OEMs who participated in Ricardo’s study
were asked to compare their MY21 baseline engine and after-treatment systems with the
Stage 3 system and confidentially share their incremental costs for implementing the
Stage 3 technical solution. The incremental hardware costs, the costs associated with the
extended the warranty and useful life, incremental costs of dealing with an expanded in-
use testing program, R&D, engineering and testing costs are all included in Ricardo’s cost
estimation study.
Figure 2: Cost Elements Included in the Study

Although there are methodological differences, EPA and Ricardo both estimated the cost
impacts of the proposed regulations by evaluating the cost elements that make up the
total incremental cost impact. Figure 3 details how these approaches were different, and
the adjustments that were made to make them more directly comparable.

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 Figure 3: EPA & Ricardo Approaches Provide a Direct Comparison of Incremental Costs

4.1 Direct Costs

Ricardo’s direct cost estimates are calculated in a similar way as the EPA’s - by estimating
the hardware changes and developing cost estimates for the identified changes. Some
OEMs indicated that they would need additional incremental engine technologies beyond
those in the Stage 3 solution. Those technologies are not listed in this report to maintain
confidentiality but can be broadly characterized as reducing parasitic engine losses and
enabling higher conversion efficiency of exhaust gases. The costs for these technologies
additional to the Stage 3 solution, are included in Ricardo’s direct cost estimates and
detailed in table 20. In addition to the direct hardware costs needed for the implementation
of the new emissions-control technologies, Ricardo also estimated the additional direct
cost elements such as existing component upgrades (such as sensors, seals, etc.),
hardware integration costs to existing powertrain systems, and R&D costs to calibrate the
new engine designs. Those costs are also included as a part of Ricardo’s analysis. Table
20 provides a summary of the engine hardware related costs for options 1 and 2.

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 Table 20: Ricardo Estimate of Engine Hardware Costs (2021 $)

Ricardo estimated the expected after-treatment system costs using an approach similar
to that used for the incremental engine hardware costs. OEMs were asked to provide
detailed responses to an RFI covering the componentry and cost elements necessary to
meet the proposed requirements of Options 1 and 2. The RFI included a detailed
breakdown of the relevant after-treatment components down to individual numbers of
sensors. Ricardo vetted the OEM cost projections through an independent
comprehensive assessment of the listed components and the corresponding costs. Table
21 provides a summary of the projected average after-treatment system costs.

26
 Table 21: Ricardo Estimate of Aftertreatment System Costs (2021 $)

Under Options 1 and 2 of the proposed regulations, and in addition to the proposed
reduction of the applicable NOx standards, there is a 50% reduction in the tailpipe PM
standards (i.e., from 0.01 to 0.005 g/bhp-hr.). In its incremental cost analysis for after-
treatment system costs, Ricardo assumes a $0 incremental cost for DOC and DPF
relative to MY21. From an emission reduction standpoint, OEMs did not estimate the cost
of complying with the new particulate matter standard. Thus, this analysis does not
include particulate matter-related technology costs. To achieve a 50% reduction, a more
efficient DPF (less porous) will be required, which could drive up the overall costs of the
after-treatment. Nonetheless, those costs are not included in this report.

4.2 Indirect Cost Elements

In contrast to the approach taken by EPA, Ricardo did not rely on the RPE methodology
to calculate the indirect cost elements. Instead, Ricardo used a bottom-up approach to
define the overall indirect costs through engagement with the engine and vehicle
manufacturers. In that process, Ricardo used a framework that included a detailed
breakdown of the constituent indirect costs. The framework included methodologies for
calculating incremental warranty costs, incremental costs for extension of useful life,
R&D, testing, and other indirect cost elements. Unlike the direct cost calculation in the
previous section where the Stage 3 system was assumed to be the basis for compliance

27
with either Option 1 or Option 2, the supplemental indirect cost elements and estimates
differ under proposed Options 1 and 2.
As the mandated warranty is extended for all emissions-related components, there is an
expected cost to be incurred not only to cover the warranty on new components (from
mile 1), but also to cover the incremental warranty costs for existing emissions-related
components. In total, there are costs to repair and replace existing and new components
throughout the extended emission warranty periods, costs due to additional recalls, and
the engineering headcount and resources required to manage the expanded
warranty/recall programs. Table 22 summarizes the incremental costs attributable to the
extended emission warranty requirements under Options 1 and 2.
Table 22: Ricardo Estimate of Extended Warranty Costs (2021 $)

