CALIFORNIA ENVIRONMENTAL PROTECTION AGENCY AIR RESOURCES BOARD

STAFF REPORT: INITIAL STATEMENT OF REASONS FOR PROPOSED RULEMAKING, PUBLIC HEARING TO CONSIDER ADOPTION OF REGULATIONS TO CONTROL GREENHOUSE GAS EMISSIONS FROM MOTOR VEHICLES

This report has been reviewed by the staff of the California Air Resources Board and approved for publication. Approval does not signify that the contents necessarily reflect the views and policies of the Air Resources Board, nor does the mention of trade names or commercial products constitute endorsement or recommendation for use.

Date of Release: August 6, 2004 Scheduled for Consideration: September 23, 2004Initial Statement of Reasons

August 6, 2004Initial Statement of Reasons

August 6, 2004

i EXECUTIVE SUMMARY

California has a long history of environmental leadership. This tradition of environmental leadership continues to this day. In 2002, recognizing that global warming would impose compelling and extraordinary impacts on California, the legislature adopted and the Governor signed AB 1493 (Pavley). That bill directs the California Air Resources Board (Board) to adopt regulations to achieve the maximum feasible and cost-effective reduction of greenhouse gas emissions from motor vehicles. This Initial Statement of Reasons presents the staff proposal that will be considered by the Board at its September 2004 public hearing.
Climate Change Overview

The Earth’s climate has always changed; the paleo-record of the last million years shows large changes with the growth and retreat of the great ice sheets over the continents. Nevertheless, over the past century the northern hemisphere has warmed at a rate faster than at any other time over the last millennium, and that change is because human activities are altering the chemical composition of the atmosphere through the buildup of greenhouse gases (GHGs), primarily carbon dioxide (CO 2 ), methane (CH 4 ), nitrous oxide ( N 2 O ), and hydrofluorocarbons. The initial focus of climate change scientists was on so-called GHGs; however, research over the last two decades has demonstrated that airborne particles also have the potential to significantly alter climate, and that anthropogenic emissions may have a substantial effect on the present day abundance of particles in the atmosphere.

Climate change can also be considerably intensified by the increase of ozone levels in the troposphere. Ozone is produced by photochemical reactions. Its precursor components are primarily the result of road traffic. Unlike many of the other GHGs, ozone is a short-lived gas that is found in regionally varying concentrations. Nevertheless, it is the third most important anthropogenic GHG behind CO2and CH 4 , and its concentration has increased by 35 percent since pre-industrial times.

The heat-trapping property of GHGs is undisputed. Although there is uncertainty about exactly how and when the earth’s climate will respond to increasing concentrations of GHGs, observations in conjunction with climate models indicate that detectable changes are under way. These observed changes go beyond a global mean rise in temperature, including also changes in regional temperature extremes, precipitation, soil moisture, and sea level, all of which could have significant adverse effects on water resources, many ecological systems, as well as on human health and the economy.

There is no scientific uncertainty about the fact that human activities have increased the atmospheric abundance of GHGs. The uncertainties start whenInitial Statement of Reasons

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ii we try to predict exactly what the climate changes will be in various local areas of the Earth, and what the effects of clouds will be in determining the rate at which the mean temperature will increase. There are also uncertainties associated with the magnitude and timing of other consequences of a warmer planet: sea level rise, spread of certain diseases out of their usual geographic range, the effect on agricultural production, water supply, sustainability of ecosystems, increased strength and frequency of storms, extreme heat events, air pollution episodes, and the consequence of these effects on the economy. Already, some of these effects have been seen in California. Over the last hundred years, average temperatures have increased 0.7 o F, sea levels have risen by three to eight inches, and spring run-off has decreased 12 percent.

California's transportation sector is the single largest contributor of GHGs in the State, producing close to 60 percent of all such emissions. If current trends continue, the State’s inventory of GHGs could mirror the growth in population. Transportation and land-use trends in California will likely continue to increase GHG emissions. This proposal will reduce GHG emissions from motor vehicles. The international community recognizes that such GHG emission reduction actions would lessen the pressures on natural and human systems from climate change. Slower rates of increase in global mean temperature and sea level would allow more time for adaptation. Consequently, mitigation actions are expected to delay and reduce damages caused by climate change and thereby generate environmental and socio-economic benefits.

California Actions to Address Climate Change

The State of California has traditionally been a pioneer in efforts to reduce air pollution, dating back to 1963 when the California New Motor Vehicle Pollution Control Board adopted the nation’s first motor vehicle emission standards. California likewise has a long history of actions undertaken in response to the threat posed by climate change. Beginning with 1988 legislation that directed the California Energy Commission, in consultation with the Air Resources Board and other agencies, to study the implications of global warming on California’s environment, economy, and water supply, and continuing on over the years through Governor Schwarzenegger’s April 2004 Executive Order outlining his vision for the California Hydrogen Highway Network, California state government has consistently recognized the necessity for state action on climate change to protect California’s interests. At the Air Resources Board, attention to the mechanisms and effects of climate change dates back to 1989, when staff first updated the Board on the emerging science.
Maximum Feasible and Cost-Effective Technologies

A key part of the staff’s technical work is an assessment of technologies and fuels that can contribute to a reduction of climate change emissions in passenger vehicles from the 2009 model-year and beyond. The staff technologyInitial Statement of Reasons

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iii assessment reviews baseline vehicle attributes and their contribution to atmospheric climate change emissions, and evaluates technologies that have the potential to decrease these emissions. The technologies explored are currently available on vehicles in various forms, or have been demonstrated by auto companies and/or vehicle component suppliers in at least prototype form. Thereport then examines the lifetime cost of these technologies to vehicle owneroperators. This approach is consistent with the AB 1493 directive to require climate change reduction technologies that are economical to an owner or operator of a vehicle, taking into account the full life-cycle costs of a vehicle.

There is a near-term, or off-the-shelf, technology package in each of the vehicle classes evaluated (small and large car, minivan, small and large truck) that resulted in a reduction of CO2emissions of at least 15 to 20 percent from baseline 2009 values. In addition, there is generally a near-term technology package in each of the vehicle classes that results in about a 25 percent CO 2 emission reduction.
Several technologies stood out as providing significant reductions in emissions at favorable costs. These include discrete variable valve lift, dual cam phasing, turbocharging with engine downsizing, automated manual transmissions, and camless valve actuation. Potential improvements in the air conditioning system include an improved variable displacement compressor with revised controls,reduced leakage systems, and the use of an alternative refrigerant (e.g. HFC152a). Packages containing these and other technologies provided substantial emission reductions at prices that ranged from a saving to several hundreds of dollars. Nearly all technology combinations modeled provide reductions in lifetime operating costs that exceed the retail price of the technology.

Climate Change Emission Standards

Vehicle climate change emissions comprise four main elements: (1) CO 2 , CH 4 and N 2 O emissions resulting directly from operation of the vehicle; (2) CO 2 emissions resulting from operating the air conditioning (AC) system (indirect AC emissions); (3) refrigerant emissions from the air conditioning system due to either leakage, losses during recharging, or release from scrappage of the vehicle at end of life (direct AC emissions); and (4) upstream emissions associated with the production of the fuel used by the vehicle. The climate change emission standard incorporates all of these elements.

Staff elected to incorporate the CO 2 equivalent emission standards into the current Low-Emission Vehicle (LEV) program along with the other light and medium-duty automotive emission standards. Accordingly, there would be a CO 2 equivalent fleet average emission requirement for the passenger car/light-duty truck 1 (PC/LDT1) category and another for the light-duty truck 2 (LDT2) category, just as there are fleet average emission requirements for criteria pollutants for both categories of vehicles in the LEV program.Initial Statement of Reasons

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iv Determination of the specific climate change emission standards for each category involved several steps. First, the maximum feasible emission reductions were modeled for five vehicle types (small and large car, minivan, small and large truck) with various technology packages. These technology packages were then categorized with respect to their technology readiness (i.e. near-, mid-, or long-term). Secondly, manufacturer specific data were collected for the California fleet in order to evaluate individual manufacturer product mix. The emission standards for each category were then determined based on the manufacturer with the highest average weight vehicles (as opposed to the average of all the manufacturers) to ensure that all manufacturers can comply with the standards.

Staff proposes setting near-term standards, phased in from 2009 through 2012, and mid-term standards, phased in from 2013 through 2016. The proposed standards, expressed in terms of CO2 equivalent grams per mile, are as follows:

Table ES-1. CO 2 Equivalent Emission Standards for Model Years 2009 through 2016

CO 2 -equivalent emission standard by vehicle category

(g/mi) Tier Year

PC/LDT1 LDT2

2009 323 439 2010 301 420 2011 267 390 Near-term

2012 233 361

2013 227 355 2014 222 350 2015 213 341 Mid-term

2016 205 332
Staff estimates that the average fleetwide incremental cost of control to meet these standards, taking into account the phase-in of the standard and the specific starting point of the six largest individual manufacturers, will be as follows:Initial Statement of Reasons

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v Table ES-2. Average Cost of Control by Model Year for the Major Six Automakers

Year All major 6

PC/LDT1 16 2009 LDT2 36

PC/LDT1 52 2010 LDT2 93

PC/LDT1 194 2011 LDT2 199

PC/LDT1 292 2012 Near-term

phase-in

LDT2 308

PC/LDT1 330 2013 LDT2 382

PC/LDT1 383 2014 LDT2 491

PC/LDT1 483 2015 LDT2 723

PC/LDT1 626 2016 Mid-term

phase-in

LDT2 955

Thus when fully phased in the near term standards will result in an estimated average cost increase of $292 for PC/LDT1, and $308 for LDT2 as compared to the 2009 baseline vehicle. The fully phased in mid term standards will result in an estimated average cost increase of $626 for PC/LDT1 and $955 for LDT2. The staff analysis concludes, however, that these increased costs will be more than offset by operating cost savings over the lifetime of the vehicle.

Looking at the cost of the technology on a per vehicle basis, staff estimates that the estimated cost to apply the near term technology to an individual vehicle would be an average of $382 for the PC/LDT1 category and $358 for the LDT2 category, compared to the 2009 baseline vehicle. The estimated average cost to apply the maximum feasible mid term technology is $1,204 for PC/LDT1 and $1,356 for LDT2. These costs are higher than the fleet averages shown above because not all vehicles will need to be controlled to the maximum level. Rather, the proposed standard is set at a level that is feasible for the manufacturer in the worst starting position. Therefore the average cost across the fleet will be less than the maximum cost of the technology on a per vehicle basis.

To provide perspective on the potential impact of the proposed regulations on the monthly cash flow for typical purchasers of vehicles affected by the regulation, staff considered a vehicle-financing period of five years at an interest rate of 5 percent. Using the average increase in vehicle prices associated with the fully phased-in regulation (2016), staff calculated the potential increases in monthly loan payments and decreases in operating cost. This methodology thus provides an estimate of the effect on individual consumers. The analysis concluded that on monthly basis, the increased vehicle payment minus the reduction in operating cost would result in a net savings to vehicle owners ranging from $6.54 to $11.73.Initial Statement of Reasons

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vi The staff analysis concludes that these standards, when applied to the fleet of the “major six” automakers (GM, Ford, DaimlerChrysler, Toyota, Honda, Nissan), would result in the following emission reductions by year. The reductions needed by individual automakers will vary depending on their initial starting position.

Table ES-3. Average Percent CO 2 Emission Change by Vehicle Model Year

Year All major 6

PC/LDT1 -1.3% 2009 LDT2 -2.1%

PC/LDT1 -4.4% 2010 LDT2 -5.5%

PC/LDT1 -14.0% 2011 LDT2 -11.8%

PC/LDT1 -24.9% 2012 Near-term

phase-in

LDT2 -18.3%

PC/LDT1 -26.7% 2013 LDT2 -19.6%

PC/LDT1 -28.5% 2014 LDT2 -20.9%

PC/LDT1 -31.2% 2015 LDT2 -22.9%

PC/LDT1 -33.9% 2016 Mid-term

phase-in

LDT2 -24.8%

The proposed standards also address upstream emissions (emissions due to the production and transportation of the fuel used by the vehicle). Staff proposes to use the upstream emission levels for conventional fuel vehicles as a yardstick against which to compare the relative emissions of alternative fuel vehicles. This approach simplifies the regulatory treatment of gasoline vehicles, while at the same time allowing for appropriate consideration of differences in upstream emissions from alternative fuel vehicles.

AB 1493 directs that emission reduction credits be granted for any reductions in GHG emissions achieved prior to the operative date of the regulations. ARB staff proposes that (1) credit for early emission reductions should be available for model years 2000 through 2008, with manufacturers allowed to opt in to the program during any model year during this timeframe, and (2) the baseline against which manufacturer emissions are measured should be the fully phased in near term standard. Thus under the staff early credit proposal a manufacturer’s fleet average emissions, for model years beginning with their first year of participation through 2008, would be compared to the 2012 standards. If a manufacturer has fleet average emissions below the standard for a specific model year, the manufacturer would earn credit.

AB 1493 also requires that the regulations “provide flexibility, to the maximum extent feasible consistent with this section, in the means by which a person subject to the regulations ... may comply with the regulations. That flexibility shall include, but is not limited to, authorization for a person to use alternative methodsInitial Statement of Reasons

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vii of compliance with the regulations.” Thus the use of alternative compliance strategies must not undercut the primary purpose of the regulation, which is to achieve GHG reductions from motor vehicles. Accordingly, the ARB's alternative compliance program will be limited to the vehicles that are regulated through AB 1493, and their fuels. This is to ensure that the program does not dilute the technology-forcing nature of the regulation, since the goal is to reduce emissions from the vehicles themselves. The major features of the staff proposal are:

• Projects must be located in California to be eligible as alternative methods of compliance.

• Only companies regulated by AB 1493 (automakers) will be permitted to apply for alternative compliance credits.

• Only those vehicles regulated under AB 1493 are eligible for alternative compliance credits. This includes model year 2009 and later passenger vehicles and light-duty trucks and other vehicles used for noncommercial personal transportation in California.

• Eligible projects are limited to those that achieve GHG reductions through documented increased use of alternative fuels in eligible vehicles.

Environmental Impacts

Taking into account the penetration of 2009 and later vehicles meeting the new standard into the fleet, staff estimates that the proposed regulation will reduce climate change emissions by an estimated 87,400 CO 2equivalent tons per day statewide in 2020 and by 154,500 CO2equivalent tons per day in 2030. This translates into a 18 percent overall reduction in climate changes emissions from the light duty fleet in 2020 and a 27 percent overall reduction in 2030.

Staff estimates that baseline emissions today (2004) are 386,600 CO 2 equivalent tons per day, and in 2010 will be 430,200 CO 2 equivalent tons per day. Thus with the regulation emissions will continue to grow from today’s level through 2009 when the regulation takes effect, but emissions in 2020 and in 2030 will be slightly lower than in 2010. Figure XS-1 illustrates this trend in graphic form.Initial Statement of Reasons

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viii Figure ES-1. Motor Vehicle Greenhouse Gas Emissions (Excluding Upstream Emissions)

Greenhouse gas emissions from California light duty vehicles are a small fraction of the global total. Based on inventory data from various sources, GHG emissions from California light duty vehicles are about 30 percent of California CO 2equivalent GHG emissions from all sources and about 2 percent of total United States GHG emissions. Although estimates of global GHG emissions vary greatly, emissions from California light duty vehicles appear to amount to less than 1 percent of the total. Thus the proposed California regulation, viewed in isolation, will not wholly mitigate the potential consequences of climate change in California.

It does not necessarily follow, however, that California should do nothing. Rather, there are several compelling reasons to move forward with the proposed regulation, even while recognizing that by itself it will not solve the climate change problem. First of all, the proposed regulation is a “no regrets” policy that addresses climate change emissions but at the same time provides economic benefit to the state. Second, California would not be acting in isolation. Other states in the United States, and other countries internationally, have already taken or are contemplating steps to reduce GHG emissions from a variety of sectors and sources. Moreover, California action specifically to control GHGs is strongly supported by the public. The July 2004 Special Survey on Californians and the Environment , conducted by the Public Policy Institute of California, found

0 100000 200000 300000 400000 500000 600000 700000

2000 2005 2010 2015 2020 2025 2030 2035
Calendar YearTons Per DAy Without Regulation
With Regulation

-18% -27%Initial Statement of Reasons

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ix that eight in ten Californians support a state law that requires automakers to further reduce the emission of GHGs from new cars in California by 2009. Finally, the longstanding technology-forcing role of California regulation should not be understated. There have been many instances where other jurisdictions have adopted motor vehicle controls that were pioneered in California. Thus there is potential for the proposed regulation to spread to other jurisdictions and thereby add momentum to the already existing set of measures that are underway around the globe.

Cost Effectiveness

Typically, emission control regulations impose a cost. Cost effectiveness is a measure of the cost imposed per ton of reduction achieved, and thus is a useful tool to compare various possible approaches. In this instance, however, AB 1493 requires that the regulations be economical to the consumer over the life cycle of the vehicle. Consistent with this direction, the technology packages that provide the basis for the standard result in operating cost savings that exceed the initial capital cost, resulting in a net savings to the consumer over the lifecycle of the vehicle. This translates to a “negative” cost effectiveness value (there is a cost savings per ton reduced). Thus staff estimates that the cost effectiveness of the staff proposal, in terms of dollars per ton of CO 2 equivalent emissions reduced, is -$138 in 2020 and -$135 in 2020.

Economic Impacts

The climate change regulation may impact several sectors of the economy. The steps that manufacturers will need to take to comply with the regulatory standards are expected to lead to price increases for new vehicles. Many of the technological options that manufacturers choose to comply with the regulation are also expected to reduce operating costs. These two responses to the regulation have combined positive and negative impacts on California businesses and consumers. The vehicle price increase will be borne by purchasers and may negatively affect businesses. However, the operating cost savings from the use of vehicles that comply with the regulation will positively impact consumers and most businesses. Based on the staff analysis, the net effect of the regulation on the economy is expected to be small but positive. The proposed climate change regulation is not expected to cause any significant adverse impact on the State's economy. It is very likely that savings from reduced vehicle operating costs would end up as expenditures for other goods and services. These expenditures would flow through the economy, causing expansion or creation of new businesses in several sectors. Staff's economic analysis shows that as the expenditures occur, jobs and personal income increase. There will not be any impacts on the ability of California business to compete with businesses in other states. State and local agencies will not be adversely impacted and are likely to realize a net reduction in their cost of fleet operations.Initial Statement of Reasons

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x I mpacts on Low Income and Minority Communities

The ARB has made the achievement of environmental justice an integral part of its activities. The Board approved Environmental Justice Policies and Actions (Policies) on December 13, 2001. These Policies establish a framework for incorporating environmental justice into the ARB's programs consistent with the directives of State law.

As the ARB developed the climate change regulations, staff worked closely with community leaders involved with environmental justice as well as with environmental and public health organizations to maintain an ongoing dialogue and thus successfully implement the ARB's environmental justice policies.

Staff has undertaken an evaluation to investigate if low-income and minority communities (communities) may be impacted disproportionately by the climate change regulation. The primary direct mechanism identified was the potential effect on used car prices. Because the vehicle price increases caused by theproposed regulation may, over time, increase the price of used vehicles that lowincome households tend to purchase, the staff focused on analyzing the potential impacts of the vehicle price increase on low-income purchasers of used vehicles. The analysis showed that the expected impacts of any price increase are minor, and would be more than outweighed by a reduction in operating cost. Thus the proposed regulation should not have a significant impact on low-income purchasers of used vehicles.

Other Considerations

Staff also has investigated several approaches that supplement the standard economic analysis. The methods used rely on recent tools and studies that provide additional insight into the potential impacts of the regulation. Using those tools and studies to investigate possible secondary impacts of the regulation, this report presents additional perspectives on the potential impact of the proposed regulation on fleet mix, emissions, the State’s economy, small businesses, and low-income households. The methods discussed are in the early stages of development relative to the standard economic analysis that has been developed over many years. As such, it is expected that these new methods will be further refined over time.

The economic impact analysis is based on the staff assessment that the reduced vehicle operating cost resulting from the regulation will be sufficiently attractive to new car buyers to compensate for the vehicle price increase, which results in vehicle sales that are unchanged from the levels that would have been the case without the regulation. Staff also, however, assessed what the consequences would be if one assumes that the changes in vehicle price and other attributes do affect sales. Staff analyzed the potential effect of price and operating costInitial Statement of Reasons

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xi changes on sales, fleet size, and fleet age using a consumer choice model developed by researchers at the University of California, Davis. The results show that the net result of increased new vehicle prices and lower operating costs is a tendency to increase sales in the near term, and slightly decrease sales in the longer term as the more stringent second step of the regulation is fully phased in.

Staff also evaluated potential adverse environmental impacts associated with increased vehicle miles traveled (VMT) due to lower operating costs. Part of this effort utilized the findings from a study conducted by researchers at the University of California, Irvine. Our analysis indicates that the benefits of reduced climate change emission from the regulation will not be affected significantly by any increase in driving attributable to lower operating cost.

The staff assessment concludes that communities with low income and minority households are expected to have increased jobs as a result of the regulation. Future employment growth in some sectors may be reduced, but an increase in overall economic activity because of increased purchasing power due to lowered operating costs of vehicles would be expected to create a sufficient number of jobs to more than offset any losses.

Many of the measures that manufacturers will employ to achieve climate change emission reductions will result in reduced vehicle operating costs, due to the fact that the vehicles will be more efficient. These operating cost savings in turn feedinto the staff analysis of the economic impact of the regulation and its costeffectiveness. The dollar value to consumers of a given motor vehicle GHG reduction and any associated increase in vehicle efficiency will vary depending on the price of fuel. Throughout the analysis staff assumed a fuel price of $1.74 per gallon for gasoline. Several commenters have noted that these assumed fuel prices do not correspond to current conditions, and have suggested that staff assess the extent to which its findings and conclusions would change given higher fuel prices. In response to these comments staff has replicated relevant portions of the analysis using an assumed fuel price of $2.30 per gallon, which is intended to be more representative of recent prices.

Almost all of the technology packages evaluated by staff paid for themselves over the lifecycle of the vehicle at the assumed fuel price of $1.74 per gallon. The choice of the technology packages to use for setting the near term and mid term standards was driven more by technical lead time and developmental constraints rather than by payback concerns. Thus although using a fuel price of $2.30 per gallon reduces the payback period and increases the net present value for all technology packages, this change by itself would not allow staff to set a more stringent standard. Rather, the limiting factor on the standard is the availability of technology packages for widespread deployment.Initial Statement of Reasons

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xii The primary staff analysis concluded that at a fuel price of $1.74 per gallon the GHG reduction technologies would more than pay for themselves over the life of the vehicle, and the regulation as a whole would have small but overall positive effects on the California economy. As would be expected, if fuel prices are $2.30 per gallon rather than $1.74 per gallon, the net benefits increase both for individual consumers and for the state as a whole.

Staff Recommendation

The ARB staff recommends that the Board adopt the regulation as proposed in this Initial Statement of Reasons. The proposed regulation is intended to achieve the maximum feasible and cost effective of GHG emissions from new motor vehicles.Initial Statement of Reasons

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TABLE OF CONTENTS 1 INTRODUCTION

................................ ................................ ................................ ...... 1 1.1 Organization of the Report

................................ ................................ .................. 1 1.2 Modifications to the June 14 Draft

................................ ................................ ..... 1

2 CLIMATE CHANGE OVERVIEW

................................ ................................ ........... 3 2.1 Climate Change Causes and Projections

................................ ......................... 4 2.2 Climate Change Pollutants

................................ ................................ ................. 8 2.3 Global Warming Potentials

................................ ................................ ............... 14 2.4 Pollutants Included in the Proposed Regulation

................................ ............ 16 2.5 Indicators of Climate Forcing and Climate Change In California

................ 16 2.6 Potential Impacts on California

................................ ................................ ........ 19 2.7 AbruptClimate Change

................................ ................................ ..................... 24 2.8 Summary

................................ ................................ ................................ .............. 25

3 CALIFORNIA ACTIONS TO ADDRESS CLIMATE CHANGE

........................ 27 3.1 Summary of California Activities

................................ ................................ ...... 27 3.2 Legislation

................................ ................................ ................................ ............ 29 3.3 Administrative Initiatives

................................ ................................ .................... 31

4 SUMMARY OF PROPOSED REGULATION

................................ ..................... 39 4.1 Climate Change Emission Reduction Standard

................................ ............ 39 4.2 Early Credi ts

................................ ................................ ................................ ........ 40 4.3 Alternative Compliance

................................ ................................ ...................... 40

5 MAXIMUM FEASIBLE AND COST-EFFECTIVE TECHNOLOGIES

............. 42 5.1 Background

................................ ................................ ................................ ......... 42 5.2 Technology Assessment

................................ ................................ ................... 46 5.3 Incremental Costs Of Technologies

................................ ................................ 80 5.4 Lifetime Cost Of Technologies To Vehicle Owner-Operator

....................... 99 5.5 Conclusions

................................ ................................ ................................ ....... 101

6 CLIMATE CHANGE EMISSION STANDARDS

................................ ............... 103 6.1 Determination of Maximum Feasible Emission Reduction Standard

....... 104 6.2 Determination of Effect of Standard on the Fleet

................................ ........ 115 6.3 Compliance with the Emission Standards

................................ .................... 121 6.4 Treatment of Upstream Emissions

................................ ................................ 124 6.5 Early Reduction Credits

................................ ................................ ................... 126 6.6 Alternative Compliance Strategies

................................ ................................ 129

7 REGULATORY ALTERNATIVES

................................ ................................ ...... 137 7.1 Less Stringent or No New Vehicle Standards

................................ .............. 137 7.2 More Stringent New Vehicle Standards

................................ ........................ 137 7.3 Standards for Mobile Air ConditionerRefrigerant Emissions

.................... 137 7.4 Summary

................................ ................................ ................................ ............ 138Initial Statement of Reasons

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8 ENVIRONMENTAL IMPACTS

................................ ................................ ........... 139 8.1 Baseline Inventory Development

................................ ................................ ... 139 8.2 Emissions Benefits of Pro posed Regulation

................................ ................ 142 8.3 Emission Impact of the Staff Proposal in a Broader Context

.................... 144 8.4 Fuel Cycle Emissions

................................ ................................ ....................... 146 8.5 Energy Cost and Demand

................................ ................................ ............... 147 8.6 Other Environmental Media

................................ ................................ ............ 147 8.7 Other Considerations

................................ ................................ ....................... 147

9 COST EFFECTIVENESS

................................ ................................ ................... 148 9.1 Cost Data and Emission Reductions

................................ ............................. 148 9.2 Cost Effectiveness

................................ ................................ ............................ 149

10 ECONOMIC IMPACTS

................................ ................................ ........................ 150 10.1 Legal Requirements

................................ ................................ ..................... 150 10.2 Potential Impacts on Business Creation, Elimination, or Expansion

.... 151 10.3 Potential Impact on California Business Competitiveness

..................... 159 10.4 Potential Costs to Local and State Agencies

................................ ........... 160 10.5 Potential Impact on Individual Consumers

................................ ............... 160 10.6 Conclusion

................................ ................................ ................................ ..... 161

11 IMPACTS ON MINORITY AND LOW INCOME COMMUNITIES

................. 162 11.1 ARB Environmental Justice Policy

................................ ............................. 162 11.2 AB 1493 Requirements

................................ ................................ ............... 162 11.3 Potential Environmental Impacts

................................ ............................... 166 11.4 Potential Economic Impacts

................................ ................................ ....... 166

12 OTHER CONSIDERATIONS

................................ ................................ .............. 171 12.1 Consumer Response Effects on Emissions and State Economy

......... 171 12.2 Alternative Approach to Assessing Consumer Response

..................... 181 12.3 Effects of Regulation on Vehicle Miles Traveled

................................ ..... 182 12.4 Combined Effect on Criteria Pollutant Emissions

................................ .... 188 12.5 Manufacturer Response

................................ ................................ .............. 190 12.6 Impact on Businesses in Low Income and Minority Communities

....... 191 12.7 Effect of Increased Fuel Price

................................ ................................ .... 196 12.8 Summary and Conclusions

................................ ................................ ......... 199

13 SUMMARY AND STAFF RECOMMENDATION

................................ ............. 201 13.1 Summary of Staff Proposal

................................ ................................ ......... 201 13.2 Staff Recommendation

................................ ................................ ................ 202

LIST OF ACRONYMS AND ABBREVIATIONS

................................ ....................... 205 REFERENCES

................................ ................................ ................................ ............. 207 APPENDIX A: PROPOSED AMENDMENTS

................................ ......................... 215Initial Statement of Reasons

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1 1 INTRODUCTION

California has a long history of environmental leadership. Motivated by the stunning natural beauty of our coastline, inland valleys, forests and mountains, as well as by the public health and environmental challenges brought about increasing levels of pollution, California’s citizens have repeatedly called for and supported measures to protect California’s environmental heritage. Our political leadership and governmental institutions have responded with a variety of initiatives that restore, protect and enhance the environment, to ensure public health, environmental quality and economic vitality. Often these California initiatives have provided a benchmark and template for further action both nationally and internationally.

This tradition of environmental leadership continues to this day. In 2002, recognizing that global warming will impose compelling and extraordinary impacts on California, the legislature adopted and the Governor signed Assembly Bill (AB) 1493 (Pavley). That bill directs the California Air Resources Board (Board) to adopt regulations to achieve the maximum feasible and cost-effective reduction of greenhouse gas emissions from motor vehicles. This Initial Statement of Reasons presents the staff proposal for consideration by the Board.

1.1 Organization of the Report

The report begins (Section 2 ) with an overview of the scientific evidence regarding climate change and its potential effects in California. Section 3 outlines the long history of previous actions that California has taken to understand and address the threat of climate change. Section 4 briefly summarizes the proposed regulation. Section 5 presents the results of staff’s detailed technology assessment, which identifies the technologies available to achieve the maximum feasible and cost-effective reduction. Section 6 describes how the vehicle-level reductions outlined in the technology assessment were translated into a standard that can be applied at the manufacturer fleet level. This section also discusses staff’s proposed approach towards alternative compliance and credits for early action. Section 8 summarizes the environmental impact of the proposed regulation, and Section 9 provides staff’s estimate of its costeffectiveness. Section 10 presents staff’s evaluation of the impact of the regulation on California’s businesses and economy. Section 11 looks more specifically at potential impacts on minority and low-income communities. Section 12 discusses the status of staff work to evaluate several other considerations, such as the possible effect of changes in vehicle attributes on vehicle purchase or vehicle miles traveled.

1.2 Modifications to the June 14 Draft

Staff released a draft version of this Initial Statement of Reasons on June 14, 2004. Four workshops were held in early July to receive public comment. Since that time staff has been reviewing issues raised by public comment and updating the staff methodology and analysis. Changes of note in this final version include:

• The introductory climate change overview has been revised;Initial Statement of Reasons

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2 • The estimated incremental cost and greenhouse gas emission reductions for several of the technology packages have been revised;

• The phase-in period for both the near term and mid term standards has been extended to four years;

• The standards themselves have been adjusted slightly due to updated staff analysis, and the use of General Motors rather than DaimlerChrysler as the initial reference point;

• The above modifications to the estimated incremental cost, the standards, and the phase in period have been incorporated into the economic and environmental impacts analyses, and the analysis of other considerations;

• The treatment of small, independent small, and intermediate manufacturers under the regulation has been clarified;

• The discussion of the environmental impacts of alternative fuels and alternative fuel vehicles has been updated;

• The upstream correction factor for hydrogen has been adjusted to differentiate between fuel cell and internal combustion engine vehicles;

• The staff proposal for early credits has been modified to allow manufacturers to take advantage of early action beginning in any year from 2000 through 2008, and to provide that the value of early credits is phased out;

• The discount factor applied to alternative compliance credits has been deleted, and other aspects of the alternative compliance staff proposal have been clarified;

• The discussion of environmental impacts considers the reductions achieved under this regulation in the broader context of global climate change emissions;

• The report summarizes issues noted during a series of environmental justice focused workshops; and

• The discussion of other considerations has been broadened to consider the environmental and economic impacts of a scenario that assumes higher fuel prices, consistent with recent experience.

The final text also contains a number of other minor updates and clarifying changes.

Staff has prepared Technical Support Documents that provide additional information and explanation regarding the staff methodology. These documents, which are listed at the end of this Staff Report as References, are included as part of the rulemaking file and are available on the ARB website.Initial Statement of Reasons

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3 2 CLIMATE CHANGE OVERVIEW

The earth’s climate has always evolved - the extremes of the 100,000-year ice-age cycles in both climate and greenhouse gases (GHGs) over the last half million years are well documented. The last 10,000 years has been a warm and stable period, and the last millennium, over which current societies have developed, has been one of the most stable climates observed. Yet, over the 20th century, we have observed a rapid change in the climate and GHGs that is attributable to human activities. These recent changes in GHGs far exceed the extremes of the ice ages, and the global mean temperature is warming at a rate that cannot be explained by natural causes alone. Human activities are directly altering the chemical composition of the atmosphere through the buildup of GHGs, primarily carbon dioxide (CO 2 ), methane (CH 4 ), and nitrous oxide (N 2 O). Climate research has identified other greenhouse agents that can drive climate change, particularly tropospheric ozone (O 3 ), hydrofluorocarbons (HFCs), and atmospheric aerosols (particles containing sulfate, black carbon or other carbonaceous compounds). Thus, it appears that an effective response to the threat of climate change ultimately will need to address CO 2 , GHGs, and aerosols.

It is true that levels of natural GHGs have fluctuated in the past. However, there are several reasons for attributing the rise in GHGs to anthropogenic, rather than natural emissions. The first indicator comes from comparing the current increase with changes that have occurred in the past. At the end of the last ice age, the concentration of CO 2 increased by around 100 ppm (parts per million) over about 8,000 years, or approximately 1.25 ppm per century. Since the start of the industrial revolution, the rate of increase has accelerated markedly. Since 1860, the concentration of CO 2 has increased by around 80 ppm, just over 50 ppm per century. The rate of CO2 accumulation has continued to increase, and it currently stands at around 150 ppm/century – over 200 times faster than the background rate for the past 15,000 years.

The heat-trapping property of GHGs is undisputed. Although there is uncertainty about exactly how and when the earth’s climate will respond to increasing concentrations of GHGs, combining observations with climate models indicates that detectable changes are under way. There most likely are and will continue to be changes beyond just a global mean warming, such as changes in regional temperature extremes, precipitation, soil moisture, and sea level, all of which could have significant adverse effects on many ecological systems, as well as on human health and the economy.

This chapter first presents the causes and projections for climate change (Section 2.1 ). The chapter then discusses climate change pollutants (Section 2.2 ), the definition of global warming potentials used in the proposed regulation (Section 2.3 ), pollutants addressed under the proposed regulation (Section 2.4 ), indicators of climate change in California (Section 2.5 ), and potential impacts of climate change on California (Section 2.6 ). The chapter concludes with a brief discussion of abrupt climate change (Section 2.7 ).Initial Statement of Reasons

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4 2.1 Climate Change Causes and Projections

Climate change is a shift in the "average weather" that a given region experiences. This is measured by changes in the features that we associate with weather, such as temperature, wind patterns, precipitation, and storms. Global climate change means change in the climate of the Earth as a whole. Global climate change can occur naturally; an ice age is an example of naturally occurring climate change. The Earth's natural climate has always been, and still is, constantly changing. The climate change we are seeing today, however, differs from previous climate change in both its rate and its magnitude.

The temperature on Earth is regulated by a system commonly known as the "greenhouse effect". Naturally occurring GHGs, primarily water vapor, CO 2 , CH 4 , and N 2 O, absorb heat radiated from the Earth's surface. As the atmosphere warms, it in turn radiates heat back to the surface, to create what is commonly called the "greenhouse effect". The Earth's surface temperature would be about 34°C (61°F) colder than it is now if it were not for the natural heat trapping effect of greenhouse gases like CO 2 , CH 4 , N 2 O, and water vapor. Indeed, water vapor is the most abundant and important of these naturally occurring greenhouse gases. In addition to its direct effect as a greenhouse gas, clouds formed from atmospheric water vapor also affect the heat balance of the Earth by reflecting sunlight (a cooling effect), and trapping infrared radiation (a heating effect).

Human activities are exerting a major and growing influence on some of the key factors that govern climate by changing the composition of the atmosphere and by modifying the land surface. The human impact on these factors is clear. The concentration of CO 2in the atmosphere has risen about 30 percent since the late 1800s (NAST, 2001). This increase has resulted from the burning of coal, oil, and natural gas, and the destruction of forests around the world to provide space for agriculture and other human activities. Rising concentrations of CO 2and other GHGs are intensifying the Earth’s natural greenhouse effect. Global projections of population growth and assumptions about energy use indicate that the CO 2concentration will continue to rise, likely reaching between two and three times its late-19th-century level by 2100. Figure 2

- 1 (Source: IPCC 2001 Synthesis report) shows the atmospheric CO 2 concentration from year 1000 to year 2000 from ice core data and from direct atmospheric measurements over the past few decades. Projections of CO2concentrations for the period 2000 to 2100 are based on model predictions.Initial Statement of Reasons

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5 Figure 2

- 1 : Past and future CO 2 atmospheric concentrations. (Source: IPCC 2001 Synthesis report ).

Figure 2

- 2 (Source: IPCC 2001 Synthesis report) shows variations of the Earth's surface temperature for years 1000 to 2100. From year 1000 to year 1860 variations in average surface temperature of the Northern Hemisphere are reconstructed from proxy data (tree rings, corals, ice cores, and historical records). The line shows the 50-year average, the gray region the 95 percent confidence limit in the annual data. For the period 1860 to 2000 the figure shows variations in observations of globally and annually averaged surface temperature from the instrumental record; the line shows the decadal average. For 2000 to 2100 projections of globally averaged surface temperature are shown for several model scenarios using a global climate model.Initial Statement of Reasons

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6 Figure 2

- 2

. Variations of the Earth's surface temperature: years 1000 to 2100 (Source: IPCC 2001 Synthesis report)

The Third Assessment Report of the International Panel on Climate Change (IPCC, Synthesis report , 2001) and the National Research Council of the National Academies (NRC, 2001) conclude that the global climate is changing at a rate unmatched in the past one thousand years. The IPCC Assessment cites new and stronger evidence that most of the global warming observed over the last fifty years is attributable to human activities and that anthropogenic climate change will persist for many centuries. Also, the IPCC concludes that the observed changes over the last fifty years and those projected for the future include higher maximum air temperatures, more hot days, fewer cold days, greater extremes of drying and heavy rainfall, and sea level rise (IPCC Synthesis report, 2001). However, while the NRC Report generally agrees with the IPCC Assessment, it does not rule out that some significant part of these changes is also a reflection of natural variability.

Many sources of data indicate that the Earth is warming faster than at any time in the previous 1,000 years. The global mean surface temperature has increased by 1.1 o FInitial Statement of Reasons

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7 since the 19th century ( IPCC Synthesis report, 2001). The 10 warmest years of the last century all occurred within the last 15 years. For example, 2002 and 2003 are tied as the second warmest years on record, according to a year-end review of climate data by the National Oceanic and Atmospheric Administration. Both the IPCC (2001) and the NAST (2001) reports project that warming in the 21st century will be significantly larger than in the 20th century. Scenarios examined in these assessments, which assume no major interventions to reduce continued growth of world GHG emissions, indicate that temperatures in the US will rise by about 5-9°F (3-5°C) on average in the next 100 years, which is more than the projected global average increase. In general the continental regions of the Northern Hemisphere are expected to warm more than the global average. This rise is very likely to be associated with more extreme precipitation and faster evaporation of water, leading to greater frequency of both very wet and very dry conditions. Climate change, whether warming or cooling, will impact public health, air quality, water resources, agriculture, ecological resources, and California’s economy. As a result, global climate change issues are receiving increasing national and international attention from governments, business and industry, the research community, environmental interests, and the public (IPCC, 2001).

The relationship between CO 2 concentration, temperature increase, and the risks of adverse impacts from climate change are depicted in Figure 2

- 3 (IPCC 2001 Synthesis report). In the upper right of the figure are bars for different atmospheric concentrations of CO2(450 ppm to 1000 ppm) showing the range of mean global temperature range predicted from these concentrations using climate models. In the upper left of the figure are five vertical bars, each representing a type of negative impact caused by climate change (e.g., threatened ecosystems, extreme climate events, etc.). In each bar the white area represents neutral or small impacts; yellow indicates low negative impacts, and red means more widespread or greater magnitude of negative impacts. It is possible the high risk, serious impacts represented by the red areas, which is associated with warming above 3.5 o C, would be avoided by stabilizing the CO2 concentrations at or below 1000 ppm. Stabilization of atmospheric CO 2concentrations at 1,000 ppm or below would require global anthropogenic CO 2 emissions to drop below year 1990 levels, within a few decades or about a century, and continue to decrease steadily thereafter to a small fraction of current emissions.

