Just before the Environmental Protection Agency's (EPA) first round of clean-air regulations went into effect in October 2002, Schneider National made a mad dash to buy new trucks that wouldn't be subject to the new emissions standards for heavy-duty diesel engines and vehicles. "We didn't have time to evaluate the new engines," recalls Steve Duley, vice president of purchasing for the Green Bay, Wis.-based truckload and intermodal carrier. "It ended up costing us and disrupting our buying cycles."

The following year, instead of purchasing a couple of thousand trucks, Duley says, the company bought just 1,200 of the new models due to uncertainty over their fuel economy and reliability. Schneider's apprehension proved to be warranted: According to Duley, the new trucks cost roughly $5,000 to $8,000 more than their predecessors, were less reliable, were more expensive to maintain, and had a fuel-efficiency rating about 4 percent lower than trucks manufactured before October 2002.

The new, EPA-compliant trucks, in short, raised motor carriers' costs considerably—and they could eventually raise shippers' costs as well. "If you look at the engine over the life of the truck, the new ones are costing us an additional $15,000, or 2 to 3 cents a mile," says Duley. "We make adjustments to costs based on a number of different factors, but at the end of the day, our average pricing is adjusted to cover these costs."

What kind of engine Schneider National—and every other for-hire and private fleet—uses in its heavy-duty trucks is regulated by federal law. In 1970, Congress passed the Clean Air Act, which established air-quality standards that would minimize the air pollution found most harmful to human health. Six pollutants were specifically targeted: particulate matter, sulfur dioxide, carbon monoxide, ozone, nitrogen dioxide, and lead. After a series of legal battles between the EPA and trucking industry organizations, petrochemical manufacturers, and truck-engine manufacturers, new emissions rules went into effect in October 2002, requiring the manufacture of cleaner diesel engines and stricter emissions standards for heavy-duty trucks and buses.

The transportation industry is now preparing for January 2007, when the Heavy-Duty Highway Diesel Rule will go into effect. That rule will require even lower sulfur levels in fuel as well as cleaner-burning engines. Glen Kedzie, environmental counsel for the American Trucking Associations (ATA), says his group calls it the "2006/7/10" rule because it will be introduced in three phases: Cleaner fuel (not to exceed 15 parts per million sulfur content) must be available for retail sale by the summer of 2006, and the new engine technologies will become available in January 2007—all in an effort to meet the 2010 standards for reduction in particulate matter and nitrogen dioxide.

"It's a systematic approach, much like dominoes falling down," says Kedzie. "You need the clean fuel first and the technologies second." He expects those changes to reach into the transportation industry's pocketbook once again, raising the average engine's sticker price by $5,000 to $8,000.

It's too soon to tell with any accuracy how the 2007 rules will affect fuel efficiency. "After the 2002 mandate we saw fuel economy go down by anywhere from no effect to a worst-case scenario of 20 percent," Kedzie observes. "We really won't know until we run the trucks and find out for ourselves." The trucking industry may feel the biggest pinch in 2006, when cleaner-burning fuels will be mandated and diesel costs are expected to increase by 4 to 5 cents a gallon.

Truck makers are now working on test engines and expect to have them ready next summer. Meanwhile, diesel suppliers are gearing up for the next stage of clean-air regulations. EPA spokesperson John Millett says the bulk of the nation's fuel producers are well prepared for the new mandate. "The major refiners and suppliers tell us they'll have no problem meeting the 2006 deadline," he says. "The smaller refiners may need more time, but they realize the low-sulfur diesel is important because the new truck engines will include catalytic converters and particulate traps to meet the 2007 standard."

According to Millett, the EPA has yet to measure the effects of its clean-air laws, even though the first phase has been in effect for nearly two years now. "The time to start measuring the effects will come when the trucks meeting the standards start rolling off the line in late 2006," he says. He expects the EPA's voluntary diesel retrofit program, which is designed for trucks that are already on the road, will also help fleet operators comply with upcoming restrictions. "We expect a complete fleet changeover by 2030, and in the meantime, we want to encourage the existing fleets to burn as clean as possible," Millett says.

With higher costs for required new technology in the offing, many motor carriers are stocking up on current equipment while they can. Tom Albrecht, managing director at BB&T Capital Markets in Richmond, Va., says that concerns over the cost of engines that comply with the 2007 round of clean-air mandates are driving truckers to "pre-buy" trucks in 2005 and 2006, ahead of the deadline. "Any truck bought before January 1, 2007, doesn't have to be retrofitted to meet the new environmental restrictions, and carriers will be taking advantage of that," says Albrecht. "It's not that they're anti-environmental, but they know the new engines will cost about $5,000 to $8,000 more than the existing ones."

Motor carriers also expect that the new engines will be 5 to 7 percent less fuel efficient, says Albrecht, and will be driven by technologies that are as yet untested. "Fuel economy turned out to be worse than expected in 2002," he says. "We've heard carriers talk about 5 percent and higher deteriorations, and I anticipate a similar result in 2007."

Exactly how these changes will trickle down and affect shippers remains up for debate, says Kedzie. However, the ATA executive acknowledges that higher-priced engines, poorer fuel economy, and increased maintenance costs over the life of a truck could translate into higher shipping costs. "I don't envision a whole lot of cost-shifting taking place between fleets and shippers, but that's not to say it can't happen," he says.

Albrecht thinks that will indeed happen, and is predicting that higher equipment and fuel costs will prompt truckload carriers to raise rates by 5 to 8 percent. In certain lanes, he suggests, pricing could increase by 15 to 20 percent.

Many shippers are certain they'll have to help carriers foot the bill for cleaner air. That's a big concern for companies like forest products manufacturer Weyerhaeuser, which operates a private fleet in addition to hiring common carriers. Says Don Trantham, manager of transportation safety and compliance: "When the time comes, we'll have to figure out how to either absorb the incremental costs that come with the changeover, or find ways to cut costs or pass them onto the customer. Either way," he adds, "it's really just another increase to the cost of doing business for us."

Trantham is worried enough about the 2007 rules that he's in constant contact with the manufacturers about future engine designs. But engine makers' experience with the first round of clean-air rules should help them comply with the next two steps in the regulatory process, says Tom Freiwald, vice president of marketing for Detroit Diesel. "The industry was asleep at the switch for this last one," he says. "We lived through it, and once we get through 2007, we get to do it all over again in 2010."