The durability of existing components and of the new incremental emissions-related

components will need to be improved to meet the longer useful life regulations that are
elements of Options 1 and 2. Engineering, testing, and validation efforts will be needed
to improve existing components' durability and to ensure the durability of new
components, and incremental material upgrades will need to be made for existing
components. Increasing the durability of certain components is technologically feasible.
However, not all components in the new after-treatment system can be made to be
durable throughout the extended full useful life periods outlined in the proposed
regulations. Thus, replacing the after-treatment system during its useful life will be a more
pragmatic approach. Depending on the final implementation of the after-treatment
solution (i.e., a 1-box or 2-box design, etc.), the replacement costs can be substantial.
The consensus from industry experts and multiple OEMs indicates that such
aftertreatment system replacements are necessary, and corresponding costs should be
included in the cost impact assessment.

28
For example, in most MY21 heavy-duty diesel applications, exhaust flow from the engine
containing HCs, soot, and other emission constituents first passes through a DOC and
DPF, where they are oxidized, filtered, etc. before getting treated in an SCR system for
NOx reduction. In the proposed Stage 3 prototype configuration, LO-SCR is added
upstream of the DOC and DPF. That will expose the LO-SCR catalyst surface directly to
the exhaust flow coming from the engine (containing HCs and soot). The performance
and longevity of SCRs when they are upstream to the DOC and DPF are much poorer
than when they are downstream. This makes the LO-SCR element in the system more
susceptible to replacements during its useful life.
Similarly, ammonia (NH3) sensors in the proposed Stage 3 after-treatment systems are
also candidates for replacement costs. Ammonia sensors available in the market become
less accurate, with lower durability and significant drift characteristics, after 30,000-
50,000 miles. This can lead to false readings, making the DEF dosing unreliable. Table
23 summarizes the likely resultant incremental costs associated with the new extended
useful life requirements.
Table 23: Ricardo Estimate of Extended Useful Life & Maintenance Costs (2021 $)

There are additional testing procedures that are mandated as a part of the proposed
regulations. Additional technologies must be commercialized to comply with new
regulations, and such research and development costs are included in this analysis. R&D
also includes any design verification testing, field testing, calibration, and certification.
Ricardo took steps to ensure that the R&D effort included in this section does not include
the engineering and development costs included in the useful life extension section, so
the R&D effort is not counted more than once. Investment in laboratory, metrology, and

29
equipment also is required to comply with the new regulations. In addition, an upgrade to
on-board diagnostic tools is deemed necessary by the manufacturers to align with the
new regulations. The cost of those additional items is smaller in comparison with the other
major cost drivers such as direct costs, warranty, and useful life extension.
Table 24: Ricardo Estimate of Additional Allied Costs (2021 $)

4.3 Operating Costs

In estimating operating cost increments, Ricardo recognizes that DEF fluid cost
represents the most significant cost driver resulting from the new regulations. Ricardo’s
prior study did not focus on quantifying the increase in operating costs driven by DEF
consumption. Ricardo recognizes that it is difficult to quantify the DEF consumption
increase without finalizing and testing the technology solutions. Despite this information
gap, to ensure that Ricardo’s current analysis considers the DEF-related operating cost
increases, Ricardo uses EPA’s method for DEF cost estimation. The other major element
of operating costs, namely the repair and maintenance in Ricardo’s approach, is already
included in the costs associated with extending useful life. Hence, the operating costs in
this approach consist only of DEF incremental costs, as aligned with EPA’s analysis.

30
 Table 25: Ricardo Estimate of Lifetime DEF Costs (2017 $)

Additionally, to achieve compliance with the proposed new regulations, the introduction
of a LO-SCR is necessary. Ricardo recognizes that with the LO-SCR included, the system
will be exposed to additional backpressure which may drive up the fuel consumption at
different operating conditions. Ricardo assumes that technological improvements related
to cylinder deactivation, utilization of EGR cooler bypass etc., will be able to nullify the
impacts of additional backpressure from LO-SCR, and, as a result, the impact of
additional fuel consumption on total cost of ownership is not included in this analysis.