Figure 2

- 3 provides a schematic view of the IPCC’s assessment of potential climate impacts at varying levels of temperature increase. It reflects the very broad range of impacts—from the local to the global, the environmental to the economic, and the gradual to the sudden. Across this full range, as the IPCC readily acknowledges, there are significant limitations on our ability to project the timing and magnitude of impacts. Even if we were able to accurately forecast future temperature rises, our understanding of the climate responses remains limited, particularly at local and regional scales. Some impacts, particularly those on ecosystems, are quite sensitive not only to the magnitude of local climatic shifts but also to the rate of change. A slow change may allow for adaptation or shifts in the spatial distribution of species, while a quick one may accelerate the rate of extinction or disrupt ecological functions in an irreversible way. However, Figure 2

- 3 presents general trends in the relationships between increases inInitial Statement of Reasons

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8 temperature and the risks of negative impacts, and the trends are not affected by the uncertainties in specific future impacts

.

Figure 2

- 3

. Risks of adverse impacts from climate change (source: IPCC 2001 Synthesis report).

2.2 Climate Change Pollutants

Naturally occurring GHGs include water vapor, CO 2 , CH 4 , N 2 O, and O3 . Several classes of halogenated substances that contain fluorine, chlorine, or bromine are also GHGs, but they are, for the most part, solely a product of industrial activities. Chlorofluorocarbons (CFCs) and hydrochlorofluorocarbons (HCFCs) are halocarbons that contain chlorine, while halocarbons that contain bromine are referred to as bromofluorocarbons (i.e., halons). Because CFCs, HCFCs, and halons are substances which deplete stratospheric ozone , they are regulated by the Montreal Protocol on Substances that Deplete the Ozone Layer. The United Nations Framework ConventionInitial Statement of Reasons

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9 on Climate Change (UNFCCC) defers to this earlier international treaty; consequently these gases are not included in national GHG inventories. Other fluorine -containing gases—hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulfur hexafluoride (SF 6 )—do not deplete stratospheric ozone but are potent GHGs. These latter substances are addressed by the UNFCCC and accounted for in State and national GHG inventories. In addition, there are a number of other pollutants such as carbon monoxide, nitrogen oxides, and aerosols that have direct or indirect effects on terrestrial or solar radiation absorption. They are discussed later in this section.

In September 2000, the California Legislature passed Senate Bill 1771 (SB1771, 2000), requiring the California Energy Commission (CEC), in consultation with other state agencies, to update California’s inventory of GHG emissions in January 2002 and every five years thereafter. The CEC (2002) report includes emissions of the four GHGs ( CO 2 , CH 4 , N 2 O, and SF 6 ) and two classes of GHGs (HFCs and PFCs) that are listed in Annex A of the Kyoto Protocol. Although the first three gases are also emitted from natural sources, the CEC report focuses on emissions due to human activities (anthropogenic emissions). The report concluded that there were major uncertainties associated with the inventory of GHG emissions, and recommended that future GHG inventories could be improved by: (1) incorporating improved data; (2) updating emissions estimates; and, (3) presenting a discussion of the uncertainty in emissions estimates from key sources.

Figure 2

- 4 shows the distribution of California's anthropogenic emissions by GHG.

HFCs, PFCs, SF

6 2%

CO 2 84% N 2 O 6% CH 4 8%

Figure 2

- 4 : Distribution of California GHG emissions by gas in 1999, expressed in terms of CO 2 equivalent (adapted from CEC, 2002).

I ndividual climate change species are briefly discussed in the following sections. Detailed discussions of GHG emissions are given in the CEC (2002) report.Initial Statement of Reasons

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10 2.2.A Carbon Dioxide (CO2 )

In the atmosphere, carbon generally exists in its oxidized form, as CO2. Increased CO 2 concentrations in the atmosphere have been primarily linked to increased combustion of fossil fuels.

Fossil fuel combustion accounted for 98 percent of gross California CO 2emissions. California's total CO 2emissions from fossil fuel combustion in 1999 were 356 million metric tons of CO2 equivalent (MMTCO 2Eq), which accounts for approximately 7 percent of the U.S. emissions from this source. The transportation sector accounted for the largest portion of emissions, averaging 59 percent of the total CO 2 emissions from fossil fuel combustion in California for the period 1990-1999. Within the transportation sector, gasoline consumption accounted for the greatest portion of emissions. Figure 2

- 5 presents the contribution of each sector to CO 2emissions from fossil fuel combustion in 1999.

Figure 2

- 5

. CO2 Emissions from the Combustion of Fossil Fuels by Sector for 1999 (adapted from CEC, 2002).

The CEC (2002) report indicates that CO 2emissions from fossil fuel combustion tracked economic and population growth in the early 1970s. Emissions remained flat through 1986, and then started to grow through the end of the decade. Economic and population growth both outpaced the growth in emissions during this period.

2.2.B Methane (CH 4 )

Methane accounted for approximately 8 percent of gross 1999 GHG emissions in California, in terms of equivalent CO 2 emissions. Methane is produced during anaerobic decomposition of organic matter in biological systems. Decomposition occurring in landfills accounts for the majority of anthropogenic CH 4 emissions in California and in the United States as a whole. Agricultural processes such as enteric fermentation, Industrial 12%

Electric Power 16% Transportation 59% Residential 9% Commercial 4%Initial Statement of Reasons

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11 manure management, and rice cultivation are also significant sources of CH 4in California.

While it is well established that exhaust from vehicles using hydrocarbon fuels contains CH 4 , there are few published data concerning the magnitude of CH 4emissions from the modern, and likely future, vehicle fleet. Metz (2001) concluded that the anthropogenic contribution of road transport to the global CH 4 budget is less than 0.5 percent. Threeway catalyst emission control systems installed on all modern vehicles are effective in removing CH 4 from vehicle exhaust (Nam et al., 2004). It seems highly likely that the future will bring increasingly stringent regulations concerning the effectiveness and durability of vehicle emission control systems. Hence, it is likely that emissions of CH 4 from gasoline- and diesel-powered vehicles will be reduced from their already low values. A possible exception to this trend would be the increased use of compressed natural gas (CNG) powered vehicles. However, based on the emission measurements reported in Nam et al. (2004) even assuming a substantial fraction of CNG-powered vehicles, the tailpipe CH 4 emissions from CNG vehicles can be controlled such that they are likely to have negligible environmental impact. However, refueling losses would be another source of CH 4 emissions from CNG vehicles, and leakage may be significant as well.

2.2.C Nitrous Oxide(N 2 O)

Nitrous oxide emissions accounted for nearly 6 percent of GHG emissions (CO 2 equivalent) in California in 1999. The primary sources of anthropogenic N 2 Oemissions in California are agricultural soil management and fossil fuel combustion in mobile

sources. Nitrous oxide is a product of the reaction that occurs between nitrogen and oxygen during fuel combustion. Both mobile and stationary combustion emit N 2 O, and the quantity emitted varies according to the type of fuel, technology, and pollution control device used, as well as maintenance and operating practices. For example, some types of catalytic converters installed to reduce motor vehicle pollution can promote the formation of N 2 O. EPA (2003) estimates suggest that, in 2001, N 2 O emissions from mobile combustion were 13 percent of U.S. N 2 O emissions, while stationary combustion accounted for 3 percent. From 1990 to 2001, combined N 2 O emissions from stationary and mobile combustion increased by 9 percent, primarily due to increased rates of N 2 O generation from on -road vehicles.

Behrentz et al. (2004) conducted a pilot study to measure exhaust emissions of N 2 O. Their results indicate that the average N 2 O emissions factor for the 37 vehicles tested was 20 ± 4 mg/km, significantly lower than previous reports of average values of ~35 mg/km (Dasch, 1992; Ballantyne et al., 1994; Barton and Simpson, 1994; Michaels et al., 1998). The difference between the previously reported emission factors and those presented in the pilot study could be related to the introduction of new technologies on some of the vehicles tested since they play a significant role in the amount of N 2 O emitted by the vehicles. The differences could also be related to difference in the vehicle fleets studied. This issue will be resolved with ARB's future analysis of a much larger database of N 2 O emissions. However, it is generally expected that N 2 OInitial Statement of Reasons

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12 emissions from light-duty vehicles will continue this pattern of decreasing emissions due to increasingly stringent control technologies for nitrogen oxides (NO X).

2.2.D Hydrofluorocarbons (HFCs), Perfluorocarbons (PFCs), and Sulfur Hexafluoride (SF 6 )

HFCs, PFCs and SF 6accounted for the remaining 2 percent of gross 1999 GHG emissions in California. HFCs are primarily used as substitutes for ozone-depleting substances (ODS) regulated under the Montreal Protocol. PFCs and SF 6are generally emitted from various industrial processes including aluminum smelting, semiconductor manufacturing, electric power transmission and distribution, and magnesium casting. There is no aluminum or magnesium production in California; however, the rapid growth in the semiconductor industry leads to greater use of PFCs.

For vehicular HFC emissions (particularly HFC-134a), four emission sources, all related to air conditioning, should be considered: emissions leaking from the hoses, seals, and system components of vehicle air conditioning system, and emissions that are released when the air conditioning system is opened for servicing. HFC emissions can also occur when the vehicle is scrapped at the end of its useful life or due to sudden releases (e.g., traffic accident refrigerant releases). HFC-134a, commercially known as R-134a, is presently the vehicle refrigerant of choice among vehicle manufacturers. The assessment of mobile air conditioning system technology and associated cost analysis are included in later chapters.

2.2.E Water Vapor

It should be noted that just because water vapor is the most important contributor to the natural greenhouse effect does not mean that human-made GHGs are unimportant. Over the past ten thousand years, the amounts of the various GHGs in the Earth's atmosphere remained relatively stable until a few centuries ago, when the concentrations of many of these gases began to increase due to industrialization, increasing demand for energy, rising population, and changing land use. A simple comparison of the relative greenhouse efficiencies of water vapor and CO 2 quickly becomes problematic because water vapor enters the climate system mostly as a "feedback" gas. The overall impact of water vapor with respect to global climate change is not well understood as it can lead to both warming (absorption of long-wave radiation from Earth) and cooling (cloud formation/reflection of solar radiation).

As the temperature of the atmosphere rises, more water is evaporated from ground storage (oceans, rivers, reservoirs, and soil). Because the air is warmer, the relative humidity can be higher, leading to more water vapor in the atmosphere. As a greenhouse gas, the higher concentration of water vapor is then able to absorb more long-wave radiation radiated from the Earth, thus further warming the atmosphere. This is referred to as a "positive or warming feedback loop.” However, as water vapor increases in the atmosphere, more of it will eventually also condense into clouds, which are more able to reflect incoming solar radiation, thus allowing less energy to reach theInitial Statement of Reasons

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13 Earth's surface and heat it up. This is referred to as a "negative or cooling feedback loop.”

Large scientific uncertainty exists in defining the extent and importance of the overall water vapor feedback (both positive and negative impacts). The uncertainties in the cloud response are probably the largest contributor to this uncertainty. Climate modeling studies provide circumstantial evidence for water vapor feedbacks. However, as the authors themselves acknowledge, their findings are unable to completely confirm the relationship.

There is an important difference between water vapor and other GHGs. Human activities do not seem to be appreciably changing the atmospheric concentration of water vapor in any direct way on the global average. Nor does water vapor accumulate in the atmosphere over the multi-year periods that other GHGs do. Natural processes (e.g., rain) remove water vapor when it reaches certain limits. Water stays in the atmosphere for a few days, while other GHGs linger for decades or centuries.

2.2.F Other Radiatively Important Gases

In addition, there are a number of man-made pollutants, emitted primarily as byproducts of combustion (both of fossil fuels and of biomass), that have indirect effects on terrestrial or solar radiation absorption by influencing the formation or destruction of other GHGs. These include carbon monoxide (CO), nitrogen oxides (NO X), nonmethane volatile organic compounds (NMVOCs), and sulfur dioxide (SO 2 ). These compounds, regulated in the US and California pursuant to the Clean Air Act, are often referred to as “criteria pollutants.” The criteria pollutants are reactive compounds, and they tend to remain in the atmosphere for a much shorter time than the previously discussed gases. As shown in Table 2.3

- 1 , CO2 , N 2 O, CH 4 , and HFC-134a have atmospheric lifetimes ranging from a century to ten years. Reactive compounds typically last only hours to months. The sequence of reactions that removes CO, NO X , and NMVOCs from the atmosphere, however, tends to promote the formation of tropospheric O 3 . Ozone in the stratosphere protects life on Earth from ultraviolet radiation, but O3at ground level causes respiratory distress in people and animals, and throughout the troposphere, O 3 is a potent (though short-lived) GHG. The lifetime of criteria pollutants in the atmosphere is short and varies by location and season. The reactions that produce O3 or alter the losses of CH 4are strongly affected by the relative concentrations of various pollutants, the ambient temperature, and local weather conditions. At present, there is large scientific uncertainty in estimating their radiative forcing effects.

California’s unique emissions and fuel standards for cars, trucks, buses, motorcycles, and other motor vehicles have dramatically reduced criteria pollutant emissions, as have controls on non-automotive pollution sources that are administered by the State’s 35 local air pollution control districts. California has achieved these improvements despite the State’s substantial growth in population, vehicle use, and business activities.

Molecular hydrogen (H 2 ) is a trace component of the lower atmosphere. Hydrogen is not radiatively-active and therefore does not have a direct impact on climate; however, itInitial Statement of Reasons

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14 has an indirect impact on climate change as (a) it is involved in the production of tropospheric ozone, and (b) it can modify the concentration of CH 4through its affect on the concentration of the hydroxyl radical (OH) (Prather, 2003).

Since the 1980s, alternative options for fulfilling the global energy demand have been developed. The use of H 2produced with renewable energy sources currently appears to be a promising option, in particular for the transportation sector. Although H 2 fuel cells themselves are a "clean" technology, producing water vapor (a GHG) as exhaust, concurrent changes in emissions of GHGs and ozone precursors associated with the production and distribution of H 2must be considered as well as the changes in vehicle fleet emissions (Schultz et al., 2003). Furthermore, the release of H 2 may increase because of leakage attributable to the production, transport, storage, and end use of H 2 (Zittel and Altmann, 1996)

. At present, the average leak rate to be expected in a fullscale hydrogen-driven economy is very uncertain.

2.2.G Aerosols

Aerosols are extremely small particles or liquid droplets found in the atmosphere. Various categories of aerosols exist, including naturally produced aerosols (e.g., soil dust, sea salt, biogenic aerosols, volcanic aerosols), and anthropogenic aerosols (e.g., sulfates, ammonium nitrate, industrial dust, carbonaceous aerosols including black carbon and organic carbon. Anthropogenic aerosols are derived directly or indirectly from transportation, coal combustion, cement manufacturing, waste incineration, and biomass burning. Aerosols affect radiative forcing in both direct and indirect ways: directly by scattering and absorbing solar and thermal infrared radiation; and indirectly by altering the cloud properties and atmospheric heating rates that in turn modify the formation, precipitation efficiency, and radiative properties of clouds. The effect of aerosols on regional and global climate is complex: in general, sulfate aerosols enhance the reflection of sunlight and cool the Earth, while black carbon aerosols enhance the absorption of sunlight and warm the Earth.

Understanding the role of aerosols in climate change requires inclusion of realistic representations of aerosols and their radiative forcings in climate models. Compared to the long-lived, well-mixed GHGs, however, the optical properties and temporal and spatial patterns of the many different types of aerosols are heterogeneous. Further uncertainty in aerosol radiative forcing arises because neither emissions, atmospheric abundance, optical properties, nor indirect effects are fully known. The IPCC (2001) and the NACIP (2002) have identified the total (direct and indirect) radiative forcing due to aerosols, and in particular light absorbing aerosols, as one of the most uncertain components of climate change models.

2.3 Global Warming Potentials

Radiative forcing is often defined as a net imbalance in energy flux in the atmosphere, and is expressed in watts per square meter (W/m 2 ), i.e. heat per area of the Earth's surface. Radiative forcing of the surface-troposphere system, resulting, for example, from a change in GHG concentrations, is the change in the balance between radiationInitial Statement of Reasons

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15 coming into the atmosphere and radiation going out. A positive radiative forcing tends, on average, to warm the surface of the Earth, and negative forcing tends, on average, to cool the surface. The impact of a GHG emission upon the atmosphere is related not only to radiative properties of the gas and its initial abundance, but also to the length of time the GHG remains in the atmosphere. Radiative properties control the absorption of radiation per kilogram of gas present at any instant, but the lifetime of the gas controls how long an emitted kilogram remains in the atmosphere and hence its cumulative impact on the atmosphere's thermal budget. The climate system responds to changes in the thermal budget on time-scales ranging from the order of months to millennia depending upon processes within the atmosphere, ocean, and biosphere.

Gases in the atmosphere can contribute to the greenhouse effect both directly and indirectly. Direct effects occur when the gas itself is a GHG. Indirect radiative forcing occurs when chemical transformations of the original gas produce other GHGs, when a gas influences the atmospheric lifetimes of other gases, and/or when a gas affects atmospheric processes that alter the radiative balance of the Earth (e.g., cloud formation). The concept of a Global Warming Potential (GWP) has been developed in parallel to the concept of ozone depletion potential developed under the Montreal Protocol to compare the ability of each GHG to trap heat in the atmosphere relative to another gas. Carbon dioxide, as the primary anthropogenic GHG, has been chosen as the reference gas. GWP is defined as the ratio of the time-integrated radiative forcing from the release of 1 kilogram of a trace substance relative to that of 1 kg of CO2(IPCC 2001). While any length of integration can be selected, the 100-year GWPs are recommended by the IPCC and will be employed by the ARB for policy-making and reporting purposes.

GWP values allow a comparison of the impacts of emission changes (reductions or increases) of different gases. According to the IPCC (2001), GWPs typically have an uncertainty of ± 35 percent. In addition to communicating GHG emissions in units of mass, we have also chosen to use GWPs to reflect their inventories in CO 2 equivalent terms because it effectively places all of the GHGs on the same comparative scale. Table 2.3

- 1 lists GWPs for CO 2 , CH 4 , N 2 O, and HFC-134a for the 20-, 100-, and 500- year time horizons. It should be noted that when the lifetime of the species in question differs substantially from the response time of CO 2(nominally about 150 years), then the GWP becomes very sensitive to the choice of time horizon. The GWP concept isonly relevant for compounds that have sufficiently long lifetimes to become globally wellmixed. Therefore, short-lived gases and aerosols with varying atmospheric distributions and lifetimes pose a problem in the simple GWP framework.Initial Statement of Reasons

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16 Table 2.3

- 1

. Numerical Estimates Of Global Warming Potentials Compared With CO 2 (Kilograms Of Gas Per Kilogram Of CO 2 -- Adapted From IPCC 2001).

Global Warming Potential Climate Pollutants Lifetime

(years) 20 years 100 years* 500 years
CO 2 ~150 1 1 1
CH 4 12 62 23 7
N 2 O 114 275 296 156
HFC-134a 14 3,300 1,300 400 * Recommended by IPCC (2001) and proposed by ARB staff for AB1493 regulation.

2.4 Pollutants Included in the Proposed Regulation

Assembly Bill 1493 calls for reductions in GHGs, which are defined in the bill as CO2 , CH 4 , N 2 O, HFCs, PFCs and SF 6 . The same list of GHGS was also included in the1997 Kyoto protocol, under United Nations Framework Convention on Climate Change (UNFCCC) agreement . The first four of these identified global climate change pollutants are clearly associated with motor vehicle use in California. PFCs and SF 6are not known to be associated with motor vehicle emissions in California and therefore are not addressed further in the staff report. Black carbon and criteria pollutant emissions from motor vehicles are also known to have climate change impacts, although these pollutants are not specifically defined as greenhouse gases in AB 1493.

The 2001 IPCC states that in addition to the gases targeted in the Kyoto Protocol, the contribution of tropospheric O 3to the greenhouse effect is also important. The report further states that in order to curb global warming it is necessary to reduce the emissions of both GHGs and other gases that influence the concentration of GHGs. Air pollutants such as NO X , CO, and NMVOC generate O3and impact tropospheric OH radicals, which in turn alters CH 4levels. Hence, they are called indirect GHGs. Due to the basic uncertainties regarding the actual impact of criteria pollutant emissions on climate, however, it is impossible at this time to have confidence in any numerical prediction of the climate effect of their emissions from light-duty motor vehicles. Because the uncertainties associated with the impact of criteria pollutants on climate change are large, at this time the ARB has chosen not to consider the potential climate change effects when regulating CO, NO X , NMVOC, or aerosols. As more definite scientific evidence becomes available, the ARB will, if appropriate, consider the climate change impacts of these criteria pollutants in its regulatory decisions.

2.5 Indicators of Climate Forcing and Climate Change In California

The climate is changing under the influence of human activity. Indicators of climate forcing and actual climate change can be used to illustrate trends, measure the suitability of particular actions in certain areas, and encourage public awareness of theInitial Statement of Reasons

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17 climate change impacts. The European Topic Center on Air and Climate Change (ETC/ACC) has recently developed a list of climate change indicators that should reflect, among other things, trends in GHG emissions, atmospheric GHG concentrations, temperature increase and effects on biodiversity, human health, and socio-economic sectors. One goal was that some indicators could show the progress made in meeting climate change policy targets and should identify requirements for adaptation and mitigation measures. Trends in GHG emissions are useful in these areas. Atmospheric CO 2 and other GHG concentrations are the key indicator for international negotiations on emission reduction. Climate and atmospheric variables such as temperature change and trends in precipitation are obvious parts of assessments, which study climate change impacts. Emphasis up to now has often been on changes in absolute trends. Extreme events and changes in seasonality have also been investigated. Statistical analysis of climate data can be used to describe the interrelationships in changes in the different climate parameters but might not be as understandable to policy makers and the public as temperature or precipitation.

For the indicators that show impacts on human health and on economic sectors, no suitable indicators were identified that could be available in the short-term. However several indicators are expected to be available in the medium-term. In general, indicators to describe the impact of climate change on human health are still limited due to lack of data. Climate change can exacerbate heat waves resulting in higher rates of morbidity and mortality. Furthermore, higher temperatures could lead to an increase of water and food related diseases. The identification and evaluation of indicators for climate change impacts on human health is one of the activities of the scientists who are studying potential implications for human health.

In California, several potential climate change indicators have been suggested, including anthropogenic GHG emissions, air temperature, annual Sierra Nevada snow melt runoff, and sea level rise in California (EPIC, 2002). Temperature data have been collected at many weather stations in the State for almost a century. The air temperature indicator can be used to track trends in statewide surface air temperatures and regional variations, allowing for a comparison of temperature changes in California with those occurring globally. In California the less populated and rural areas have shown the lowest average rate of temperature increase. For the period 1910 to 2000 these areas have shown a temperature increase of 0.7 oF per century. (EPIC, 2002).

The warming of global climate could increase evaporation rates, thereby potentially increasing precipitation and storms in the State. Snowmelt and runoff volume data can be used as a climate change indicator to document changes in runoff patterns. These specific regional changes are related, at least in part, to the climate change associated with the observed global mean warming. In California, large accumulations of snow occur in the Sierra Nevada and southern Cascade Mountains from October to March. Each winter, at the high elevations, snow accumulates into a deep pack, preserving much of California’s water supply in cold storage. If the winter temperatures are warm, more of the precipitation falls as rain instead of snow, and water directly flows from watersheds before the spring snowmelt. Thus, there is less buildup of snow pack; as a result, the volume of water from the spring runoff is diminished. Lower water volumes ofInitial Statement of Reasons

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18 the spring snowmelt runoff may indicate warmer winter temperatures or unusually warm springtime temperatures. Figure 2

- 6 shows that throughout the 20 th century, annual April to July spring runoff in the Sierra Nevada has been decreasing. This decreased runoff was especially evident after mid -century; since then the water runoff has declined by about twelve percent.

Figure 2

- 6 : Sacramento River Runoff (1910-2000) - April to July as a Percent of Total Runoff (Roos, 2002). Sea level rise also provides a physical measure of possible oceanic response to climate change. Increasing global mean temperatures will result in the rise in mean sea level. Warming of the ocean water will cause a greater volume of sea water because of thermal expansion. This contributes the largest share of sea level rise, followed by melting of mountain glaciers and ice caps (IPCC, 2001). Along California’s coast, sea level already has risen by three to eight inches over the last century, consistent with the global mean value of four to eight inches (IPCC, 2001). Long-term data from 10 of 11 California stations show increases in sea level ( Figure 2

- 7 , using San Francisco as an example). Sea level rise is not expected to be uniform globally and is influenced by shifts in weather patterns as well as the long-term motion of the continents. 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% 70%

1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Water Year (October 1 - September 30)Percent of Water Year RunoffInitial Statement of Reasons

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19 Figure 2

- 7 : 1855-2000 San Francisco yearly mean sea level (Roos, 2002). The climate change indicators described in this report represent key properties of the climate system that are considered sensitive to climate change. Many additional potential indicators remain to be explored. For example, climate change may influence the frequency of extreme weather events, ecosystem structures and processes, and species distribution and survival. It may affect forestry, energy and other industries, insurance and other financial services, and human settlements. In addition, the impacts can vary from one region, ecosystem, species, industry, or community to the next. Research into the regional impacts of climate change is ongoing, and the potential climate change indicators will be updated and expanded as new information becomes available.

2.6 Potential Impacts on California

Climate is a central factor in Californian life. It is at least partially responsible for the State’s rapid population growth in the past 50 years, and largely responsible for the success of industries such as agriculture and tourism. The potential effects of climate change on California have been widely discussed from a variety of perspectives (Lettenmaier and Sheer 1991; Gleick and Chalecki 1999; Wilkinson 2002). The signs of a global warming trend continue to become more evident and much of the scientific debate is now focused on expected rates at which future changes will occur. Rising temperatures and sea levels, and changes in hydrological systems affecting water resources are threats to California’s economy, public health, and environment. The following section discusses evidence of a changing climate in California and provides examples of why the State is particularly at risk from an increasingly warmer and more variable climate. 8.0 8.2 8.4 8.6 8.8 9.0 9.2 9.4 9.6 9.8 10.0

1850 1865 1880 1895 1910 1925 1940 1955 1970 1985 2000
YearMSL (Feet)Initial Statement of Reasons

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20 2.6.A Human Health and Air Pollution

Human health in California is likely to be impacted by climate change. Several recent studies have addressed potential implications for human health at the national and international levels (Patz et al., 2000). Greater climate variability and changes in climate patterns would potentially cause both direct and indirect health effects. Direct health impacts due to climate change include extreme events, such as heat waves, droughts, increased fire frequency, and increased storm intensity resulting in flooding and landslides. Secondary or indirect health effects include damages to infrastructure causing, for example, sanitation and water treatment problems leading to an increase in water-borne infections. Air quality impacts such as increases in tropospheric ozone due to higher temperatures may also cause secondary health impacts.

The most obvious direct impacts of projected climate change are higher temperatures and increased frequency of heat waves that may increase the number of heat-related deaths and the incidence of heat-related illnesses. Studies of heat waves in urban areas have shown an association between increases in mortality and increases in heat, measured by maximum or minimum temperature, heat index (a measure of temperature and humidity), or air-mass conditions (Semenza et al., 1996). For example, after a 5- day heat wave in 1995 in which maximum temperatures in Chicago ranged from 93 to 104°F, the number of deaths increased 85 percent over the number recorded during the same period of the preceding year. At least 700 excess deaths (deaths beyond those expected for that period in that population) were recorded, most of which were directly attributed to heat (Semenza et al., 1999).

Until recently, excess deaths occurring during heat waves have been attributed entirely to heat-induced stress. However, analyses in the Netherlands (Fischer et al., 2004) and the United Kingdom (Stedman, 2004) during the August 2003 heat wave in Europe conclude that a substantial portion of the mortality is actually due to elevated O3and aerosol levels. Air quality has a very real and direct effect on the health of many Californians who experience the worst air quality in the nation. Over 90 percent of Californians are living in areas that violate the State ambient air quality standard for ozone and/or particulate matter. In the Los Angeles area, population density and sprawl, cars, climate, and geography conspire to create some of the nation’s worst air quality.

Climate change can lead to changes in weather patterns that can influence the frequency of meteorological conditions conducive to the development of high pollutant concentrations. High temperatures, strong sunlight, and stable air masses tend to occur simultaneously and increase the formation of ozone and secondary organic carbon particles

− weather conditions associated with warmer temperatures increase smog. Figure 2

- 8 shows the relationship between ozone and temperature in the South Coast Air Basin, and indicates that ozone air quality can be profoundly affected by changes in climate and meteorology.Initial Statement of Reasons

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21 Figure 2

- 8 : Relationship between ozone and temperature in the South Coast Air Basin, 1996-1998.

Climate change may alter the frequency, timing, intensity, and duration of extreme weather events (meteorological events that have a significant impact on local communities). Injury and death are the direct health impacts most often associated with natural disasters. Indirect health effects of climate change include increases in the potential transmission of vector-borne infectious diseases caused by the extensions of ranges and seasons of some vector organisms and acceleration of the maturation of certain infectious parasites. Most vector-borne diseases exhibit a distinct seasonal pattern that clearly suggests that they are weather sensitive. Rainfall, temperature, and other weather variables affect in many ways both the vectors and the pathogens they transmit. In California, as in much of the world there is concern that increased heat and moisture will facilitate the spread of emerging infectious diseases, many of which are vector-borne. It has also been suggested that climate change will increase exposure to natural allergens. Fungi have adapted to virtually all environments, but fungal growth is often enhanced at increased temperature and/or humidity (Bernard et al., 2001)

. In summary, serious effects on human health may result from climate change. It is clear that heat waves and other extreme events pose serious public health concerns. Higher temperatures are also likely to negatively affect health by exacerbating air pollution. The elderly, infirm, and poor are most at risk because these conditions can exacerbatepre-existing disease. Lack of access to air conditioning increases the risk of heatrelated illness. Secondary or indirect effects of changes in climate such as changes in disease vectors may also pose concerns. Poor and immigrant populations (residence in urban areas where the heat island effect actually increases warming and the consequent effects of heat) are more vulnerable to climate change as they are often

0.00 0.05 0.10 0.15 0.20 0.25 0.30

40 60 80 100 120

Mean Maximum Temperature ( o F)Daily Maximum Ozone (ppm)Initial Statement of Reasons

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22 without adequate resources to control their environment with appliances such as air conditioners, or to seek medical attention. Thus, these communities are the first to experience negative climate change impacts like heat death and illness, respiratory illness, infectious disease, and economic and cultural displacement.

2.6.B Water Resources

Much of California is semi-arid and, thus, water resources are a key factor in the State’s economic and environmental well being. Water resources are affected by changes in precipitation as well as by temperature, humidity, wind, and sunshine. Water resources in drier climates, such as California, tend to be more sensitive to climate changes. Because evaporation is likely to increase with warmer climate, it could result in lower river flows and lake levels, particularly in the summer. In addition, changes in meteorology could result in more precipitation occurring in intense events, which reduces the ability to capture the water and could increase flooding. If stream flow and lake levels drop, groundwater also could be reduced. The seasonal pattern of runoff into California’s reservoirs could be susceptible to climatic warming. Winter runoff most likely would increase, while spring and summer runoff would decrease. This shift could be problematic, because the existing reservoirs are not large enough to store the increased winter flows for the demand in summer. Increased winter flows to San Francisco Bay could increase the risk of flooding ( Gleick and Chalecki 1999; Miller, et al., 2001; Roos 2002 ).

California is home to about 35 million people. Using the California Department of Finance projections, it is estimated that California's population will grow by an average of 1.4 percent per year over the next 20 years. This projection translates to approximately 10 million more Californians by 2020. The combination of population growth and climate warming could impose serious environmental challenges. Increased water demands and decreased water availability raise substantially the costs of providing water to urban, agricultural, and hydropower users. It is possible that California’s water system could adapt to the population growth and climate change impact. However, even with new technologies for water supply, treatment, and water use efficiency, widespread implementation of water transfers and conjunctive use, coordinated operation of reservoirs, improved flow forecasting, and the close cooperation of local, regional, State, and federal government, this adaptation most likely will be costly.

2.6.C Agriculture

If California’s water resource systems face challenges from climate change and variability, so will the State's agricultural sectors. While agricultural production is potentially vulnerable to climate change risks associated with adverse water system impacts, this sector also faces other risks that come with increasingly unpredictable variations in both temperature and precipitation. For example, increases in the frequency of extreme weather at inopportune times can cause significant declines in agricultural productivity (Wilkinson, 2002).Initial Statement of Reasons

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23 The impacts of global warming on crop yields and productivity will vary considerably by region. But several studies, including one by the US Department of Agriculture, show that maintaining today's levels of agricultural productivity would be difficult. At best, this would require expensive adaptation strategies. Farmers will likely need to change crops and cultivation methods because warming generally hinders crop yields, although the beneficial effects of elevated CO 2 in fertilizing plant growth may cancel out the effects of warming. If climate warming is accompanied by increased drought, however, the detrimental effects would be intensified.

In California, 87 percent of the crop area is irrigated, and increased drought could be countered by human management. Yet there are severe constraints on increased irrigation since 100 percent of the surface water is already allocated. Agricultural water users in the Central Valley are the most vulnerable to climate warming. While wetter future climates could increase water availability for these users, the drier climates could significantly reduce agricultural water deliveries in the Central Valley. If the climate shifts toward a severe drought, not only will more irrigation be needed, but also the snow pack at higher elevations will be lacking. This can be disastrous for producers that grow fruit trees and vines that will require years to reestablish production.

2.6.D Ecological Impacts

California is an ecologically diverse state, with 134 endangered and threatened species, including the sea otter, the California condor, and the American bald eagle. California’s unique ecosystems include 25,000 square miles of desert. California’s mountain ecosystems in the Sierra Nevada, including Yosemite National Park, contain alpine wilderness areas with large numbers of sequoia trees. The ranges of many species of plants and animals are restricted and fragmented because of both natural and human causes. Many invading species have colonized large areas and displaced native species in the wake of environmental changes in recent centuries (Wilkinson and Rounds, 1998).

Climate change could have an impact on many of California's species and ecosystems. For example, aquatic habitats are likely to be significantly affected by climatic changes. Most fish have evolved to thrive in a specific, narrow temperature range. As temperatures warm, many fish will have to retreat to cooler waters. Species differ significantly in their abilities to disperse and to become established in new locations with more suitable climates. Poorly dispersed species such as oak trees and related species, and amphibians, may not be able to survive the predicted rapid climatic changes if they have narrow tolerances for specific environmental conditions. Even for easily dispersed species, such as grasses and birds, other biological interactions (i.e., new predators, missing pollinators, lack of specific food sources) or physical environments (i.e., different soils, roads, lack of suitable intervening habitat) may block the success of migration.

With changes in climate, the extent of forested areas in California could also change. The magnitude of change depends on many factors, including whether soils become drier and, if so, how much. Hotter, drier weather could increase the frequency andInitial Statement of Reasons

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24 intensity of wildfires, threatening both property and forests. Along the Sierras, drier conditions could reduce the range and productivity of conifer and oak forests. Farther north and along the northern coast, drier conditions could reduce growth of the Douglas fir and redwood forests. A significant increase in the extent of grasslands and chaparral throughout the State could result. These changes would affect the character of California forests and the activities that depend on them.

2.6.E Impact on Economy

California produces more than one-eighth of total U.S. economic output, which makes it equivalent to the sixth largest economy in the world

. I ncreased climate variability and long-term climate change potentially will affect the state’s sectors in important and different ways. Some activities and enterprises will be impacted directly through changes in natural resource and ecosystem services. Water shortages and increased insect damage to crops due to relatively rapid changes in insect populations, for example, will have direct impacts on the State’s diverse agricultural sector. While field crops may be switched by the season, perennial crops including vineyards and orchards are long-term investments. The reported damages from the El Niño storms in 1997-98 for agricultural losses approached $100 million. From dairy farmers losing cows to exhaustion as they try to escape the mud, or are attacked by diseases, to strawberry growers losing crops to the rain, farmers have experienced significant losses due to strong climate variability (Wilkinson and Rounds, 1998).

Precipitation falling as rain instead of snow will pose major problems for water managers, as the existing capture will become inadequate, and distribution system designed for the current supply and demand areas will develop bottlenecks. Higher summer temperatures will cause more rapid deterioration of asphalt and concrete, impacting the highway and rail systems. Sea level increases of up to three feet over the next century, with consequent implications for coastal erosion, inundation of wetlands, salt water intrusion of coastal and delta aquifers, and impacts on developed areas would clearly be extremely costly to mitigate, and devastating to some ecosystems and urban communities. Climate change has the potential to affect many aspects of California—the survival of its unique ecosystems, its ability to produce electricity, its supply of water and agricultural products, and the resources that support its economy.

2.7 Abrupt Climate Change

When most people think about climate change, they imagine gradual increases in temperature and only marginal changes in other climatic conditions, continuing indefinitely or even leveling off at some time in the future. It is assumed that human societies can adapt to gradual climate change. However, recent climate change research has uncovered a disturbing feature of the Earth's climate system: it is capable of sudden, violent shifts. T his is a critically important realization. Climate change will not necessarily be gradual, as assumed in most climate change projections, but may instead involve relatively sudden jumps between very different states. A mounting body of evidence suggests that continued GHG emissions may push the oceans past a critical threshold and into a drastically different future. Abrupt climate change is theInitial Statement of Reasons

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25 subject of reports commissioned by the National Academy of Science (NRC 2002) and the U.S. Department of Defense (Schwartz and Randall, 2003).

Change in any measure of climate or its variability can be abrupt, including a change in the intensity, duration, or frequency of extreme events. For example, single floods, hurricanes, or volcanic eruptions are important for humans and ecosystems, but their effects generally would not be considered abrupt climate changes. A rapid, persistent change in the number or strength of floods or hurricanes might, however, be an abrupt climate change. Although more regionally limited, the apparent change in El Niño behavior (Graham, 1994; Trenberth and Hoar, 1996) could also be considered an abrupt change. El Niño is characterized by a large -scale weakening of the trade winds and warming of the surface layers in the eastern and central equatorial Pacific Ocean. El Niño is notorious worldwide for causing catastrophic disruptions in weather patterns. Floods in California are countered by droughts in Australia.

Societies have faced both gradual and abrupt climate changes for millennia and have learned to adapt through various mechanisms, such as developing irrigation for crops, and migrating away from inhospitable regions. Nevertheless, because climate change will likely continue in the coming decades, denying the likelihood or downplaying the relevance of past abrupt events could be costly. Thus, in addition to the gradual (albeit accelerated) climate changes projected by current climate models, Californians need to be aware of the possibility of much more sudden climate shifts. These shifts have a scientifically well-founded place among the possible futures facing the State and should be among the possibilities accommodated in planning and adaptation measures.

2.8 Summary

Historically, atmospheric gases such as water vapor, CO 2 , CH 4 , N 2 O, O

3 , and halocarbons have trapped terrestrial radiation in the Earth’s atmosphere, which has maintained a temperature and climate hospitable to life over much of the Earth

 a condition known as the greenhouse effect

. It is true that levels of natural GHGs have fluctuated in the past. However, there are several reasons for attributing the rise in GHGs to man-made, rather than natural, emissions. T he first indicator comes from comparing the current increase with changes that have occurred in the past. At the end of the last ice age, the concentration of CO 2 increased by around 100 ppm (parts per million) over about 8,000 years, or approximately 1.25 ppm per century. Since the start of the industrial revolution, the rate of increase has accelerated markedly. Since 1860, the concentration of CO 2 has increased by around 80 ppm, just over 50 ppm per century. The rate of CO2accumulation has continued to increase, and currently stands at around 150 ppm per century – over 200 times faster than the background rate for the past 15,000 years.

There is little doubt that climate change is happening today, that human-caused increases in the atmospheric abundance of GHGs are a large cause of that change, and the 21 st century climate change will be greater than that we have experienced in the 20 th . Much of that projected climate change is as yet unrealized warming from theInitial Statement of Reasons

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26 GHGs in the atmosphere today. Nevertheless, actions taken to reduce GHGs today can reduce the magnitude and rate of climate change this century.

There is no scientific uncertainty about the fact that human activities have increased the atmospheric abundance of GHGs. The uncertainties start when we try to predict exactly what the climate changes will be in various local areas of the Earth, and what the effects of clouds will be in determining the rate at which the mean temperature will increase. There are also uncertainties associated with other consequences of a warmer planet: sea level rise, spread of certain diseases out of their usual geographic range, the effect on agricultural production, water supply, sustainability of ecosystems, increased strength and frequency of storms, extreme heat events, air pollution episodes, and the impact of these effects on the economy. Already, some of these effects have been seen in California. Over the last hundred years, average temperatures have increased 0.7 o F, sea levels have risen by three to eight inches, and spring run-off has decreased 12 percent.

