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The term is often confused with several other types of braking, most notably compression-release braking or "jake braking" which uses a different mechanism entirely. Correct use of the term only applies to petrol engines and other engines that throttle air intake (As opposed to, e.g. diesel engines or electric engines).
Petrol (gasoline) engines 
The term engine braking usually refers to the braking effect caused by the closed-throttle partial-vacuum in petrol (gasoline) engines when the accelerator pedal is released. While some of the braking force is due to friction in the drive train, this is negligible compared to the effect from the vacuum.
When the throttle is closed, the air flow to the intake manifold is greatly restricted. The concept can be illustrated by the amount of effort required to blow/suck through a thin tube vs. a thicker one. It is the work the engine has to do against this restricted air flow that provides the braking effect.
Diesel engines 
Diesel engines do not have engine braking in the above sense. Unlike petrol engines, diesel engines vary fuel flow to control power rather than throttling air intake and maintaining a constant fuel ratio as petrol engines do. As they do not maintain a throttle vacuum, they are not subjected to the same engine braking effects.
However, some alternative mechanisms which diesel engines use that replace or simulate real engine braking include:
- A compression release brake, or jake brake, this is the type of brake most commonly confused with real engine braking; it is used mainly in large diesel trucks and works by opening the exhaust valves at the top of the compression stroke, resulting in adiabatic expansion of the compressed air, so the large amount of energy stored in that compressed air is not returned to the crankshaft, but is released into the atmosphere.
- Normally during the compression stroke, energy is used as the upward-traveling piston compresses air in the cylinder; the compressed air then acts as a compressed spring and pushes the piston back down. However, with the jake brake in operation, the compressed air is suddenly released just before the piston begins its downward travel. (This sudden release of compressed air creates audible sound waves similar to the expanding gases escaping from the muzzle of a firearm.) Having lost the energy stored within the compressed air, the engine is then made to pull the piston down (which sucks new air into the cylinder), and then travel upward again, compressing the new volume of air, which will again be released to the atmosphere after having been compressed. The engine loses energy.
- This type of brake is banned or restricted in many locations where people live because it creates a sound loud enough to disturb the peace, including waking people at night. It is very effective however, and creates immense amounts of braking force which significantly extends friction brake life - A 565 hp (421 kW) diesel engine can produce up to 600 hp (450 kW) of braking force.
- An exhaust brake - This works by causing a restriction in the exhaust, much like the intake throttle causes in a gasoline engine. In simple terms, it works by increasing the back-pressure of the exhaust. Nearly all of these brakes are butterfly valves similar to a throttle valve, mounted downstream of the turbocharger if there is one.
A mechanism related to the exhaust brake is back-pressure from a turbocharger. In turbo diesels with variable-vane turbos, the vanes will close when the accelerator is released, which creates a back-pressure braking effect similar to an exhaust brake. Even fixed turbos, especially larger ones, will cause some back-pressure when they are below the turbo threshold (albeit not to the same extent as a variable turbo) and contribute to the braking effect.
Modern diesel engines have engine braking characteristics more akin to petrol engines. This is due to additional devices to allow them comply with emissions regulations. Two in particular cause significant engine braking:
1) Particulate filter
This device filters out soot particles before they exit the exhaust, but it creates a large obstruction in the exhaust path. This causes considerable backpressure, much more than from the turbo charger mentioned above
2) EGR (Exhaust Gas Recirculator)
This device sucks exhaust gas back into the air intake and is usually controlled by a throttle which, depending on the design, can cause a restriction effect similar to that in petrol engines.
Two-stroke engines 
Engine braking in a premix two-stroke engine can be extremely harmful to the engine, because cylinder and piston lubricant is delivered to each cylinder mixed with fuel. Consequently, during engine braking, the engine starves not only of fuel but also lubricant, causing reciprocating parts to wear rapidly. Many old two-stroke cars (Saab, Wartburg, etc.) had a freewheel device on the transmission to make engine braking optional. Most two-stroke motorcycle engines since the 1970s have had lubrication by an oil pump, independent of the throttle and fuel system, such as Suzuki's Posi-Force system.
As soon as the accelerator is released and the throttle closes, engine braking comes into effect as long as the wheels remain connected via the transmission to the engine. (A clutch or a torque converter can disengage the wheels or absorb braking energy.) The braking force varies depending on the engine, but also what gear the vehicle is in (Generally, the lower the gear, the higher the braking effect as long as the wheels continue to maintain traction with the road surface).
Engine braking passively reduces wear on brakes and helps a driver maintain control of the vehicle. Active use of engine braking (shifting into a lower gear) is advantageous when it is necessary to control speed while driving down very steep and long slopes. It should be applied before regular disk or drum brakes have been used, leaving the brakes available to make emergency stops. The desired speed is maintained by using engine braking to counteract the gravitational acceleration.
Improper engine braking technique can cause the wheels to skid (also called shift-locking), especially on slippery surfaces such as ice or snow, as a result of too much deceleration. As in a skid caused by overbraking, the vehicle will not regain traction until the wheels are allowed to turn more quickly; the driver must reduce engine braking (shifting back up or disengaging the clutch on a manual transmission) to regain traction.
Engine braking is intrinsically available in non hybrid vehicles with gasoline-powered internal combustion engines, regardless of transmission type. With diesel engines however, there is no intrinsic engine braking effect so more care must be taken. Turbo-diesel engines, on the other hand, generally have a more noticeable engine braking effect due to the turbo stalling when the accelerator is released and increasing the back-pressure in the exhaust.
In almost all cases, it is active when the foot is lifted off the accelerator, the transmission is not in neutral, the clutch is engaged and a freewheel is not engaged. Using frequent engine braking while changing down gears may cause higher than normal wear on clutch plates if the driver uses the poor gear-changing technique of slipping the clutch to raise the engine's rpm to match the transmission speed, instead of rev-matching using the throttle. This is in contrast to "conventional" braking where the engine's rpm is already reduced prior to the downshift.
In hybrid electric vehicles, like the Toyota Prius, engine braking is simulated by the computer software to match the feel of a traditional automatic transmission. For long downhill runs, the "B" mode acts like a lower gear, using higher RPM in the internal combustion engine to waste energy, preventing the battery from becoming overcharged. Almost all electric and hybrid vehicles are able to convert kinetic motion into electricity, i.e. regenerative brakes, but this is not the same as engine braking.
Legal implications 
Engine braking is a generally accepted practice and can help save wear on friction brakes. It's even used in some motor sports to reduce the risk of the friction brakes overheating. Additionally, most modern engines don't use any fuel while engine braking which helps reduce fuel consumption. This is known as DFCO or Deceleration Fuel Cut-Off and is used with Burn and Coast.
Although being phased out from road traffic, there are still plenty of carbureted engines in service, on the most of which engine braking is counter-productive to fuel economy due to the lack of a DFCO mechanism. With increasing fuel prices, the loss in wasted fuel can well outweigh the gain from saving mechanical brake parts.
Compression-release ("Jake") braking, a form of engine braking used almost exclusively on diesel engines, produces extreme amounts of noise pollution if there is no muffler on the intake manifold of the engine. Anecdotally, it sounds similar to a jackhammer, however the loudness is between 10 and 20 times the sound pressure level of a jackhammer (10 to 13 dB). Numerous cities, municipalities, states, and provinces have banned the use of unmuffled compression brakes, which are typically only legal in roads away from populations. In Australia, traffic enforcement cameras are currently being tested that automatically photograph heavy vehicles that use compression braking.
See also