4.4 Cost Summary

A summary of Ricardo’s cost analysis is listed in Table 26. The sum of technology costs
includes direct and indirect costs along with operating costs. Since Ricardo’s original cost
calculations were evaluated with dollar values equivalent to 2021, we have adjusted those
costs to 2017 US dollar equivalents to be in line with EPA’s cost method. The sum of
direct and indirect costs represents the portion that the manufacturer typically must
recover at the point of sale.

31
 Table 26: Ricardo Cost Incremental Cost Analysis Summary (adjusted to 2017 $)

4.5 Comparison of EPA vs. Ricardo Cost Assessment

Although EPA and Ricardo have identified cost impacts using their unique approaches,
the fundamental framework of the cost elements studied are aligned. While some
differences in sub-categorization exist, Ricardo was able to make direct commensurate
comparisons of the various cost line items with only minor adjustments in categorization.
Table 27 provides a summary of the comparison of cost estimates. Of note, while EPA
predicts the incremental costs for Option 1 will be $16,750, Ricardo’s analysis shows that
the incremental costs for Option 1 will be $42,051. That difference is largely driven by the
differences in the methodologies that Ricardo and EPA utilized.

32
Table 27: EPA vs. Ricardo Incremental Cost Comparison

Figure 4: Breakdown of EPA vs. Ricardo Cost Comparison

33
From a closer examination of the differing cost increments assessed through both of the
approaches, there appear to be three key areas where the cost estimates are quite
different – engine hardware, warranty, and extension of useful life (that includes
maintenance). The following sections of this report goes into the details of those
differences and the rationale behind them. In addition to those key differences, the
following section also highlights additional commentary about the NPRM and RIA.

5. Reconciliation of Inconsistencies in EPA Approach

5.1 Engine Hardware
There is a significant difference in the cost increment calculations for engine hardware
costs between the EPA and Ricardo approaches. The difference is attributable primarily
to the incremental costs ascribed to cylinder deactivation and EGR cooler bypass.
Table 28: Engine Hardware - EPA vs. Ricardo

EPA estimates its CDA costs in reliance on a “teardown study” conducted by an external
agency (details of which are available in a white paper referenced in the NPRM). That
study estimates the cost of CDA systems to be $206 (2017 $). EPA reports using a tier 1
supplier’s cost for CDA systems as the basis for an OEM’s cost for such systems.
However, it is not explicit in the NRPM or RIA whether the cost teardown study provides
an actual estimate of costs to the OEM, or the costs to the CDA system supplier. The
white paper indicates that a bottom-up cost study of supplier components was performed
to determine the CDA costs, and that, as a result, the cost calculations were performed
based on the cost of the CDA components at the supplier level. Such an approach,
however, is incomplete. Additional markups are needed to translate that supplier cost to
the OEM cost. Studying the current sources of valvetrain components, CDA system
components are likely to be sourced from tiered suppliers, and it is necessary to include
the markups that those suppliers would include when selling their CDA components to
the OEMs. EPA has marked up its direct costs by 42% in earlier analysis that utilized the
RPE method. Accordingly, a markup of that magnitude should be added (at a minimum)
to the CDA cost estimates. In fact, those markups should be higher for newer technologies
like CDA when newly introduced.