California's transportation sector is the single largest contributor of GHGs in the State, producing close to 60 percent of all such emissions. If current trends in transportation energy consumption continue, the State’s inventory of GHGs could mirror the growth in population. Transportation and land-use trends in California will likely continue to increase GHG production. This proposal will reduce GHG emissions from motor vehicles. The international community recognizes such GHG emission reduction (mitigation) actions would lessen the pressures on natural and human systems from climate change. Slower rates of increase in global mean temperature and sea level would allow more time for adaptation. Consequently, mitigation actions are expected to delay and reduce damages caused by climate change and thereby generate environmental and socio-economic benefits.Initial Statement of Reasons

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27 3 CALIFORNIA ACTIONS TO ADDRESS CLIMATE CHANGE

The State of California has traditionally been a pioneer in efforts to reduce air pollution, dating back to 1963 when the California New Motor Vehicle Pollution Control Board adopted the nation’s first motor vehicle emission standards. California likewise has a long history of actions undertaken in response to the threat posed by climate change. Beginning with 1988 legislation that directed the California Energy Commission, in consultation with the Air Resources Board and other agencies, to study the implications of global warming on California’s environment, economy, and water supply, and continuing on over the years through Governor Schwarzenegger’s April 2004 Executive Order outlining his vision for the California Hydrogen Highway Network, California state government has consistently recognized the necessity for state action on climate change to protect California’s interests.

At the Air Resources Board, attention to the mechanisms and effects of climate change dates back to 1989, when staff first updated the Board on the emerging science.

3.1 Summary of California Activities

Listed below is a chronology of major California activities to address climate change. The noted activities illustrate the depth and breadth of California’s commitment. The sections that follow provide more detail on major activities, beginning with state legislation and concluding with administrative initiatives.
Chronology of California Activities Addressing Global Climate Change

1988 AB 4420—Directs California Energy Commission (CEC), in consultation with the Air Resources Board and other agencies, to study and report on how global warming trends may affect California’s energy supply and demand, economy, environment, agriculture, and water supplies.

1989 CEC reports— Comparing the Impacts of Different Transportation Fuels on the Greenhouse Effect; The Impacts of Global Warming on California ARB—Board agenda item on global warming

1990 CEC releases 1988 Inventory of California Greenhouse Gas Emissions

1991 CEC report— 1991 Global Climate Change Report CEC sponsors Symposium on Global Climate Change CEC report— Global Climate Change: Potential Impacts and Policy RecommendationsInitial Statement of Reasons

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28 1998 CEC report— 1997 Global Climate Change Report: Greenhouse Gas Emission Reduction Strategies for California

1999 CEC sponsors Global Climate Change Science Workshop California Fuel Cell Partnership established

2000 CEC sponsors Global Climate Change Strategies Workshop SB 1771—Establishes California Climate Action Registry, and designates CEC and ARB with advisory functions Executive Order D-16-00—directs Secretary for State and Consumer Services to facilitate sustainable building practices ARB— Public Meeting to Consider an Informational Report on Air Pollution Trends: Past Progress and Future Challenges; included discussion of global warming

2001 SB 1170—cites global warming as one of the public health and environmental problems associated with petroleum use. To mitigate such effects the bill required the commission, the Air Resources Board and the Department of General Services to develop and adopt fuel-efficiency specifications governing the purchase by the state of motor vehicles and replacement tires. California Stationary Fuel Cell Collaborative established

2002 CEC report— Inventory of California Greenhouse Gas Emissions and Sinks: 1990-1999 California Climate Action Registry launched CEC reports— Guidance to the California Climate Action Registry: General Reporting Protocol; Guidance to the California Climate Action Registry: Certification Protocol AB 1493—directs Air Resources Board to adopt regulations that achieve the maximum feasible and cost effective reduction of GHG emissions from motor vehicles SB 812—directs California Climate Action Registry to include forest management practices SB 1078—establishes California Renewable Portfolio Standard Program SB 1389—directs CEC to adopt Integrated Energy Policy Report every two years AB 857—directs Governor to prepare comprehensive State Environmental Goals and Policy Report

2003 CEC, California Power Authority and Public Utilities Commission issue Energy Action Plan for the State of California West Coast Governors adopt Global Warming Initiative Office of Planning and Research issues Governor’s Environmental Goals and Policy Report , which included discussion of climate change impacts CEC submits first Integrated Energy Policy Report to Governor, including supporting document entitled Climate Change and CaliforniaInitial Statement of Reasons

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29 CEC Public Interest Energy Research Program creates California Climate Change Research Center CEC Public Interest Energy Research Program reports— Global Climate Change and California: Potential Implications for Ecosystems, Health and the Economy; Climate Change Research, Development and Demonstration Plan

2004 CalTrans issues California Transportation Plan (DRAFT) Executive Order S-7-04—outlines Governor Schwarzenegger’s vision for the California Hydrogen Highway Network Staff releases draft action plans for first five project topics in West Coast Governor’s Global Warming Initiative

3.2 Legislation

This section provides a brief description of significant legislative actions taken to address climate change in California.

AB 4420 (Chapter 1506, Statutes of 1988, Sher) Assembly Bill 4420 was signed on September 28, 1988 and directed the Energy Commission, in consultation with the Air Resources Board and other agencies, to “study and report...on how global warming trends may affect California’s energy supply and demand, economy, environment, agriculture, and water supplies”. Furthermore, “the study shall include recommendations for avoiding, reducing, and addressing the impacts.” In approving the bill the Legislature declared that “recent projections regarding global warming trends raise long-range energy, economic, environmental planning issues for the State of California.”

SB 1771 (Chapter 1018, Statutes of 2000, Sher) Senate Bill 1771 was signed on September 30, 2000. This bill established the California Climate Action Registry and designated the Energy Commission and the Air Resources Board with advisory functions. It also required the Energy Commission to periodically update the State’s GHG inventory, to “acquire and develop information on global climate change,” to “convene an interagency task force consisting of state agencies with jurisdiction over matters affecting climate change to ensure policy coordination at the state level for those activities,” and to “establish a climate change advisory committee.” The Legislature stated that “it is in the best interest of the State of California, the United States of America, and the earth as a whole, to encourage voluntary actions to achieve all economically beneficial reductions of greenhouse gas emissions from California sources.” The bill’s stated purpose was to “encourage voluntary actions to increase energy efficiency and reduce greenhouse gas emissions.”

SB 527 (Chapter 769, Statutes of 2001, Sher) SB 1771 was followed by Senate Bill 527, which was signed on October 11, 2001. This clean-up legislation authorized administrative penalties for certain violations of air pollution laws and clarified and added language to SB 1771. In the bill the Legislature repeated its statement that it “finds and declares [that it] is in the best interest of theInitial Statement of Reasons

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30 State of California, the United States of America, and the earth as a whole, to encourage voluntary actions to achieve all economically beneficial reductions of greenhouse gas emissions from California sources.”

SB 1170 (Chapter 912, Statutes of 2001, Sher) Senate Bill 1170 was signed on October 14, 2001. The bill cited global warming as one of the “public health and environmental problems” associated with petroleum use. Specifically, the bill mentioned “air pollution, acid rain, global warming, and the degradation of California’s marine environment and fisheries." To mitigate such effects, the bill required the commission, the Air Resources Board and the Department of General Services to develop and adopt fuel-efficiency specifications governing the purchase by the state of motor vehicles and replacement tires.

AB 1493 (Chapter 200, Statutes of 2002, Pavley) Assembly Bill 1493, the subject of this staff report, was signed on July 22, 2002. It required that the State Air Resources Board “develop and adopt regulations that achieve the maximum feasible and cost-effective reduction of greenhouse gases from motor vehicles”. In the bill the Legislature declared that “global warming is a matter of increasing concern for public health and the environment in the state” and that ”the control and reduction of emissions of greenhouse gases are critical to slow the effects of global warming”. The bill also directed the California Climate Action Registry to adopt protocols for reporting “reductions in greenhouse gas emissions from mobile sources”.

SB 812 (Chapter 423, Statutes of 2002, Sher) Assembly Bill 812 was signed on September 7, 2002. It instructed the California Climate Action Registry to include forest management practices as a mechanism to achieve emission reductions and “to adopt procedures and protocols for the reporting and certification of greenhouse gas emission reductions resulting from a project” and for “the monitoring, estimating, calculating, reporting, and certifying of carbon stores and carbon dioxide emissions resulting from the conservation and conservation-based management of native forest reservoirs in California”

SB 1078 (Chapter 516, Statutes of 2002, Sher) Senate Bill 1078 was signed on September 12, 2002 and established the California Renewable Portfolio Standard Program. In the bill the Legislature finds that “[t]he development of renewable energy resources may ameliorate air quality problems throughout the state and improve health by reducing the burning of fossil fuels and the associated environmental impacts.”

SB 1389 (Chapter 568, Statutes of 2002, Bowen) Senate Bill 1389 was signed on September 14, 2002 and required that the Energy Commission compile and “adopt an integrated energy policy report” every two years. In the report the Commission shall develop public interest energy strategies that include “reducing statewide greenhouse gas emissions and addressing the impacts of climate change on California”.Initial Statement of Reasons

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31 AB 857 (Chapter 1016, Statutes of 2002, Wiggins) Assembly Bill No. 857 was signed on September 28, 2002 and instructed the Governor to prepare a “comprehensive State Environmental Goals and Policy Report”. The bill sets out the State’s planning priorities as being “to promote equity, strengthen the economy, protect the environment, and promote public health and safety”. After approval of the report it shall serve as a guide for state expenditures.

3.3 Administrative Initiatives

This section provides more detail on climate change initiatives that have been undertaken by state agencies.

3.3.A Governor’s Office

A number of activities have been undertaken at the Governor’s Office level, as outlined below.
Sustainable Building Practices . In 2000 Governor Gray Davis signed Executive Order D-16-00, which directed the Secretary for State and Consumer Services to facilitate the incorporation of sustainable building practices into the planning, operations, policymaking, and regulatory functions of State entities. The Integrated Waste Management Board mitigates emissions through actions contained in the “Sustainable Building Implementation Plan.”

West Coast Governor’s Global Warming Initiative . On September 22, 2003 Governor Davis announced the formation of the West Coast Governor’s Global Warming Initiative in cooperation with the governors of Oregon and Washington. The three states intend to reduce GHG emissions through six initial project areas. These areas include (1) using the states' purchasing power to purchase fuel-efficient vehicles and low-rolling resistance tires for motor pool fleets, (2) reducing emissions from diesel generators in ships at west coast ports, and create a system of emission-free truck stops along the Interstate 5 corridor, (3) encouraging the development of renewable electricity generation resources and technologies, (4) improving efficiency standards, (5) developing consistent and coordinated GHG emission inventories, protocols for standard accounting and reporting methods for GHG emissions, and (6) promoting a hydrogen fuel infrastructure for transportation. In April 2004 the staff of the three states released draft initiatives covering the first five project areas for public comment. The hydrogen fuel infrastructure draft initiative will be completed in the near future.

Environmental Goals and Policy Report . In November of 2003 the Governor’s Environmental Goals and Policy Report was published by the Governor’s Office of Planning and Research. The report details the significant impact of potential climate change on California’s public health, agriculture, water supply, ecosystems, and economy. The report encouraged the establishment of “achievable targets for greenhouse gas emissions that are incorporated into regulatory programs and reflected in subsequent investments in greenhouse gas reduction.” Analyses to estimate the “cumulative effects of proposed government actions on total greenhouse gas emissionsInitial Statement of Reasons

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32 and require feasible mitigation measures that would achieve greenhouse gas emission and fossil fuel use reduction targets” should also be undertaken.

California Hydrogen Highway Network . Governor Arnold Schwarzenegger signed Executive Order (EO) S-7-04 on April 20, 2004. This EO acknowledged that hydrogen, a non-carbon energy carrier, is ideally suited to address global, regional and local energy and environmental challenges. The EO designated California’s 21 interstate freeways as the “California Hydrogen Highway Network”. The EO directed the California Environmental Protection Agency (Cal/EPA), in concert with the State Legislature, and in consultation with the California Energy Commission and other relevant state and local agencies, to develop the California Hydrogen Economy Blueprint Plan (Blueprint Plan) for the rapid transition to a hydrogen economy. The Blueprint Plan is due to the Governor and the Legislature in January 2005 and must include recommendations that promote environmental benefits, including global climate change benefits.

Cal/EPA has established a Hydrogen Highways Implementation Advisory Panel (Panel) to direct the Blueprint Plan effort. The Panel Chair will be chaired by Cal/EPA Agency Secretary Terry Tamminen and is made of up high-level executives from the public and private sector, including representatives from environmental organizations, the California Fuel Cell Partnership, the California Stationary Fuel Cell Collaborative, and a representative of environmental justice organizations. The Panel will be advised by Topic Teams that include experts in specific hydrogen-related issues. The Blueprint Plan will undergo review by a Senior Review Committee that includes Cabinet members and Legislators prior to going to the Governor and the full Legislature.

3.3.B California Energy Commission

As a result of AB 4420 the Energy Commission initiated several research efforts to clarify the consequences of global warming on California. In April of 1989 a report Comparing the Impacts of Different Transportation Fuels on The Greenhouse Effect surveyed how crude oil, compressed natural gas, natural gas and coal transportation fuels affected GHG emissions. In August of the same year another report The Impacts of Global Warming on Californiaexamined the risk of significant global warming upon water resources, electrical energy, agriculture, forestry, rising ocean level, natural habitat, regional air quality and human health, and the California economy.

The efforts to complete an inventory of California’s GHG emissions were concluded in October of 1990 with the release of the 1988 Inventory of California Greenhouse Gas Emissions . It inventoried emissions of CO 2 , CH 4 , N 2 0 and halocarbons, and included estimates of emissions from some out-of-state electricity fuel supplies.

In January of 1991 the Energy Commission reported to the Governor and Legislature with the 1991 Global Climate Change Report detailing the GHG emissions inventory, GHG reduction strategies and recommended policies to avoid and reduce global warming impacts. The following month leading climate scientists presented information on climate change science, global climate change models, and the importance ofInitial Statement of Reasons

August 6, 2004

33 California public policy at A Symposium on Global Climate Change.At the end of 1991 the Energy Commission compiled the findings of the earlier reports and recommended actions to reduce GHG emissions and adapt to potential global climate change in the Global Climate Change: Potential Impacts & Policy Recommendations.

In January of 1998 the emissions inventory was updated, and emission forecasts were presented along with an overview of the progress of the policies recommended in 1991. A follow-up to the global climate change symposium was conducted in 1999 with presentations by ten of the nation's leading climate scientists on the latest scientific data and information on global climate change potential impacts at the Global Climate Change Science Workshop

.
In June of 2000 a Global Climate Change Strategies Workshop included presentations by California, national and international businesses who have adopted "early actions" to reduce GHG emissions and elicited suggestions for strategies that could be cooperatively undertaken by the State government and the private sector.

The Inventory of California Greenhouse Gas Emissions and Sinks: 1990-1999 was presented in 2002. In addition to emission estimates it included an examination of trends in GHG emissions over the decade of the 1990s.

Integrated Energy Policy Report . The California Energy Commission adopted the 2003 Integrated Energy Policy Report on November 12, 2003. This document contains numerous recommendations to the Governor about current and potential energy issues confronting the state. Recommendations on the topic of climate change focused on the need to partner with neighboring states to take leadership positions in addressing global warming. Specific actions mentioned include required reporting of GHG emissions as a condition of state licensing of new electric generating facilities; use of sustainable energy and environmental designs in all state buildings; and a requirement for all state agencies to incorporate climate change mitigation and adaptation strategies in planning and policy documents.

Public Interest Energy Research Program . The California Energy Commission’s Public Interest Energy Research Environmental Area (PIER-EA) is engaged in a variety of activities to address both the causes and impacts of global climate change. These collaborative activities leverage public and private research expertise and funding, from within California and throughout the world.

In 2003, the Energy Commission’s PIER Staff created the California Climate Change Research Center (CCCRC) to initiate and implement climate-related research, development, and demonstration projects. The CCCRC has three components. The first, located at Scripps Institution of Oceanography, concentrates on scientific research related to climate variability and change. The second, located at the University of California atBerkeley, focuses on the economic and social aspects of climate change. The third, located at the University of California’s Office of the President (UCOP), manages a competitive grant program that funds research related to climate change.Initial Statement of Reasons

August 6, 2004

34 Also, in 2003, PIER-EA released two major climate-related reports. Global Climate Change and California: Potential Implications for Ecosystems, Health, and the Economy discusses various affects of climate change on the state. The Climate Change Research, Development, and Demonstration Plan outlines the need for state-sponsored climate change research, identifies research gaps, and prioritizes research activities to address climate change and its impacts in a number of disciplines.

These interrelated programs and projects are building a strong foundation that enables PIER-EA to collaborate with other organizations to address climate change issues that are affecting the environmental and economic health of the state and the region.

Energy Efficiency Activities . The Energy Commission adopted 2005 building energy efficiency standards in November 2003. These standards have growing positive effects. The savings that these standards are expected to yield for each year of construction are 180 megawatts of electric demand, 475 giga-watt hours of electric energy and 8.8 million therms of natural gas. These energy savings will yield significant reductions in criteria pollutant and GHG emissions.

CO 2Reporting in Power Plant Licensing . The Energy Commission staff is examining the feasibility and advisability of CO2 reporting in power plant licensing. This information would allow staff to estimate the amount of GHG emissions that will be emitted by the project, and would prove useful in establishing a more comprehensive and accurate inventory of GHG emissions from the electric generation sector within the state. In addition, by identifying and quantifying these emissions strategies can be developed, if appropriate, addressing the feasibility and cost-effectiveness of potential mitigation measures. The staff will also examine whether it should recommend that the Commission require power plant applicants, as a condition of certification, to submit actual monthly operational emissions data for GHGs.

The staff also expects to study the issue of whether it would be advisable to require power plant applicants to obtain carbon dioxide (CO 2 ) emission offsets, as is currently done in Oregon. If it were decided that a California CO 2emission offset market had merit, this issue would be reviewed in cooperation with the Air Resources Board and local air districts and would be the subject of public hearings.

3.3.C California Air Resources Board

Prior to being designated as lead role for implementation of AB 1493, the California Air Resources Board had already taken a number of actions to better understand climate change mechanisms and effects and encourage low GHG emission technologies. The Board’s focus on the issue dates back to 1989, when staff provided to the Board a presentation on the emerging science. At a Board hearing in 2000 staff updated the scientific evidence and highlighted ARB and state actions on global climate change as an air pollution challenge. Specific initiatives are summarized below.

Zero Emission Vehicle Regulation . This regulation, first adopted in 1990 and most recently modified in 2003, requires manufacturers to offer for sale in California specifiedInitial Statement of Reasons

August 6, 2004

35 numbers of zero and near-zero emitting vehicles. Although the regulation focuses most directly on criteria pollutants, the emerging technologies encouraged by the regulation, such as battery electric, fuel cell and hybrid electric vehicles, also offer significant GHG benefits.

California Fuel Cell Partnership . The California Fuel Cell Partnership, established in 1999, is a unique collaborative of auto manufacturers, energy companies, fuel cell technology companies, and government agencies. The Partnership is committed to promoting fuel cell vehicle commercialization as a means of moving towards a sustainable energy future, increasing energy efficiency and reducing or eliminating criteria pollutants and GHG emissions.

California Stationary Fuel Cell Collaborative . The mission of the California Stationary Fuel Cell Collaborative, which was established in 2001, is to promote stationary fuel cell commercialization. One of the Collaborative’s key objectives to be achieved through commercialization of stationary fuel cell technology is the reduction or elimination of air pollutants and GHG emissions. The Collaborative envisions fuel cell installations pursued by state, local and public organizations as well as private entities. The Collaborative will take specific actions to promote a wide variety of fuel cell technologies, sizes and applications for installation in California.

Research . Global air pollution issues are specifically highlighted in the 10-year research strategy adopted by the Board in 2001. The purpose of the ARB’s global climate research program is to assess the effects of GHG emissions, global climate change, and global transport of pollutants, especially as they impact the public health and environment of California. This comprehensive scientific research and assessment will help policymakers design the most appropriate control strategies to deal with these very complex issues. Important research questions concerning global air pollution and global climate change include the following:

• How can the GHG emission inventory be improved?

• What is the true contribution of motor vehicles to N 2 O emissions?

• What is the role of aerosols in climate change?

• What will be the effects of global climate change on human health?

• What are the possible economic impacts of global climate change on California?

One example of climate change related research is a study entitled Global Radiative Effect of Particulate Black Carbon . T he goal of this project, which is underway, is to provide the ARB with state-of-the-science global radiative forcing estimates for black carbon (BC) and other aerosols. Quantitative understanding of the absorbing aerosol’s role in the climate change is required to accurately evaluate the radiative forcing impacts of PM emissions. Such information is needed in order to determine whether PM should at some point be incorporated into climate change regulations.

A second study, entitled Climate Change - Characterization of Black Carbon and Organic Carbon Air Pollution Emissions and Evaluation of Measurement Methods , is under consideration. This project will result in an improved understanding of the effectInitial Statement of Reasons

August 6, 2004

36 of different combustion sources and their particle emissions, in particular black carbon and organic carbon , on air pollution and climate change.

ARB staff are currently reviewing climate change research proposals as part of the 2004/2005 research solicitation. The climate change proposals as well as those addressing other air quality-related needs will be considered by the Research Screening Committee. It is expected that the highest-ranking proposals will be presented to the Board with the recommendation that they be funded.

Innovative Clean Air Technologies Program . The Innovative Clean Air Technologies (ICAT) program provides co-funding for companies that are developing technologies supporting ARB's clean air objectives for California. This program has funded several projects on hydrogen, fuel cells, and hybrids, primarily for their GHG emission reductions.

3.3.D California Climate Action Registry

Legislation passed in 2000 called for creation of the California Climate Action Registry (CCAR), a non-profit organization with the primary function of promoting voluntary annual reporting of GHG emissions inventories by California entities. In 2002 the California Climate Action Registry was launched and several recommendations were provided by the Energy Commission to the Registry's Board of Directors. These included the Guidance to the California Climate Action Registry: General Reporting Protocol and Guidance to the California Climate Action Registry: Certification Protocol

. The Registry has over 35 participants from business, industry, government, and other types of organizations. Emissions data by Registry members are reported at the facility level, and are verified by state approved certifiers.

Under the enabling legislation, the State of California agrees to provide “appropriate consideration” of certified emissions that result in the future, when possible regulatory regimes may be implemented to reduce GHG emissions at the international, national, or state level. A forestry protocols workgroup has been convened and a power generator/utility sector workgroup is currently being formed to draft industry-specific GHG reporting and certification protocols. In addition, there is an effort underway to establish oil and gas industry reporting protocols. Lastly, there is an effort underway toquantify the “asset value” of GHG emissions reductions and move toward a marketbased system for recording actual emissions savings. The Oregon Climate Trust has been instrumental in this effort.

3.3.E California Department of Transportation

The California Department of Transportation (CalTrans) is working on a California Transportation Plan which “is a policy plan designed to guide transportation investments and decisions at all levels of government and the private sector to enhance [California’s] economy...and safeguard [California’s] environment for the benefit of all.” In a draft version of the plan CalTrans stated that “the use of fossil fuels to transport people and goods leads to air emissions that contribute to the warming of earth’s atmosphere”. TheInitial Statement of Reasons

August 6, 2004

37 report cites “potential adverse impacts to public health, agriculture, forest, and other systems, storm frequency and intensity, mountain snow pack, smog, and rising sea levels resulting from climate change.”

CalTrans also has a Director’s Policy entitled "Energy Efficiency and Conservation Policy." This policy promotes environmental stewardship, sustainable transportation, reductions in GHG emissions, and educational programs.

3.3.F California Department of Water Resources

The California Department of Water Resources (DWR) has recognized that climate change and variability can have important consequences for the state’s water resource systems. As a result the Scripps Institution of Oceanography is partnering with DWR and the PIER Program to improve data collection and regional climate modeling in an effort to reduce the uncertainty surrounding predictions of how precipitation patterns may change in California. DWR has also been documenting sea levels that dates back to the mid-1800s measured at San Francisco Bay. DWR is evaluating these risks and considering adaptive measures as part of the state’s planning process related to water

resources.

3.3.G Department of General Services

SB 1170 highlighted global warming as one of the public health and environmental problems associated with petroleum use. In response to the bill the Department of General Services (DGS) has developed “green” specifications for the procurement of all new passenger and light duty vehicles. The DGS solicits bids and publishes annual purchasing contracts for new passenger cars, pickups, passenger and cargo vans, and utility vehicles. Currently, all new passenger and light duty vehicles offered for purchase by state and local governmental fleets meet and in some cases exceed the Ultra Low Emission Vehicle (ULEV) requirements as established by the CARB.

3.3.H Multi-Agency Initiatives

Renewable Portfolio Standard (RPS). The California Public Utilities Commission (CPUC) and the Energy Commission have established a collaborative process to implement the state’s RPS. Legislation currently requires retail sellers to increase percentage of renewable energy sources in their portfolio by 1 percent of sales per year, up to 20 percent by the year 2017. Additional legislation provides up to $135 million per year to help achieve the objectives of the RPS and other renewable energy policies of the state.

A plan has been developed for the proceedings and workshops have been held to discuss implementation topics. A final document entitled “Renewable Resources Development Report” was prepared for the Legislature that describes the renewable resource potential in California and other states in the Western Electricity Coordinating Council.Initial Statement of Reasons

August 6, 2004

38 Energy Action Plan – 2003 . In 2003 the Energy Commission, the California Power Authority, and the Public Utilities Commission joined to create an Energy Action Plan for the State of California. One of the proposed actions was for “California [to] decrease its per capita electricity use through increased energy conservation and efficiency measures. This would minimize the need for new generation, reduce emissions of toxic and criteria pollutants and greenhouse gases, avoid environmental concerns, improve energy reliability and contribute to price stability.” The plan also argues that the state should “encourage companies that invest in energy conservation and resource efficiency to register with the state’s Climate Change Registry.” The plan states that “the agencies will each take into account the effect the action will have on energy expenditures, the environment and climate change, and the overall economy.” The state’s Energy Action Plan also calls for an accelerated RPS goal of 20% renewable energy electricity by the year 2010.

West Coast Regional Carbon Sequestration Partnership . In August 2003, the U. S. Department of Energy selected the West Coast Regional Carbon Sequestration Partnership as one of seven regional groups to evaluate a range of carbon sequestration options. The partnership (which consists of the Western Governor’s Association; various state agencies in California, Oregon, and Washington; and oil and gas companies) is focusing on terrestrial and geological sequestration. California and neighboring states will examine opportunities to capture and store CO 2 , including issues related to transport, permitting, monitoring, verification, and public outreach. This regional partnership approach is a cooperative effort between federal, state, and private organizations and described as “the centerpiece” of federal efforts to understand the potential of carbon sequestration to help mitigate GHG emissions.

The Energy Commission is managing the task-related working groups that are addressing issues relating to CO 2 transport, permitting, monitoring, verification, and public outreach. Phase I projects are developing the framework, tools, and methods for a regional assessment and identifying regional sequestration options and candidate projects. In Phase II, participants will conduct terrestrial and geologic sequestration pilot demonstrations to provide information for full-scale demonstrations.

Forest Management Practices . In response to SB 812 the Energy Commission and the Department of Forestry and Fire Protection are participating in the Registry’s efforts to develop guidance for protocols estimating emissions storage in forests. The Energy Commission, the Department of Forestry and Fire Protection and the Department of Food and Agriculture are also working to improve methods of establishing an extensive inventory of carbon currently stored within California’s landscapes.Initial Statement of Reasons

August 6, 2004

39 4 SUMMARY OF PROPOSED REGULATION

4.1 Climate Change Emission Reduction Standard

Vehicle climate change emissions comprise four main elements: (1) CO 2 , CH 4and N 2 O emissions resulting directly from operation of the vehicle, (2) CO 2emissions resulting from operating the air conditioning system (indirect AC emissions), (3)refrigerant emissions from the air conditioning system due to either leakage, losses during recharging, sudden releases due to accidents, or release from scrappage of the vehicle at end of life (direct AC emissions, and (4) upstream emissions associated with the production of the fuel used by the vehicle. The climate change emission standard incorporates all of these elements.

The staff proposal recommends that one standard be established for passenger cars and the lightest trucks (PC and LDT1), and a separate standard for heavier trucks (LDT2). Staff proposes setting near-term standards, phased in from 2009 through 2012, and mid-term standards, phased in from 2013 through 2016. The proposed standards, expressed in terms of CO2 equivalent grams per mile, are shown in Table 4.1

- 1 below:

Table 4.1

- 1 . CO 2 Equivalent Emission Standards for Model Years 2009 through 2016

CO 2 -equivalent emission standard by vehicle category

(g/mi) Tier Phase-in Year

PC/LDT1 LDT2

20% 2009 323 439 40% 2010 301 420 70% 2011 267 390 Near-term

100% 2012 233 361

20% 2013 227 355 40% 2014 222 350 70% 2015 213 341 Mid-term

100% 2016 205 332

To maintain simplicity, staff proposes to use the upstream emissions for vehicles that use conventional fuels as a “baseline” against which to compare the relative merits of alternative fuel vehicles. Therefore, the emissions standards as shown above do not directly reflect upstream emissions. Rather, when certifying gasoline or diesel-fuel vehicles manufacturers would report only the “direct” or, “on vehicle” emissions. For alternative fuel vehicles, exhaust CO 2emissions values will be adjusted in order to compensate for the differences in upstream emissions. This approach simplifies the regulatory treatment of gasoline vehicles, while at the same time allowing for appropriate treatment of alternative fuel vehicles.

Small Volume, Independent Low Volume, and Intermediate Volume manufacturers would not be required to comply with the climate change requirements until the finalInitial Statement of Reasons

August 6, 2004

40 year of the phase-in (2016). Beginning in 2016, these smaller manufacturers would be required to meet the average CO 2equivalent emissions of all 2012 comparable vehicles produced by the major vehicle manufacturers, beginning in 2016. A specialty low volume vehicle that utilizes a powertrain from a major manufacturer from the same model year would be considered compliant with the GHG emission standards if it adopted the package without modifications. Should a comparable vehicle not be available from a large manufacturer, the small volume manufacturer would be required to meet the 2012 emission standard for large volume manufacturers in 2016 and beyond.

4.2 Early Credits

AB 1493 directs that emission reduction credits be granted for any reductions in GHG emissions achieved prior to the operative date of the regulations. ARB staff proposes that (1) credit for early emission reductions should be available for model years 2000 through 2008, with manufacturers allowed to opt in to the program during any model year during this timeframe, and (2) the baseline against which manufacturer emissions are measured should be the fully phased in near term standard.

As noted in Table 6.1

- 5 above, staff has proposed that the fully phased in near term standard for passenger cars and T1 trucks should be 233 grams per mile CO2 equivalent, and for T2 trucks should be 361 grams per mile. Thus under the staff early credit proposal a manufacturer’s fleet average emissions, for model years beginning with their first year of participation through 2008, would be compared to these standards. If a manufacturer has fleet average emissions in a specific model year lower than these standards, the manufacturer would earn early compliance credits. Any emission reduction early credits earned could be used during model years 2009 through 2014, or traded to another manufacturer. To ensure that the regulation ultimately achieves the greatest possible climate change reductions, staff proposes that the credits generated by early compliance retain full value through the 2013 model year. These credits will then be worth 50 percent of their initial value in MY 2014, 25 percent of their initial value in MY 2015 and have no value thereafter.

4.3 Alternative Compliance

AB 1493 requires that the regulations “provide flexibility, to the maximum extent feasible consistent with this section, in the means by which a person subject to the regulations ... may comply with the regulations. That flexibility shall include, but is not limited to, authorization for a person to use alternative methods of compliance with the regulations.” Thus the use of alternative compliance strategies must not undercut the primary purpose of the regulation, which is to achieve GHG reductions from motor vehicles. Accordingly, the ARB's alternative compliance program will be limited to the vehicles that are regulated through AB 1493, and their fuels. This is to ensure that the program does not dilute the technology-forcing nature of the regulation, since the goal is to improve the vehicles themselves. The major features of the staff proposal are:

• Projects must be located in California to be eligible as alternative methods of compliance.Initial Statement of Reasons

August 6, 2004

41 • Only companies regulated by AB 1493 (automakers) will be permitted to apply for alternative compliance credits.

• Only those vehicles regulated under AB 1493 are eligible for alternative compliance credits. This includes model year 2009 and later passenger vehicles and light-duty trucks and other vehicles used for noncommercial personal transportation in California.

• Staff proposes that eligible projects be limited to those that achieve GHG reductions through documented increased use of alternative fuels in eligible vehicles.Initial Statement of Reasons

August 6, 2004

42 5 MAXIMUM FEASIBLE AND COST-EFFECTIVE TECHNOLOGIES

A key part of the staff’s technical work, and the focus of this section, is an assessment of technologies and fuels that can contribute to a reduction of climate change emissions in passenger vehicles from the 2009 model-year and beyond. The relevant portions of AB 1493 that guide this technology and economic assessment read -

43018.5. (a) No later than January 1, 2005, the state board shall develop and adopt regulations that achieve the maximum feasible and cost-effective reduction of greenhouse gas emissions from motor vehicles.... [where] (i) For the purposes of this section, the following terms have the following meanings: (1) ‘‘Greenhouse gases’’ means those gases listed in subdivision (g) of Section 42801.1. (2) ‘‘Maximum feasible and cost-effective reduction of greenhouse gas emissions’’ means the greenhouse gas emission reductions that the state board determines meet both of the following criteria: (A) Capable of being successfully accomplished within the time provided by this section, taking into account environmental, economic, social, and technological factors. (B) Economical to an owner or operator of a vehicle, taking into account the full life-cycle costs of a vehicle. (Stats. 2002, Ch. 200, §3)

5.1 Background

The GHG emission standards being proposed are being incorporated into the Low Emission Vehicle (LEV) program because it governs the emission cleanup of the cars and trucks sold in California. Like the emission standards previously adopted in the LEV program, the proposed GHG emission standards are also far reaching in that they prescribe the levels of emissions that would be required through 2016. As in the case of the earlier LEV program, staff is receiving initial comments from the automotive industry suggesting that the standards being proposed are too stringent, too soon and too expensive. As in the past, industry points to the considerable effort that would be involved in revising their entire fleet of vehicles and caution that there is insufficient lead time or resources for the task. Further, they generally believe that the staff’s cost assessments are too optimistic, as they did in the earlier LEV program, usually by citing costs as they exist in the near term rather than when the program would be fully phased in and the technologies fully learned-out in a high volume competitive environment.

In the most recent major LEV program revisions that were adopted in November, 1998, staff conducted an extensive evaluation of the technologies that might be developed further to provide the near-zero emissions required from even the largest vehicles in the fleet. Staff equipped numerous heavy large truck and sport utility test vehicles with prototype emission control equipment and tested them in our laboratories to demonstrate the proposed levels would be feasible, and projected costs for attaining the standards based on estimates obtained from component suppliers. Despite the staff’s considerable efforts to demonstrate the feasibility of the proposed standards at that time, industry mounted an aggressive opposition campaign claiming that trucks andInitial Statement of Reasons

August 6, 2004

43 sport utility vehicles would no longer be available that would meet consumer requirements or that they would be too expensive even if they could ultimately meet the proposed levels. Today, however, the LEV program is clearly successful with vehicles now meeting near zero criteria pollutant emissions ahead of schedule, bargain priced, and with full model availability. They also provide longer emission warranties that reflect the improved durability of the advanced emission control equipment.

For the GHG emission standards being proposed, staff has again sought out a very reliable and industry accepted means of evaluating the potential for achieving the standards. Because powertrain changes will be the focus for obtaining the reductions sought in this rulemaking rather than aftertreatment technologies, staff could not reasonably build prototypes and test them in our laboratory. Instead, staff relied on the NESCCAF study that utilized the services of an experienced and recognized vehicle simulation firm to provide projected reductions in GHG emissions. This is the only reasonable means of accurately estimating the combined effects of multiple technologies to reduce climate change emissions. The only other way would be to build and develop prototype vehicles and directly test their emissions. Because building and testing prototypes is so expensive and time consuming, even major automobile manufacturers rely on vehicle simulation firms to predict the performance of new technologies, either individually or in combination, and to assess their performance and emissions. As was the case in the 1998 LEV program rulemaking, the technologies that industry could utilize to meet the proposed climate change emission regulations are already in production on some models, are in prototype form, or are being seriously developed. Because of the large range of technologies that could be used, staff also relied on the NESCCAF evaluation of costs conducted by a recognized authority that the automotive industry itself relies on to obtain such costs. The same costing firm was consulted informally by ARB staff in setting the LEV I and LEV II program standards to compare notes on projected costs as a way of double checking our own estimates.

Although looking forward to 2016 and projecting what will be feasible in that timeframe may appear daunting to the automotive industry, as it did in the past, staff believes that the level of engineering analysis and rigor reflected in this staff report to demonstrate feasibility and cost-effectiveness is comparable to the previous efforts in the LEV program. Likewise, staff expects that the ultimate climate change emission reductions being proposed can be achieved effectively, on schedule and economically. Staff also expects that industry will once again exceed our expectations when we get there.

5.1.A Development of Staff Technology Assessment

Since passage of AB 1493, ARB has hosted several meetings to provide an update on the process of formulating climate change emission standards and to solicit feedback and public comment from relevant stakeholders, interested parties, and technology developers. ARB hosted the International Technology Symposium in March of 2003 in an effort to bring together international experts on climate change emission reduction technologies. Leading researchers from the auto industry, vehicle component suppliers, academia, and vehicle simulation firms were invited to speak, covering numerous technologies and their potential to reduce climate change emissions of vehicles in theInitial Statement of Reasons

August 6, 2004

44 2009-2015 timeframe. Additional feedback on developing a climate change regulation came from an update to the Board on November 20, 2003. ARB staff presented its early findings on the individual technologies that are likely to be available in the 2009 timeframe and the potential for climate change emission reductions from these technologies.

Building on the work presented at the earlier public meetings, on April 1, 2004 staff released the Draft Technology and Cost Assessment for Proposed Regulations to Reduce Vehicle Climate Change Emissions Pursuant to Assembly Bill 1493 . That report provided a comprehensive assessment of the technologies considered by the ARB staff in formulating targets for the “maximum feasible and cost-effective reduction of greenhouse gases.” ARB then hosted a public workshop on April 20, 2004 to receive public comment on the draft technology assessment. Staff subsequently made available on June 14, 2004 a draft of the Staff Proposal Regarding the Maximum Feasible and Cost-Effective Reduction of Greenhouse Gas Emissions From Motor Vehicles , containing the methodology for developing the standards and the preliminary standards themselves. A workshop was conducted on July 7, 2004 in which staff received valuable comments that were carefully considered in developing the final staff proposal.

5.1.B Research Method Overview

The vehicle technology results presented in this report are derived primarily from a comprehensive vehicle simulation modeling effort and a thorough cost analysis performed for the Northeast States Center for a Clean Air Future (NESCCAF). The participants in the study include AVL Powertrain Engineering, Inc. (AVL), Martec, and Meszler Engineering Services. ARB staff has been monitoring progress of this independent study and has been afforded various opportunities to provide comments on the analysis. ARB staff believes the NESCCAF study is the most advanced and accurate evaluation of vehicle technologies that reduce greenhouse emissions yet performed. ARB staff also monitored a separate TIAX, LLC analysis of the GHG benefits of alternative fuel vehicles, including upstream benefits, and the cost associated with alternative fuel vehicle technologies. ARB staff also met with representatives from EPA, the Society of Automotive Engineers, the Mobile Air Conditioning Society, and the National Renewable Energy Laboratory to develop its approach for reducing the effects of air conditioning refrigerant emissions and excess CO 2emissions from air conditioning use on climate change.

A key part of the ARB staff’s technical work is to assess technologies that will be available to reduce GHGs for model year 2009 and later light-duty passenger vehicles. As directed by AB 1493, the technologies assessed need to “achieve the maximum feasible and cost-effective reduction of greenhouse gas emissions from motor vehicles.” This section provides a brief overview of the methodology used in the NESCCAF study that serves as the basis of the ARB staff assessment of the potential GHG reductions and the cost of various available and emerging vehicle technologies.Initial Statement of Reasons

August 6, 2004

45 In Section 5.2 , the “Technology Assessment” section, we review NESCCAF’s 2002 baseline vehicle attributes, their contribution to atmospheric climate change emissions, and evaluate technologies that have the potential to decrease these emissions. The technologies being explored are currently available on vehicles in various forms or have been demonstrated by auto companies and/or vehicle component suppliers in at least prototype form. Brief generalized descriptions of the technologies and their level of current and potential commercial deployment are provided. Results for climate change emission reductions from more detailed analyses, with specific engine and drivetraintechnologies applied to specific vehicles, are presented and summarized. Mobile airconditioning systems are investigated to determine potential climate change emission reductions from improved efficiency air-conditioning compressors, reduced refrigerant leakage systems, and the use of alternative refrigerants. An assessment of technology options to reduce climate change emissions with the use of alternative fuel vehicles is provided, including analysis of both exhaust and fuel-cycle-related (i.e. “upstream”) emissions. Lastly, potential climate change reductions from improved exhaust catalyst technologies are considered.

