Regulations

Diesel Engine Regulations

The Environmental Protection Agency (EPA) has identified reducing emissions from diesel engines as one of the most important air quality challenges facing the United States today. According to the American Lung Association, for example, over 90 percent of California residents live in areas with serious air quality problems, largely due to the transportation sector. Additionally, analysis by the American Lung Association shows that vehicles meeting current tailpipe standards will cause $14.5 billion in public health and societal costs annually in the United States. In Europe, the World Health Organization estimates that particulate matter (PM) claims an average of 8.6 months from the life of every person and that €58-161 billion could be saved if deaths from PM pollution were reduced, noting that diesel combustion contributes 1/3 of total emissions of PM less than 2.5 micrometers in diameter, or PM2.5. To address these issues, policies have been implemented in major markets across the globe that have significantly reduced diesel emissions relative to prior regulations. Increased regulations are expected to further reduce emissions levels.

Regulatory programs driving the market – United States

The EPA has established the National Clean Diesel Campaign in order to promote diesel emission reduction strategies and oversee regulatory programs that address new diesel engines as well as other innovative programs to address the millions of diesel engines already in use. The EPA estimates that more than 20 million diesel engines operating in the United States today fail to meet the new clean diesel standards, yet the engines can operate for 20 to 30 years. Retrofitting of this fleet is estimated by the EPA to cost approximately $7 billion.

In the United States, heavy duty diesel retrofits have been driven primarily by subsidy programs supported under the Diesel Emissions Reduction Act, or DERA, the American Recovery and Reconstruction Act, or ARRA, Proposition 1B in California, the U.S. Department of Transportation’s Congestion Mitigation and Air Quality Improvement, or CMAQ, program, as well as various other state and local programs.

Several U.S. state, county and city governments have ongoing retrofit programs for on- and off-road diesel engines. As with many environmental issues, California has been a leader in driving increasingly tough emissions standards for heavy duty diesel vehicles. Historically, most retrofitting in California has been done voluntarily with support from grant programs like those outlined above. However, in 2010, California passed the Truck and Bus Regulation, which mandates that all 1996 through 2006 diesel trucks in Class 7 (gross vehicle weight of 26,001-33,000 pounds) and Class 8 (gross vehicle weight greater than 33,000 pounds) be retrofitted with diesel particulate filters, if not so equipped, to meet state emission standards between 2012 and 2016, with 90 percent required by 2014. We estimate that this rule will require well over 100,000 heavy duty diesel trucks to be replaced or retrofitted.

Low Emission Zones driving the market – Europe and Asia

In Europe, air quality standards have been set within the European Union. One method being used to address increased air quality standards is the establishment of low emission zones (LEZs), 180 of which were in operation in 9 countries, as of December 2011, with others being planned in Europe and Asia. LEZs are areas or roads where vehicles are banned, or charged, if engine emissions exceed a set level. One of the largest and most important LEZs is in London. Due to stricter requirements that went into effect January 3, 2012, we believe the London LEZ regulations will have resulted in the successful retrofit of an estimated 20,000 additional heavy duty diesel vehicles in 2011and by early 2012. We anticipate targeting other larger LEZs in the future, including for example, those in Italy, the Netherlands and Germany.

We view the U.S. and European legislation, requiring significant reduction in particulate matter and nitrogen oxide emissions from on- and off-road diesel vehicles, as providing an opportunity for growth of both our heavy duty diesel retrofit systems and catalyst products. Catalysts using traditional technology generally require high platinum group metal loadings to comply with these standards, and diesel engine manufacturers are very concerned about the high price of these units. We believe our low- and zero-platinum group metals catalyst products are able to effectively address this concern. Additionally, we believe that fleet owners and operators complying with existing on-road legislation and regulations will continue to seek out more cost-effective suppliers for existing retrofit technology applications.