34
Another problem with EPA’s approach is that there is insufficient clarity regarding the
sales volumes that the external agency assumed as a part of its cost teardown study. The
teardown study must have been made using certain projected sales volumes, and those
volumes would have resulted in a certain amortization schedule for the fixed costs
incurred. Nonetheless, the details regarding the projection of heavy-duty vehicle sales
are missing in the analysis.
In that regard, EPA is using cost numbers corresponding to the size of the total heavy-
duty vehicle market. However, for individual OEMs, the fraction of market share they
possess dictates how their fixed costs are amortized into the per-vehicle price of the new
components. The nature of market segmentation is a factor that dictates how fixed costs
can be distributed among an OEM’s products. The external analysis that EPA has relied
on appears to have considered the overall market size, and hence it could be very
different from the actual costs for the OEMs. The method used by the external agency,
although suitable in other contexts, needs to be adjusted for use in EPA’s cost impact
analysis. It appears from the NPRM and RIA that EPA has not made that adjustment to
its cost assessment. Failing to make that adjustment necessarily results in an under-
estimation of costs, as do the other weaknesses in EPA’s approach.
The third major factor driving the cost difference relates to the peripheral costs associated
with CDA systems. EPA’s analysis only considers the CDA hardware as a simple add-on
system to the existing base engine. However, additional integration costs are associated
with modifying a current heavy-duty engine and vehicle to integrate with a CDA system,
costs which are not considered or included in the EPA study. Additional sensors,
extensive engine ECU programming, calibration, and performance testing, including for
noise, vibration, and harshness (NVH) issues, is integral to that integration process.
EPA’s analysis does not include any of those factors, focusing only on the CDA hardware
costs. Ricardo interfaced with several heavy-duty truck OEMs and internal experts to
develop an estimate of those additional costs.
Another aspect of engine hardware that EPA does not include in its analysis is the
inclusion of the EGR cooler bypass in the system. To ensure optimal engine functioning,
under certain operating conditions, the EGR cooler bypass is necessary to meet the
specified parameters of regulations.
After adjusting the EPA cost calculations to account for the key factors highlighted above,
EPA’s cost estimates align quite well with Ricardo’s cost estimates, particularly when the
necessary adjustment regarding market sales volumes is made. Table 29 provides the
summary of EPA’s cost estimate with the recommended adjustments.

35
 Table 29: Adjusting EPA Engine Hardware Cost with Additional Identified Factors

In summary, EPA’s estimate of the CDA system costs vastly underestimates the actual
costs it will take to fully integrate CDA systems into heavy duty engines and vehicles. The
direct costs in EPA’s methodology are predicted to be lower, which then form the basis
of other cost predictions and have a roll-on effect of further under-estimating the overall
costs.

5.2 Warranty
The following table provides a comparison summary of the warranty costs as estimated
by Ricardo and EPA. There is a significant difference in the results of the incremental
warranty cost calculations. This section explores the details of that difference to identify
the likely reasons behind the identified inconsistencies between EPA’s and Ricardo’s cost
assessments.

36
 Table 30: Warranty Costs - EPA vs. Ricardo

Warranty costs in the EPA analysis are estimated using a linear extrapolation from current
warranty costs. Ricardo’s approach is quite different from that EPA methodology. Ricardo
developed incremental cost estimates for increasing the reliability of existing components
and added on the incremental warranty cost of the new components. Those costs were
estimated through a detailed RFI to OEMs, and were then corroborated through
consultations with industry experts.
There are a number of weaknesses in EPA’s methodology for estimating incremental
warranty costs. EPA based its calculations on a base case, and then extrapolated from
that base case using a scaler derived from the increased warranty-mileage period. EPA’s
base case calculation for warranty cost is 3% of the material cost of the component. The
background rationale behind that 3% is not clear. While the use of historical data can be
a valid approach for evolutionary changes in products and technologies, the dramatic
systemic and technology changes under this rulemaking proposal clearly amount to a
case of new technology introduction. Thus, adhering to the same approach in both of
those cases does not represent the best approach to model the associated incremental
warranty costs.
Also, the magnitude of warranty cost as a proportion of material costs as considered by
EPA is much lower in comparison to the aftertreatment system warranty costs incurred
historically by the OEMs. Ricardo studied emissions-related component data to assess
the warranty performance of such components, and that analysis shows that the actual

37
observed warranty costs as a fraction of direct material costs is much higher than the 3%
number assumed by EPA in its analysis.
Ricardo validated this distribution for emissions-related components with an analysis of
failure-related data from the OEMs. Ricardo studied detailed component failure data, and
those failures were assessed with respect to vehicle mileage. The data suggests that,
with an increase in vehicle miles traveled, the failures of components tend to behave
nonlinearly. Warranty performance of components typically follows a Weibull distribution.
The Weibull distribution is an exponential distribution with parameters that vary
throughout the life of the vehicle. Consequently, linear modeling of incremental warranty
costs as EPA has done in its analysis is not accurate.
Figure 5: Field Data on Warranty Behavior and Costs

Ricardo also reviewed historical data on the costs associated with the optional extended
warranties that OEMs have offered, and then adjusted those costs to correspond with the
longer warranty periods under the proposed regulations. The OEM data that Ricardo
received appears to be in line with incremental warranty costs as estimated using
Ricardo’s approach.