Many different data sources were used for this analysis. U.S. Environmental Protection Agency data (EPA, 2003) was used to estimate baseline vehicle characteristics, and vehicle systems modeling simulations were used to analyze the potential benefits of various technologies. As indicated before, staff has relied extensively on the NESCCAF 2004 study “Reducing Greenhouse Gas Emissions from Light-Duty Motor Vehicles” for our analysis. It was tailored specifically for the task of formulating a cost-effective vehicular GHG regulation, and offers the most definitive, contemporary, and relevant research results to date.

The NESCCAF assessment of the costs and benefits of potential climate change reduction technologies relies on vehicle computer modeling simulations in order to reduce the potential error involved with overcounting the potential benefits of clusters of technologies used simultaneously on vehicles. This study also projected 2009 baseline vehicle performance using current trend lines and results of interviews with manufacturers and suppliers concerning production plans relative to performance and weight (the latter being constrained by pending implementation of a Corporate Average Fuel Economy (CAFE) increase for light-duty trucks and influenced upward due to pending side impact safety requirements), and the subsequent modeling maintained those outcomes. The vehicle simulation data used in this assessment rely on a validated model used by the auto industry that includes systems level analyses of the subsystems of the vehicle, including the various types of fuel intake systems, engines, drivetrain configurations, electrical systems, and overall vehicle drag and resistance parameters.

Section 5.3 , “Incremental Cost of Technologies,” examines the incremental cost of the climate change reduction technologies of Section 5.2 . The analysis includes a collection of cost data for the technology packages modeled by NESCCAF. Our cost estimates associated with the technologies of the previous section again rely to a large extent on the portion of the NESCCAF study conducted by Martec, which specifically analyzes the costs associated with the vehicle technology packages that wereInitial Statement of Reasons

August 6, 2004

46 examined in the vehicle simulation modeling. Determination of the costs of these technologies involved a detailed investigation of all of the components involved in implementing them in baseline vehicles, with inclusion of the effects of the new technologies on other vehicle systems. The level of detail in the cost analysis again raises the bar relative to any other cost study that we have seen to date. However, there are some aspects of the cost analysis that ARB staff believes need to be modified to meet our long-term cost projection guidelines. Specifically, ARB staff applied additional cost reduction factors for some emerging technologies that account for additional innovation and higher volume learning than was assumed by Martec. In some cases, cost estimates from various other sources were also included in our assessment. California-specific vehicle use data, such as average annual vehicle use and vehicle lifetime, were obtained from the California Department of Motor Vehicles and the ARB’s EMFAC emission model.

Section 5.4 , “Lifetime Cost of Technologies to Vehicle Owner-Operator,” includes a net present value analysis of climate change emission reduction technologies. This assessment is under the direction of AB 1493 to demonstrate climate change reduction technologies that are “Economical to an owner or operator of a vehicle, taking into account the full life-cycle costs of a vehicle.” Here we apply the initial incremental retail price of the technologies, average vehicle use data, and the resulting lifetime cost benefits to the consumer from the technologies to determine whether technology packages are economical over the life of the vehicle.

5.2 Technology Assessment

NESCCAF established baseline vehicle characteristics and assessed technologies with potential to reduce GHG emissions for CO 2 , N 2 O, CH

4 , and HFCs. This was done for five current representative vehicles. These five base vehicles were established in order to compare the differences of various GHG reduction technologies on various vehicle platforms (e.g. cars, minivans, trucks) with differing characteristics (e.g., maximum power, acceleration).

U.S. Environmental Protection Agency data (from EPA, 2003) was used to establish five representative current vehicles using data from 2002 model year light-duty vehicles. Representative vehicles were chosen to correspond to each of five passenger vehicle classes – small cars, large cars, minivans, small trucks, and large trucks. Separating the fleet into these five subdivisions was done to group vehicles that have similar attributes (e.g. weight, size), have comparable performance (e.g., acceleration), have similar technologies (e.g., transmission types, valvetrain designs), and that are functionally similar. This approach makes the modeling exercise affordable by limiting the number of modeling runs. The approach also acknowledges that some greenhouse gas-reducing technologies may be more applicable to different vehicle classes than others, and each vehicle modeling platform starts from a vehicle that is commercially viable with compatible subsystems.

Table 5.2

- 1 shows each of the five representative vehicles that was chosen to represent its vehicle class in terms of the following attributes: engine type, number of cylinders,Initial Statement of Reasons

August 6, 2004

47 transmission type, maximum power, engine displacement, curb weight, number of transmission speeds, driveline type, and cam type. The table also includes average vehicle class performance characteristics from the EPA (2003) data, including power and acceleration characteristics. Instead of making idealized composite vehicles that had the average or most common sales-weighted vehicle attributes, five actual 2002 model year vehicles were chosen based on closeness of fit to their class average attributes, average performance parameters, and dominant technologies. By choosing existing vehicles, not all characteristics are the exact average of their class. Instead, all the characteristics closely match the class averages, and the vehicles have the advantage of being based on actual existing vehicle platforms.

Table 5.2

- 1 : Representative 2002 Vehicles (NESCCAF, 2004)

Vehicle class

Small car Large car Minivan Small truck Large truck

EPA-defined vehicle types included Subcompact and compact sedans Mid-size

and large sedans Minivans Small sport utility vehicles and small pick-ups Standard pickups and large sport utility vehicles Curb weight (lbs) 2762 3380 3980 3714 4826 GVWR (lbs) 4867 7167
Engine displacement (liters) 2.27 3.18 3.42 3.41 5.01

Engine Type L4 V6 V6 V6 V8 Charge Type NA NA NA NA NA Cam Type DOHC DOHC OHV DOHC OHV

Driveline FWD FWD FWD 4WD 4WD Transmission Type Automatic Automatic Automatic Automatic Automatic

Number of Transmission Speeds 4 4 4 4 4 Class average vehicle attributes

Rated power (hp) 148 194 199 195 257

Peak Torque (lb -ft) 152 208 222 218 311 Power/weight ratio (HP/lb) 0.0530 0.0569 0.0498 0.0524 0.0537 Performance characteristics Torque/weight ratio

(lb-ft/lb) 0.0545 0.0610 0.0558 0.0586 0.0649

Representative vehicles for vehicle class Chevrolet Cavalier 2.2 L I-4 Ford

Taurus 3.0 L V-6 Daimler Chrysler

Town & Country 3.3 L V-6 Toyota

Tacoma 3.4 L V-6 GMC Sierra

5.3 L V-8

Baseline exhaust CO 2 emissions for each of five vehicle classes were based on a combined EPA driving cycle. The EPA combined cycle includes a driving schedule of specific speeds over time to simulate city driving, called the Federal Test Procedure (FTP, also known as the Urban Dynamometer Driving Schedule (UDDS)), and another cycle to simulate highway driving (HWY). Because the resulting emissions from the FTP and HWY cycles are used to determine California vehicle emission certificationInitial Statement of Reasons

August 6, 2004

48 compliance, using a weighted combination of the CO 2emissions results from both cycles was deemed appropriate for this assessment.

The GHG emissions of interest in this report impact the atmospheric radiation budget differently due to their distinct chemical and physical properties. For the purpose of this report, they are expressed in terms of their CO 2equivalent global warming potential (GWP). Table 5.2

- 2 lists the GWP value for these gases. The emission rate of 0.005 grams of CH 4 per mile for 2009 baseline vehicles is derived using EMFAC. The emission rate of 0.006 grams of N 2 O per mile driven was derived from the ratio of N 2 O to oxides of nitrogen derived from emission test data generated at ARB’s vehicle test facility.

Table 5.2

- 2 : Global Warming Potential

Greenhouse Gas Compound Global Warming Potential

Carbon Dioxide 1 Methane 23 Nitrous Oxide 296 HFC 134a 1300 HFC152a 120 Source: IPCC, Third Assessment Report, 2003
Mobile air conditioning has an environmental impact because of both “direct” refrigerant releases and “indirect” exhaust CO 2 emissions. Direct emissions include refrigerant releases from vehicles through air conditioning system leakage (a slow process, sometimes called “regular emissions”), during accidents or other events that suddenly breach containment of the system refrigerant (sometimes called “irregular emissions”), during service events, and when vehicles are dismantled without recovery of the refrigerant. The refrigerant currently used in vehicle air conditioning systems is 1,1,1,2- tetrafluoroethane, which is a hydrofluorocarbon commonly referred to as HFC-134a. The NESCCAF study also included modeling runs to estimate the total amount of “indirect” CO

2exhaust emissions that is associated with the use of the air conditioning system. Both the “indirect” CO 2emissions and the CO2 -equivalent “direct” HFC emissions are summarized in Table 5.2

- 11 and Table 5.2

- 12

. In the following subsections (5.2.A ) through (5.2.E ), technologies with potential to achieve net reductions in total baseline vehicle GHG emission levels are investigated. The technologies involved are briefly described and the potential emission reduction benefits are quantified. The assessment of technology options to reduce these emissions is split into the five generalized technology areas:

5.2.A Engine, Drivetrain, and Other Vehicle Modifications – valvetrain, transmission, vehicle accessory, hybrid-electric, and overall vehicle modifications designed to reduce engine exhaust CO 2emissions from conventional vehiclesInitial Statement of Reasons

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49 5.2.B Mobile Air-Conditioning System – air conditioning unit modifications to reduce vehicle CO 2emissions and refrigerant modifications to reduce emissions of HFC refrigerants, such as HFC-134a 5.2.C Alternative Fuel Vehicles – the use of vehicles that use fuels other than gasoline and diesel to reduce the sum of exhaust emissions and “upstream” fuel-delivery emissions of climate change gases 5.2.D Exhaust Catalyst Improvement – exhaust aftertreatment alternatives to reduce tailpipe emissions of CH 4 and N 2 O

5.2.A Engine, Drivetrain, and Other Vehicle Modifications

This section includes research into the potential to reduce tailpipe carbon dioxide emissions with the introduction of various available or emerging valvetrain, engine, transmission, vehicle accessory and body improvement technologies on conventional gasoline and diesel vehicles by model year 2009. The assessment relies primarily on the NESCCAF (2004) analysis, which establishes baseline 2009 vehicle characteristics and evaluates the potential CO 2reductions from individual technologies and packages of multiple technologies. Many of these technologies could also be applied to alternative fuel vehicles, which would further increase their GHG benefits.

5.2.A.1 Carbon Dioxide Reduction Technologies

This subsection provides brief, generalized descriptions of the carbon dioxide reduction technologies and their levels of commercial deployment. The technologies being explored for carbon dioxide emission reductions are currently available on vehicles in various forms or have been demonstrated by auto companies or vehicle component suppliers in prototype form, so as to conform to the 2009 – 2015 timeframe of the assessment. Although general estimates for potential CO 2 reductions can be found in the technical literature, they are not reported here because improved and more detailed estimates are obtained from the vehicle simulation modeling results below for one or more of these technologies on specific vehicles. These technologies are contained either in or around the engine itself, pertain to the transfer of motive force between the engine and the wheels through the drivetrain, or involve overall vehicle changes. Those technologies contained in the engine include modifications to the functioning of the intake and exhaust valves, the charge type, or the injection and preparation of the fuel or fuel-air mix into the cylinders. Drivetrain technologies that could reduce GHGs include modifications to the transmission and various degrees of hybridization. This section offers a brief description of these technology options. Abbreviations for each of the technologies within each description in this section are used to refer to the technologies in shorthand in later sections of this report.

Factors that affect CO2emissions from an engine include friction of internal components and the presence of a throttle that restricts airflow into the engine, thereby resulting in pumping losses. The remainder of the driveline also contributes to higher CO 2 emissions due to frictional and hydraulic losses in the transmission and differential or transaxle. Further, CO 2emissions are increased due to the work performed by theInitial Statement of Reasons

August 6, 2004

50 engine to run accessories needed to maintain the electrical system, operate the power steering and air conditioning compressor, or from operation of other devices. CO 2 emissions are further increased when the engine has to work to overcome inertial forces due to vehicle weight during acceleration or hill climbing, to overcome wind resistance, or to overcome tire rolling resistance. Shutting off the engine when possible during idling reduces CO 2 emissions and using a regenerative braking system for capturing otherwise lost energy to assist in relaunching a vehicle from a stop also minimizes CO 2 emissions production.

Engine Valvetrain Modification Valve timing and lift have historically been fixed for most manufacturers regardless of vehicle load demand. Variable valve timing, also known as “cam phasing,” and variable valve lift can improve engine carbon dioxide emissions by more optimally managing precisely when the valves open and close and exactly how much they open and close. Cam phasing can be varied either by linking the intake and exhaust cams together and rotating them with one phaser (CCP) or independently using dual cam phasers (DCP) for varying engine operation conditions. Valve lift technologies can be introduced to make continuous variations in lift (CVVL) or make discrete valve height lift increments (DVVL). These technologies can also be introduced either singly or in combination, providing reduced engine pumping losses, improved power output that permits engine downsizing, and substantial CO 2 reductions.

Increased control of intake and exhaust valves also provides for selective cylinder deactivation (DeAct) by closing both sets of valves. The selective deactivation of cylinders allows each of the other still-active cylinders to operate in more optimal regions of higher loads (higher torque and/or engine speeds) and reduces pumping losses. The technology has been found to be better suited for vehicles with relatively high engine displacement to weight ratios and engines with at least six cylinders.

More advanced and offering even greater improvements are camless valve actuation (CVA) systems that replace a belt, chain- or gear-driven camshaft system with variable electrohydraulic or electromagnetic actuation of the valves. Electrohydraulic actuation systems provide greater potential to reduce CO 2 emissions than electromagnetic systems since less power is required for system operation throughout the engine speed range. As shown in Figure 5

- 1 , electrohydraulic camless valve systems are relatively simple in their design and operation. Electromagnetic systems continue to have issues with valve closing force and attendant noise, but progress is being made according to some. Also, electrohydraulic systems can incorporate variable valve lift more readily. However, there are proponents for both systems who strongly believe they will be in volume production in the 2012 timeframe. Camless valve actuation is the ultimate goal of engine designers to achieve optimum valve position and lift for maximum engine performance and lowest CO 2 emissions over the full range of engine operation. Engines with CVA systems do not need a throttle and can deactivate cylinders at anytime as opportunity exists. Staff is aware of significant development activity taking place in Europe and Japan. Manufacturers that develop this technology such that they are first to market will have a strong competitive advantage. It also represents a more logical next step for manufacturers of overhead valve engines than going to overheadInitial Statement of Reasons

August 6, 2004

51 cam designs that might be short-lived should camless valve actuation come to fruition as early as the 2010 timeframe as is now predicted.

Variable valve timing and lift (Honda V-tec system) Electrohydraulic valve actuation (Sturman DHOS Valve Technology) Figure 5

- 1 : Two Variable Valve Systems

Charge Modification In conventional gasoline-fueled passenger vehicles, air-fuel mixture (i.e. “charge”) enters the cylinders near ambient pressure. Increasing, or “boosting”, the pressure of the air-fuel mix in the cylinder results in a higher specific power output from the engine. Therefore, the use of a supercharging or turbocharging compressor to increase the charge entering the cylinders improves engine power output and offers the opportunity to downsize the engine without compromising vehicle performance, thereby allowing operation of the engine in more optimal, low-CO 2regions. A supercharger (Super) offers this advantage by using mechanical power directly off the main engine. A turbocharger system (Turbo) utilizes the otherwise lost thermal energy of the exhaust to operate a turbine, which then drives a compressor. Both of these systems are shown schematically in Figure 5

- 2 . Superchargers were not modeled in the NESCCAF study since they do not offer the level of CO2 benefits achieved from turbochargers and are generally more costly. Current state of the art turbochargers incorporate a variable geometry feature that provides quicker boost at all speeds to maintain performance from downsized engines, especially at lower speeds where “turbo lag” can otherwise result in sluggish performance.Initial Statement of Reasons

August 6, 2004

52

Mechanical power supercharging (BorgWarner Turbo Systems) Exhaust gas turbocharging (BorgWarner Turbo Systems) Figure 5

- 2 : Schematics for Supercharged and Turbocharged Engines

Variable Compression Ratio Engine compression ratio is a key determining factor for optimal engine operation and lower CO2emissions. Current gasoline engines generally use a compression ratio of about ten-to-one and are limited from using higher ratios by pre-ignition or “knocking” at high loads. Because knocking generally increases with engine load, overall CO 2 emissions can be improved with the use of higher compression ratios at lower loads and lower compression ratios under higher loads with the use of variable compression ratio (VCR) technology that can vary cylinder geometry. This technology, however, is relatively expensive to implement given its current state of development and greater CO 2 reductions can be obtained from other approaches at less cost. Therefore, the NESCCAF study did not include modeling of this technology.

Gasoline Direct Injection Carbon dioxide reductions can be achieved through modifications of the fuel injection system of gasoline vehicles to directly inject the fuel into the cylinder (conventional engines inject fuel into the intake manifold ahead of the intake valve, wherein fuel evaporates and is inducted into the cylinder with the incoming air). This can be done under stoichiometric (i.e., using only enough air to burn the fuel) or “lean burn” (i.e., excess air) conditions. Due to thermodynamic improvements, lean burn GDI (GDI-L) systems can offer substantial CO 2reductions, but with some complications involved in controlling oxides of nitrogen (NO x ) emissions. Advances in lean burn aftertreatment devices similar to those being developed for diesel engines may offer a solution. Stoichiometric GDI (GDI-S) systems offer smaller CO 2 reductions than GDI-L technology, but without NO x aftertreatment concerns.

Homogeneous Charge Compression Ignition Through precise control of the temperature and pressure in the combustion chamber, spontaneous and homogeneous ignition of the air fuel mixture can occur. Since combustion occurs simultaneously throughout the combustion chamber without forming a flame front and at lower temperatures than conventional spark ignited engines,Initial Statement of Reasons

August 6, 2004

53 engine-out particulate matter (PM) and NO x emissions are very low. Homogeneous charge compression ignition (HCCI) can offer substantial CO 2emission reductions and can be applied to engines using a variety of fuels, including gasoline and diesel. While significant effort is being directed to its development, some technical challenges remain before it becomes commercially applicable. At present, HCCI operation is possible only in a portion of the engine operating range. Therefore gasoline engines with this capability are based on a direct injection engine wherein its spark ignition capability is retained for the non-HCCI operating modes that will continue to require a spark to ignite the mixture.

Diesel Fuel High speed direct injection (HSDI) diesel vehicles have improved with the advancement of several technologies. Diesel compression-ignition engines, with higher compression ratios, turbocharging, and lean air-fuel ratios provide significant CO 2 reductions compared with conventional gasoline engines. Advancements in small diesel engines running at high speeds (over 4000 rpm compared to heavy-duty diesel engines at about 2000 rpm) in the areas of fuel injection, emissions, noise, and vibration have addressed many of the more objectionable aspects of these vehicles, making them more acceptable to the public. Diesel vehicles are popular in Europe but face a substantial challenge meeting more stringent emission standards in the U.S. Advanced multi-mode diesel engines combine homogeneous charge compression ignition operation at lower engine speeds and loads to minimize particulate matter (PM), NO x and CO

2 emissions compared to conventional diesels and revert to conventional diesel engine operation at higher speeds and loads to ensure expected power levels. Maximum use of homogeneous charge combustion operation reduces CO 2 emissions and lessens the burden of aftertreatment of NO x and PM emissions. Some manufacturers have recently expressed considerable optimism regarding successful development of advanced multi-mode engines that operate over a wide range of engine speeds and loads. Accordingly, there is increased optimism that such diesel engines will be able to meet very low NOx and PM emission levels with a minimum of aftertreatment.

Figure 5

- 3 : Electric Water Pump (Pierburg)

Engine Accessory Improvement Improvements to various electrical components on vehicles can provide significant improvements in CO 2emissions. Electrification (eACC) of engine accessoryInitial Statement of Reasons

August 6, 2004

54 subsystems, such as coolant pumps and other accessories, can reduce the overall losses associated with powering them mechanically. Electrifying the power steering for most cars or utilizing an electro-hydraulic power steering system for larger cars and trucks is also being considered for its contribution to total vehicle CO 2emissions. Improvements in the vehicle alternator (ImpAlt) that would power these accessories can also provide benefits. Regarding electric coolant pumps, staff included these when 42 volt electrical systems were available on the base vehicles, but we have since learned of these being applied on vehicles with conventional 12 volt systems. With further changes to the engine to make the best use of electric coolant pumps, CO2 reductions are also being claimed that are greater than were assumed in our modeling runs.

42 Volt Systems Upgrading of vehicle electrical systems to 42 volts (42V), a step many manufacturers are currently contemplating, is an enabling technology for more diverse electrical opportunities. The 42-volt electrical system can accommodate more powerful electrical accessories on-board the vehicle and an integrated starter generator. An integrated starter-generator 42-volt vehicle system (ISG 42v) recoups energy while decelerating through regenerative braking and provides instantaneous engine restart to avoid engine idling; some variants can provide power assist in vehicle acceleration. The trend we are seeing is for manufacturers to only provide 42 volt capability where needed on the vehicle rather than converting the entire vehicle to 42 volts. This results in a more economical package overall that still delivers the desired CO2 reductions.

Transmissions Automatic transmissions on today’s vehicles generally have 4 gear ratios, or speeds. Increasing the number of gears to 5- or 6-speeds, as has already been done in numerous vehicle models, allows the engine to operate in more optimum ranges for lowest CO 2 emissions during the drive cycle. Each increase in number of speeds corresponds approximately to a two percent reduction in CO 2 emissions. More advanced transmissions may offer more substantial improvements. The automated manual transmission (AMT) acts like a conventional automatic transmission in that shifting is performed automatically, but no torque converter used. AMTs with a dual wet clutch system provide shift quality that equals or exceeds the smoothness of current automatic transmissions. Although our cost assessment indicates these transmissions will cost no more than current 6 speed automatic transmissions, we have heard some speculate they will actually cost significantly less when in full volume production. In the August 2004 issue of MOTOR TREND, an evaluator of an Audi TT equipped with this so-called “direct shift gearbox – 6” concluded “If there is a more stunning piece of technology than the TT’s transmission, I don’t know about it.” While this transmission is currently being used in the Audi TT in the U.S., they are being used in Europe in several models. Just as increasing the number of gears from 4 to 5 speeds or more allows the engine to operate closer to its ideal operating point at any given time, the continuously variable transmission (CVT) provides engines a greater ability to operate at precisely the optimal speed for a given load. The CVT effectively acts as a transmission with an infinite number of gears, using either a belt or chain on a system of two pulleys (see Figure 5

- 4 ). At this time, however, manufacturers seem to be obtaining most of the CO2emission reductions of a CVT by using a 6-speed automaticInitial Statement of Reasons

August 6, 2004

55 transmission at significantly less cost. Therefore, few of the modeling runs incorporated CVTs. Because of the superior performance of the AMT coupled with is low CO2 emission performance, this transmission was chosen for most of our modeling scenarios. Because it will likely cost less than current 6 seed automatics, we believe it will therefore dominate in the future.

Honda CVT Schematic for CVT developed by General Motors and Southwest Research Institute Figure 5

- 4 : Continuously Variable Transmissions

Hybridization Hybridization, or use of both combustion engines and electric motors for propulsion, is being actively explored by all major auto manufacturers. Hybridization of current and planned vehicles varies widely from “mild” hybrids, which tend to be more similar to conventional gasoline passenger vehicles to fully-integrated “advanced” hybrids that use and store more electric energy on-board. Differentiating the mild system from more advanced hybrids is the increased extent to which electrical power is stored on the vehicle and used during driving. In a fully integrated hybrid (e.g., Toyota Prius), the electric motor approaches the same size as the on-board combustion engine and therefore can be used exclusively to power the vehicle during low-load, low speed conditions. In the moderate “motor-assist” hybrid configuration, such as the Honda Civic Hybrid, the maximum power output of the engine is substantially greater than that of the electric motor. The electric motor then is generally used for times of higher load demands, such as acceleration or hill climbing, providing for engine downsizing and optimization for low load conditions such as cruising. Mild hybrids generally offer only idle off capability. Compared with similar performing conventional vehicles, moderate to aggressive hybrids can achieve improvements of over thirty percent in CO 2emissions. Along with the commercially available Toyota and Honda hybrid vehicles, every major automaker has plans to produce hybrid vehicles in the next few years. EPA is investigating the potential of hydraulic hybrids and has published an interim report on their progress.Initial Statement of Reasons

August 6, 2004

56 At this time, staff is projecting that high volume production of advanced hybrids will not be accomplished before the 2017 timeframe. The complexity of these vehicles and the significant increase in resources to engineer and fully develop them will require a more gradual roll out than for more conventional technologies. Further, there is considerable debate about the eventual cost increase that these vehicles will require when in volume production. Some manufacturers are skeptical that hybrids will achieve volume production costs that make for a sound business case, and instead are betting that diesels will eventually be a better solution for reduced climate change emissions. Rather than attempt to sort out the costs of future hybrid vehicles at this time, staff continues to rely on the NESCCAF estimates after applying a 30% reduction to the incremental costs for hybrids cited by Martec, to account for expected improvements in technology and processes to produce them in the future. A more detailed evaluation of hybrid vehicles and their costs will take place in a few years as part of the review of ZEV and near-ZEV technologies to be undertaken by the Independent Expert Technology Panel .

Engine Friction Reduction Due to the large number of internal parts in today’s engines coupled with numerous accessory drives, improvements in the design of engine components and subsystems can continue to drive friction reductions, resulting in improved engine operation and reduced climate change emissions. Friction reductions in and around the engine can result from such measures as engine component weight reduction, use of different materials, more optimal thermal management, and improved computer-aided understanding of component dynamics under various engine load and vibration conditions. Further friction reductions result from the use of advanced multi-viscosity engine and transmission oils.

Aerodynamic Drag and Rolling Resistance Reduction Improvements in the overall force required to propel a vehicle reduces engine load thereby leading to a reduction in vehicle exhaust CO 2emissions. Two ways to reduce the engine load for a given vehicle are to reduce the opposing resistance or frictional forces that act against the motion of the vehicle. Two prominent resistance forces are aerodynamic drag and rolling resistance at the tires. The most obvious areas for potential aerodynamic drag improvements are reducing the frontal area of the vehicle or improving the shape of the body, with skirts, air dams, underbody covers, and other features that have less aerodynamic friction. The rolling resistance force due to friction between the tires and the road can be improved via shoulder design improvements or with design and material modifications to the tire tread pattern, tire belts, or the traction surface.

Aggressive Shift Logic Shifting schedules, or the engine speed at which automatic transmissions switch from one gear ratio to another, can have a substantial impact on CO 2emissions. Using a more aggressive shift logic allows more flexible shifting of gears and thus allows for operation of the engine at more optimal low CO 2 emission regions of the engine maps. Generally, aggressive shift logic entails moving transmission upshift points to lowerInitial Statement of Reasons

August 6, 2004

57 speeds and reducing the amount of downshifting. Driveability and acceleration concerns must be accounted for carefully in these alterations of shifting schedules.

Early Torque Converter Lock-up Conventional automatic transmissions employ a torque converter between the engine and transmission. This is a fluid coupling with hydraulic torque multiplication capability that helps provide a brisk “launch feel” to vehicles so-equipped. They also dampen engine vibrations in the driveline and allow engines to remain at idle speeds with the transmission engaged in a forward or reverse gear. Unfortunately, the torque multiplication at launch and the other features result in higher CO 2emissions compared to a manual transmission. In order to reduce slip, virtually all of today’s automatic transmissions offer some degree of lock-up capability during some light accelerations and during cruise conditions (this means the torque converter no longer slips needlessly and provides direct or near-direct mechanical transmission of power to the drive wheels much like a manual transmission). The conditions under which lock-up operation occurs can be improved by doing so earlier than at present, especially when the number of transmission speeds increases, thereby reducing CO 2 emissions. As with early shift speeds, however, care must be exercised to ensure smooth, responsive driveability and low noise, vibration, and harshness. AVL was conservative in its modeling of these features to ensure good driveability and minimum vibration.

Weight Reduction Although ARB staff efforts do not rely on weight reductions in setting its proposed climate change emission standards, manufacturers would still have the option of lowering weight to improve CO 2emission performance. Lower weight results in lower CO 2emissions by lowering the forces needed to accelerate the vehicle and climb grades. Lower weight can be achieved by substitution of lighter materials, better packaging, and shifting to a smaller platform. Besides the use of high strength low alloy steels, some manufacturers are relying on more use of aluminum and magnesium alloys and plastics to achieve greater weight savings, although at somewhat higher cost than steel.

5.2.A.2 Summary of Vehicle Simulation Modeling Results

As was alluded to above, a detailed vehicle simulation model was used in the NESCCAF study to estimate CO 2 emission reductions from applying various combinations of technologies to the baseline vehicles. The year 2002 is held as a base year for the calculations because it is the year the modeling platforms were built upon and is the most recent year for which extensive knowledge of the vehicle fleet was available. Because the pending regulation would be applicable for model year 2009 and later vehicles, potential reductions for 2009 vehicles are also provided in the summary.
The modeling presented here (and in the NESCCAF report) utilizes the vehicle simulation model developed by AVL Powertrain Engineering, Inc. called CRUISE. The modeling software is designed for the advanced study of various vehicle platforms to provide estimates of vehicle performance, emissions, and fuel usage. The modularInitial Statement of Reasons

August 6, 2004

58 systems-based nature of the CRUISE software allows for investigation of sophisticated and detailed analyses of each vehicle component, from the fuel intake system and engine through the drivetrain to the tires. An advantage of systems modeling such as this is to allow a wide diversity of combinations of technologies to be modeled together and examine how they interact when simulating a vehicle operating on various driving cycles.

The AVL CRUISE model was first used to create the five 2002 representative vehicle simulation models with representative attributes and to validate these models with the known actual vehicle performance characteristics. In addition to modeling the 2002 representative vehicles, separate 2009 baseline vehicles were characterized through analysis of vehicle trends and market research in order to quantify costs and benefits of vehicle technologies. The NESCCAF study uses EPA data on vehicle trends to characterize vehicle class characteristics and market research by Martec to forecast vehicle technology platforms that will dominate the base case, or “business-as-usual,” (i.e. absence of new climate change regulations) 2009 model year vehicles. With the use of historical trends from the EPA (EPA 2003b) dataset, the baseline vehicle characteristics of acceleration and weight were examined. The 0-60 miles-per-hour acceleration changes for the five vehicle classes were projected to increase by seven to sixteen percent for the 2009 model year. Averaged vehicle inertia weights were projected to hold constant for all the classes except small cars based on an evaluation of historical trends and consideration of input from manufacturers relative to their product plans (which take into account implementation of federal CAFE regulations for light duty trucks and pending safety requirements).

The NESCCAF study highlights several key technology changes for their “business-asusual” scenario for the 2009 model year. The Martec market research projected the technologies that are likely to enter the vehicle fleet to deliver the power and acceleration requirements for 2009 for each of the five vehicle classes. The primary difference from the 2002 fleet is the widespread introduction of emerging engine valvetrain and transmission technologies. Introducing cam phasing technology to alter the timing of intake and/or exhaust valves during engine operation is forecast to dominate in each vehicle class, and all classes but the large truck are expected to have some form of variable valve lift technology. Each vehicle class is expected to increase the number of transmission gears from four to either five (for small cars and minivans) or six (large cars, small trucks, and large trucks). All vehicles were then modeled on a combined EPA driving cycle. Using a 55/45 percent weighted combination of emissions from the FTP and HWY cycles was deemed appropriate for the assessment because emissions from these cycles are used to determine California vehicle emission certification.

The technologies for reducing CO 2 emissions were modeled both individually and in various technology packages by AVL. A summary of the modeling results for individual technologies from the NESCCAF study is shown in Table 5.2

- 3 . In the table, the baseline 2002 CO 2 emission rates, in grams per mile, for each vehicle class are shown, and the results from the other modeling runs are shown as percentage reductions from these baseline values. Modeling of single technologies often was accomplishedInitial Statement of Reasons

August 6, 2004

59 through partial CRUISE modeling or use of other abbreviated simulation techniques to save cost in the study. This seems reasonable since this step was only intended to provide an estimate of the benefits in order to provide a basis for selecting the technology combinations for full CRUISE modeling.

Table 5.2

- 3 : Potential Carbon Dioxide Emissions Reductions from Individual Technologies (from NESCCAF, 2004)

Vehicle Class Small

car Large car Minivan Small truck Large

truck Baseline 2002 CO 2 emissions (g/mi) 291.4 344.6 395.4 444.7 511.6 Technologies Percent reduction from 2002 baseline Near Term Technologies 2009-2012 Intake Cam Phasing -2% -1% -1% -1% -2% Exhaust Cam Phasing -2% -3% -2% -2% -3% Dual Cam Phasing (DCP) -3% -4% -2% -3% -4% Coupled Cam Phasing (CCP) -3% -4% -2% -2% -4% Discrete Variable Valve Lift (DVVL) -4% -4% -3% -4% -4% Continuous Variable Valve Lift (CVVL) -5% -6% -4% -5% -5%
2 Turbocharging (Turbo) -6% -8% -6% -6%
3 Electrically Assisted Turbocharging (EAT) -6% -8% -6% -6%
2 Cylinder Deactivation (DeAct) -3% -6% -5% -6% -4%

1 Variable Charge Motion (CBR) -3% -4% -2% -3% -4%
5 Variable Compression Ratio -7% -7% -7% -7% -7%
5 Gasoline Direct Injection - Stochiometric (GDI-S) 0% -1% 1% 1% 0%
2 4-Speed Automatic Transmission 0% 0% 0% 0% 0%
2 5-Speed Automatic -2% -1% -1% -1% -1%
2 6-Speed Automatic -3% -3% -3% -3% -2%
6 6-Speed Automated Manual -8% -7% -8% -8% -5%
2 Continuously Variable Transmission (CVT) -4% -3% -4%

2 Electric Power Steering (EPS) -1% -1%
3 Electro-Hydraulic Power Steering (E-HPS) -1% -1%
2 Improved Alternator (Higher efficiency) -1% 0%
2 Electric Accessories -3% -2%
3 Aggressive Transmission Shift-Logic -1.5% -1.5% -1.5% -1.5% -1.5%
3 Early Torque Converter Lock-up -0.5% -0.5% -0.5% -0.5% -0.5%
2 Variable Displacement AC Compressor -10% -9% -7% -9%

2 Aerodynamic Drag Coefficient (% CO 2 / % Cd) 0.165 0.192
2 Improved Tire Rolling Resistance (% CO 2 / % TRR) 0.180 0.204 Mid Term 2013-2015

1 Electromagnetic Camless Valve Actuation (emCVA) -11% -11% -11% -11% -11%
2 Electrohydraulic Camless Valve Actuation (ehCVA) -11% -16% -11% -13% -12%
5 Gasoline Direct Injection - Lean-Burn Stratified (GDI-L) -6% -9% -4% -5% -8%
5 Gasoline Homogeneous Compression Ignition (gHCCI) -4% -6% -3% -4% -5%
2 Electric Water Pump (EWP) 0% 0%

2 42-Volt 10 kW ISG (Start Stop) -7% -4% -4% -4% -5%
2 42-Volt 10 kW ISG (Motor Assist) -10% -6% -6% -6% -5%
2 Diesel – HSDI -20% -22% -24% -27% -23% Long Term 2015-

6 Moderate Hybrid-Electric Vehicle (HEV) 29% 29% 29% 29% 29%
6 Advanced Hybrid-Electric Vehicle (HEV) 54% 54% 54% 54% 54%
2 Diesel – Advanced Multi-Mode -13% -15% -18% -21% -17%

1 Based on Literature Search; 2 Based on Full AVL CRUISE Simulation; 3 Based on Combined Literature/AVL CRUISE Simulation; 4

Estimated Value; 5

Additional Reduction due to Downsizing is not Included; 6 HEV numbers based on internal ARB analysis (not from NESCCAF, 2004), See Technical Support DocumentInitial Statement of Reasons

August 6, 2004

60 This report relies on the NESCCAF analysis of hybrid electric vehicle costs and CO 2 emission benefits since ARB staff has not performed a separate analysis at this time. ARB is planning on reviewing this issue as part of the forthcoming ZEV and near-ZEV technology assessment to be undertaken by the Independent Expert Review Panel.

Given the multitude of technologies available for reducing vehicle CO 2 emissions, there needs to be some engineering guidelines for choosing combinations that would be economical to the consumer. Generally it is important to avoid combining technologies that tend to address the same categories of losses or technologies that may not complement each other from a driveability standpoint. For example, it would not be advisable to combine cylinder deactivation capability with a lean burn gasoline direct injection engine design since both technologies address reductions in pumping losses within an engine. Also, when transitioning in and out of the deactivation mode, operating in a lean burn mode at the same time could make the transitions more noticeable to the driver since larger throttle changes would be needed to ensure constant engine torque than if the vehicle were operating in a stoichiometric mode.

Some technologies are attractive to combine because their features enhance each other. For example, combining cylinder deactivation with stoichiometric gasoline direct injection makes sense since the transitions in and out of the deactivation mode tend to introduce fuel control challenges due to the abrupt changes in operating modes that occur. By using a direct injection concept where fuel is introduced directly into the combustion chamber, control of transient fueling is much more precise. This is because fuel preparation and wall wetting issues in the intake passages encountered with conventional engines introduce fueling errors in transient engine operation. The more precise control afforded by direct injection would therefore be an enabler for some engines to meet the lowest emission categories in the Low-Emission Vehicle program when utilizing cylinder deactivation or to reduce emission aftertreatment expense.

Some technologies are attractive because they provide elegant solutions to minimizing CO 2emissions. One such technology is electrohydraulic camless valve actuation combined with stoichiometric gasoline direct injection. This technology permits operating the engine in modes that generate the lowest CO 2 emissions at all times with minimum complexity. It would allow operation without a throttle to minimize pumping losses, could employ cylinder deactivation whenever it was useful, and would provide the maximum flexibility necessary to achieve maximum performance from a given engine displacement, thereby enabling smaller engine displacements. Again, stoichiometric gasoline direct injection would further complement this technology because it permits higher compression ratios due to the cooling effect of fuel evaporation in the combustion chamber, thereby affording more optimal engine operation from a low CO 2 emission standpoint.

AVL provided a chart summarizing the most appropriate engine technologies for achieving the most cost effective CO 2emission reductions (Figure 5-4). The chart is read first across and then down (as illustrated by the arrow) to determine which technologies are compatible. For example, turbocharging is considered compatible with all technologies except GDI lean burn, since both technologies address the sameInitial Statement of Reasons

August 6, 2004

61 engine pumping losses. Therefore, it is unlikely that a manufacturer would combine these two technologies. This figure was used by NESCCAF participants when they constructed their technology combinations.

Feasible Technology CombinationsCam Phaser-Single (Intake Cam)Cam Phaser-Single (ExhaustCam)Cam Phaser-DualCam Phaser-CoupledVariable Valve Lift-DiscreteVariable Valve Lift-ContinuousCamless Valve Actuation-ElectrohydraulicTurbochargingElectrically Assisted Turbocharging (EAT)Cylinder DeactivationVariable Charge Motion (CBR)GDI StochiometricGDI Lean Burn StratifiedGasoline HCCIDiesel–HSDIDiesel–Advanced Multi-Mode

Cam Phaser

- Single (Intake Cam)
Cam Phaser

- Single (Exhaust Cam) NO
Cam Phaser

- Dual NO NO
Cam Phaser

- Coupled NO NO NO

Variable Valve Lift

- Discrete YES YES YES YES

Variable Valve Lift

- Continuous YES YES YES YES NO
Camless Valve Actuation

- Electrohydraulic NO NO NO NO NO NO Turbocharging YES YES YES YES YES YES YES Electrically Assisted Turbocharging (EAT) YES YES YES YES YES YES YES NO Cylinder Deactivation YES YES YES YES YES NO YES NO NO Variable Charge Motion (CBR) YES YES YES YES YES YES YES NO NO YES
GDI Stochiometric YES YES YES YES YES YES YES YES YES YES YES
GDI Lean Burn Stratified YES YES YES YES NO NO NO NO NO NO NO NO
Gasoline HCCI YES YES YES NO YES NO YES NO NO NO NO NO NO

Diesel

– HSDI NO NO NO NO NO NO YES YES YES NO NO NO NO NO

Dies el

– Advanced Multi

- Mode NO NO NO NO NO NO YES YES YES NO NO NO NO NO NO
Figure 5

- 5

. Feasible Technology Combinations

Having selected a variety of engine technologies, further choices are available relative to the rest of the driveline for enhancing low CO 2 performance. Transmissions with more gear ranges allow the engine to operate more of the time in a low CO 2 mode, and continuously variable transmissions provide an unlimited number of ratios for achieving improvements. Use of a 6 speed automated manual transmission affords further reductions in CO 2 since it allows elimination of the torque converter utilized in a conventional automatic transmission or continuously variable transmission. CO 2 savings also result from use of integrated starter generators that permit shutoff of the engine when the vehicle is not in motion. Further, more capable integrated starter generators permit capture of braking energy that can be deployed during launch of the vehicle to further minimize production of CO 2

. Engine accessories can also be improved to reduce CO 2emissions through use of variable displacement air conditioning compressors with external controls, electric power steering, improved efficiency alternators and other approaches.Initial Statement of Reasons

August 6, 2004

62 With these guidelines in mind, participants in the NESCCAF study assembled a wide variety of combined technologies to evaluate through simulation modeling in order to identify those that would provide the greatest CO 2 reductions. ARB staff provided some suggested technology combinations for full simulation modeling.