38
 Figure 6: OEM Extended Warranty Costs

EPA’s analysis takes a different approach to model the anticipated component failure
rates and associated warranty costs. EPA uses a linear scalar (based on projected and
current warranty coverage) to scale-up the warranty costs that will result from the
increased warranty claims under the Option 1 and 2 extended warranty periods. That
approach, although it reflects the upward trend in anticipated warranty costs, is not a
proper or reasonable representation of warranty costs. Failure rates of components,
especially towards the tail-end of an extended warranty period, exponentially increase.
Using a linear scalar to represent such a non-linear trend grossly underestimates the
actual warranty costs that will be incurred.
EPA’s estimate of the magnitude of warranty costs as a percentage of direct material
costs (a 3% estimate) is inherently lower than the actual percentage. That under-
estimation, coupled with EPA’s linear extrapolation of costs where the actual costs follow
an exponential distribution, vastly under-predicts the actual warranty costs at issue, as
revealed by comparing the EPA cost calculations against Ricardo’s assessment.

5.3 Maintenance
EPA and Ricardo follow very different approaches for estimating the maintenance cost
impacts of the proposed regulations. Based on consultation with the leading
manufacturers, different manufacturers have varied strategies for implementing the new
technologies required to comply with Option 1 or 2. That said, most manufacturers believe
that the replacement of ERCs is needed at some point in the vehicle’s extended useful

39
life. The current level of durability of technologies has not evolved enough to be able to
adhere to the extended useful life requirements proposed in the NPRM. As a result, and
given the risks and costs of recalls, manufacturers do not foresee sufficient technology
development in the next few years to ensure that the useful life regulations can be met
without aftertreatment component replacements. That reality is different from the
assumptions behind EPA’s cost modeling approach, where any increased maintenance
costs are calculated solely based on the increased ratio of vehicle miles covered under
former versus future mandated emission warranties.
The Stage 3 demonstrator technology assumed to be required for meeting the new
proposed emissions regulations includes a LO-SCR system upstream of the DOC and
DPF, exposing it to the engine-out emissions including particulate matter, soot, etc. This
has the potential to impact the performance of the LO-SCR, and consequently,
maintenance and replacement of the LO-SCR system is deemed necessary within the
extended useful life. Ammonia sensors also are proposed to be used in the Stage 3 after-
treatment system. Current ammonia sensors are prone to performance issues and
reliability concerns. Replacing ammonia sensors will be imperative during the operational
life of the vehicle. These are examples of just some of the necessary component
replacement costs that are not included in the EPA methodology.
This fundamental difference in the cost calculation approach, as summarized below, is
the key reason behind the large cost differences in the results of the two approaches.
EPA has simply assumed that ERCs will not need to be replaced even under a scenario
where the useful life period is extended out to 800,000 miles. Ricardo, based on direct
input from OEMs and other industry experts, applies the contrary data-driven conclusion.
ERC replacement will be necessary under the proposed extended useful life (EUL)
periods, and EPA’s analysis needs to account for that in order to calculate accurate
incremental cost estimates.