Table 5.2

- 4 . Impacts and Costs of Additional CO 2 Reduction Technologies

Transmission Type Technology Automatic Automated Manual CVT Impact 10% reduction in rolling resistance = 2% reduction in CO 2 Improved Tires Cost $20 to $90 RPE Impact Reduced internal friction/lower viscosity oil, 0.5% CO 2 reduction Engine Friction Reduction or Improved Lubricating Oil Cost $5 to $15 RPE Impact 8 -10% reduction in drag = 1.5 -2% reduction in CO 2 Aerodynamic Drag Reduction Cost $0 to $125 RPE Impact 1.5% CO 2 reduction 0.5% CO 2 reduction Aggressive Shift Logic Cost $0 to $50 RPE $0 to $20 RPE None
Impact 0.5% CO 2 reduction Improved Torque Converter or Early Lockup Cost $0 to $10 RPE None
Impact 6% to 6.5% CO 2 4.5% to 5% CO 2 4% to 4.5% CO 2 Total Potential (Excludes Weight Reduction) Cost $25 to $290 RPE $25 to $250 RPE $25 to $230 RPE Average RPE per Percent CO 2 $25 $29 $30 Impact 5% CO2

reduction 5% CO2 reduction 4% CO2 reduction Assumed Improvement Cost $125 RPE $145 RPE $120 RPE

Notes: from NESCCAF, 2004

Table 5.2

- 4 lists the CO 2improvements that can be achieved through various technologies such as lower rolling resistance tires and aerodynamic drag reduction. These improvements are included in the CO 2 benefits listed in Table 5.2

- 5 through Table 5.2

- 9 below containing the simulation modeling results for various combinations of individual technologies using the 2002 vehicle platforms.

Guidelines contained in Table 5.2

- 3 , as well as cost, served as the basis for the selections in the following tables. The study participants also wanted to cover the full spectrum of CO 2reductions that would be possible. We have partitioned the results into three categories for near-, mid-, and long-term volume application.

Hybrid vehicles are available now in several models, and the current Zero Emission Vehicle regulations will yield about 10 percent hybrids in the implementation timeframe of this proposed regulation. Because these are not high volume requirements, hybrids were grouped with the long-term strategies. Additional time is needed to sort out the level of consumer acceptance, real world performance, suitability in various applications, changes in maintenance costs, long term durability and other issues. Further, hybrids are more resource intensive than conventional vehicles in terms of engineering development and manufacturing investment, which also slows implementation. Because hybrids are already being addressed in the Zero Emission Vehicle regulations, changes in hybrid requirements will be more properly considered in that context rather than this proposed regulation.Initial Statement of Reasons

August 6, 2004

63 Diesels continue to improve rapidly in recent years in both performance and other characteristics that should improve consumer acceptance. Diesel emission aftertreatment technology, however, remains a challenge in terms of meeting Low Emission Vehicle requirements over the full vehicle life. Given the current uncertainty in consumer acceptance in the United States and low emission aftertreatment capability at this time plus relatively high cost, staff has elected a conservative approach and considers them a promising, but mid to long-term strategy.

In the following tables, CO 2emission reductions and package costs are shown relative to both the 2002 and 2009 baselines that were established in the NESCCAF report. When describing the results following each table, the text highlights the CO 2 reductions relative to the 2002 baseline because this is the reference most studies use. For describing the costs, however, staff cites them relative to the 2009 baseline because those would be the actual increment that the consumer would see when purchasing a 2009 and subsequent vehicle (i.e., NESCCAF predicted that even without regulations, industry will be making improvements to vehicles that could reduce CO 2emissions by 2.6 percent to 9.0 percent and will increase their cost).

Table 5.2

- 5 . Potential Carbon Dioxide Emissions Reductions from Small Car (NESCCAF, 2004)

Small Car Combined Technology Packages CO 2 (g/mi) Potential

CO 2 reduction from 2002 baseline Retail Price

Equivalent 2002 Potential

CO 2 reduction from 2009 baseline Retail Price

Equivalent 2009

DVVL,DCP,A5 (2009 baseline) 284 -2.6% $308 0% $0 DCP,CVT,EPS,ImpAlt 270 -7.6% $561 -5.1% $253 DCP,A4,EPS,ImpAlt 269 -7.6% $351 -5.2% $43 DCP,A5,EPS,ImpAlt 260 -10.7% $446 -8.3% $178 DCP,A6 260 -10.8% $346 -8.4% $38 DVVL,DCP,AMT,EPS,ImpAlt 233 -19.9% $457 -17.8% $149 Near Term 2009-2012

GDI-S,DCP,Turbo,AMT,EPS,

ImpAlt 215 -26.4% $1120 -24.4% $812

gHCCI,DVVL,ICP,AMT,EPS,ImpAlt 229 -21.6% $1767 -19.6% $1459 CVVL,DCP,AMT,ISG-SS,EPS, ImpAlt 216 -25.7% $1379 -23.8% $1071 Mid Term 2013-2015 gHCCI,DVVL,ICP,AMT,ISG,

EPS,eACC 204 -29.9% $1767 -28.1% $1459

dHCCI,AMT,ISG,EPS,eACC 217 -25.5% $2635 -23.5% $2327
ModHEV 213 -45.4% $2546 -44.0% $2238 HSDI,AdvHEV 147 -49.5% $6060 -48.2% $5752 Long Term 2015-
AdvHEV 138 -53.3% $4009 -52.1% $3701 Notes: Costs are included here to place the technology benefits in context. Costs and their derivation are discussed in greater detail in Section 5.3 ; Reductions and costs for all scenarios except the baseline include benefits and costs listed in Table 5.2

- 4

and benefits and costs from improved air conditioning systems from NESCCAF (2004).
For the small car category, CO2reductions were greatest using a turbocharged engine that was downsized such that overall performance was maintained. GasolineInitial Statement of Reasons

August 6, 2004

64 stoichiometric direct injection engine technology was also included in this package because it affords a higher compression ratio than would otherwise be possible in order to further reduce CO 2emissions. Dual cam phasers provide additional flexibility relative to optimum intake and exhaust valve timing and the use of a six speed automated manual transmission, electric power steering and a more efficient alternator all contribute to lower vehicle CO 2emissions as well. A lower cost runner-up approach in terms of CO

2 reductions for small cars was a package utilizing discrete variable valve lift and dual cam phasers that also affords some engine downsizing and reduced pumping losses, again combined with the same transmission and improved auxiliaries as the previous case. These packages achieved CO 2reductions of about 20-26 percent relative to the 2002 baseline. For the mid-term, technologies that combine gasoline homogeneous charge compression ignition engines with or without an integrated starter generator plus use of electrical engine water pump and more could reduce CO 2 emissions approximately 22-30 percent. Instead of the 42 volt integrated starter generator, a lower cost 42 volt belt assisted start-stop starter-alternator system could also be incorporated, but with somewhat lower reductions in CO 2emissions (it should be mentioned that this analysis assumes 42 volt capability is confined only to those systems requiring it, and not the whole vehicle - this saves cost). In the longer term, use of diesel homogeneous charge compression ignition engines and hybrids could provide CO

2reductions of approximately 26-50 percent.Initial Statement of Reasons

August 6, 2004

65 Table 5.2

- 6

. Potential Carbon Dioxide Emissions Reductions from Large Car (NESCCAF, 2004)

Large Car Combined Technology Packages CO 2 (g/mi) Potential

CO 2 reduction from 2002 baseline Retail Price

Equivalent 2002 Potential

CO 2 reduction from 2009 baseline Retail Price

Equivalent 2009

DVVL,DCP,A6 (2009 baseline) 322 -6.6% $427 0% $0 DCP,A6 304 -11.5% $479 5.6% $52 DCP,CVT,EPS,ImpAlt 303 -12.1% $709 -6.0% $282 CVVL,DCP,A6 290 -15.9% $864 -10.0% $437 DCP,DeAct,A6 286 -16.9% $662 -11.0% $235 DCP,Turbo,A6,EPS,ImpAlt 279 -19.2% $266 -13.5% -$161 CVVL,DCP,AMT,EPS,ImpAlt 265 -23.2% $874 -17.8% $447 GDI-S,DeAct,DCP,AMT,EPS, ImpAlt 265 -23.2% $930 -17.8% $503 Near Term 2009-2012

GDI-S,DCP,Turbo,AMT,EPS,

ImpAlt 251 -27.2% $362 -22.1% -$65

gHCCI,DVVL,ICP,AMT,EPS,ImpAlt 272 -21.0% $881 -15.5% $454 DeAct,DVVL,CCP,A6,ISG,EPS, eACC 259 -24.7% $1879 -19.4% $1452
ehCVA,AMT,EPS,ImpAlt 250 -27.4% $930 -22.2% $503 ehCVA,GDI-S,AMT,EPS,ImpAlt 242 -29.9% $1188 -24.9% $761 gHCCI,DVVL,ICP,AMT,ISG,EPS, eACC 231 -32.9% $2002 -28.2% $1575 Mid Term 2013-2015

GDI-S,Turbo,DCP,A6,ISG,EPS,

eACC 224 -35.1% $1402 -30.5% $975

dHCCI,AMT,ISG,EPS,eACC 277 -19.7% $2037 -14.0% $1610
ModHEV 252 -45.4% $1968 -41.6% $11541
AdvHEV 163 -53.3% $3749 -50.0% $3322 Long Term 2015-
HSDI,AdvHEV 157 -54.4% $5695 -51.1% $5268 Notes: Costs are included here to place the technology benefits in context. Costs and their derivation are discussed in greater detail in Section 5.3 ; Reductions and costs for all scenarios except the baseline include benefits and costs listed in Table 5.2

- 4

and benefits and costs from improved air conditioning systems from NESCCAF (2004).
For the large car class, a turbocharged engine approach similar to the one modeled in the small car class again provided maximum CO 2 reductions in the near term of about 27 percent. Since the base engine was a 6 cylinder design, staff assumed that downsizing to a 5 cylinder engine (for costing purposes) would maintain most of the smoothness of a V6 configuration and remain attractive to consumers. Even then, there was a projected small savings relative to a 2009 baseline model. CO 2 emission reduction results of about 23 percent were obtained (but at some net cost relative to a 2009 baseline vehicle this time) using cylinder deactivation in conjunction with a gasoline stoichiometric direct injection engine with dual cam phasers (plus the same 6 speed automated manual transmission, electric power steering, and an improved efficiency alternator). Another similar performing package (23.2 percent CO 2 reduction) for the near term utilized continuously variable valve lift and dual cam phasers plus the same additional equipment at an additional cost in 2009 of $447. For the mid-term, a number of alternatives provide substantial reductions in CO 2emissions. One of the more effective technology clusters includes electrohydraulic camless valve actuation in conjunction with gasoline stoichiometric direct injection plus the 6 speed automatedInitial Statement of Reasons

August 6, 2004

66 manual transmission, electric power steering and more efficient alternator, yielding up to about 30 percent reduction in CO2emissions at a cost increment of $761 in 2009. To obtain even further reductions, integrated starter generators could also be utilized. Other combinations that could be used with integrated starter generators to achieve over a 30 percent reduction include gasoline homogeneous charge compression ignition engines and again turbocharged engines with gasoline direct injection systems. For the long term, moderate and advanced hybrids can achieve around 30-50 percent reductions in CO 2 emissions.

Table 5.2

- 7 . Potential Carbon Dioxide Emissions Reductions from Minivan (NESCCAF, 2004)

Minivan Combined Technology Packages CO 2 (g/mi) Potential

CO 2 reduction from 2002 baseline Retail Price

Equivalent 2002 Potential

CO 2 reduction from 2009 baseline Retail Price

Equivalent 2009

DVVL,CCP,A5 (2009 baseline) 370 -6.4% $315 0% $0 DCP,A6 348 -12.0% $670 -5.9% $355 GDI-S,CCP,DeAct,AMT,EPS, ImpAlt 328 -17.0% $561 -11.2% $379
DVVL,CCP,AMT,EPS,ImpAlt 325 -17.7% $478 -12.1% $163 CCP,AMT,Turbo,EPS,ImpAlt, 325 -17.8% $325 -12.2% $-10 DeAct,DVVL,CCP,AMT,EPS, ImpAlt 317 -19.9% $524 -14.4% $209
CVVL,CCP,AMT,EPS,ImpAlt 316 -20.2% $1011 -14.7% $696 Near Term 2009-2012

GDI-S,DCP,Turbo,AMT,EPS,

ImpAlt 307 -22.3% $887 -17.0% $572

ehCVA,GDI-S,AMT,EPS,ImpAlt 300 -24.1% $1414 -18.9% $1099 Mid Term 2013-2015 GDI-S,CCP,AMT,ISG,DeAct,EPS,

eACC 297 -25.0% $1904 -19.8% $1589

dHCCI,AMT,EPS,ImpAlt 313 -20.8% $1260 -15.3% $945
Mod HEV 389 -26.8% $2300 -21.8% $1985 Long Term 2015- Adv HEV 188 -52.6% $4204 -49.3% $3889 Notes: Costs are included here to place the technology benefits in context. Costs and their derivation are discussed in greater detail in Section 5.3 ; Reductions and costs for all scenarios except the baseline include benefits and costs listed in Table 5.2

- 4

and benefits and costs from improved air conditioning systems from NESCCAF (2004).
Essentially the same technologies emerged as most effective in reducing CO 2 emissions for the minivan as for the large car group.Initial Statement of Reasons

August 6, 2004

67 Table 5.2

- 8 . Potential Carbon Dioxide Emissions Reductions from Small Truck (NESCCAF, 2004)

Small Truck Combined Technology Packages CO 2 (g/mi) Potential

CO 2 reduction from 2002 baseline Retail Price

Equivalent 2002 Potential

CO 2 reduction from 2009 baseline Retail Price

Equivalent 2009

DVVL,DCP,A6 (2009 baseline) 404 -9.0% $427 0% $0 DCP,A6 379 -14.7% $479 -6.3% $52 DCP,A6,Turbo,EPS,ImpAlt 371 -16.7% $266 -8.4% -$161 DCP,A6,DeAct 366 -17.7% $587 -9.5% $160 GDI-S,DCP,DeAct,AMT,EPS, ImpAlt 334 -24.9% $841 -17.5% $414 DeAct,DVVL,CCP,AMT,EPS, ImpAlt 330 -26.2% $671 -18.9% $244 Near Term 2009-2012

GDI-S,DCP,Turbo,AMT,EPS,

ImpAlt,DCP-DS 318 -28.4% $350 -21.3% -$77

DeAct,DVVL,CCP,A6,ISG,EPS, eACC 316 -29.0% $1897 -22.0% $1470
ehCVA,GDI-S,AMT,EPS,ImpAlt 309 -30.5% $1169 -23.6% $742 Mid Term 2013-2015 HSDI,AMT,EPS,ImpAlt 307 -31.0% $1568 -24.2% $1141

dHCCI,AMT,EPS,ImpAlt 331 -25.6% $896 -18.3% $469
Mod HEV 325 -27.0% $1968 -19.7% $1844 Long Term 2015- Adv HEV 210 -52.7% $3823 -48.0% $3396 Notes: Costs are included here to place the technology benefits in context. Costs and their derivation are discussed in greater detail in Section 5.3 ; Reductions and costs for all scenarios except the baseline include benefits and costs listed in Table 5.2

- 4

and benefits and costs from improved air conditioning systems from NESCCAF (2004).
Once again, the same technology clusters that were most effective in reducing CO 2 emissions in the large car and minivan classes were also effective in the small truck class. Of interest, high speed direct injection diesel engines using the same driveline and accessory improvements didn’t achieve significantly lower CO 2emissions than the electrohydraulic camless valve actuation/gasoline direct injection system that was modeled in this class. This outcome is due largely to diesel fuel’s relatively high carbon content that results in relatively higher CO 2 emissions (diesel fuel has a higher density than gasoline, so that a gallon of diesel has a greater mass of carbon in it than gasoline – this results in about a 14 percent higher CO2 production from a gallon of diesel fuel). Given the higher cost of diesels and their attendant emission cleanup challenges, they are not necessarily clear CO 2emission improvement strategies.Initial Statement of Reasons

August 6, 2004

68 Table 5.2

- 9 . Potential Carbon Dioxide Emissions Reductions from Large Truck (NESCCAF, 2004)

Large Truck Combined Technology Packages CO 2 (g/mi) Potential

CO 2 reduction from 2002 baseline Retail Price

Equivalent 2002 Potential

CO 2 reduction from 2009 baseline Retail Price

Equivalent 2009

CCP,A6 (2009 baseline) 484 -5.5% $126 0% $0 DVVL,DCP,A6 442 -13.6% $549 -8.6% $423 CCP,DeAct,A6 433 -15.4% $480 -10.5% $354 DCP,DeAct,A6 430 -15.9% $845 -11.0% $931 DeAct,DVVL,CCP,A6,EHPS,ImpAlt 418 -18.4% $789 -13.6% $663 Near Term 2009-2012

DeAct,DVVL,CCP,AMT,EHPS,

ImpAlt 396 -22.6% $677 -18.1% $551

CCP,DeAct,GDI-S, AMT,EHPS,ImpAlt 416 -18.6% $827 -13.9% $701 DeAct,DVVL,CCP,A6,ISG, EHPS,eACC 378 -26.2% $1885 -21.9% $1759 Mid Term 2013-2015 ehCVA,GDI-S,AMT,EHPS,ImpAlt 381 -25.5% $1621 -21.2% $1495

GDI-L,AMT,EHPS,ImpAlt 354 -24.4% $1460 -20.0% $1334
Mod HEV 372 -44.5% $2630 -41.3% $2504 dHCCI,AMT,ISG,EPS,eACC 362 -29.3% $2705 -25.2% $2579 GDI-L,AMT,ISG,EPS,ImpAlt 354 -30.7% $2537 -26.7% $2411 HSDI,AdvHEV 244 -52.2% $8363 -49.5% $8237 Long Term 2015-

AdvHEV 241 -52.5% $5311 -49.8% $5185 Notes: Costs are included here to place the technology benefits in context. Costs and their derivation are discussed in greater detail in Section 5.3 ; Reductions and costs for all scenarios except the baseline include benefits and costs listed in Table 5.2

- 4

and benefits and costs from improved air conditioning systems from NESCCAF (2004).
For large trucks, cylinder deactivation strategies in conjunction with variable valve timing and lift strategies were the most effective in the near term, offering a CO 2reduction of about 18 percent (also included 6 speed automated manual transmission, electrohydraulic power steering, and an improved alternator). Strategies relying on turbocharging and engine downsizing were avoided since large trucks may be more likely to encounter periods of sustained high load operation where cylinder pressures and temperature would be much higher than in non-turbo applications. In order to retain adequate engine durability under such conditions, significant engine upgrades would likely be needed, which were difficult to quantify. For the mid-term adding an integrated starter generator and electric engine water pump brought the potential CO 2reduction to about 26 percent. Use of electrohydraulic camless valve actuation coupled with gasoline stoichiometric direct injection achieved about the same CO 2 reduction without an integrated starter generator. Use of the latter would improve the CO 2 reductions even more, though this was not specifically modeled. For the long term, gasoline lean burn direct injection or use of diesel multi-mode technology, both coupled with an integrated starter generator could allow about a 30 percent reduction in CO 2 , but both technologies have aftertreatment issues remaining. Otherwise, moderate or aggressive hybrids that rely on a downsized engine coupled with an electric motor for assist could achieve around about a 30-50 percent CO 2reduction. However, some believe that the short lived motor assistance based on battery storage capacity would limit theInitial Statement of Reasons

August 6, 2004

69 attractiveness of such large truck hybrids when sustained high load operation might be more likely. Perhaps an approach such as in the Lexus RX400H, wherein the base engine stays constant and the hybrid system is added to boost short-term acceleration and significantly improve CO 2emissions during normal driving, would be a better approach for large trucks.

5.2.B Mobile Air Conditioning System

5.2.B.1 Improved Air Conditioning Systems

Mobile air conditioning contributes to GHG emissions through “direct” refrigerant releases and “indirect” exhaust CO2 emissions. Direct emissions are due to releases from vehicles through air conditioning system leakage (a slow process, sometimes called “regular emissions”), during accidents or other events that suddenly breach containment of the system refrigerant (sometimes called “irregular emissions”), during service events, and when vehicles are dismantled without proper recovery of the refrigerant. In new vehicles, the potential for reduction of direct emissions is considerable. Industry sources estimate that existing systems can be cost-effectively improved to achieve up to 50 percent reduction in refrigerant leakage. Strategies for reducing direct emissions and estimates of the corresponding emission reductions are presented in this section.

Although current emission certification testing procedures do not include operation of vehicle air conditioning systems, their operation contributes significantly to exhaust CO 2 emissions, also known as "indirect emissions." These emissions are largely due to the added load on the engine from operation of the air conditioning system. It has been estimated that CO 2emission reductions from 30 to 50 percent of the fraction attributable to air conditioning use may be achievable by reducing the engine load requirements of air conditioning systems. Potential measures for reducing indirect emissions are presented in this section. The associated emission reductions were estimated through vehicle simulation modeling performed by NESCCAF (2004). Again, these technologies can be applied to air conditioner system operation in alternative fuel vehicles, thus increasing their GHG reduction benefits.

5.2.B.2 Estimating Direct Emissions

Modern mobile air conditioning systems that enhance travel comfort and safety include features such as integrated cooling, heating, demisting, defrosting, air filtering, and humidity control. The basic components of a typical system are shown in Figure 5

- 6

.Initial Statement of Reasons

August 6, 2004

70 Figure 5

- 6 . Typical Mobile Air-Conditioning System Components (Clodic et al, 2003)

The current refrigerant in new vehicles is HFC-134a (1,1,1,2-tetrafluoroethane), which has a global warming potential (GWP) of 1,300. Direct lifetime emissions of HFC-134a from vehicular air conditioning systems in California have been estimated using a method developed by ARB staff based on 1) HFC-134a consumption data by nine government and commercial fleets, 2) surveys of 966 vehicle owners on their air conditioning system repair incidence, 3) data on repair incidence among 12,000 fleet vehicles in California, and 4) information from automobile dismantlers. The data were used to provide estimates of the averages of the parameters in a mass balance model that equates vehicular lifetime emissions to lifetime inputs of HFC-134a. The analysis yielded lifetime direct emissions of approximately 1.36 kg of HFC-134a for a typical vehicle in the current California fleet, which has a 16-year median lifetime. This is equivalent to emissions of 85 grams of HFC-134a per year of life per vehicle, although the emissions may not be uniform over the vehicle's life. The limited data available suggest that about 72 percent of the lifetime refrigerant emissions are due to leakage (“regular emissions”), 22 percent are due to sudden or accidental releases (“irregular emissions”), and 6 percent are due to releases during dismantling. Assuming 200,000 lifetime miles driven, this breaks down into approximately 6 CO 2 -equivalent grams per mile from “regular” emissions, 2 CO 2 -equivalent grams per mile from “irregular” emissions and 0.5 CO 2 -equivalent grams per mile from dismantling emissions.

5.2.B.3 Possible Measures to Reduce Direct Emissions

Reduction of direct emissions can be achieved through system improvements such as the use of low-permeability hoses and improved elastomer seals and connections. Work is in progress to define a component-specific blueprint for a baseline (current) air conditioning system and to identify key components for potential improvement (reduced leakage). It is anticipated that upgrades to a few key components (e.g., compressor shaft seal) would result in a low-leak system that can achieve a 50 percent reduction inInitial Statement of Reasons

August 6, 2004

71 “regular” emissions. However, improved containment would not reduce accidental releases or releases during scrapping. A 50 percent reduction in “regular” leakage emissions by a low-leak system translates into a reduction of approximately 3 CO 2 - equivalent grams/mile, for an incremental increase in cost to the manufacturer of approximately twelve dollars. Table 5.2

- 10 illustrates the principal components of interest for upgrading to a low-leak system that halves "regular" emissions.

Table 5.2

- 10 . Preliminary components of interest in a low-leak HFC-134a air conditioning system.

Component Approximate Contribution to Leakage Emissions

Flexible hose (high and low pressure) construction and dimensions 25%
System component connections (type and number) 25%

Compressor shaft seal 50% Leakage emissions prior to component improvements 6 CO 2 -equiv (g/mi)

5.2.B.3.1 50% Reduction in Leakage ~3 CO 2 -equiv (g/mi)

While low-cost improvements to current systems for reducing refrigerant leakage appear feasible, other alternatives can achieve greater benefits. As mentioned earlier, HFC-134a is the current refrigerant in vehicles manufactured during and since the 1995 model year. HFC-134a has a GWP of 1,300. Emissions of HFC-134a could be avoided completely by using an alternative refrigerant with a lower GWP. The leading alternatives are HFC-152a (1,1-difluoroethane), with a GWP of 120, and CO 2 , with a GWP defined as one. HFC-152a could be introduced as a vehicular refrigerant on a schedule that appears to be consistent with the requirements of AB 1493.

For systems equipped with HFC-152a, total refrigerant emissions would be reduced by 91 percent (on a CO2 -equivalent mass basis). However, since HFC-152a is mildly flammable under certain conditions, mitigation options are being considered. Specifically, industry representatives report that they are currently evaluating technical solutions for mitigating potential safety concerns associated with HFC-152a, including the use of charge evacuation technologies that could be invoked in vehicle crash situations. The schedule for which CO 2systems could be deployed is uncertain. For systems that use CO 2 , the relative global warming impact of refrigerant emissions would be virtually eliminated. Safety issues related to high system pressures and in-cabin releases are currently under evaluation.

Table 5.2

- 11 presents estimates of emission reductions to be achieved from upgrading to a low-leak HFC-134a system, a low-leak HFC-152a system, and a carbon dioxide system. Note that it is only "regular" (leakage) emissions that would be impacted by theInitial Statement of Reasons

August 6, 2004

72 upgrade of a current HFC-134a system, not all the lifetime emissions. That is, approximately 72 percent of the lifetime emissions from a current HFC-134a system are due to leakage. For a low-leak system, the relative proportions of "regular", "irregular", "service events" and "dismantling" emissions are altered by factors consequential to reduced leakage (e.g. increase in "dismantling" emissions due to a larger refrigerant volume during dismantling). It is recommended that the reader consult the Technical Support Document (emissions quantification) for the methodology used to estimate emissions for low-leak systems.

A reduction of approximately 3 CO2 -equivalent grams per mile is estimated for upgrading to a low-leak HFC-134a system that achieves a 50 percent reduction in leakage. In contrast, the use of alternative refrigerants with lower GWPs can result in greater benefits because they reduce total lifetime emissions (i.e., regular, irregular, and end-of-life releases). For upgrading to a low-leak HFC-152a system or a CO 2 system, the benefits are approximately 8.5 or 9 CO2 -equivalent grams per mile, respectively.

Table 5.2

- 11 : Direct Climate Change Emissions from Baseline and Alternative Mobile Air Conditioning Systems

Air Conditioning System

HFC-134a Baseline Technology Low-Leak

HFC-134a Low-Leak

Primary Expansion HFC-152a 1 Carbon

Dioxide 2

Total refrigerant emissions (g/yr) 85 70 70 85 Total refrigerant emissions, in CO 2 eq. (g/mi) 9 7 0.7 0.007 Refrigerant leakage emissions, in CO 2 eq. (g/mi) 6 3 0.3 0.005 Reduction in CO 2 eq (g/mi) Baseline 3 8.5 9

1 Assuming same mass leak rate as a low-leak HFC-134a system
2 Assuming same mass leak rate as a baseline HFC-134a system

5.2.B.4 Efforts by the European Union to Reduce Direct Emissions

In August of 2003, the European Commission advanced a proposal mandating the future phaseout of HFC-134a for vehicle air conditioning systems. Beginning in 2005, annual leakage rates would be limited for refrigerants with a GWP of 150 or higher. Effectively, this action targets reductions for HFC-134a. A system of credits was also proposed that would ultimately accomplish a phaseout by 2019 of any refrigerant with a GWP of 150 or higher (Meszler, 2004). At the time of this report, the direction of the proposed regulation appears to be shifting towards elimination of a credit system and a future ban for new vehicles with a refrigerant having a GWP greater than 50. This would remove HFC-152a as a refrigerant option, and require substitution with other refrigerants, such as CO 2 or hydrocarbons. While there are significant advantages to substitution with CO 2 , including the fact that it has the lowest GWP of the leading technologies, there are also disadvantages. Some characteristics of CO 2air conditioning systems are: 1) significantly higher pressures and associated leak tendency, 2) high component costs, 3) new service training would be needed, 4) anInitial Statement of Reasons

August 6, 2004

73 internal heat exchanger would be necessary, 5) lower performance at higher ambient temperature conditions, and 6) timing for deployment is uncertain.

The European Union regulation is not final, and the ultimate outcome remains uncertain. However, because both the European Union and the United States each comprise about one third of worldwide vehicle sales, it is likely that there will be some uniformity in air conditioning system design. Note that the European Union's efforts did not result in a proposal to address indirect emissions due to a lack of consensus on how to address these emissions.

5.2.B.5 Possible Measures to Reduce Indirect Emissions

The contribution of mobile air conditioning systems to exhaust CO 2 (indirect) emissions can be attributed to transportation of the unit’s mass and operation of the system. It is estimated that reducing the engine load requirements from air conditioning systems can reduce these emissions up to 50 percent. This can be accomplished by utilizing more efficient variable displacement compressors (VDC) with better control systems, and condensers and evaporators with improved heat transfer.

The engine load requirements for externally controlled VDCs are lower than those of current fixed displacement compressors (FDCs) with current controls. Rather than providing a constant flow of refrigerant with on/off cycling, VDCs with appropriate controls modulate compressor displacement, allowing refrigerant flow to vary to meet cooling demands. For example, under more mild ambient and solar load conditions, the need for low temperature discharge air into the cabin is decreased, and a VDC with external controls can increase discharge air temperature by reducing the amount of refrigerant that is compressed in the VDC. Current FDC systems with current control do not have this capability and instead compress the full charge of refrigerant to provide near freezing evaporator air discharge temperatures and then blend in some heat to achieve the same discharge air temperature. As cooling demands increase, the benefits of VDCs decrease relative to those of current FDCs with internal controls. For the limited conditions that require maximum compressor displacement, the benefit of VDCs over FDCs approaches zero. It should also be noted that it may be possible to incorporate external controls with FDCs, thereby allowing the compressor to cycle on and off to maintain a discharge temperature above freezing as does the FDC compressor with external controls under more mild conditions. While a FDC with external controls would likely yield fewer CO 2 emissions than one with current controls, they would still be a little higher than when using a VDC with external controls.

VDCs are a currently available technology. Though not yet commonly employed in the United States, VDCs are more prevalent in the European Union. The on/off cycling associated with FDCs noticeably impacts the driveability of smaller engines. Consequently, in the European Union, where the average engine displacement is less than two liters, VDCs provide significant improvement to engine driveability.

Another means to enhance air conditioning system operation is to reduce the amount of outside air admitted to the passenger compartment relative to recirculated air. ThisInitial Statement of Reasons

August 6, 2004

74 reduces the amount of hot air from outside that needs to be cooled by the system. This strategy can be applied to either manually or automatically controlled air conditioning systems and is also currently feasible.

As mentioned previously, substitution with the refrigerant HFC-152a appears to have significant near-term potential for reducing CO 2 -equivalent emissions associated with the refrigerant. In addition, because HFC-152a transfers heat slightly more efficiently than HFC-134a, there are also gains to be made with HFC-152a substitution from a CO 2emission reduction (indirect emissions) standpoint. While the driving force behind substitution with HFC-152a may be the reduction in direct emissions, the likelihood of near-term implementation is favorable and therefore the indirect benefits were included in the vehicle simulation modeling.

Other air conditioning system CO 2reduction strategies aim to reduce the vehicle solar load. Use of solar reflective glass, modified glass angles, improved cabin insulation, altering interior and exterior colors, and other measures can significantly reduce the solar load and consequently ease the engine load from air conditioning systems. However, these strategies are independent of air conditioning design and were not incorporated into the simulation modeling. In the future, benefits from these types of measures may be credited through the incorporation of whole vehicle testing that simulates solar load. However, presently such testing is neither reliable nor accurate, and needs further development.

Vehicle simulation modeling was performed to estimate the CO 2 benefits from the use of an improved air conditioning system for each of the five vehicle classes. Details of the modeling inputs are provided in the Technical Support Document. Given the considerations discussed in this section, operation with a conventional FDC was compared to that of a system comprised of a VDC with external controls, air reuse strategy, and substitution with HFC-152a refrigerant. Results are presented in Table 5.2

- 12 and have been adjusted to reflect data from an extensive study by the National Renewable Energy Laboratory (NREL). This study indicates that within California, vehicle air conditioning is operated for cooling or demisting during 29 percent of the vehicle miles traveled (Johnson, 2002; Rugh and Hovland, 2003). Consequently, failure to adjust the modeling results would have overestimated the benefits of upgrading the air conditioning system.Initial Statement of Reasons

August 6, 2004

75 Table 5.2

- 12 : Indirect CO 2 Emissions from Baseline and Improved Mobile Air Conditioning Systems

Vehicle class

Small Car Large

Car Minivan Small

Truck Large

Truck With no A/C system operation 277.9 329.2 376.4 425.7 492.6 With baseline A/C system 1 291.4 344.6 395.4 444.7 511.6 Due to baseline air conditioning 13.5 15.4 19.0 19.0 19.0 Emissions (g/mi)

With improved A/C system 2 284.4 336.6 385.6 434.9 501.8 Reductions Due (g/mi) 7.1 8.1 10.0 10.0 10.0 To Improved In A/C emissions 52% 52% 52% 52% 52% A/C System From baseline A/C system 2.4% 2.3% 2.5% 2.2% 1.9%

1 Utilizes fixed displacement compressor
2 Equipped with a variable displacement compressor, air recirculation, and HFC-152a as the refrigerant

For upgrading to a VDC with external controls, air recirculation, and HFC-152a as the refrigerant, the estimated indirect emission reduction is 7 CO 2–equivalent grams per mile for a small car, 8 CO2–equivalent grams per mile for a large car, and 9.8 CO 2– equivalent grams per mile for minivans, small trucks, and large trucks

.
5.2.C Alternative Fuel Vehicles

Alternative fuel vehicles have been used for many years as a means of providing reductions of smog-forming emissions. Alternative fuel vehicles may also provide reductions of climate change pollutants, in two ways. First, during the combustion process, alternative fuels produce lower climate changes emissions. Second, alternative fuels have different upstream emissions than conventional gasoline or diesel. The upstream emissions are the “well-to-tank” emissions, and include extraction, transport, processing, distribution, and marketing. TIAX, LLC evaluated upstream emissions from conventional and dedicated alternate fuel vehicles for cases that are most likely to be available in the 2009 timeframe. This section, which relies in large part on a report by TIAX entitled “Climate Friendly Alternative Fuel Vehicle Analysis,” describes the estimated fuel cycle emission benefits and costs of various alternative fuel vehicles .

Under the staff proposal, the regulatory treatment of alternative fuel vehicles will vary depending on whether the vehicle is a “dedicated” vehicle, which uses only alternative fuel, or has the capability to use multiple fuels. For dedicated alternative fuel vehicles, the staff proposed methodology for dealing with relative differences in upstream emissions is presented in section 6.4 , which describes the basic regulatory standard. For bi-fuel or flexible-fuel vehicles, the emissions benefits achieved are dependent on the extent to which the alternative fuel is used. Under the basic regulatory standard, emissions from such vehicles will be calculated assuming that the vehicle uses the “dirtier” fuel. If a manufacturer can demonstrate that the vehicle uses an alternative fuel with lower climate change emissions, the manufacturer can earn credit under the alternative compliance mechanism described in section 6.6

.Initial Statement of Reasons

August 6, 2004

76 The following sections describe the climate change emission characteristics of various alternative fuel vehicles.

Compressed Natural Gas (CNG) Vehicles Compressed natural gas (CNG) has been effectively utilized to achieve NOx and PM emission benefits from both light-duty and heavy-duty vehicles. Manufacturers market a variety of CNG vehicles, including passenger cars, pick-up trucks, shuttle buses, school buses, refuse haulers, and transit buses. In addition, a natural gas vehicle was the first vehicle to be certified to the ARB’s lowest emissions category (partial zero-emission vehicle or PZEV).

With regard to climate change emissions, current CNG vehicles have lower CO 2 emissions than comparable gasoline vehicles, but higher emissions of methane (CH 4 ). Methane has a relatively high global warming potential, which could significantly increase the overall climate change emissions of CNG vehicles. However, recent studies have shown that the high methane emissions of CNG vehicles can be significantly reduced through improved catalysts (increasing the cell density of the catalyst). Since CNG vehicles have inherently lower CO 2 emissions than gasoline vehicles, staff believes manufacturers would incorporate the improved catalyst technology on their future vehicles. Current CNG vehicles provide an estimated climate change emissions benefit of approximately 16 percent.

Liquid Petroleum Gas (LPG Vehicles) More than 33,000 LPG vehicles are currently operating in California. These vehicles are popular in fleet applications where central refueling is possible. LPG is the most cost-effective alternative fuel option identified. LPG provides modest combustion benefits and significant upstream benefits of over 60 percent, compared to conventional gasoline vehicles. Overall, LPG provides climate change emission reductions of approximately 20 percent relative to gasoline vehicles.

Ethanol Currently, approximately 2 percent of new vehicles sold in California are capable of running on a blend of up to 85 percent ethanol and 15 percent gasoline (E85). Almost all of these vehicles use primarily, if not exclusively, conventional gasoline. The reasons for this are the high cost of ethanol, and the resulting lack of consumer demand, the lack of fueling infrastructure, and E85 availability. As previouslydiscussed, for purposes of compliance with the basic regulation, emissions from flexfuel vehicles will be calculated assuming that they are running on gasoline. If a manufacturer can demonstrate that the vehicle is using E85 then the manufacturer can earn credit under the Alternative Compliance Strategies program. Ethanol derived from corn has negative upstream climate change emissions because corn crops will remove significant CO

2from the ambient air. Overall, dedicated E85 vehicles provide a climate change emission reduction of approximately 23 percent.Initial Statement of Reasons

August 6, 2004

77 Electricity Both electricity and hydrogen are unique among alternative fuels in that they are generally converted from hydrocarbon fuel feedstocks and energy sources into a transportation fuel.

Battery electric vehicles (BEVs) have the largest potential to reduce climate change emissions relative to any other alternative fuel vehicle or conventional technology option under consideration. These vehicles can provide greater than 60 percent emission reductions, depending upon how the electricity used by these vehicles is produced. The emission benefits estimated here should be considered conservative for the long term because many existing zero-emission sources are not included and future combined cycle power plants will be more efficient and less polluting.

Unfortunately, building and marketing commercially viable and cost-effective “full function” BEVs remains a significant challenge. With near-term cost projections and technology options, staff believes that only relatively small neighborhood and “city” BEVs have the potential to be commercially produced at attractive prices in the 2009 timeframe. These vehicles can also provide climate change emission reductions, albeit smaller than those of full function BEVs.

Grid-connected hybrid electric vehicles (GHEVs) have the ability to operate on battery power alone for some distance. Researchers studying GHEVs have been focusing on those with zero emission range capabilities of 20-60 miles. For a GHEV, once the battery is depleted to a given threshold, these vehicles operate similar to a conventional non-grid HEV, with the engine being used for acceleration and cruise conditions. GHEVs are analogous to bi-fuel vehicles in that their emissions benefit is dependent on the extent to which the alternative fuel (electricity) is used. Therefore, these systems are also considered as part of the discussion in Section 6.6 , Alternative Compliance Strategies.