40
 Table 31: Extended Useful Life Costs (including maintenance) - EPA vs. Ricardo

5.4 R&D Costs

Using an approach similar to that for incremental warranty costs, EPA has used historic
R&D cost data calculated as a fraction of direct material costs to determine the
incremental R&D costs. To adjust for the increased stringency of the proposed
regulations, EPA has again made use of a linear scalar to calculate the R&D costs. In
essence, EPA uses a linear extrapolation of base R&D costs, with the linear scalar
derived from the relative increase in the mandated vehicle useful life period. The scalar
is applied to the first three years of the new product introduction. Although this approach
adjusts the total direct costs to include increased R&D costs, it does not explain the
assumed linear correlation between useful life and R&D costs. The proposed increases
to the current useful life periods will require extensive R&D efforts, but the manner in
which EPA attempts to account for those increased efforts does not appear to be
accurate. In essence, EPA is using a scalar to calculate indirectly the increase in R&D
without any corroboration with actual R&D costs. Ricardo believes that a bottom-up
approach for cost estimates could work best in this case. Under that approach, the
incremental technology that is needed to comply with the new regulations can be studied,
and the commercialization R&D costs can be estimated by breaking down the steps
involved and estimating the effort for the individual steps. A bottom-up cost estimate, as

41
Ricardo has done in this case, can provide a more accurate estimate of the necessary
incremental R&D costs.

5.5 Pre-buy/ Low-buy Analysis

Historically pre-buy and no-buy scenarios have occurred in the trucking industry in
response to new regulations due to the industry’s risk-averse nature and thin operating
margins. More specifically, the industry seeks to avoid the higher costs associated with
new regulations and new emission-control technologies, leading to a pre-buy
phenomenon. Typically, pre-buys occur in the years before the new regulations become
effective, while low-buys occur in the years thereafter.
EPA has estimated a pre-buy and low-buy in the RIA. EPA estimates that the pre-and
low-buy for Class 8 trucks may range from zero to an approximate two percent increase
in sales over a period of up to 8 months before the 2031 standards begin (pre-buy) and
a decrease in sales from zero to approximately two percent over a period of up to 12
months after the 2031 standards begin (low-buy). The EPA analysis is based on a
statistical analysis of historic pre-buys and low-buys from certain previous regulations
when implemented. Additional macro-economic factors can also influence the vehicle
sales numbers, and EPA’s analysis includes efforts to isolate the pre-buy and low-buy
associated only with new regulations.
Based on the incremental cost impacts that Ricardo has assessed, Ricardo developed
an estimate for the anticipated pre-buy/ low-buy. That estimate was performed through
collaboration with ACT Research, which has performed a detailed analysis for estimating
pre-buy/ low-buys for heavy duty trucks. Ricardo leveraged the data from ACT Research,
scaled it appropriately based on the incremental costs calculated for the different Options
1 and 2 of the NPRM, and then estimated the corresponding anticipated pre-buy and low-
buy volumes. Unlike ACT Research, whose pre-buy and low/buy estimates are based on
the full U.S. market for class 6-8 trucks and related forcasts for future volumes, Ricardo’s
estimates are based on the market share of the OEMs that enaged with Ricardo in this
study. Ricardo assumed a constant growth rate for market share of the participating
OEMs. It should be noted that the OEMs Ricardo worked with account for the vast majority
of the market and so their cumulative sales projections approximately represent the
overall size of the market. The effects of operating costs on pre-buy and low-buy are
minimal and hence the operating cost increments are not included in the analysis. That
is in alignment with EPA’s approach, which also does not include operating costs in the
Agency’s pre-buy calculations. The impacts of the pre-buy derived from EPA’s method
are much lower in comparison to Ricardo’s. The EPA analysis evaluates pre-buy and low-
buy only for 23 month prior to and after the implementation of the proposed regulations.
That difference could influence the costs and benefits estimation overall, and is a potential
weakness in the EPA analysis. The pre-buy/ low-buy estimate developed by Ricardo is
highlighted in the following Table 32 and Figure 8.

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 Table 32: Predicted pre-buy volumes

Figure 7: Pre-buy Analysis

5.6 Learning Curve Difference

With the introduction of any new technology, there is a learning curve associated with
commercialization. Manufacturers learn from the experience of manufacturing the product
and as a result, over the long term, the cost of the technology tends to decrease (though
at times this trend is reversed or mitigated when resolving field quality issues can increase
technology costs). EPA has included a learning curve trend in its analysis. Ricardo,
similarly, has received historic long term cost data from the manufacturers to determine