The emissions benefit and cost evaluations for GHEVs are based on GHEVs capable of a 20-mile all-electric range. To compare their relative emission benefits, staff relied on performance data from the NESCCAF (2004) report on non-GHEVs. This data was adjusted using data from a report by the Electric Power Research Institute entitled “Comparing the Benefits and Impacts of Hybrid Electric Vehicle Options” to estimate the relative benefits of GHEVs with a 20 mile range. The EPRI study assessed the benefits of various HEVs, including non GHEVs and GHEVs, based on a mid-sized sedan and thus provides a consistent comparison of the technologies. Staff applied the results of this analysis to the emission benefit projections as presented in Table 5.3-8. The results do not consider promising developments in the performance and cost of lithium ion batteries.

Hydrogen As stated above hydrogen is generally converted from hydrocarbon fuel feedstocks and energy sources into a transportation fuel. Hydrogen also has the potential to be generated from renewable resources, which would result in zero upstream climateInitial Statement of Reasons

August 6, 2004

78 change emissions. The most likely near-term method of producing hydrogen in the 2009 timeframe is steam-reformation of natural gas.

Automobile manufacturers are currently aggressively pursuing the commercialization of hydrogen fuel cell vehicles, which can provide transportation with zero GHG or criteria pollutant tailpipe emissions. Hydrogen internal combustion engine vehicles also offer significant potential for climate change emission reductions as their climate change tailpipe emissions are near zero.

Availability of cost-effective vehicles and lack of fueling infrastructure make hydrogen fuel cell and internal combustion engine vehicles challenging for consideration in the 2009 timeframe. However, a relatively small number of vehicles will be produced in that timeframe in order to comply with the zero-emission vehicle requirements. Therefore, the proposed regulation includes an adjustment factor for both hydrogen fuel cell and hydrogen internal combustion engines vehicles.

Summary of Alternative Fuel Vehicle Emissions Benefits Listed below are estimated CO 2 emissions for current conventional vehicles and several alternative fuels, as discussed above. As shown in the table, each alternative fuel vehicle technology analyzed can provide positive climate change benefits relative to comparable gasoline-fueled vehicles.

Table 5.2

- 13 . Potential Carbon Dioxide Equivalent Emissions Reductions with Alternative Fuel Vehicle Technologies for Passenger Cars

Sources: TIAX, LLC, Climate Change Friendly Alternative Fuel Vehicle Analysis; EPRI report Comparing the Benefits and Impacts of Hybrid Electric Vehicle Options

5.2.D Exhaust Catalyst Improvement

Potential reduction of passenger vehicle GHG contribution could result from improved exhaust catalysts to reduce emissions of CH 4and N 2 O. Catalysts would reduce N 2 O and CH 4 emissions from the tailpipe, as other air contaminants, including criteria air pollutants, have been controlled for decades. Both of these gases, although their mass emissions are much less than CO 2 emissions from vehicles, have significant overall contributions to global climate change. Each of these gases, due to their distinct

Vehicle type Vehicle CO2 emissions (g/mi) Upstream

CO2 equivalent emissions (g/mi) Total CO2

emissions (g/mi) Lifetime CO2

equivalent emissions (ton) Lifetime CO2

equivalent emissions reduced from 2002 baseline (ton) Percent reduction

from Conventional Gasoline Vehicle

Conventional vehicles 346.7 102.7 449 99.9 0.0 0% Compressed natural gas (CNG) 284.8 92.9 378 83.9 15.9 16% Liquid petroleum gas (LPG) 313.9 50.4 364 80.9 18.9 19% HEV20 89.0 82.0 171 38.1 61.8 62% Ethanol (E85) 356.9 -12.7 344 76.5 23.4 23% Electric 0 150 150 33.4 66.5 67%Initial Statement of Reasons

August 6, 2004

79 chemical properties, impacts the atmospheric energy balance differently than CO 2 , such that a ton of CH 4in the atmosphere is estimated to have the same net warming effect over 100 years as 23 tons of CO 2 . Emissions of N 2 O have an even more potent effect on the atmosphere, with an estimated effect 296 times greater than CO 2

. Methane is a component of the unburned hydrocarbons emitted by motor vehicles. Since it has a very low potential to form ozone in the atmosphere, vehicular CH 4 emissions are not specifically regulated. Methane emissions are generally proportional to vehicle hydrocarbon (HC) and non-methane organic gas (NMOG) emissions. However, as NMOG fleet average emissions approach near-zero levels by 2010 (i.e., 0.035 grams/mile for passenger cars), CH 4 emissions are also expected to be extremely low. The expected CH 4emission rates for 2009 vehicles less than 8,500 lbs is 0.005 grams/mile (EMFAC, 2003).

Nitrous oxide emissions are a by-product of a vehicle’s aftertreatment catalyst and are primarily formed during catalyst warm-up. Similar to CH 4emissions, N 2 O emissions are generally proportional to vehicle oxides of nitrogen (NO x ) emissions. In addition, as fleet average NO x emissions approach near-zero levels by 2010, N 2 O emissions are also expected to be extremely low. Since it is not specifically a regulated pollutant, catalyst manufacturers are not currently pursuing strategies to reduce vehicle N 2 O emissions. However, inclusion of N 2 O emissions in the proposed vehicle climate change regulations may encourage more development work if a cost-effective solution can be identified.

Table 5.2

- 14 shows estimates of the total contribution of N 2 O and CH 4 emissions to the climate change emission inventory for average light-duty vehicles. Although it is conceivable that these emissions could be reduced through faster catalyst heating at vehicle start-up and enhanced catalyst systems with either higher surface density or higher and/or revised catalyst loadings, staff is not aware of such efforts at this time.

Table 5.2

- 14 . Contribution of Nitrous Oxides and Methane to Vehicle Climate Change Emissions

Nitrous oxide (N 2 O) Methane (CH 4 )

Emission rate 1 (g/mi) 0.006 0.005
Global warming impact (GWP) 296 23

Lifetime CO

2 equivalent emissions (tons/vehicle) 0.4 0.03

Emission rate in CO

2 equivalent g/mile 1.78 0.12

1 Emission rates based on EMFAC, 2003 estimates for the 2019 vehicle fleet

5.2.E Summary of Technology Assessment Results

For the purpose of providing perspective regarding the various sources of CO 2 equivalent emissions that have been covered in this report, Table 5.2

- 15 itemizes the various contributions of CO 2equivalent emissions and provides a total inventory. TheInitial Statement of Reasons

August 6, 2004

80 table also provides an indication of the degree of reduction that an ARB climate change emission regulation could achieve.

Table 5.2

- 15 . Summary of Technology Options and Potential Reductions

Vehicle/Fuel System Climate Change

Emission Average lifetime GHG contribution (ton CO 2 equiv.) Percent of

lifetime GHG contribution Technologies

available for GHG reduction Maximum

percent GHG reduction studied here

Carbon dioxide 100.6 74.64% Engine, drivetrain, alternative fuels technologies up to 60%

Nitrous Oxide 0.4 0.30% Improved exhaust catalyst negl. Exhaust emissions

Methane 0.03 0.02% Improved exhaust catalyst negl.

FuelDelivery “Upstream” CO2 , N 2 O, and CH 4 31.8 23.59% Alternative fuels up to 80%

Refrigerant leakage Hydrofluorocarbons

(HFCs) 1.95 1.45% Tighter A/C system, R-152 Up to 95%

Total 134.78 100.0%

5.3 Incremental Costs Of Technologies

This section includes an analysis of the incremental cost of the climate change emission technologies of Section 5.2 in reducing climate change emissions.

The initial cost is the incremental cost of the climate change reduction technology, or package of technologies. These technology costs are discussed for specific technologies in the sections below. Along with the initial cost of the new technology, there are additional mark-up costs to account for the profit and overhead for the companies that research, develop, and manufacture those technology components. Our analysis uses a 40 percent mark-up rate, i.e. each of the technology costs is multiplied by 1.4 to determine its retail price equivalent. This is between the conventionally utilized retail price equivalent (RPE) multipliers for general environmental technology assessments of 1.26 (EPA, 2004) and research studies of particular vehicle components with factors of 1.5 and above (Vyas, et al, 2000).

5.3.A Engine, Drivetrain, and Hybrid-Electric Vehicle Technologies

Estimates of the incremental cost to the manufacturer for each of the technologies considered were taken primarily from those supplied by Martec for the NESCCAF (2004) study. Some of the key aspects of the methodology used in the NESCCAF report for determining the costs of the engine and drivetrain technologies areInitial Statement of Reasons

August 6, 2004

81 summarized here. For further documentation see NESCCAF (2004). The main source of the price estimates were field interviews with representatives from automotive and component manufacturing industries that are involved with the engineering, production, product planning, and purchasing of new technologies. The costing assumes long term learned-out production volumes of at least 500,000 units for each of the technologies, and assumes a highly competitive purchasing environment including several suppliers.

Using cost projections that assume a competitive environment of three suppliers with plants each producing 500,000 annual units, and using flexible manufacturing that canproduce a variety of models in one plant, represents an appropriate long term, learnedout volume assumption for purposes of this analysis. California annual sales of light duty vehicles are approximately 1.7 million units. It is expected that some of the northeast states that have adopted the LEV II program will adopt the low GHG standards as well. Also, Canada has been actively working to establish low CO 2 emission limits as part of its commitment under the Kyoto treaty. Canadian annual sales are approximately 1.7 million units annually. Thus demand in North America for vehicles that utilize the low GHG technologies identified in our analyses can be expected to be at least 4 to 5 million annually.

Some of these vehicles are imported from Europe and Japan. The European Union andJapan have adopted programs requiring reduced greenhouse gas emissions from lightduty vehicles sold domestically. Thus demand abroad for vehicles using low greenhouse gas technologies, combined with export volumes to the North American market, is also consistent with our volume assumptions.

Nearly all the near- and mid-term technology packages used to determine the emission standards include automated manual transmissions, electric power steering and improved alternator. By 2012, staff estimates that 76 percent of vehicles in the PC/LDT1 class and 86 percent of vehicles in the LDT2 class would incorporate these technologies. Assuming a 50/50 split between the two vehicle classes, North American demand for these technologies exceeds 3 million, well in excess of the volume assumptions used to determine our estimated program costs. Other supplier provided technologies listed in the technology packages include integrated starter generator (ISG) and turbocharging. By 2016, staff estimates demand for ISG, a mid-term technology, to be 1.3 to 1.6 million units, again consistent with plant volume assumptions used to determine costs. Turbochargers are already in production in high volumes for North America.

Some adjustments were made to the Martec cost estimates. For some of the emerging technologies, Martec did not account for additional cost reductions resulting from unforeseen innovations in design and manufacturing. While this may be adequate for technologies that are well defined and primarily mechanical in nature, staff expects that further cost reductions for emerging technologies that incorporate electromechanical and electronic components are highly probable. Based on our experience in the Low Emission Vehicle program, it is inevitable that consolidation of parts and further simplifications in production processes will take place when volumes reach into the millions per year per supplier and numerous suppliers are competing. The prices thatInitial Statement of Reasons

August 6, 2004

82 ARB projects normally reflect components that have become commodity items. One example is the dramatic cost reductions for consumer electronic devices a few years after the first ones go on sale. Another example is the reduction in costs from initialestimates for emission control components developed by manufacturers for LowEmission Vehicles. For example, there were projections of the need for multiple closecoupled catalysts to meet the SULEV emission levels when the Low Emission Vehicle program was adopted and yet we now have at least one manufacturer utilizing only one underfloor catalyst to meet these emission levels.

Usually, ARB estimates themselves tend to be high when high volume production is achieved. The Martec costs for these emerging technologies, we believe, will ultimately cost less in high volume production due to improvements from innovative design changes and manufacturing techniques. Accordingly, they have been discounted by 30 percent, to make them consistent with ARB's experience in estimating costs in the Low Emission Vehicle program. In discussions with some suppliers, it was their opinion that such costs might be reduced as much as 50 percent depending on the level of utilization of the part at present and the type of system in which it is utilized.

In addition, ARB staff reduced the cost of converting from an overhead valve engine to a dual overhead cam system by the cost of the aluminum block that was included by Martec. Although manufacturers may switch to an aluminum block when making such a changeover, staff believes it is not a necessary step to accomplish the conversion. Manufacturers may utilize an aluminum block to save weight or perhaps for competitive marketing reasons, or others. Staff, therefore, reduced the conversion cost by $250 for a V-6 engine and $300 for a V-8 engine relative to Martec’s estimates. For cylinder deactivation, Martec indicated they did not include cost for controlling driveline noise when in the cylinder deactivation mode since systems to accomplish this were in a state of flux. Staff included an additional $50 for a long term solution that involves modifications to the current exhaust system rather than inclusion of a special valve in the exhaust or active engine mounts since at least one vehicle in current production utilizes the more simple approach successfully.

Table 5.3

- 1 lists the estimated RPE costs of the individual technologies considered by this study.Initial Statement of Reasons

August 6, 2004

83 Table 5.3

- 1

. Estimated Cost of Individual Technologies
Vehicle Class Small
car Large

car Minivan Small

truck Large

truck Technologies Retail Price Equivalent ($) Intake Cam Phasing 49 98 290 98 311 Exhaust Cam Phasing 49 98 49 98 49 Dual Cam Phasing (DCP) 98 388 196 409 Coupled Cam Phasing (CCP) 70 161 49 161 49 Discrete Variable Valve Lift (DVVL,ICP) 154 259 451 259 259 Discrete Variable Valve Lift (DVVL,DCP) 203 357 549 357 619 Discrete Variable Valve Lift (DVVL,CCP) 175 322 210 322 584 Continuous Variable Valve Lift (CVVL,ICP) 259 483 675 483 731 Continuous Variable Valve Lift (CVVL,DCP) 308 581 773 581 829 Continuous Variable Valve Lift (CVVL,CCP) 280 546 738 546 794 Electromagnetic Camless Valve Actuation (emCVA) 676 764 1078 764 1274 Electrohydraulic Camless Valve Actuation (ehCVA) 564 637 882 637 1078 Turbocharging (Turbo) 560 (210) -18 (210)

- Cylinder Deactivation (DeAct)

- 113 113 113 147 Cylinder Deactivation (DeAct,DVVL)

- - - - - Cylinder Deactivation (DeAct,DVVL,ICP)

- 265 399 265 472 Cylinder Deactivation (DeAct,DVVL,DCP)

- 333 467 333 541 Cylinder Deactivation (DeAct,DVVL,CCP)

- 309 443 309 289 Variable Charge Motion (CBR) Gasoline Direct Injection - Stochiometric (GDI-S) 189 259 259 259 294 Gasoline Direct Injection - Lean-Burn Stratified (GDI-L) 728 959 1043 1057 1554 Gasoline Homogeneous Compression Ignition (gHCCI) 392 588

- 588

- Diesel – HSDI 2100 1225 1802 1260 2521 Diesel – Advanced Multi-Mode 1225 588 953 568 1275 4-Speed Automatic Transmission 0 0 0 0 0 5-Speed Automatic 140 140 140 140 140 6-Speed Automatic 70 105 105 105 112 6-Speed Automated Manual 0 0 0 0 0 Continuously Variable Transmission (CVT) 210 245 245 245

- 12-volt 2kW BAS (Start Stop) 196

- - - - 42-Volt 10 kW ISG (Start Stop) 559

- - - - 42-Volt 10 kW ISG (Motor Assist) 1107 1107 1107 1107 1107 Electric Power Steering (EPS) 20 39 39 39

- Electro-Hydraulic Power Steering (E-HPS)

- - - - 60 Improved Alternator (Higher efficiency) 56 56 56 56 56 Electric Water Pump (EWP) 70 70 70 70 70 Improved AC 88 88 88 88 88 ModHEV 2546 2546 2300 1968 2340 AdvHEV 4009 4009 4204 3823 5311

Manufacturer Investment

At the July 7, 2004 workshop, staff received several comments that investments needed to achieve the reductions specified in this proposal would reach into the billions of dollars and might affect the viability of some major vehicle manufacturers. The commenters apparently envisioned the need for complete redesign of all existing engines and transmissions as well as other vehicle changes.

Staff spent some time evaluating these remarks in terms of lead time, phase in periods, flexibility, and the likely sources of the various revised powertrain components that would be needed (whether from a supplier or designed in-house). Also considered wasInitial Statement of Reasons

August 6, 2004

84 the forecast provided by Martec regarding the content of 2009 vehicle powertrains in terms of advanced technology in the absence of any regulatory requirements relative to climate change.

Martec’s forecast was that all 2009 engines would incorporate some form of variable valve timing using either single, coupled, or dual cam phasers. These changes will require cylinder head revisions to incorporate the mechanisms for overhead camshaft engines and some modification to the camshaft drive for overhead valve engines. They also concluded that virtually all models would incorporate newly designed 5 and 6 speed automatic transmissions.

For overhead camshaft engines, it would be possible to account for additional features in camshaft phasing and valve lift control as manufacturers redesign their cylinder heads to incorporate variable cam phasing for 2009 according to current plans. The basic engine block architecture would generally not require much revision. For example, provisions for incorporating discrete or continuously variable intake valve lift or even cylinder deactivation could be accounted for during their planned cylinder head revisions to incorporate variable valve timing for the 2009 timeframe. Manufacturers of overhead valve engines would probably benefit from considering moving to a new cylinder head that incorporates electrohydraulic camless valve actuation rather than designing a new overhead camshaft variant that will likely become obsolete in a few years. Conventional overhead valve engines could also incorporate changes to accommodate cylinder deactivation or variable valve lift as they are modified to accommodate the changes slated for 2009. For example, Daimler Chrysler uses a conventional overhead valve train in the Hemi 5.7 liter engine used in their Ram truck applications, but the version used in the passenger cars incorporates cylinder deactivation. The latter was accomplished inexpensively because initial design of the engine was done with the eventual incorporation of cylinder deactivation in mind. Another change that involves primarily the engine cylinder head(s) again is incorporation of gasoline direct injection. To get the most out of this technology, engine downsizing while maintaining performance would also be included in the revision, but this could be done without changing the basic cylinder block design, thereby saving any large investment costs in that respect (it would involve revised bore size and associated internal parts to reduce engine displacement and to raise compression ratio associated with GDI). There would be attendant changes to the fuel system to achieve higher fuel pressures, but such changes should not be high investment items. Given these considerations, staff expects that cylinder head redesign investment that will be taking place in the future anyway could include concurrent planning for further revisions to meet the proposed climate change emission standards without substantial increased investment cost.

While the above scenarios are one approach to improving CO 2emissions, the proposed requirements contain sufficient flexibility and credit mechanisms to allow for other technology approaches. As an alternative to further revising valve trains, engines such as the General Motors’ in-line 6 cylinder used in a number of their models could be downsized by reducing cylinder count to 5 and incorporating turbocharging in order to reduce CO

2 emissions. This technology is readily available and such a changeoverInitial Statement of Reasons

August 6, 2004

85 could be accomplished in the 2009 to 2013 timeframe as needed. Overall cost for such an engine would remain favorable relative to their current 6 cylinder engine since such a new 5 cylinder turbocharged engine would not have much change in the net number of components. In designing some of the engines for their newest vehicles, General Motors claims they are already capable of handling the additional stresses of turbocharging without further revisions. Again, the investment to incorporate additional technologies can be greatly minimized by judicious planning for the future and providing sufficient lead time and phase-in periods.

One commenter at the workshop also expressed the view that lead time for designing a new automated manual transmission and incorporating it in a manufacturer’s product line would require more than the four to five years lead time provided in the proposed regulation. It was pointed out that new transmissions require considerable investment and that industry was generally planning on introducing new 5 and 6 speed automatic transmissions in the 2006 model year if not earlier. Evidence of the magnitude of investment is the joint venture between Ford and General Motors to design a new front and all wheel drive automatic 6 speed transmission. Normally each manufacturer would have designed its own transmission. It is a reasonable point that these manufacturers would need to recover their investment in the redesign before making another large investment in designing an automated manual transmission. In recognition of this, staff elected to include an additional 2 years of phase-in time compared to the original proposal to minimize the need for large investments and to allow industry to amortize their costs over a longer period of production. At the same time, however, staff also expects that independent automatic transmission suppliers such as ZF, Aisin, and others would follow Borg Warner’s lead in developing the automated manual dual clutch transmission (with partner Volkswagen-Audi) in order to keep pace with advancing technology and ensure their future competitiveness. Such transmissions are a compelling choice for the future since they provide excellent shift quality, perhaps even lower cost than a 6 speed automatic, and significantly reduced CO 2emissions. Accordingly, these transmissions suppliers would absorb the bulk of investment costs, not the vehicle manufacturers.

One further point is that manufacturers could avoid incorporation of an automated manual transmission in the near term by incorporating instead all of the conventional valve train technology that gets them most of the way to the benefits of electrohydraulic camless valve actuation. This would be dual cam phasers with continuously variable valve lift for the overhead camshaft engines. An example of this technology currently in production is BMW’s “Valvetronic” system available in the in-line 6 cylinder and V12 engines. This is a superb design that allows throttleless engine operation most of the time (i.e., except when purging is needed to maintain clean vapor canister conditions). By gaining the CO 2reduction benefits of this technology in the near term, ahead of the schedule laid out for such technology earlier, incorporating an automated manual 6 speed transmission could be delayed to the mid-term, assuming incorporation of the other technologies covered earlier as well (i.e., electric or electrohydraulic power steering, improved alternator, electric water pump, etc.). Alternatively, manufacturers could incorporate integrated starter generators in some near term models should they choose to delay incorporating other technologies to meet the CO2 requirements in theInitial Statement of Reasons

August 6, 2004

86 near term (e.g., they could delay changeover from overhead valve engines in expectation that camless valve actuation will be available later).

With an additional two years of phase-in time now, the flexibility provided by an assortment of technology paths that a manufacturer could take, the credit and banking system afforded, and by providing for incorporation of advanced valvetrain technologies during redesign of valvetrains/cylinder heads that will take place with already planned updates to powertrains for the 2009 timeframe, there should be no need for large investments by the auto manufacturers to meet the proposed regulations. Large investment costs were also avoided in the Low Emission Vehicle programs by providing adequate lead time and phase-in time so that revisions could take place with already planned updates to powertrains that were already planned to maintain competitiveness in the industry. While the scope an magnitude of the changes is somewhat greater in the proposed climate change regulation than in the Low Emission Vehicle program, with the added phase-in time and credit provisions that have been included plus the added reliance of vehicle manufacturers on suppliers to absorb investment costs, this regulation should also be phased in economically without large investment.

Maintenance Costs

With adoption of additional new technologies in motor vehicle powertrains, commenters suggested staff should indicate where owners might expect increased maintenance costs.

Looking at the new valvetrain technologies, there will be additional valvetrain components that comprise more complex systems than at present. The new elements include camshaft phasers, lost motion linkages, solenoids, hydraulic valves, and more. However, staff is not aware of any expectation that these components couldn’t be designed to perform as reliably as other engine components. Similarly, for electric water pumps, electric power steering, improved alternators, integrated starter generators, and similar driveline components, there is no reason to expect that these components would need servicing more frequently than any other components. Discussions with manufacturers indicate generally uniform durability requirements for powertrain components, which is a lifetime of 200,000 miles before maintenance would be needed. In the case of automated manual transmissions, there are fewer and less complex systems involved compared to today’s automatic 6 speed transmissions. For the continuously variable automatic transmissions, there may be some issues with the long term durability of the chain, belt, or toroidal power transfer system, but staff expects that these issues have been mostly sorted out after some initial start up issues with some designs.

Perhaps more problematic are the hybrid electric vehicles that have significantly more components and a greater proportion of high voltage system elements than in conventional vehicles. Of course, the life of the battery pack may also be an issue. In discussing this topic with some manufacturers, it seems they are confident that nickel metal hydride batteries will generally be capable of achieving a 10 year life and at least 150,000 miles of operation before there is a decline in battery performance. By betterInitial Statement of Reasons

August 6, 2004

87 controlling cooling of the battery packs to achieve more uniform temperature distribution and by carefully controlling the depth of discharge and other control issues such as recharge strategy, battery life should continue to improve. Also, materials improvements are a constant pursuit of battery manufacturers. It seems reasonably likely that by 2009 further improvements would enable these batteries to last the life of the vehicle. Some hybrids utilize ultracapacitors for rapid current discharge that have a cycle life well beyond the vehicle life, but are able to store less energy than batteries. Hybrid vehicles generally tend to have tires that are of lower rolling resistance than the norm and which also tend to have shorter life than more traditional tires. Therefore, there will likely be additional tire replacement costs for hybrids.

Until repair technicians have greater experience in repairing hybrid electric vehicles, there may be additional repair difficulties experienced by consumers. Nonetheless, the presence of detailed and comprehensive On-Board Diagnostic II systems required on hybrids as well as conventional vehicles should provide considerable help in identifying faulty systems and components.

Listed below in Table 5.3

- 2 through Table 5.3

- 6 are the incremental cost to the manufacturer and the RPE cost to the consumer for the technology combinations modeled for each vehicle class. Again these technologies are separated into near-, mid-, and long-term according to their relative readiness for potential widespread market penetration. The package costs listed here include credit for the elimination of duplicate technologies such as the exhaust gas recirculation (EGR) valve that can be eliminated when using variable valve timing or cam phasing, elimination of the conventional starter and alternator when using ISG systems, or engine downsizing when using turbocharging. Note that these costs are relative to the incremental cost for the 2009 baseline vehicle in each vehicle class. Each of the technology packages, along with the technologies listed, also includes the improved variable-displacement compressor/external control air-conditioning systems, aggressive shift logic, improved rolling resistance tires, and engine friction reduction technologies.Initial Statement of Reasons

August 6, 2004

88 Table 5.3

- 2

. Estimated Incremental Costs for Carbon Dioxide Reduction Technologies for Small Car Relative to 2009 Baseline

Small Car Combined Technology Packages Technology cost ($) Retail Price

Equivalent ($)
DCP,EPS,A4,ImpAlt 31 43 DCP,CVT,EPS,ImpAlt 181 253 DVVLd,A5 (2009 baseline) 0 0 DCP,A6 27 38 DCP,A5,EPS,ImpAlt 127 178 DVVL,DCP,AMT,EPS,ImpAlt 106 149 Near Term 2009-2012

GDI-S,DCP,Turbo,AMT,EPS,ImpAlt 580 812

gHCCI,DVVLi,AMT,EPS,ImpAlt 255 357 gHCCI,DVVL,ICP,AMT,ISG,EPS,eACC 1042 1459 Mid Term 2013-2015 CVVL,DCP,AMT,ISG-SS,EPS,ImpAlt 765 1071

ModHEV 1599 2238 dHCCI,AMT,ISG,EPS,eACC 1662 2327 AdvHEV 2644 3701 Long Term 2015-
HSDI,AdvHEV 4109 5752

Table 5.3

- 3

. Estimated Incremental Costs for Carbon Dioxide Reduction Technologies for Large Car Relative to 2009 Baseline

Large Car Combined Technology Packages Technology cost ($) Retail Price

Equivalent ($)

DCP,A6 37 52 DCP,CVT,EPS,ImpAlt 201 282 DVVL,DCP,A6 (2009 baseline) 0 0 CVVL,DCP,A6 319 447 DCP,DeAct,A6 168 235 DCP,Turbo,A6,EPS,ImpAlt (115) (161) CVVL,DCP,AMT,EPS,ImpAlt 319 447 GDI-S,DeAct,DCP,AMT,EPS,ImpAlt 359 503 Near Term 2009-2012

GDI-S,DCP,Turbo,AMT,EPS,ImpAlt (46) (65)

gHCCI,DVVL,ICP,AMT,EPS,ImpAlt 324 454 DeAct,DVVL,CCP,A6,ISG,EPS,eACC 1037 1452 ehCVA,AMT,EPS,ImpAlt 359 503 ehCVA,GDI-S,AMT,EPS,ImpAlt 544 761 gHCCI,DVVL,ICP,AMT,ISG,EPS,eACC 1125 1575 Mid Term 2013-2015

GDI-S,Turbo,DCP,A6,ISG,EPS,eACC 696 975

dHCCI,AMT,42V,EPS,eACC 1150 1610
ModHEV 1101 1541
AdvHEV 2373 3322 Long Term 2015-
HSDI,AdvHEV 3763 5268Initial Statement of Reasons

August 6, 2004

89 Table 5.3

- 4

. Estimated Incremental Costs for Carbon Dioxide Reduction Technologies for Minivan Relative to 2009 Baseline

Minivan Combined Technology Packages Technology cost ($) Retail Price

Equivalent ($)

DVVL,CCP,A5 (2009 baseline) 0 0 DCP,A6 254 355 GDI-S,CCP,DeAct,AMT,EPS,ImpAlt 271 379 DVVL,CCP,AMT,EPS,ImpAlt 116 163 CCP,AMT,Turbo,EPS,ImpAlt 7 10 DeAct,DVVL,CCP,AMT,EPS,ImpAlt 149 209 CVVL,CCP,AMT,EPS,ImpAlt 497 696 Near Term 2009-2012

GDI-S,DCP,Turbo,AMT,EPS,ImpAlt 409 572

GDI-S,CCP,AMT,ISG,DeAct,EPS,eACC 1135 1589 Mid Term 2013-2015 ehCVA,GDI-S,AMT,EPS,ImpAlt 785 1099

ModHEV 1418 1985
AdvHEV 2778 3889 Long Term 2015- dHCCI,AMT,EPS,ImpAlt 675 945

Table 5.3

- 5 . Estimated Incremental Costs for Carbon Dioxide Reduction Technologies for Small Truck Relative to 2009 Baseline

Small Truck Combined Technology Packages Technology cost ($) Retail Price

Equivalent ($)

DCP,A6 37 52 DVVL,DCP,A6 (2009 baseline) 0 0 DCP,A6,Turbo,EPS,ImpAlt (115) (161) DCP,A6,DeAct 114 160 GDI-S,DCP,Turbo,AMT,EPS,ImpAlt, DCP-DS (55) (77) DeAct,DVVL,CCP,AMT,EPS,ImpAlt 174 244 Near Term 2009-2012

GDI-S,DCP,DeAct,AMT,EPS,ImpAlt 296 414

DeAct,DVVL,CCP,A6,ISG,EPS, eACC 1050 1470
ehCVA,GDI-S,AMT,EPS,ImpAlt 530 742 Mid Term 2013-2015 HSDI,AMT,EPS,ImpAlt 815 1141

ModHEV 1101 1541
AdvHEV 2426 3396 Long Term 2015- dHCCI,AMT,EPS,ImpAlt 335 469Initial Statement of Reasons

August 6, 2004

90 Table 5.3

- 6 . Estimated Incremental Costs for Carbon Dioxide Reduction Technologies for Large Truck Relative to 2009 Baseline

Large Truck Combined Technology Packages Technology cost ($) Retail Price

Equivalent ($)

CCP,A6 (2009 baseline) 0 0 DVVL,DCP,A6 302 423 CCP,DeAct,A6 253 354 DCP,DeAct,A6 514 719 DeAct,DVVL,CCP,A6,EHPS,ImpAlt 474 663 Near Term 2009-2012

DeAct,DVVL,CCP,AMT,EHPS,ImpAlt 394 551

CCP,DeAct,GDI-S, AMT,EHPS,ImpAlt 501 701 DeAct,DVVL,CCP,A6,ISG,EPS, eACC 1256 1759 Mid Term 2013-2015 ehCVA,GDI-S,AMT,EHPS,ImpAlt 1068 1495

GDI-L,AMT,EHPS,ImpAlt 953 1334 dHCCI,AMT,ISG,EPS,eACC 1842 2579
ModHEV 1789 2504
AdvHEV 2590 3626 HSDI,AdvHEV 5884 8237 Long Term 2015-

GDI-L,AMT,42V,EPS,ImpAlt 1722 2411

Figure 5

- 7 through Figure 5

- 11 show the results of the incremental cost assessments of each technology package for the five different vehicle types. These figures plot each packages’ incremental costs versus the resulting GHG reduction from the technology packages.

The diagonal lines in the figures show, for given economic assumptions, the break-evencut-off for the technologies. Thus the furthest right-most point that is under the “breakeven” line is the maximum potential cost-effective reduction GHGs for that vehicle class. Almost all of the GHG reduction technologies evaluated are below the break even lines, which means that they result in lifetime operating cost savings that exceed their incremental cost. The methodology to determine the “break-even” point is outlined below in section 5.4 . More detailed results in tabular form are summarized at the end of the section in Table 5.3

- 8

. The data points have been shaped differently to denote their expected market readiness. Near-term technology packages are diamonds, mid-term are triangles, and long-term are “X”s.
For the small cars (see Figure 5

- 7 ), the near-term technologies have incremental costs ranging from $38 to $812. Of these near-term technologies, the maximum reduction technology package was the one with a turbocharged stoichiometric gasoline direct injection (GDI-S) engine with dual cam phasing (DCP) and an automated manualInitial Statement of Reasons

August 6, 2004

91 transmission (AMT), and various other technology improvements. This package yielded a 24 percent CO 2 emission reduction for an incremental cost of $812 from the 2009 small car baseline. Due to the reduction in operating cost that is also achieved by this package, the package results in a net present value (lifetime savings) of $1,141. That is, over the life of the vehicle, the operating cost savings is sufficient to entirely pay for the initial cost of the technology, and provide an additional $1,141 in savings to the owner. The next highest near-term package CO 2 reduction came from discrete variable valve lift (DVVL), dual cam phasing (DCP), and an automated manual transmission (AMT). This package yielded an 18 percent CO 2 reduction with respect to the 2009 baseline small car at an incremental cost of $149, with a lifetime savings of $1,275. The highest mid-term technology scenario for small cars included homogeneous combustion compression ignition (HCCI) technology and offered a 28 percent CO 2 emission reduction for an additional cost of $1459, with a lifetime savings of $787. Some of the longer-term (beyond 2009) technologies, such as advanced hybrid-electrics and diesels, resulted in higher potential CO 2 reductions, but had incremental costs ranging from $2238 to $5752. Many of these technologies nevertheless resulted in lifetime savings.

Small Car

DVVL,DCP,A5 DCP,A6

DCP,EPS,ImpAlt

DCP,A5,EPS,ImpAlt DCP,CVT,EPS,ImpAlt

DVVL,DCP, AMT,EPS,ImpAlt gHCCI,DVVL, ICP,AMT,EPS,ImpAlt

GDI-S,DCP,Turbo, AMT,EPS,ImpAlt

gHCCI,DVVL,ICP, AMT,ISG,EPS,eACC ModHEV dHCCI,AMT, ISG,EPS,eACC AdvHEV HSDI,AdvHEV

Break-even (d=5%, $1.74/gal, 16-yr)

CVVL,DCP,AMT, ISGSS,EPS,ImpAlt

-500 500 1,500 2,500 3,500 4,500 5,500

0% 10% 20% 30% 40% 50%

Percent CO 2

Reduction from 2009 BaselineIncremental Cost ($)

Figure 5

- 7 . Incremental Costs for Technology Packages on 2009 Baseline Small Cars

For large cars (see Figure 5

- 8 ), the incremental costs to the consumer for the near-term technology scenarios ranged from a cost savings of $161 to a cost increase $503. The maximum reduction from a near-term technology was from the turbocharged stoichiometric gasoline direct injection (GDI-S) engine with dual cam phasing (DCP), and an automated manual transmission (AMT). This package yielded a 22 percent reduction in exhaust CO 2emissions for a cost savings of $65 compared to the 2009 baseline large car technology package, with a lifetime savings of $2,067. The maximum reduction mid-term technology package in the analysis had a very similar technology package – a turbocharged stoichiometric gasoline direct injection (GDI-S) engine with dual cam phasing (DCP), a 6-speed automatic transmission (A6), and also had anInitial Statement of Reasons

August 6, 2004

92 integrated starter generator (ISG). This package yielded a 30 percent reduction in exhaust CO2emissions for an increased initial cost of $975 from the 2009 large car baseline, with a lifetime savings of $1,794.