43
the learning curve effects to be included in the Ricardo analysis. Data was received
regarding multiple technology introductions and Ricardo developed an aggregate learning
curve considering all of the data. OEMs were asked to share historical cost data for some
technologies introduced in the market to meet regulatory requirements, and the cost
improvements they experienced after that. Due to confidentiality agreements, only a few
OEMs provided data for this study section at an anonymized aggregate level. Cost data
shared by OEMs included data for engine and after-treatment technologies. Figure 9
compares the learning curves as derived by EPA for Options 1 and 2, and as derived by
Ricardo based on OEM input.
Figure 8: Learning Curve Differences - EPA Options & Ricardo

EPA has included a learning curve that is steeper than OEM’s during the initial years of
the introduction. Most OEMs do not experience the steep learning cost reductions that
EPA uses in its analysis. That is because OEMs’ experiences with cost reductions
associated with learning are heavily dependent on their purchasing terms with respective
suppliers. Long-term supply contracts are usually included during sourcing decision
making. Those long-term supply contracts can delay the cost reductions that can be
derived from learning. Those delaying impacts are not reflected in EPA’s learning curves,
especially the steeper learning curves in the initial phases of the regulations.

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5.7 Additional Comments
5.7.1 Qualitative feedback on the proposed options
5.7.1.1 Lack of Emissions Compliance Margin
Manufacturers at the time of emissions certification (de-greened aftertreatment system),
typically certify their products at an emissions level that is lower than the family emissions
limit (FEL). That downward adjustment of emission targets from FEL accounts for
deterioration factors (DF), Infrequent Regeneration Adjustment Factors (IRAF), variability
in emission measurements, as well as production variability. The rationale for building in
this type of compliance margin is to help ensure that even as emission-system
performance gets degraded over its useful life, and experiences numerous regeneration
events and real-world operating conditions, the emissions at the end of useful life will still
be under the FEL.
Figure 9: Emissions Certification Targets & Compliance Margins

EPA’s proposed Option 1 is based on a FTP/RMC NOx standard set at 0.02 g/bhp-hr.
Factoring in the above-described elements of the compliance margins that OEMs need
to account for, the actual further-reduced emissions target necessary for OEMs to ensure
full useful life and in-use compliance with the Option 1 standard may be infeasible to
achieve.
5.7.1.2 Extended Useful Life requirements & challenges for low-annual-
mileage vehicles
The extended FUL requirement present difficult challenges for low-annual-mileage HD
vehicles.

45
 Table 33: NPRM Requirements - NOx Limits & Years of Compliance

The tables above show the proposed Option 1 NOx standards (FTP and RMC) on both a
mileage-basis and on a calendar years-basis. Vehicles that accumulate high annual miles
are expected to reach the useful life mileage limits well before they reach the useful life
year limits. Similarly low annual mileage-accumulating vehicles are expected to reach the
useful life year limits before they reach the useful life mileage limits. High annual mileage
vehicles will reach the IUL point much quicker than low annual mileage vehicles, which
will lead to quicker implementation of the less stringent NOx standard of 0.040g/hp-hr.
Low annual mileage vehicles will have to comply with the more stringent NOx standard
of 0.020g/hp-hr. over a greater proportion of their FULs. This poses a challenge for a
given engine and after-treatment platform that has different use cases. The feasibility for
low mileage vehicles to comply to a 0.02 g/hp-hr. standard for an extended duration needs
to be demonstrated, the details of which are not included in the NPRM.
5.7.1.3 Time Intensive Durability Demonstration Program (DDP)
Currently, manufacturers have the choice of aging an engine/ after-treatment system to
its full useful life or aging to a percentage (between 35% and 50%) of the useful life, then
extrapolating emission levels to the end of the useful life. EPA’s Low-NOx Regulations
would significantly change and lengthen the aging protocol for the DFs by requiring FUL
aging. Under the proposed regulation, manufacturers would age the engine/ after-
treatment system to a mileage that is less than regulatory useful life, which would then be
followed by bench-aging of the after-treatment system to regulatory useful life. The
combination of the engine and the bench-aged aftertreatment system would then be run
for at least 100 hours before collecting emission data for determination of the DF. That
proposed process is much more time intensive than the current practice. In some cases,
this will force manufacturers to accelerate their product development timelines since DF
determination is typically conducted on a production intended hardware set.

46
 There is no provision in the proposed regulations for carry-over DFs. In the current
regulations, there are provisions for carrying across DFs, which is essential for controlling
testing-related costs and meeting program timelines. EPA should provide an allowance
for carry-across DFs.

5.7.2 Hours in Operation Thresholds

The warranty regulations in proposed Option 1 include run-time thresholds for the engines
(22,000 hours for MY2027 and 30,000 hours for MY2031). Such run-time thresholds are
not included in Option 2. EPA does not provide sufficient background or rationale to
support this difference. Similar thresholds could be included for Option 2. Considering the
proportion between engine run-time and warranty miles in Option 1 and extrapolating it
accordingly, Ricardo estimates that 17,000 hours are appropriate for Option 2.
Table 34: Warranty Parameter Adjustment Including Hours in Operation for Option 2

6. Conclusion
EPA has released a rulemaking proposal for new emission standards and related
requirements for heavy-duty on-highway engines and vehicles. EPA also included a
detailed cost assessment of its rulemaking proposal. EPA is seeking feedback from the
industry stakeholders on the proposed regulations, the proposed options, the feasibility
of achieving and maintaining compliance with the proposed emission standards, and the
methodologies that EPA has used to assess the incremental costs that will be incurred
by OEMs and vehicle purchasers. Ricardo performed a detailed assessment of the
incremental cost impacts of the proposed regulations through direct engagement with
OEMs and consultations with Ricardo’s technical experts. Several areas are identified
where EPA’s approach and cost assessments are not sufficiently robust.
Ricardo developed its estimates of incremental cost impacts and compared them against
the incremental cost estimates derived by EPA. On close comparison, the major
differences in incremental costs can be attributed to differences in cost-assessment
approaches in three key areas – engine hardware costs, the costs of the proposed
extended emissions warranties, and the costs of the proposed extended useful life
periods. Ricardo examined all of those key areas to explain the differences that drive the
differing cost estimates.

47
 Figure 10: Key Areas of Focus Highlighting Higher Cost Differences

Engine hardware cost differences are driven by the costs associated with cylinder
deactivation and EGR cooler bypass systems. In EPA’s analysis, the CDA system costs
are calculated independently at the supplier level, and the full integration of CDA systems
into OEMs’ existing engines and vehicles is not considered. EGR cooler bypass systems
are not considered at all as a part of EPA’s estimated hardware costs. EPA’s warranty
cost estimation methodology grossly underestimates the expected incremental warranty
costs. EPA estimates warranty costs using an indirect RPE approach that is not correlated
against actual field data. Linear extrapolation of the indirectly derived warranty costs
based on VMT is performed, even though warranty costs over time are not typically linear.
In contrast, Ricardo estimated incremental warranty costs based on feedback from OEMs
and validated their feedback with industry experts. Also, historic data from OEMs
regarding the incremental costs associated with their optional extended warranties were
assessed and found to be in-line with Ricardo estimates. The difference in costs
associated with the proposed extended useful life periods result from a fundamental
difference in the approach used by EPA and Ricardo. The clear consensus from OEMs
is that in order to comply with the proposed regulations over the extended useful life
periods powertrain and aftertreatment part replacements are necessary at some point
during those extended useful life periods. Ricardo includes those necessary replacement
costs in its analysis, while EPA does not. Setting that key difference aside, the reminder
of the costs for extending the useful life periods are aligned between EPA and Ricardo.

7. Acronyms and Abbreviations

AT After-treatment

CARB California air resources board

DMC Direct manufacturing cost

DEF Diesel exhaust fluid

48
DF Deterioration factors

EGR Exhaust gas recirculation

EPA Environmental protection agency

ERC Emission-related components

FEL Family emissions limit

FTP Federal test procedure

HDOH Heavy-duty on-highway

HHDDE Heavy heavy-duty diesel engine

IUL Intermediate useful life

IRAF In-regen adjustment factor

LHD Light heavy-duty

LLC Low load cycle

LO SCR Light-off selective catalytic reduction

MHDDE Medium heavy-duty diesel engine

OEM Original equipment manufacturer

PM Particulate matter

RFI Request for information

SCR Selective catalytic reduction

SwRI Southwest research institute

VMT Vehicle miles travelled

49