Large Car

GDI-S,DCP,Turbo, AMT,EPS,ImpAlt DCP,DeAct,A6 CVVL,DCP,A6
CVVL,DCP, AMT,EPS,ImpAlt gHCCI,DVVL, ICP,AMT,EPS,ImpAlt GDI-S,Turbo,DCP, A6,ISG,EPS,eACC DeAct,DVVL,CCP, A6,ISG,EPS,eACC gHCCI,DVVL,ICP, AMT,ISG,EPS,eACC dHCCI,AMT,ISG, EPS,eACC
Moderate HEV Advanced HEV

CVAeh,AMT,EPS,ImpAlt

DVVL,DCP,A6 GDI-S,DeAct,DCP, AMT,EPS,ImpAlt Break-even (d=5%, $1.74/gal, 16-yr)

CVAeh,GDI-S, AMT,EPS,ImpAlt

-500 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Percent CO 2

Reduction from 2009 BaselineIncremental Cost ($)

Figure 5

- 8 . Incremental Costs for Technology Packages on 2009 Baseline Large Cars

For the minivan (see Figure 5

- 9 ), the maximum reduction from a near-term technology package in the analysis was determined to be the stoichiometric gasoline direct injection (GDI-S) engine with dual cam phasing (DCP), turbocharging, and an automated manual transmission (AMT). This package yielded a 17 percent reduction in exhaust CO 2 emissions for an increased initial cost of $36 from the 2009 minivan baseline, with a lifetime savings of $1865. A similar package that also included cylinder deactivation (DeAct) and a 42-volt integrated starter-generator (ISG) resulted in a 20 percent CO 2 reduction at an initial cost of $1520, with a lifetime savings of $627.Initial Statement of Reasons

August 6, 2004

93 Minivan

DVVL,CCP,A5 DCP,A6

DVVL,CCP,AMT, EPS,ImpAlt CVVL,CCP,AMT, EPS,ImpAlt GDI-S,DCP,Turbo, AMT,EPS,ImpAlt
DeAct,DVVL,CCP, AMT,EPS,ImpAlt GDI-S,CCP,DeAct, AMT,EPS,ImpAlt

CCP,AMT, Turbo, EPS,ImpAlt dHCCI,AMT, EPS,ImpAlt GDI-S,CCP,AMT,ISG, DeAct,EPS,eACC

CVAeh,GDI-S, AMT,EPS,ImpAlt AdvHEV Break-even (d=5%, $1.74/gal, 19-yr)

ModHEV

-500 500 1,500 2,500 3,500 4,500 5,500

0% 10% 20% 30% 40% 50%

Percent CO 2

Reduction from 2009 BaselineIncremental Cost ($)

Figure 5

- 9 . Incremental Costs for Technology Packages on 2009 Baseline Minivans

For the small truck vehicle type (see Figure 5

- 10 ), the incremental costs for the nearterm scenarios ranged from a cost savings of $161 to a cost increase of $414. The near-term scenario with turbocharging, stoichiometric gasoline direct-injection, dual cam phasing (DCP), and an automated manual transmission (AMT), yielded a 21 percent reduction in exhaust CO 2emissions at a cost savings of $77compared to the 2009 baseline, and a lifetime savings of $2680. The stoichiometric gasoline direct-injection engine with electrohydraulic camless valve actuation and an automated manual transmission (AMT) offered a 24 percent CO 2emission reduction at an additional cost of $742, and a lifetime savings of $2,147.Initial Statement of Reasons

August 6, 2004

94 Small Truck

DVVL,DCP,A6 DCP,A6 DCP,A6,Turbo, EPS,ImpAlt

DCP,A6,DeAct
GDI-S,DCP,Turbo, AMT,EPS,ImpAlt DeAct,DVVL,CCP, AMT,EPS,ImpAlt DeAct,DVVL,CCP, A6,ISG,EPS,eACC

GDI-S,DCP,DeAct, AMT,EPS,ImpAlt dHCCI,AMT, EPS,ImpAlt HSDI,AMT, EPS,ImpAlt

CVAeh,GDI-S, AMT,EPS,ImpAlt AdvHEV

Break-even (d=5%, $1.74/gal, 19-yr)

ModHEV

-500 500 1,500 2,500 3,500 4,500 5,500

0% 10% 20% 30% 40% 50%

Percent CO 2

Reduction from 2009 BaselineIncremental Cost ($)

Figure 5

- 10 . Incremental Costs for Technology Packages on 2009 Baseline Small Trucks

For the large trucks (see Figure 5

- 11 ), the maximum reduction near- and mid-term scenario packages involved cylinder deactivation, coupled cam phasing, and variable valve lift. The near-term version, which included an automated manual transmission (AMT), had an 18 percent CO 2emission reduction and a cost increase of $551 relative to the 2009 baseline vehicle, with a lifetime savings of $2,096. The more advanced mid-term version of this package also included a 42-volt integrated starter-generator (ISG) and had a 22 percent CO 2 reduction with a $1,759 incremental cost from the 2009 large car baseline, with a lifetime savings of $1,445.Initial Statement of Reasons

August 6, 2004

95 Large Truck

CCP,A6 DVVL,CCP,A6

DCP,DeAct,A6

CCP,DeAct,A6 DeAct,DVVL,CCP,

A6,EHPS,ImpAlt DeAct,DVVL,CCP,

AMT,EHPS,ImpAlt GDI-L,AMT, EHPS,ImpAlt DeAct,DVVL,CCP,

A6,ISG,EPS,eACC dHCCI,AMT, 42V, EPS,eACC AdvHEV HSDI,AdvHEV

GDI-L,AMT,ISG, EPS,ImpAlt

Break-even (d=5%, $1.74/gal, 19-yr)

CVAeh,GDI-S, AMT,EHPS,ImpAlt

CCP,DeAct,GDI-S, AMT,EHPS,ImpAlt

-500 500 1,500 2,500 3,500 4,500 5,500 6,500 7,500

0% 10% 20% 30% 40% 50%

Percent CO 2

Reduction from 2009 BaselineIncremental Cost ($)

Figure 5

- 11 . Incremental Costs for Technology Packages on 2009 Baseline Large Trucks

5.3.B Alternative Fuel Vehicles

This section presents ARB staff’s assessment of the incremental costs of alternative fueled vehicles as compared to gasoline vehicles. The incremental cost estimates include only those costs directly related to the vehicle and while not exhaustive, provide a general sense of the relative cost of these vehicles. Thus, in the case of E85 where there are no additional costs to modify the vehicle, the incremental cost is zero.
Table 5.3

- 7 . Incremental Costs of Alternative Fuel Vehicles

Sources: TIAX, LLC, Climate Change Friendly Alternative Fuel Vehicle Analysis; EPRI report Comparing the Benefits and Impacts of Hybrid Electric Vehicle Options; CEC and ARB report Reducing Petroleum Dependency

Vehicle type Lifetime CO2 equivalent emissions (ton) Lifetime CO2 equivalent emissions reduced from 2002 baseline (ton) Percent reduction

from Conventional Gasoline Vehicle Incremental

technology cost ($)

Conventional vehicles 99.9 0.0 0%

- Compressed natural gas (CNG) 83.9 15.9 16% 3300 Liquid petroleum gas (LPG) 80.9 18.9 19% 370 HEV20 38.1 61.8 62% 4500 Ethanol (E85) 76.5 23.4 23% 0 Electric 33.4 66.5 67% 8800Initial Statement of Reasons

August 6, 2004

96 5.3.C Summary of Incremental Cost Assessment

Technology improvements to vehicle engine, drivetrain, and air-conditioning systems all result in incremental cost increases for light-duty vehicles. Improvements in the air conditioning system include an improved variable displacement compressor/externalcontrols, reduced leakage systems, and the use of an alternative refrigerant (HFC152a). Other technologies such as improved aerodynamics and improved tires also resulted in increased vehicle costs. These costs are shown in Table 5.3

- 8 .. The table summarizes for each technology package the results for exhaust CO 2emissions, the percentage change from the 2009 baseline emissions, and the retail price increment for the five vehicle classes that were studied. There is a near-term, or off-the-shelf, technology package in each of the vehicle classes evaluated (small and large car, minivan, small and large truck) that resulted in a reduction of CO 2 emissions of at least 15 to 20 percent from baseline 2009 values. In addition, there is generally a near-term technology package in each of the vehicle classes that results in about a 25 percent CO 2 emission reduction. .Initial Statement of Reasons

August 6, 2004

97 Table 5.3

- 8

. Summary of Cost-Effectiveness Parameters for Climate Change Emission Reduction Engine, Drivetrain, and Hybrid-Electric Vehicle Technologies

Vehicle Class Combined Technology Packages Technology readiness CO2 emissions (g/mi) CO2

change from 2002 baseline Lifetime

CO2 reduced from 2002 baseline (ton) CO2

change from 2009 baseline Lifetime

CO2 reduced from 2009 baseline (ton) Retail cost

incremental (2004$) Cost

incremental from 2009 baseline (2004$) Lifetime Net

Present Value (2004$) Payback

period (yr)

Small car DVVL,DCP,A5 Near-term 284 -2.6% 1.7 0.0% 0.0 308 0 0 0

DCP,A6 Near-term 260 -10.8% 7.0 -8.4% 5.3 346 38 635 1 DCP,EPS,ImpAlt Near-term 269 -7.6% 4.9 -5.2% 3.3 351 43 372 1 DCP,A5,EPS,ImpAlt Near-term 260 -10.7% 6.9 -8.3% 5.3 446 178 487 3 DCP,CVT,EPS,ImpAlt Near-term 269 -7.6% 4.9 -5.1% 3.2 561 253 158 8 DVVL,DCP, AMT,EPS,ImpAlt Near-term 233 -19.9% 12.9 -17.8% 11.3 457 149 1,275 1 gHCCI,DVVL, ICP,AMT,EPS,ImpAlt Mid-term 229 -21.6% 14.0 -19.5% 12.3 665 357 1,202 3 GDI-S,DCP,Turbo, AMT,EPS,ImpAlt Near-term 215 -26.4% 17.1 -24.4% 15.4 1,120 812 1,141 5 gHCCI,DVVL,ICP, AMT,ISG,EPS,eACC Mid-term 204 -29.9% 19.4 -28.1% 17.7 1,767 1,459 787 8 dHCCI,AMT, ISG,EPS,eACC Long-term 217 -25.5% 16.5 -23.5% 14.9 2,635 2,327 383 13 HSDI,AdvHEV Long-term 147 -49.5% 32.1 -48.2% 30.4 6060 5752 -1340 >16 CVVL,DCP,AMT, ISG-SS,EPS,ImpAlt Mid-term 216 -25.7% 16.7 -23.8% 15.0 1,379 1,071 830 7 Advanced HEV Long-term 138 -53.3% 34.1 -52.1% 32.5 4009 3701 465 13 Moderate HEV Long-term 213 -45.4% 17.5 -44.0% 15.8 2546 2238 1280 8 Large car DVVL,DCP,A6 Near-term 322 -6.6% 5.1 0.0% 0.0 427 0 0 0

DCP,DeAct,A6 Near-term 286 -16.9% 12.9 -11.0% 7.9 662 235 764 3 CVVL,DCP,A6 Near-term 290 -15.9% 12.2 -10.0% 7.2 864 437 469 6 DCP,A6 Near-term 304 -11.9% 9.1 -5.6% 4.0 479 52 459 1 DCP,Turbo,A6,EPS,ImpAlt Near-term 279 -19.2% 14.7 -13.5% 9.6 266 -161 1,381 0 CVVL,DCP,AMT,EPS,ImpAlt Near-term 265 -23.2% 17.8 -17.8% 12.7 874 447 1,165 3 gHCCI,DVVL, ICP,AMT,EPS,ImpAlt Mid-term 272 -21.0% 16.1 -15.5% 11.1 881 454 948 4 GDI-S,DCP,Turbo, AMT,EPS,ImpAlt Near-term 251 -27.2% 20.9 -22.1% 15.8 362 -65 2,067 0 DCP,CVT,EPS,ImpAlt Near-term 303 -12.1% 9.3 -6.0% 4.3 709 282 258 6 GDI-S,Turbo,DCP, A6,ISG,EPS,eACC Mid-term 224 -35.1% 26.9 -30.5% 21.9 1,402 975 1794 4 DeAct,DVVL,CCP, A6,ISG,EPS,eACC Mid-term 259 -24.7% 19.0 -19.4% 13.9 1,879 1,452 308 12 gHCCI,DVVL,ICP, AMT,ISG,EPS,eACC Mid-term 231 -32.9% 25.2 -28.2% 20.2 2002 1575 981 8 dHCCI,AMT,ISG, EPS,eACC Long-term 277 -19.7% 15.1 -14.0% 10.1 2037 1,610 720 9 HSDI,AdvHEV Long-term 157 -54.4% 41.7 -51.1% 36.6 5695 5268 -32 >16 GDI-S,DeAct,DCP, AMT,EPS,ImpAlt Near-term 265 -23.2% 17.8 -17.8% 12.8 930 504 1,112 4 CVAeh,AMT,EPS,ImpAlt Mid-term 250 -27.4% 21.0 -22.2% 15.9 930 503 1,513 3 CVAeh,GDI-S, AMT,EPS,ImpAlt Mid-term 242 -45.4% 22.9 -41.6% 17.8 1,188 761 1,497 4 Advanced HEV Long-term 163 -53.3% 40.4 -50.0% 35.3 3749 3322 1210 10 Moderate HEV Long-term 252 -45.4% 20.7 -41.6% 15.6 1968 1541 2230 5Initial Statement of Reasons

August 6, 2004

98 Table 5.3

- 8(cont.) Summary of Incremental Cost Parameters for Climate Change Emission Reduction Engine, Drivetrain, and Hybrid-Electric Vehicle Technologies

Vehicle Class Combined Technology Packages Technology readiness CO2 emissions (g/mi) CO2

change from 2002 baseline Lifetime

CO2 reduced from 2002 baseline (ton) CO2

change from 2009 baseline Lifetime

CO2 reduced from 2009 baseline (ton) Retail cost

incremental (2004$) Cost

incremental from 2009 baseline (2004$) Lifetime Net

Present Value (2004$) Payback

period (yr)

Minivan DVVL,CCP,A5 Near-term 370 -6.4% 6.3 0.0% 0.0 315 0 0 0

DCP,A6 Near-term 348 -12.0% 11.7 -5.9% 5.4 670 355 308 7 DVVL,CCP,AMT, EPS,ImpAlt Near-term 325 -17.7% 17.3 -12.1% 11.0 478 163 1,190 2 CVVL,CCP,AMT, EPS,ImpAlt Near-term 316 -20.2% 19.7 -14.7% 13.4 887 572 1329 4 GDI-S,DCP,Turbo, AMT,EPS,ImpAlt Near-term 307 -22.3% 21.8 -17.0% 15.5 561 36 1865 1 DeAct,DVVL,CCP, AMT,EPS,ImpAlt Near-term 317 -19.9% 19.4 -14.4% 13.2 524 209 1,335 2 GDI-S,CCP,DeAct, AMT,EPS,ImpAlt Near-term 328 -17.0% 16.5 -11.2% 10.3 694 379 809 4 CCP,AMT,Turbo, EPS,ImpAlt Near-term 325 -17.8% 17.4 -12.2% 11.1 325 -10 1350 1 dHCCI,AMT, EPS,ImpAlt Long-term 313 -20.8% 20.2 -15.3% 14.0 1260 945 2053 4 GDI-S,CCP,AMT,ISG, DeAct,EPS,eACC Mid-term 297 -25.0% 24.3 -19.8% 18.1 1904 1589 628 11 CVAeh,GDI-S, AMT,EPS,ImpAlt Mid-term 300 -24.1% 23.5 -18.9% 17.2 1,414 1,099 1016 7 Advanced HEV Long-term 188 -53.0% 51.2 -49.8% 44.9 4204 3889 1676 10 Moderate HEV Long-term 289 -42.0% 26.1 -41.6% 19.9 2300 1985 2266 6 Small truck DVVL,DCP,A6 Near-term 404 -9.0% 9.9 0.0% 0.0 427 0 0 0

DCP,A6 Near-term 379 -14.7% 16.1 -6.3% 6.2 479 52 713 1 DCP,A6,Turbo, EPS,ImpAlt Near-term 371 -16.7% 18.3 -8.4% 8.4 266 -161 1,186 0 DCP,A6,DeAct Near-term 366 -17.7% 19.3 -9.5% 9.4 587 160 928 2 GDI-S,DCP,Turbo, AMT,EPS,ImpAlt Near-term 318 -28.4% 31.1 -21.3% 21.2 350 -77 2,680 0 DeAct,DVVL,CCP, AMT,EPS,ImpAlt Near-term 328 -26.2% 28.7 -18.9% 18.8 671 244 2062 1 DeAct,DVVL,CCP, A6,ISG,EPS,eACC Mid-term 316 -29.0% 31.8 -22.0% 21.9 1,897 1,470 1,214 7 GDI-S,DCP,DeAct, AMT,EPS,ImpAlt Near-term 334 -24.9% 27.3 -17.5% 17.4 841 414 1,720 2 dHCCI,AMT, EPS,ImpAlt Long-term 331 -25.6% 28.1 -18.3% 18.2 896 469 3,117 2 HSDI,AMT, EPS,ImpAlt Long-term 307 -31.0% 34.0 -24.2% 24.1 1,568 1,141 3,069 3 CVAeh,GDI-S, AMT,EPS,ImpAlt Mid-term 309 -30.5% 33.5 -23.6% 23.6 1,169 742 2,147 3 Advanced HEV Long-term 209 -53.0% 57.7 -47.6% 47.8 3375 2948 2960 7 Moderate HEV Long-term 258 -42.0% 29.5 -38.9% 19.6 2071 1644 2785 5 Large truck CCP,A6 Near-term 484 -5.5% 6.9 0.0% 0.0 126 0 0 0

DVVL,CCP,A6 Near-term 442 -13.6% 17.1 -8.6% 10.2 549 423 829 4 DCP,DeAct,A6 Near-term 430 -15.9% 20.0 -11.0% 13.1 845 719 887 6 CCP,DeAct,A6 Near-term 433 -15.4% 19.4 -10.5% 12.5 480 354 1,182 3 DeAct,DVVL,CCP, A6,EHPS,ImpAlt Near-term 418 -18.4% 23.1 -13.6% 16.2 789 663 1,330 4 DeAct,DVVL,CCP, AMT,EHPS,ImpAlt Near-term 396 -22.6% 28.5 -18.1% 21.6 677 551 2,096 3 GDI-L,AMT, EHPS,ImpAlt Long-term 387 -24.4% 30.7 -20.0% 23.8 1,460 1,334 1,589 6 DeAct,DVVL,CCP, A6,ISG,EPS,eACC Mid-term 378 -26.2% 33.0 -21.9% 26.1 1,885 1,759 1,445 7 dHCCI,AMT,ISG, EPS,eACC Long-term 362 -29.3% 36.9 -25.2% 30.0 2705 2,579 1107 10 HSDI,AdvHEV Long-term 244 -52.2% 65.8 -49.5% 58.9 8363 8237 -8 >19 GDI-L,AMT,ISG, EPS,ImpAlt Long-term 354 -30.7% 38.7 -26.7% 31.8 2,537 2,411 1,493 9 CVAeh,GDI-S, AMT,EHPS,ImpAlt Mid-term 381 -25.5% 32.1 -21.2% 25.2 1,621 1,495 3,162 4 CCP,DeAct,GDI-S, AMT,EHPS,ImpAlt Mid-term 416 -18.6% 23.5 -13.9% 16.6 827 701 1,333 4 Advanced HEV Long-term 243 -52.5% 66.7 -49.8% 59.8 5311 5185 2087 11 Moderate HEV Long-term 284 -44.5% 34.4 -41.3% 27.5 2340 2214 3818 5Initial Statement of Reasons

August 6, 2004

99 5.4 Lifetime Cost Of Technologies To Vehicle Owner-Operator

Following the direction of AB 1493 to demonstrate maximum cost-effective GHG reductions that are “economical to an owner or operator of a vehicle, taking into account the full life-cycle costs of a vehicle,” this portion of the assessment provides estimations of the lifetime impact to vehicle operators for the GHG reduction technologies that were described previously. Such a detailed analysis has not been needed for previous California motor vehicle emission standards and regulations to meet federal requirements and is not needed here for that purpose; it is introduced here to satisfy AB 1493.

Applying estimations for the technology costs and assumptions for vehicle use and economic variables, estimations of the lifetime vehicle costs are quantified using a net present value (NPV) framework. This section conducts a NPV analysis on the engine, drivetrain, hybrid-electric, and alternative fuel vehicle technologies that were described in the technology section. The ARB staff is currently investigating ways to integrate the air conditioning cost-effectiveness work presented in the previous section with the engine, drivetrain, and other technologies into this section on lifetime costs. This NPV analysis involves an assessment of an initial consumer cost for the climate change reduction technologies and the potential net lifetime benefits in the future that result from the initial investment. If the sum of net future benefits outweighs the initial technology cost within the lifetime of the technology, the investment in the new technology is cost beneficial. The first year in which the net future benefits exceed the initial cost of the technology is called the break-even, or payback, period. The total initial cost to consumers, including the manufacturing cost plus the 40 percent mark-up for profit, and overhead, is K 0

.

0 0 K NPV

− =

Future vehicle operator benefits and costs due to the new technology are discounted by the discount rate, or time value of money, d, to correct for the difference in the value of money in hand today versus money in the future (based primarily on interest rate and inflation). The NPV of the investment one year from now (in current dollars) is calculated,

1 0 1 ) 1 ( )

1

, ( ) 1

, (
d year

Costs year Benefits NPV NPV + −

+ = 

## ∑ ∑

Or, more generally in any year x ,

x x x d x year Costs x year Benefits NPV NPV ) 1 ( )

, ( )

, (

1 + − + = 

## ∑ ∑

−Initial Statement of Reasons

August 6, 2004

100 Following historical trends, the analysis uses a real discount rate, or time value of money, of 5 percent. These values for the discount rate are based on ten-year averages of automobile interest rate and the general inflation rate.

The costs of the alternative fuels that are considered in this report were taken from the TIAX, LLC alternative fuel vehicle study. For gasoline and diesel fuels, the prices are inflation adjusted from the values in the California Energy Commission (CEC) Integrated Energy Policy Report

(CEC, 2004). For gasoline the price is $1.74 per gallon, and the diesel price is $1.73 per gallon (in 2004 dollars). These values are roughly consistent with the 3-yr historical California fuel prices.

5.4.A Engine, Drivetrain and Hybrid Electric Vehicle Technologies

The GHG reduction technologies evaluated in this report yield reductions in operating cost over the lifetime of the vehicle. The effects of the new engine and drivetrain technology systems are not expected to increase vehicle maintenance costs, with the possible exception of hybrids as explained earlier. Until diesel aftertreatment systems are better defined, it is difficult to predict whether there will be additional maintenance costs for these systems. Staff expects lower leakage rate air conditioning systems should reduce maintenance costs. Due to a lack of comprehensive data, staff assumed no change in air conditioning maintenance costs for the purpose of this analysis. Therefore, the potential savings resulting from the elimination of a service event due to improved containment of the refrigerant is not reflected in the staff analysis.

The costs and lifetime benefits for the technology packages were evaluated over the vehicle lifetime, using the same vehicle use parameters as Section 5.3 . The results are shown in the “lifetime Net Present Value” and “Payback Period” columns in Table 5.3

- 8

. Nearly all of the technologies evaluated provide a positive lifetime net present value, and thus are economical to the owner over the lifecycle of the vehicle.

5.4.B Alternative Fuel Vehicles

ARB staff has estimated the incremental costs of deploying alternative fuel vehicles to reduce GHGs. This analysis compared the life-cycle costs of alternative fuel vehicles to the life-cycle cost of a conventional gasoline vehicle. The analysis is similar to the net present value analysis of engine and drivetrain technologies presented above. For this analysis, however, comprehensive data on how alternative fuel vehicle technologies differ among different vehicle types (e.g. small cars and large trucks) were not available. Therefore, the analysis compared a mid-sized alternative-fueled vehicle produced in volume production to a baseline conventional vehicle. The baseline conventional vehicle represents the California-specific sales weighting of 2009 small and large cars (i.e. trucks, minivans and SUVs are excluded).

ARB staff relied on modeling and cost information presented as part of the TIAX LLC analysis. To estimate fuel costs, staff consulted with the California Energy Commission. For purposes of this comparison, staff has used the CEC’s estimated gasoline price ofInitial Statement of Reasons

August 6, 2004

101 $1.74 per gallon. The analysis includes an evaluation of the incremental retail costs associated with equipping vehicles to operate on alternative fuels and the costs of the alternative fuels for 2009. The analysis does not include transitional costs such as vehicle development, certification or fuel transition infrastructure costs. Projecting fuel cost for 2009 is particularly difficult and can substantially affect the overall net present value. All cost estimates are presented in Table 5.4

- 1 . The analysis uses the same methodology to determine net present value as described in Section 5.4

. The results demonstrate that two alternative fuel technologies can meet the life cycle costs of conventional gasoline vehicles. These include plug-in HEVs with an all-electric range of 20 miles, and LPG. Both alternative fuels are also projected to provide significant climate change emission reductions and can thus provide automakers with additional cost effective compliance pathways in meeting the regulation.

Table 5.4

- 1 . Life Cycle Cost of Alternative Fuel Vehicles

Sources: TIAX, LLC; California Energy Commission, EPRI

5.5 Conclusions

Identified in this analysis are a large number of technologies that reduce GHG emissions. The technologies range from low friction oils to advanced hybrid electric drive trains to alternative fuel vehicles. Many of the technologies, especially those involving the engine valve train and transmission, are used on some cars now, and could be in near universal use in the 2009 timeframe. Other technologies are still undergoing development, and can be expected to be available for widespread use after 2010. These include advanced valve trains and advanced hybrid electric drives.

Logical combinations of these technologies have been modeled to determine the potential to reduce GHG emissions from different size vehicles. The cost of the technology packages has also been determined, as has their impact on operating costs. Reductions in CO 2 -equivalent emissions, compared to emissions of 2009 models in the absence of government regulation, vary widely, from a few percent to over 45 percent. In general the higher percentage reductions involve technologies that may not be widely available in 2009, but are expected to be available sometime after 2010.

Several technologies stood out as providing significant reductions in emissions at favorable costs. These include discrete variable valve lift, dual cam phasing,

Vehicle-fuel systems Distance per fuel usage (miles/fuel unit) Sales-average

fuel usage (fuel unit/mi) fuel unit Fuel cost ($/fuel unit) Cost increment from 2009 baseline Lifetime (16-yr)

Net Present Value (2004$) Payback

period

Conventional vehicles 24.8 0.040 GGE 1.74 0 (0) 0 Compressed natural gas (CNG) 24.8 0.040 GGE 1.50 3300 (1,919) >16 Liquid petroleum gas (LPG) 18.8 0.053 LPG gal 1.12 370 1,161 3 2.96 0.337 kWh 0.074

- - - 59 0.017 GGE 1.74

- - - 4500 3,824 8 Ethanol (E85) 17.6 0.057 e85 gal 1.76 0 (4,203) none Electric 2.86 0.350 kWh 0.074 8800 (2,530) >16 HEV20Initial Statement of Reasons

August 6, 2004

102 turbocharging with engine downsizing, automated manual transmissions, and camless valve actuation. Packages containing these and other technologies such as improved air conditioning compressors provided substantial emission reductions at prices that ranged from a saving to several hundreds of dollars. Nearly all technology combinations modeled provided reductions in lifetime operating costs that exceeded the retail price of the technology.

Two alternative fueled vehicle technologies are also projected to provide positive life cycle cost benefits when compared to conventional vehicles. These include LPG and HEVs with an all-electric range of 20 miles.

.Initial Statement of Reasons

August 6, 2004

103 6 CLIMATE CHANGE EMISSION STANDARDS

Vehicle climate change emissions comprise four main elements, 1) CO 2 , CH 4 and N 2 O emissions resulting directly from operation of the vehicle, 2) CO 2 emissions resulting from operating the air conditioning system (indirect AC emissions), 3) refrigerant emissions from the air conditioning system due to either leakage, losses during recharging, or release from scrappage of the vehicle at end of life (direct AC emissions), and 4) upstream emissions associated with the production of the fuel used by the vehicle. The climate change emission standard incorporates all of these elements.

This section also outlines the staff proposal with respect to credits for early action, and credit for alternative compliance projects.

Staff elected to incorporate the CO 2 equivalent emission standards into the current LEV program along with the other light and medium-duty automotive emission standards. The FTP urban and highway test cycles used as a basis in setting the existing LEV emission standards are also used in setting the climate change emission standards. Accordingly, there would be a CO 2equivalent fleet average emission requirement for the passenger car/light-duty 1 (PC/LDT1) category and another for the light-duty truck 2 (LDT2) category, just as there are fleet average emission requirements for criteria pollutants for both categories of vehicles in the LEV program.

The fleet average requirements in the current LEV program rely on results of FTP urban cycle testing, with the highway test being used to ensure proper control of NOx emissions under all driving conditions. In the more distant past, when emission controls consisted primarily of engine modifications, it was possible to calibrate these controls to be effective in reducing emissions during FTP urban driving while being less effective during highway driving, especially relative to NOx emissions. With the advent of the LEV program, however, where emission control is dominated by effective aftertreatment devices, vehicles capable of passing the FTP test virtually always pass the highway test requirements with considerable margin. Hence the highway test serves more of a “capping” function to ensure that NOx emissions are well-controlled under all driving conditions.

In the case of CO2tailpipe emissions, however, there generally are no aftertreatment devices that can be applied to reduce engine out CO 2emissions, so there is greater reliance on engine modifications to achieve these reductions (in concert with other powertrain and vehicle modifications). Accordingly it is important to ensure that vehicles are achieving maximum reductions under all driving conditions. Therefore, it is necessary to use both the FTP urban and highway cycles in determining the fleet average CO 2equivalent emissions. In order to best reflect real world fleet emissions based on the two test cycles, theInitial Statement of Reasons

August 6, 2004

104 NESCCAF study presented its findings in terms of a combined 55 percent urban/45 percent highway harmonic average. This split represents the national mix of urban and rural driving historically used by government agencies in reports that rely on this statistic. The statistic comes from the US Department of Transportation, Federal Highway Administration. In the absence of more applicable data for California driving, staff has also adopted this apportionment.

6.1 Determination of Maximum Feasible Emission Reduction Standard

For each of the vehicle classes, NESCCAF modeled numerous technology combinations in order to determine the most effective packages for reducing CO 2 emissions. This section outlines how the ARB staff utilized the NESCCAF modeling results to propose emission standards for the two LEV program vehicle classes – passenger cars and light duty trucks with test weights under 3751 lbs loaded vehicle weight (PC/LDT1), and light duty trucks with test weights between 3751 lbs. loaded vehicle weight and 8,500 lbs. gross vehicle weight (GVW) (LDT2). Medium-duty passenger vehicles (MDPVs) between 8,500-10,000 lbs. GVW would be included with manufacturers’ LDT2 vehicles when determining compliance with the climate change emission standards.

Before describing the procedure used to develop the climate change emission standards below, it should be noted that different methodologies must be used when transitioning from an analysis of the potential benefits of the technology packages to setting emission standards based on these packages. First, in section 5 (Maximum Feasible and Cost-Effective Technologies) that describes the technology packages and their emission benefits relative to 2002, the baseline 2002 vehicle emissions include the indirect CO 2emissions resulting from the use of an air conditioning system with a conventional fixed displacement compressor and current controls. The emission benefits listed in section 5 compare, against their respective baseline vehicles, the results from modeling vehicles using the chosen technology packages along with the additional benefits resulting from the use of an air conditioning system incorporating improved controls and a variable displacement compressor, and the CO 2reductions that can be achieved from the use of lower friction tires, early lock-up torque converters, better aerodynamics and other technologies. This methodology is appropriate if the purpose of the analysis is to approximate the reductions that would be realized when the vehicles are operated under real world conditions.

Vehicles demonstrating compliance with the proposed emission standards, however, would not be tested under real world conditions but would be tested on a chassis dynamometer where the air conditioning system is not operated. Therefore, it is appropriate to first establish the emission values that would be measured on a dynamometer for each of the selected technology packages before including the emissions (indirect and direct) resulting from the operation of mobile air conditioning systems. Consequently, the emission values listed in the tables in this section do not reflect the values listed in the tables in section 5.Initial Statement of Reasons

August 6, 2004

105 While NESCCAF was able to predict the penetration of new technologies into the vehicle fleet in the 2009 timeframe using the projections from Martec, thereby enabling the construction of the appropriate baseline vehicles for 2009, staff is unable to translate these baseline vehicles into a representative California fleet for 2009. Individual manufacturer market share and consumer vehicle preferences may change depending on many factors. Accordingly, staff relied on its analysis of the 2002 fleet to determine climate change emission standards for 2009 and beyond.

Currently, minivans are classified as light-duty trucks and fall into the LDT2 category since their test weights are on the order of 4,000 lbs. However, these vehicles are generally based on a passenger car chassis and an examination of the NESCCAF data reveals that their CO 2emissions are more properly aligned with passenger cars than trucks. Given this finding and because minivans constitute a farily small portion of the T2 fleet (about 12 percent), staff concluded that the standards for the T2 category would be more representative by not including them in the regression for setting the category standard.

Determination of the climate change emission standards involves several steps. First, the maximum feasible emission reductions were modeled (NESCCAF 2004) for the five vehicle types with various technology packages (e.g., engine, drivetrain, and air-conditioning systems). These technology packages were thencategorized with respect to their technology readiness (i.e. near-, mid-, or longterm). Second, manufacturer specific data was collected for the California fleet in order to evaluate individual manufacturer product mix. The proposed emission standards for each category were then developed based on the manufacturer with the highest average weight vehicles to ensure all manufacturers can comply with the standards (i.e. not simply according to the average of all the manufacturers).

To summarize the process, the steps taken to derive the climate change emission standards are:

1) Select appropriate technology packages from the NESCCAF study for setting the near and mid-term emission standards. 2) F rom the NESCCAF modeling results, determine average CO 2exhaust emission values for each group of selected technology packages. 3) Adjust these values to reflect the CO 2equivalent reductions achievable from improved mobile air conditioning systems, and include vehicle emissions of CH 4 and N 2 O. 4) Using the resulting CO 2equivalent emission values, derive the regression lines for setting the near and mid term climate change emissions standards. 5) Determine the baseline CO 2 emissions for California 2002 model year light-duty vehicles.Initial Statement of Reasons

August 6, 2004

106 6) Using California baseline data, establish the baseline CO 2emission rates for the PC/LDT1 and LDT2 classes from which the standards will be derived using the manufacturer with the heaviest fleet (this ensures that the proposed reductions are feasible for all manufacturers). 7) Derive the near and mid-term emission standards using the vertical intersection between the baseline emission rates for each vehicle class and the regression lines determined in step 6.

This process is explained in detail below.

6.1.A Selection of Technology Packages for Setting the Near- and MidTerm CO2Equivalent Requirements

As a prelude to setting CO 2equivalent emission standards, staff grouped the various packages into near, mid and long-term applicability based on the projected readiness of the individual technologies for implementation in large volumes in the given timeframes. A brief description of the chosen technology packages is offered here, and a tabular summary of the technologies and their CO 2equivalent emission levels are shown below in Table 6.1

- 2 (for near-term) and Table 6.1

- 3 (for mid-term).

Near-term technologies were considered in assessing technological feasibility in the 2009 to 2012 timeframe. For the 2009 through the 2012 model years (MYs), staff developed the CO2equivalent emission standards based on the two packages in each of the five vehicle classes modeled in the NESCCAF study that yielded the greatest emission reductions. There was no need to further distinguish these packages on the basis of cost since each was relatively low (in fact, two of the packages yielded a cost savings). These packages generally include gasoline direct injection engines in conjunction with either turbocharging or cylinder deactivation, plus an automated manual 6-speed transmission and other technologies.

In assessing feasible reductions for 2013 and on, the mid-term technology package emission levels were utilized. For the 2013 and subsequent model years, staff developed CO 2equivalent emission standards based on the top two or three potentially successful packages that yielded the greatest emission reductions while moderating costs. Selecting several packages provides manufacturers with greater flexibility to match technologies with their particular designs. Incremental costs for these packages ranged from $761 to $1759 as compared to the 2009 baseline. The technology packages generally included either electrohydraulic camless valve actuation in conjunction with gasoline direct injection, or various other engine technologies (e.g., turbochargers, advanced valvetrain systems, gasoline HCCI, cylinder deactivation, etc.) coupled with an integrated starter generator system providing regenerative braking and some launch assist.Initial Statement of Reasons

August 6, 2004

107 6.1.B Inclusion of Mobile Air Conditioning CO 2 Equivalent Emissions in the Standard

Since no test protocol exists at this time to measure HFC emissions, either direct or indirect, these emissions have been included in the emission standards in the form of a credit such that manufacturers making improvements to their air conditioning systems can apply the credit towards their measured exhaust emissions when demonstrating compliance with the standard. Specifically, the emission reductions achievable from improved air conditioning systems have been subtracted from the emission values derived from the NESCCAF modeling of the near term and mid term technology packages used to set the climate change standards

Direct Air Conditioning System Emissions Where a manufacturer demonstrates that their systems employ advanced leak reduction components such as improved seals, connections and hoses, the credit ranges from 3 grams per mile CO 2equivalent emissions for systems using HFC 134a to 8.5 grams per mile CO 2 equivalent emissions for systems using HFC152a. Staff anticipates that manufacturers can readily incorporate low leak air conditioning systems in their vehicles for the near term (2009-2012), and will be converting to HFC 152a systems in the mid term (2013 and beyond). Therefore, staff has increased the stringency of the near term and mid term climate change emission standards accordingly.

Using the best information available at this time, reasonable criteria for crediting a "low-leak air conditioning system" are as follows:

A. All pipe and hose connections must be equipped with multiple orings, seal washers, or metal gaskets only (e.g., no single o-rings); and B. All hoses in contact with the refrigerant must be equipped with anultra-low permeability barrier or veneer hose on both the highpressure and the low-pressure sides of the system (e.g., no rubber hoses); and C. Only multiple-lip compressor shaft seals may be used (with either body o-rings or gaskets).

For a "low-leak air conditioning system" using HFC-134a as the refrigerant, a direct emission credit of 3.0 CO2-equivalent grams per mile will apply. A direct emission credit greater than 3.0 and not to exceed 6.0 CO2-equivalent grams per mile may be applied to an air conditioning system that reduces refrigerant leakage further than would be obtained from the above "low-leak air conditioning system."

Note that for an air conditioning system equipped with HFC-134a as the refrigerant, a direct emission credit of 3 CO2-equivalent grams per mileInitial Statement of Reasons

August 6, 2004

108 corresponds to a 50 percent reduction in leakage emissions (also referred to as "regular" emissions). Further, a direct emission credit of 6.0 CO2-equivalent grams per mile would apply to a system in which the refrigerant and all components exposed to refrigerant are fully sealed. To obtain a credit greater than 3.0 CO2-equivalent grams per mile, the manufacturer would need to provide an engineering evaluation that supports the requested credit.
For air conditioning systems equipped with HFC-134a as the refrigerant, a direct emission credit, if applicable, will range from 3.0 to 6.0 CO2-equivalent grams per mile and will be based solely on reduced refrigerant leakage. However, for systems using a refrigerant having a GWP of 150 or less, the direct emission credit will be larger because, besides factoring in reduced leakage (if applicable), the credit will also take into account emission reductions from the lower global warming potential of the refrigerant.

The direct emissions credit for an air conditioning system equipped with a refrigerant having a GWP of 150 or less will be calculated through the following equation:

Direct Emissions Credit = A - (B x C)

where "A" equals 9 CO2-equivalent grams per mile, which are the lifetimerefrigerant emissions from an air conditioning system containing HFC134a. This value results from the following equation:

A = 85 grams/year * 16 year vehicle * GWP HFC-134a/ 200,000 vehicle miles lifetime refrigerant traveled per emissions lifetime

where B = 9 CO2-equivalent * GWP substitute refrigerant

grams per mile 1300

"B" represents the lifetime refrigerant emissions from an air conditioning system using a refrigerant with a GWP of 150 or less. "B" is obtained by multiplying the lifetime emissions from a system containing HFC-134a (9 CO2-equivalent grams per mile) by the relative GWPs of the substitute refrigerant to that of HFC-134a (GWP = 1300)

where C = 1 - (reduced leakage credit x 0.72) 6

which simplifies into: C = 1 - (0.12 * reduced leakage credit)

"C" is an adjustment factor that incorporates the benefit from improved leak tightness.Initial Statement of Reasons

August 6, 2004

109 For systems that do not obtain credit for low-leakage, C = 1

The "reduced leakage credit" ranges from 3 to 6 grams CO2-equivalent grams per mile

"0.72" is the fraction of lifetime refrigerant emissions attributed to leakage ("regular") emissions (refer to Section 5.2.B.2 of this report)

"6" is the "reduced leakage credit" that would apply to a fully contained refrigerant system.

Indirect Air Conditioning System Emissions Indirect HFC emissions from conventional fixed displacement compressors and variable displacement compressors with external controls were modeled in the NESCCAF study. The study demonstrated that using variable displacement compressors in conjunction with other system improvements can significantly reduce the exhaust CO 2emissions associated with air conditioning use. Therefore, manufacturers incorporating improved air conditioning systems using variable displacement compressors and other features can apply a credit towards the measured exhaust emissions when demonstrating compliance with the emission standard. One comment staff received at its workshop indicated that fixed displacement compressors with improved thermal control can also reduce the indirect emissions associated with air conditioning operation. Manufacturers using improved air conditioning systems with fixed displacement compressors that can demonstrate CO 2reductions can also apply some portion of the credit towards meeting the CO 2equivalent emission standard. Staff believes that these advanced systems can be readily incorporated in vehicles in the near-term and has, therefore, increased the stringency of the climate change emission standards accordingly. The reductions of indirect air conditioning CO 2 emissions from improved air conditioning systems range from 7.1 grams CO 2per mile for small cars up to 10 grams CO2per mile for light trucks. Manufacturers that choose to incorporate other advanced climate change technologies to achieve the standards may of course forego improvements to their air conditioning systems if they so choose.

The CO

2equivalent emission values for indirect air conditioning system emissions from the NESCCAF study and direct CO 2 equivalent emissions from Table 5.2

- 11 used to adjust the chosen technology packages are listed in Table 6.1

- 1

.Initial Statement of Reasons

August 6, 2004

110 Table 6.1

- 1 . Improved Air Conditioning System CO 2 Equivalent Emission Reductions

Direct CO 2 Equivalent Emission Reduction (g/mi) Total A/C System Reduction 4

(g/mi) Indirect CO

2 Equivalent Reduction from Advanced AC VDC system 1 (g/mi) Near-term 2 Mid-term 3 Near-term Mid-term
Small car 7.1 3 8.5 10.1 15.6 Large car 8.1 3 8.5 11.1 16.6
Minivan 10.0 3 8.5 13.0 18.5 Small truck 10.0 3 8.5 13.0 18.5 Large truck 10.0 3 8.5 13.0 18.5
1 improved efficiency air conditioning VDC or FDC system. 2 improved low leak HFC 134a system. 3 improved low-leak HFC 152a. 4 sum of direct and indirect emission reduction credits.
As noted above, the air conditioning system credits were subtracted from the modeled gram-per-mile CO 2levels for each of the different technology packages. The resulting CO 2equivalent gram per mile values including CH 4and N 2 O are shown in Table 6.1

- 2 and Table 6.1

- 3 for the near- and mid-term, respectively. The average CO 2 gram-per-mile values of the selected technology packages were then used to determine the maximum feasible CO 2 equivalent reduction for each of the two LEV II vehicle classes.

Table 6.1

- 2 . Maximum Feasible Near-Term CO 2 Reduction Levels

Vehicle Class Combined Technology Packages Test CO2 , without A/C (g/mi) Test CO2

equivalent with A/C credit (g/mi) Maximum feasible

reduction tested
CO2 equivalent with A/C credit for vehicle class (g/mi)

DVVL,DCP, AMT,EPS,ImpAlt 229 219 Small car GDI-S,DCP,Turbo, AMT,EPS,ImpAlt 210 200 209

GDI-S,DeAct,DCP, AMT,EPS,ImpAlt 259 248 Large car GDI-S,DCP,Turbo, AMT,EPS,ImpAlt 245 234 241

CVVL,CCP,AMT, EPS,ImpAlt 299 287 Minivan GDI-S,DCP,Turbo, AMT,EPS,ImpAlt 290 279 283

DeAct,DVVL,CCP, AMT,EPS,ImpAlt 321 308 Small truck GDI-S,DCP,Turbo, AMT,EPS,ImpAlt 311 298 303

DeAct,DVVL,CCP, A6,EHPS,ImpAlt 410 398 Large truck DeAct,DVVL,CCP, AMT,EHPS,ImpAlt 389 376 387Initial Statement of Reasons

August 6, 2004

111 Table 6.1

- 3 . Maximum Feasible Mid-Term CO 2 Reduction Levels

Vehicle Class Combined Technology Packages Test CO2 , without A/C (g/mi) Test CO2

equivalent with A/C credit (g/mi) Maximum feasible

reduction tested CO2 equivalent with A/C credit for vehicle class (g/mi) CVVL,DCP,AMT, ISG-SS,EPS,ImpAlt 212 196 Small car gHCCI,DVVL,ICP, AMT,ISG,EPS,eACC 200 184 190

CVAeh,GDI-S, AMT,EPS,ImpAlt 236 220 gHCCI,DVVL,ICP, AMT,ISG,EPS,eACC 226 209 Large car
GDI-S,Turbo,DCP, A6,ISG,EPS,eACC 218 202 210

CVAeh,GDI-S, AMT,EPS,ImpAlt 282 266 Minivan GDI-S,CCP,AMT,ISG, DeAct,EPS,eACC 280 263 265

DeAct,DVVL,CCP, A6,ISG,EPS,eACC 309 290 CVAeh,GDI-S, AMT,EPS,ImpAlt 302 283 Small truck HSDI,AMT, EPS,ImpAlt 298 280 284

CVAeh,GDI-S, AMT,EHPS,ImpAlt 374 355 Large truck DeAct,DVVL,CCP, A6,ISG,EPS,eACC 370 352 354

6.1.C Light-Duty Vehicle Fleet Baseline

Characterizing California light-duty vehicle fleet baseline CO 2 emissions and vehicle weights by manufacturer is necessary in determination of feasibility of the standard for each manufacturer. That is, the maximum feasible standard must be set relative to the manufacturer with the highest average baseline emissions and/or average vehicle test weights.

The 2002 model year baseline is derived from California Department of Motor Vehicles records for registered 2002 model year vehicles adjusted to include the CO 2equivalent emissions of CH 4 and N 2 O. Table 6.1

- 4 shows sales-averaged CO 2data, and sales-averaged test weight data for the six major light-duty vehicle manufacturers. Because the form of the climate change emission standard is structured similar to the LEV standard, the baseline for the California fleet is segmented into two light-duty classes (PC/LDT1 and LDT2) for each manufacturer. Smaller auto companies were grouped with their parent companies where applicable.Initial Statement of Reasons

August 6, 2004

112 Table 6.1

- 4 . 2002 Baseline CO 2 Equivalent Emissions and Test Weight by Manufacturer

Percent of vehicles for each auto (2002) Sales-averaged test weight (lb) Sales-averaged CO 2 (g/mi) Company 1

PC/LDT1 LDT2 PC/LDT1 LDT2 PC/LDT1 LDT2 Daimler Chrysler 45% 55% 3,644 4,729 346 451
Ford 44% 56% 3,569 4,909 334 445
General Motors 41% 59% 3,470 5,113 318 459
Honda 82% 18% 3,248 4,544 282 379
Nissan 61% 39% 3,369 4,393 305 447 Toyota 59% 41% 3,462 4,555 301 422 Average (6 major auto companies) 53% 47% 3457 4833 312 443

1 The following models are included within each larger company name: Daimler Chrysler – Dodge, Chrysler, Mercedes, Jeep; Ford – Ford, Lincoln, Mercury, Jaguar, Rover, Mazda; General Motors – Chevrolet, Pontiac, Buick, GMC, Cadillac, Geo, Saturn; Honda – Honda, Acura; Nissan – Nissan, Infiniti; Toyota – Toyota, Lexus
Manufacturer data for sales-weighted averages of CO 2emissions and test weight (from Table 6.1

- 4 ) are plotted along with the maximum feasible reduction CO 2 equivalent levels (from Table 6.1

- 2 and Table 6.1

- 3 ) in Figure 6

- 1 for the PC/LDT1 category and in Figure 6

- 2 for the LDT2 category. In these figures, the labeled points represent each manufacturer’s average CO 2emission level and test weight. The maximum feasible reduction levels are shown in the diagonal lines: solid black for the near-term, and dotted gray for the mid-term. The regression lines are based on the small and large car maximum feasible reduction CO

2 -equivalent values in Table 6.1

- 2 and Table 6.1

- 3 for the PC/LDT1 category, and the small and large truck CO 2 -equivalent values for the LDT2 category.
Setting the maximum feasible reduction level for each category that is feasible for all manufacturers according to their baseline fleet would call for setting the standard to the rightmost (i.e. heaviest) manufacturer point in each of the figures. Noting that the technology assessment indicated that for a given weight (within given vehicle classes) a certain gram-per-mile CO 2is technically feasible, for the PC/LDT1 category this would entail drawing a line straight down from the Daimler Chrysler point in Figure 6

- 1 until it intersects the black “near-term” line. That point, 242 grams of CO 2 equivalent per mile would be the near-term standard. Similarly, this would make 211 grams CO 2equivalent per mile the mid-term standard.Initial Statement of Reasons

August 6, 2004

113 Figure 6

- 1 . Manufacturer Baseline CO 2 and Maximum Feasible Regression Lines for PC/LDT1 Vehicle Category

However, because trading between the two categories would be allowed for each manufacturer, the CO 2equivalent standard for both the PC/LDT1 and the LDT2 categories need not be set according to the rightmost, heaviest manufacturer in both of the categories. Trading offers flexibility for each manufacturer to overcomply with one category’s standard and trade those credits to compensate for a debit, or under-compliance, within the other category. Because of trading, each category’s standard can be set using the same manufacturer, achieving greater total CO2equivalent emission reductions while still maintaining technical feasibility for all manufacturers. In this case, the maximum total emission reduction results from setting both standards according to the General Motors CO 2and test weight points of Figure 6

- 1 and Figure 6

- 2 . General Motors was chosen to set the standard because it is the manufacturer with the heaviest overall average vehicle weight. Graphically this is shown by the vertical gray dotted lines running down from the “GM” point in those figures. This equates to a PC/LDT1 standards of 233 g/mi CO2 equivalent in the near-term and 205 g/mi CO 2 equivalent in the mid-term. The LDT2 standards are 361 g/mi in the nearterm and 332 g/mi in the mid-term. DC Ford

GM

Honda Nissan

Toyota

150 180 210 240 270 300 330 360 390 420

2750 3000 3250 3500 3750 4000 Test Weight ( lb)CO2 Equivalent (g/mi) near-term PC/LDT1 standard regression mid-term PC/LDT1 standard regression Near-term PC/LDT1 standard Mid-term PC/LDT1 standardInitial Statement of Reasons

August 6, 2004

114 Figure 6

- 2

. Manufacturer Baseline CO 2 and Maximum Feasible Regression Lines for LDT2 Vehicle Category

The proposed near-term and mid-term standards are to be phased-in by 20 percent, 40 percent, 70 percent and 100 percent over four-year time periods. For the near-term, this entails phasing in the standard from MY 2009 through MY 2012. For example, in MY 2009, the standard is 20 percent of the way from the highest 2002 baseline CO 2 level for any of the major manufacturers (323 g/mi CO 2equivalent/mi for PC/LDT1, 439 g/mi CO 2equivalent/mi for LDT2) to the near-term standard. Similarly, for MY 2010 the standard is 40 percent of the way from the highest 2002 baseline CO 2 level to the near-term standard. The 2012 CO 2equivalent standard emission levels then are set to the near-term standards shown above in Figure 6

- 1 and Figure 6

- 2

.The mid-term standards are phased-in from MY 2013 through 2016. The phasein from the 2013 near-term standards to the 2016 mid-term standards is set with interim 20 percent, 40 percent, and 70 percent steps in MY 2013, 2014, and 2015, respectively. A tabular summary of the proposed climate change emission standards is presented in Table 6.1

- 5

. DC Ford GM

Honda Nissan

Toyota

250 280 310 340 370 400 430 460 490 520 550

4000 4250 4500 4750 5000 5250 5500 Test Weight (lb)CO2 Equivalent (g/mi) near-term LDT2 standard regression mid-term LDT2 standard regression Near-term LDT2 standard Mid-term LDT2 standardInitial Statement of Reasons

August 6, 2004

115 Table 6.1

- 5 . CO 2 Equivalent Emission Standards for Model Years 2009 through 2016

CO 2 -equivalent emission standard by vehicle category

(g/mi) Tier Phase-in Year

PC/LDT1 LDT2

20% 2009 323 439 40% 2010 301 420 70% 2011 267 390 Near-term

100% 2012 233 361

20% 2013 227 355 40% 2014 222 350 70% 2015 213 341 Mid-term

100% 2016 205 332

6.2 Determination of Effect of Standard on the Fleet

Since each manufacturer starts at a different baseline CO 2emission level, each manufacturer will have a different percentage of vehicles that must be improved to comply with the regulation, and different resulting average costs. This section provides an estimation of the percent of vehicles that will need to be improved during the near- and mid-term phase-in periods in order to comply with the proposed climate change emission standards. It is assumed here that all of the major six manufacturers will be in compliance with the standard at all phases. Also, it is assumed that the use of the major six manufacturers offers a representative picture of the entire vehicle fleet for these emission reduction and control cost calculations.

6.2.A Emission Reduction by Model Year

The manufacturer average CO 2equivalent levels, resulting from compliance with the standard, are shown in Table 6.2

- 1 . Because for the 2009 and 2010 model year phase-in some of the manufacturers’ fleets are already in compliance (i.e., below the proposed standards), their CO 2 levels are assumed to remain the same as the 2002 baseline. For example, the average Honda CO 2 emission value is unchanged during 2009 and 2010 because its baseline emission values are already below each of those years’ standards. The last column, “All major 6,” in the following tables shows the sales-weighted averages based on 2002 California vehicle sales by the six major manufacturers.Initial Statement of Reasons

August 6, 2004

116 Table 6.2

- 1 . Average CO 2 Equivalent Emissions (g/mi) by Vehicle Model Year

Year DC Ford GM Honda Nissan Toyota All major 6

PC/LDT1 323 323 318 282 305 301 307 2009 LDT2 439 439 439 379 439 422 433

PC/LDT1 301 301 301 282 301 301 297 2010 LDT2 420 420 420 379 420 420 418

PC/LDT1 267 267 267 267 267 267 267 2011 LDT2 390 390 390 379 390 390 390

PC/LDT1 233 233 233 233 233 233 233 2012 Near-term

phase-in

LDT2 361 361 361 361 361 361 361

PC/LDT1 227 227 227 227 227 227 227 2013 LDT2 355 355 355 355 355 355 355

PC/LDT1 222 222 222 222 222 222 222 2014 LDT2 350 350 350 350 350 350 350

PC/LDT1 213 213 213 213 213 213 213 2015 LDT2 341 341 341 341 341 341 341

PC/LDT1 205 205 205 205 205 205 205 2016 Mid-term

phase-in

LDT2 332 332 332 332 332 332 332

Table 6.2

- 2 tabulates the percent reduction from 2002 model year baseline emission values that each manufacturer must achieve to become compliant with the proposed emission standards.

Table 6.2

- 2 . Average Percent CO 2 Emission Change by Vehicle Model Year

Year DC Ford GM Honda Nissan Toyota All major 6

PC/LDT1 -7% -3% 0% 0% 0% 0% -1.3% 2009 LDT2 -3% -1% -4% 0% -2% 0% -2.1%

PC/LDT1 -13% -10% -5% 0% -1% 0% -4.4% 2010 LDT2 -7% -6% -9% 0% -6% -1% -5.5%

PC/LDT1 -23% -20% -16% -5% -12% -11% -14.0% 2011 LDT2 -13% -12% -15% 0% -13% -8% -11.8%

PC/LDT1 -33% -30% -27% -17% -24% -23% -24.9% 2012 Near-term

phase-in

LDT2 -20% -19% -21% -5% -19% -14% -18.3%

PC/LDT1 -34% -32% -28% -19% -25% -25% -26.7% 2013 LDT2 -21% -20% -23% -6% -21% -16% -19.6%

PC/LDT1 -36% -34% -30% -21% -27% -26% -28.5% 2014 LDT2 -22% -21% -24% -8% -22% -17% -20.9%

PC/LDT1 -38% -36% -33% -24% -30% -29% -31.2% 2015 LDT2 -24% -23% -26% -10% -24% -19% -22.9%

PC/LDT1 -41% -39% -35% -27% -33% -32% -33.9% 2016 Mid-term

phase-in

LDT2 -26% -25% -28% -12% -26% -21% -24.8%

6.2.B Percent of Vehicles Controlled by Model Year

In order achieve the CO 2 -equivalent emission reduction levels shown in Table 6.2

- 2 , each manufacturer will need to deploy technology packages in their new vehicle fleet for years 2009 through 2016. To estimate the impact on manufacturers, it is assumed that the maximum feasible “near-term” technologies will first be used only on those vehicles necessary to comply with the proposedInitial Statement of Reasons

August 6, 2004

117 emission standards. The following scenarios assume that manufacturers will apply the lowest cost approaches to complying with the proposed emission standards. Daimler Chrysler, for example, with the highest PC/LDT1 2002 baseline CO

2value, would need to install the near-term technology package on 20 percent, 40 percent, 70 percent, and 100 percent of PC/LDT1 vehicles from 2009 to 2012. Since some manufacturers’ baseline values are closer to the 2012 standard, fewer of their vehicles would need to employ the same technology packages in order to be compliant. The baseline CO 2value of Honda, for example, is closer to the PC/LDT1 standard for 2012 and, therefore, Honda would need to utilize the “near-term” technology packages on only 53 percent of its PC/LDT1 vehicles to become compliant by 2012. (Of course, Honda could also choose to apply less technology to more of its vehicles). The estimated percentages of each manufacturers’ vehicles equipped with near-term technology packages are shown in Table 6.2

- 3

. For the mid-term 2013-2016 phase-in, some manufacturers could not achieve the emission standards using only the “near-term” technology packages. Once a manufacturer’s entire fleet has the near-term technology package installed and further reductions are needed, the mid-term technology packages are utilized to the extent necessary to comply with the 2013-2016 standards. Table 6.2

- 4 shows the projected use of mid-term technology packages. Table 6.2

- 5 sums the values of Table 6.2

- 3 and Table 6.2

- 4 to show the total number of vehicles that have some CO 2 -reduction control technology.

Table 6.2

- 3 . Percent of Vehicles Equipped with Near-Term Technology Package by Vehicle Model Year

Year DC Ford GM Honda Nissan Toyota All major 6

PC/LDT1 20% 9% 0% 0% 0% 0% 4% 2009 LDT2 12% 6% 20% 0% 8% 0% 10%

PC/LDT1 40% 30% 16% 0% 4% 1% 14% 2010 LDT2 32% 27% 40% 0% 29% 3% 26%

PC/LDT1 70% 61% 49% 16% 38% 35% 51% 2011 LDT2 63% 58% 70% 0% 60% 35% 55%

PC/LDT1 100% 92% 81% 53% 72% 69% 76% 2012 Near-term

phase-in

LDT2 94% 88% 100% 22% 91% 68% 86%

PC/LDT1 80% 98% 87% 59% 78% 75% 79% 2013 LDT2 99% 95% 80% 30% 97% 74% 84%

PC/LDT1 60% 89% 92% 65% 84% 81% 79% 2014 LDT2 81% 98% 60% 37% 91% 81% 77%

PC/LDT1 30% 58% 99% 74% 92% 89% 75% 2015 LDT2 51% 67% 30% 47% 61% 90% 56%

PC/LDT1 0% 27% 66% 83% 98% 98% 65% 2016 Mid-term

phase-in

LDT2 20% 36% 0% 58% 30% 100% 36%Initial Statement of Reasons

August 6, 2004

118 Table 6.2

- 4 . Percent of Vehicles Equipped with Mid-Term Technology Package by Vehicle Model Year

Year DC Ford GM Honda Nissan Toyota All major 6

PC/LDT1 0% 0% 0% 0% 0% 0% 0% 2009 LDT2 0% 0% 0% 0% 0% 0% 0%

PC/LDT1 0% 0% 0% 0% 0% 0% 0% 2010 LDT2 0% 0% 0% 0% 0% 0% 0%

PC/LDT1 0% 0% 0% 0% 0% 0% 0% 2011 LDT2 0% 0% 0% 0% 0% 0% 0%

PC/LDT1 0% 0% 0% 0% 0% 0% 0% 2012 Near-term

phase-in

LDT2 0% 0% 0% 0% 0% 0% 0%

PC/LDT1 20% 0% 0% 0% 0% 0% 2% 2013 LDT2 0% 0% 20% 0% 0% 0% 6%

PC/LDT1 40% 11% 0% 0% 0% 0% 7% 2014 LDT2 19% 2% 40% 0% 9% 0% 16%

PC/LDT1 70% 42% 1% 0% 0% 0% 16% 2015 LDT2 49% 33% 70% 0% 39% 0% 39%

PC/LDT1 100% 73% 34% 0% 2% 0% 32% 2016 Mid-term

phase-in

LDT2 80% 64% 100% 0% 70% 0% 62%

Table 6.2

- 5 . Total Percent of Vehicles Equipped with Near- and Mid-Term Technology Packages by Vehicle Model Year

Year DC Ford GM Honda Nissan Toyota All major 6

PC/LDT1 20% 9% 0% 0% 0% 0% 4% 2009 LDT2 12% 6% 20% 0% 8% 0% 10%

PC/LDT1 40% 30% 16% 0% 4% 1% 14% 2010 LDT2 32% 27% 40% 0% 29% 3% 26%

PC/LDT1 70% 61% 49% 16% 38% 35% 51% 2011 LDT2 63% 58% 70% 0% 60% 35% 55%

PC/LDT1 100% 92% 81% 53% 72% 69% 76% 2012 Near-term

phase-in

LDT2 94% 88% 100% 22% 91% 68% 86%

PC/LDT1 100% 98% 87% 59% 78% 75% 81% 2013 LDT2 99% 95% 100% 30% 97% 74% 90%

PC/LDT1 100% 100% 92% 65% 84% 81% 86% 2014 LDT2 100% 100% 100% 37% 100% 81% 93%

PC/LDT1 100% 100% 100% 74% 92% 89% 92% 2015 LDT2 100% 100% 100% 47% 100% 90% 96%

PC/LDT1 100% 100% 100% 83% 100% 98% 96% 2016 Mid-term

phase-in

LDT2 100% 100% 100% 58% 100% 100% 98%

6.2.C Cost of Control by Model Year

To translate the percent of vehicle fleet utilizing the near- and mid- term technology packages (from Table 6.2

- 3 and Table 6.2

- 4 ) into average cost-ofcompliance estimations, the costs associated with the maximum feasible CO 2 reduction technologies are applied. These costs, directly associated with the technology packages of Table 6.1

- 2 and Table 6.1

- 3 above, are shown below in Table 6.2

- 6 and Table 6.2

- 7 . The costs are shown as the incremental cost with respect to the 2009 baseline vehicle cost within each of the five vehicle classes. The costs are then aggregated into a sales-averaged cost for each of the twoInitial Statement of Reasons

August 6, 2004

119 vehicle categories, PC/LDT1 and LDT2, according to the estimated percentage of the 2002 California fleet that each vehicle class represents. The average costof control for maximum feasible climate change emission reductions for nearterm technology packages on a vehicle in the PC/LDT1 category is estimated tobe $382. The average cost of control for maximum feasible reductions for nearterm technology packages on a vehicle in the LDT2 category is estimated to be $358. These costs do not include any operating cost savings, which staff has determined to be more than sufficient to offset the upfront incremental cost.

Table 6.2

- 6 . Technology Cost for Maximum Feasible Near-Term CO 2 Reduction by Vehicle Category

Category Vehicle

Class Combined Technology Packages Cost incremental from 2009 baseline (2004$) Average

cost incremental from 2009 baseline (2004$) Estimated

percentage of CA 2002 fleet Average

cost for near-term control technology for vehicle category ($) DVVL,DCP, AMT,EPS,ImpAlt 149 Small car GDI-S,DCP,Turbo, AMT,EPS,ImpAlt 812 481 34%

GDI-S,DeAct,DCP, AMT,EPS,ImpAlt 504 PC/LDT1 Large car GDI-S,DCP,Turbo, AMT,EPS,ImpAlt -65 219 20% 382

CVVL,CCP,AMT, EPS,ImpAlt 696 Minivan GDI-S,DCP,Turbo, AMT,EPS,ImpAlt 572 634 9%

DeAct,DVVL,CCP, AMT,EPS,ImpAlt 244 Small truck GDI-S,DCP,Turbo, AMT,EPS,ImpAlt -77 84 22%

DeAct,DVVL,CCP, A6,EHPS,ImpAlt 663 LDT2

Large

truck DeAct,DVVL,CCP,

AMT,EHPS,ImpAlt 551 607 15% 358

Similar calculations were performed for the maximum feasible emission reductions for mid-term technology packages. The average cost of control to achieve the maximum feasible reduction for a vehicle in the PC/LDT1 category is estimated to be $1,204. The average cost of control to achieve the maximum feasible reduction for vehicles in the LDT2 category is estimated to be $1,326. Again, these costs do not include operating cost savings.Initial Statement of Reasons

August 6, 2004

120 Table 6.2

- 7 . Technology Package Cost for Maximum Feasible Mid-Term CO 2 Reduction by Vehicle Category

Category Vehicle

Class Combined Technology Packages Cost incremental from 2009 baseline (2004$) Average

cost incremental from 2009 baseline (2004$).) Estimated

percentage of CA 2002 fleet Average

cost for mid-term control technology for vehicle category ($) CVVL,DCP,AMT, ISG-SS,EPS,ImpAlt 1,071 Small car gHCCI,DVVL,ICP, AMT,ISG,EPS,eACC 1,459 1,265 34%

CVAeh,GDI-S, AMT,EPS,ImpAlt 761 gHCCI,DVVL,ICP, AMT,ISG,EPS,eACC 1,575 PC/LDT2 Large car GDI-S,Turbo,DCP, A6,ISG,EPS,eACC 975 1104 20% 1204

CVAeh,GDI-S, AMT,EPS,ImpAlt 1,099 Minivan GDI-S,CCP,AMT,ISG,

DeAct,EPS,eACC 1,589 1,344 9%

DeAct,DVVL,CCP, A6,ISG,EPS,eACC 1,470 CVAeh,GDI-S, AMT,EPS,ImpAlt 742 Small truck HSDI,AMT, EPS,ImpAlt 1,141 1118 22%

CVAeh,GDI-S, AMT,EHPS,ImpAlt 1,495 LDT2

Large

truck DeAct,DVVL,CCP, A6,ISG,EPS,eACC 1,759 1,627 15% 1326

Multiplying the cost-of-control estimations ( Table 6.2

- 6 and Table 6.2

- 7 ) with the corresponding percentages of the each manufacturer’s fleet that has these packages installed to achieve compliance ( Table 6.2

- 3 and Table 6.2

- 4 ) results in the average cost increase per vehicle manufacturer per model year under the proposed climate change regulation. These average costs per vehicle for each manufacturer for each model year are shown in Table 6.2

- 8 . The final column “All major 6” shows the estimated cost increase averaged across all vehicle sales of the six manufacturers.

Table 6.2

- 8 . Average Cost of Control by Vehicle Model Year ($)

Year DC Ford GM Honda Nissan Toyota All major 6

PC/LDT1 76 36 0 0 0 0 16 2009 LDT2 43 21 72 0 30 0 36

PC/LDT1 153 115 61 0 16 2 52 2010 LDT2 116 95 143 0 104 10 93

PC/LDT1 267 234 186 61 146 134 194 2011 LDT2 226 206 251 0 214 127 199

PC/LDT1 382 353 311 202 276 265 292 2012 Near-term

phase-in

LDT2 335 317 358 80 324 244 308

PC/LDT1 547 373 332 225 298 287 330 2013 LDT2 357 339 552 106 346 266 382

PC/LDT1 711 470 352 248 319 309 383 2014 LDT2 539 377 745 131 442 289 491

PC/LDT1 958 726 394 283 351 341 483 2015 LDT2 834 676 1036 169 740 324 723

PC/LDT1 1204 982 663 318 395 374 626 2016 Mid-term

phase-in

LDT2 1129 975 1326 208 1038 358 955Initial Statement of Reasons

August 6, 2004

121 6.3 Compliance with the Emission Standards

The proposed climate change emission standards incorporate the three elements listed above. Therefore, to demonstrate compliance with these standards, manufacturers will need to report the CO 2 equivalent emission values of their vehicles over the combined driving cycle. The structure of the standard can be expressed as follows:

Vehicle GHG emissions (gm/mi) = CO 2 (exh) + N 2 O (exh) + CH 4 (exh) - MAC (dir) - MAC (indir)

Where: CO 2 (exh) = CO2exhaust emissions in grams per mile measured over the

applicable test cycle. N 2 O (exh) = N 2 O exhaust emissions in grams per mile measured over the

applicable test cycle expressed as CO 2 equivalent (N 2 O emissions times 296). CH 4 (exh) = CH 4exhaust emissions in grams per mile measured over the

applicable test cycle expressed as CO 2 equivalent (CH 4 emissions times 23) MAC (dir) = Allowance in grams per mile CO2equivalent for low leak A/C

system if applicable. MAC (indir) = Allowance in grams per mile CO2equivalent for improved A/C

system if applicable.

The gram per mile CO2 equivalent values for HFC (dir) for the PC/LDT1 and LDT2 classes are listed above in Table 6.1

- 1 . These values are 3 grams per mile for the near term standard and 8.5 grams per mile for the mid term standard.

As mentioned above, the CO2equivalent reductions of A/C indirect emissions from improved systems were derived from the NESCCAF study. In the NESCCAF study, a factor was established for the exhaust CO 2emission reductions determined by modeling the use of variable displacement compressors per 100cc displacement. The factor was then adjusted depending on the size of compressors in general use for each of the five vehicle categories. For example, the small car category was assumed to use a compressor with a 150cc displacement. Therefore, the calculated value was adjusted upward by a factor of 1.5. Staff is proposing that when certifying to the climate change emission standards, manufacturers use the factor derived from the NESCCAF study (adjusted for California A/C use) and adjust it according to the size of the A/C compressor used in their vehicles. In grams per mile CO 2 per 100cc of compressor displacement, the factor is equal to 5 for the combined UDDS cycle and highway cycle.

Regarding emissions of N 2 O and CH 4 , preliminary emission rates for these gases are contained in the technical support document. Staff is proposing that manufacturers use these emission rates when demonstrating compliance, ratherInitial Statement of Reasons

August 6, 2004

122 than measuring them when testing their vehicles. Manufacturers can retain the option to measure these gases if they believe that their vehicles emit at lower emission rates or they have incorporated technologies to reduce N 2 O and/or CH 4 emissions.

Similar to the LEV II requirements, when complying with the climate change requirements, manufacturers must separately calculate the average fleet emissions for their PC/LDT1 and LDT2 classes to determine compliance with the standards. Also, similar to the LEV II non-methane organic gas fleet average requirement, debits in one vehicle class may be offset by credits earned in the other. In addition, overall debits occurring during the phase-in periods for both the near and mid-term standards need not be offset prior to one year after the applicable phase-in period has ended. Similarly, credits will be discounted by 50 percent the second year after accrual, another 50 percent the third year after accrual, and fully discounted in the fourth year.

Small Volume, Independent Low Volume, and Intermediate Volume manufacturers would not be required to comply with the climate change requirements until the final year of the phase-in, that is in 2016. Based on the requirements of AB 1493, staff interpreted the language to require that these low volume manufacturer offerings need to be preserved in the marketplace to ensure continued consumer choice of specialty vehicles. Given their more limited resources to make major revisions to their powertrains, it was also important to provide such manufacturers with greater lead time to make improvements to their products. In addition, staff needed to consider that major volume manufacturers could produce specialty offerings in direct competition with these smaller manufacturer offerings, but offset their potentially poorer GHG emission performance by making other easier to control cars in their fleet incrementally cleaner. These small volume manufacturer offerings also tend to be high performance vehicles.

Given these constraints, staff decided to require these smaller manufacturers to meet the average CO 2equivalent emissions of all 2012 comparable vehicles produced by the major vehicle manufacturers, beginning in 2016. In determining the group of comparable vehicles, staff would consider principally weight and horsepower to weight ratio in determining a comparable vehicle. A specialty low volume vehicle that utilizes a powertrain (at least the engine, transmission and related controls) from a major manufacturer from the same model year would be considered compliant with the GHG emission standards if it adopted the package without modifications. Should a comparable vehicle not be available from a large manufacturer, the small volume manufacturer would be required to meet the 2012 emission standard for large volume manufacturers in 2016 and beyond.Initial Statement of Reasons

August 6, 2004

123 6.3.A Aggregation Provisions for Small Volume Manufacturers

The LEV II program currently allows small volume manufacturers to meet less stringent requirements than those applicable to larger manufacturers in recognition that small volume manufacturers have fewer resources and product line flexibility to meet these requirements.

The areas in which a small volume manufacturer receives special treatment include: (1) the application of the fleet average non-methane organic gas (NMOG) requirements; (2) the phase-in requirements for the LEV II exhaust and evaporative emission standard; (3) the optional durability demonstration requirement for small volume manufacturers in the certification test procedures; and (3) the optional in-use verification testing requirement for small volumemanufacturers. Small volume manufacturers are also not subject to zeroemission vehicle (ZEV) requirements.

Currently if 10 percent or more of a small volume manufacturer is owned by a larger manufacturer, that small volume manufacturer is not eligible to use the optional durability demonstration requirements or in-use verification testing requirements. Rather, the larger manufacturer assumes responsibility for compliance by the small volume manufacturer. Aggregation provisions do not apply for the purpose of applying small volume manufacturer fleet average requirements and phase-in requirements because of an error of omission by ARB during the 1998 LEV II rulemaking.

Staff is currently proposing that the 10 percent aggregation criteria apply for the purpose of determining a small volume manufacturer’s obligations under this GHG rulemaking. Because the GHG requirements do not begin until the 2009 model year, the definition of a small volume manufacturer in title 13, CCR section 1900 has been changed to include a 10 percent aggregation provision that begins with the 2009 model year. This change will also apply for the purpose of determining compliance with the LEV II fleet average NMOG requirements beginning with the 2009 model year. Including a 10 percent aggregation criteria in California’s definition of a small volume manufacturer will provide consistency with California’s definition of an Independent Low Volume Manufacturer, which contains this criteria and it will harmonize California’s treatment of small volume manufacturers with that of the U.S. Environmental Protection Agency. Finally, adopting aggregation criteria for small volume manufacturers should not cause undue hardship for manufacturers because of the long lead time involved. (This change will not affect the phase-in requirements for the LEV II exhaust and evaporative emission standard, which will be fully phased-in in the 2007 model year.)Initial Statement of Reasons

August 6, 2004

124 6.3.B Test Groups

Similar to LEV II, certification to the GHG requirements will be determined by demonstrating compliance using GHG vehicle test groups. In LEV II, test groups can include several vehicle models with different engine displacements and inertia weights. Since the vehicle model within the test group with the “worst case” emissions is selected to represent the test group emissions, compliance with the emission standards is assured for all vehicles in the test group. However, GHG emissions can vary depending on vehicle inertia weight and engine displacement, therefore test group emissions determined by a “worst case” vehicle may overstate the GHG emissions of the test group .

Ideally, test groups composed of a single vehicle model would provide the most accurate determination of a manufacturer’s fleet average GHG emissions. However, this would present a significant test burden for manufacturers. Therefore, staff proposes to maintain the current LEV II definition of a test group and modify the protocol for choosing emission data vehicles, thus retaining flexibility for the manufacturers in determining the composition of their test groups. Since manufacturers may choose to include different vehicle models with different inertia weights and engine displacements within their test groups, selection of a single representative GHG emission data vehicle for the test group is problematic. Therefore, staff proposes that the “worst case” vehicle within the test group be selected for emission testing (generally the vehicle with the highest inertia weight and largest engine displacement). However, manufacturers would be allowed to select as many additional vehicles in the test group as they wish whereby their emissions would be weighted with the emissions of the “worst case“ vehicle to determine the GHG emissions of the test group. The emissions of the “worst case” vehicle would be weighted to represent the entire test group minus that percentage of the test group represented by the additional emission data vehicle(s). When selecting the additional vehicle(s), manufacturers would be required to provide data demonstrating that weighting the emissions of the vehicles would more accurately represent the GHG emissions of the test group.

6.4 Treatment of Upstream Emissions

Historically, alternative fuel vehicles have been an important but small percentage of total light-duty vehicle sales. Therefore, staff originally considered treating all fuels as having the same upstream emissions until an alternative fuel reached a minimum sales threshold. The primary benefit of such an approach was simplicity. Comments on the proposal, however, indicated that this approach did not appropriately account for the upstream benefits of the initial vehicles, and thus did not provide the proper incentives to manufacturers. Staff agrees that it is more accurate, and fair, to consider the relative upstream emissions for all vehicles produced, without consideration of a minimum threshold.Initial Statement of Reasons

August 6, 2004

125 Approximately 31 percent of the total CO 2 emissions associated with conventional gasoline-fueled vehicles are a result of the upstream emissions (diesel-fueled vehicles result in approximately the same upstream emissions fraction as gasoline vehicles.) To maintain simplicity, staff proposes to use the upstream emissions fraction of conventional fuels as a “baseline” against which to compare the relative merits of alternative fuel vehicles. Therefore, the emissions standards as described in Table 6.1

- 5 above do not directly reflect upstream emissions. Rather, when certifying gasoline or diesel-fuel vehicles manufacturers would report only the “direct” or, “vehicle” emissions. For alternative fuel vehicles, however, exhaust CO 2 emissions values will be adjusted in order to compensate for the differences in upstream emissions. This approach simplifies the regulatory treatment of gasoline vehicles, while at the same time allowing for appropriate treatment of alternative fuel vehicles.

For vehicles other than zero emission vehicles, the exhaust CO 2 emissions will be multiplied by the CO 2 Adjustment Factor for the alternative fuel, as shown in Table 6.4

- 1 . These factors reflect the upstream benefit (or disbenefit) of the alternative fuel, relative to conventional vehicles. Manufacturers may use different factors if they can demonstrate to the Executive Officer that the vehicle model being certified produces substantially different emission values.
Table 6.4

- 1 . Upstream Adjustment Factor for Alternative Fuel Vehicles1

Fuel Fuel Cycle

Emission Ratio (upstream g CO 2 / exhaust g CO

2 ) Fuel Cycle Factor (g/g CO

2 ) CO2

Adjustment Factor - ratio to RFG (g/g CO

2 )

Fuels with Direct CO 2 Emissions Conventional vehicles (RFG) 0.31 1.31 1.00
Compressed natural gas (CNG) 0.35 1.35 1.03
Liquid propane gas (LPG) 0.17 1.17 0.89

E85, corn -0.04 0.96 0.74

Fuels with No Direct CO 2 Emissions 2

Electricity n/a n/a 115 g/mi

Hydrogen –ICE 3 n/a n/a 290 g/mi

Hydrogen – Fuel cell 3 n/a n/a 210 g/mi

1 Emission estimates from TIAX, LLC. 2 Emission estimates have been reduced by 31 percent to be consistent with the Adjustment Factors for vehicles with direct emissions. 3 Assumes a fuel usage of 32 miles per kilogram for an internal combustion engine vehicle and 45 miles per kilogram for a fuel cell vehicle (DOE Fuel Economy Guide). Hydrogen produced by on-site steam reformation which is consistent with the goals set forth by the California Hydrogen Economy Blueprint Plan for the 2009 timeframe. Hydrogen production emission estimate from TIAX, LLC.Initial Statement of Reasons

August 6, 2004

126 For example, assume that a mid-size LPG passenger car has measured exhaust emissions of 192.0 g/mile CO 2 . The adjusted emissions value would then be:

192.0 g/mile * (0.89) = 170.9 g/mile Adjusted CO2
The manufacturer would use the value of 170.9 g/mile CO 2 to determine compliance with the applicable standards.

Several technologies require special consideration. First, since the CO 2exhaust emissions of ZEVs (BEVs or hydrogen fuel cells) are zero, manufacturers would use the default values shown in Table 6.4

- 1 . As mentioned above, a manufacturer may petition the Executive Officer to adjust the values presented in the Table 6.4.1 to reflect differences in specific vehicle operating characteristics. Second, emissions from vehicles that can operate on two alternate fuels, (e.g., a CNG-hydrogen internal combustion vehicle) will be calculated based on the worst-case fuel.

6.5 Early Reduction Credits

AB 1493 directs that emission reduction credits be granted for any reductions in GHG emissions achieved prior to the operative date of the regulations. Specifically, the bill states that in developing the regulations, the state board shall

“Grant emissions reductions credits for any reductions in greenhouse gas emissions from motor vehicles that were achieved prior to the operative date of the regulations...to the extent permitted by state and federal law governing emissions reductions credits, by utilizing the procedures and protocols adopted by the California Climate Action Registry.

The bill further provides that:

“the state board shall utilize the 2000 model year as the baseline for calculating emission reduction credits.”

This section presents the ARB staff proposal for implementing this element of the legislation.

6.5.A Background

The early credit provision of the bill raises several complex issues that need to be addressed. First of all, how should the regulation take into account the fact that the various manufacturer fleets have different initial GHG emission levels? As noted in the technology assessment and standard development discussions above, GHG emissions are affected by the average size and weight of a manufacturer’s fleet, and also by the level of technology employed on theInitial Statement of Reasons

August 6, 2004

127 vehicles. Thus the model year 2000 unregulated GHG emissions vary across the different manufacturers.

This in turn leads to a dilemma. If one uses each manufacturer’s actual model year 2000 emissions as the base against which to measure reductions, then a manufacturer could earn early reduction credit even though it had higher emissions than another manufacturer that did not earn credit. Imagine, for example, that the model year 2000 fleet average emissions are 400 grams per mile for manufacturer A and 300 grams per mile for manufacturer B. Using actual emissions as the base, then manufacturer A would earn credit for reducing its emissions to 350, even though it still had higher emissions than manufacturer B. Manufacture B would in effect be penalized for having lower initial emissions.

If one instead uses the average model year 2000 emissions across all manufacturers, however, other issues arise. Building on the previous example, imagine that average model year 2000 emissions across all manufacturers are 350 grams per mile. In that scenario, manufacturer A would earn no credit for reducing its emissions from 400 to 350, but manufacturer B would earn credit even if it did nothing and its emissions remained at 300.

This dilemma is related to the second issue to be addressed, which is should the early credit provision reward actions that were taken prior to the passage of the bill, or encourage manufacturers to make future changes? The answer to this question affects the “start date” for the granting of credits. If the intent is to encourage changes, then given the 2002 passage of the bill the earliest date by which changes could be reflected in the manufacturer’s production vehicles would be the 2005 or 2006 model years. If on the other hand the intent is to reward past actions, then the granting of early credits could go back as far as one wanted to go.

Finally, careful consideration is needed to ensure that any apparent reductions are real. For example, one possible approach would be to provide credit to manufacturers for exceptional vehicles whose GHG emissions are below a certain threshold. Depending on what happens with the remaining vehicles in the manufacturer fleet, however, it is possible that a manufacturer could build large numbers of such low emission vehicles and still have an overall emission increase.

In attempting to sort through these and other issues, ARB staff began by evaluating alternative credit structures based on two basic approaches: generating credits based on industry-average levels, or generating credits based on automaker-specific emissions. Staff also explored the various issues related to program implementation start date.

As part of its background research, staff attempted to gain an understanding of legislative intent through review of documentary information and also throughInitial Statement of Reasons

August 6, 2004

128 discussions with stakeholders familiar with the 2002 legislative debate. Staff also solicited comments regarding the various program design issues at a public workshop held on September 18, 2003. General comments received during this workshop suggested that the early credit program should meet existing state and federal early credit criteria. That is, in order to earn credit reductions must be real, surplus, verifiable, enforceable, and quantifiable. In addition, commenters suggested that the program should push technology development and only reward reductions achieved over an automaker’s entire fleet. One automaker recommended that the early emission reduction credit program should be consistent with the form of the standard adopted for the 2009 model year.

Taking into account all of the information available, ARB staff has developed a proposed approach that is intended to meet the intent of the legislation while avoiding undesirable results. More specifically, the ARB staff has sought to ensure that early reduction emission credits are real, surplus, verifiable, enforceable, and quantifiable, while at the same time rewarding early actions taken that push commercialization of technologies to reduce climate change emissions.

6.5.B Early Credit Program Staff Proposal

ARB staff proposes that (1) credit for early emission reductions should be available for model years 2000 through 2008, with manufacturers allowed to opt in to the program during any model year during this timeframe, and (2) the baseline against which manufacturer emissions are measured should be the fully phased in near term standard.

As noted in Table 6.1

- 5 above, staff has proposed that the fully phased in near term standard for passenger cars and T1 trucks should be 233 grams per mile CO2 equivalent, and for T2 trucks should be 361 grams per mile. Thus under the staff early credit proposal a manufacturer’s fleet average emissions would be compared to these standards. If a manufacturer has fleet average emissions in a specific model year lower than these standards, the manufacturer would earn early compliance credits. Any emission reduction early credits earned could be used during model years 2009 through 2014, or traded to another manufacturer. To ensure that the regulation ultimately achieves the greatest possible climate change reductions, staff proposes that the credits generated by early compliance retain full value through the 2013 model year. These credits will then be worth 50 percent of their initial value in MY 2014, 25 percent of their initial value in MY 2015 and have no value thereafter.

The proposed program thus is consistent with the form of the standard proposed for 2009. Staff has chosen this approach because the two tier form of the standard represents staff’s best thinking as to how to balance among a number of competing concerns, and as such it is appropriate to apply it during the early credit period as well.Initial Statement of Reasons

August 6, 2004

129 Staff notes that the legislative language directs that the 2000 model year be used as the baseline for calculating early emission reduction credits. Staff believes that among the alternatives available, the proposed approach best meets the intent of the legislation. First of all, the staff proposal uses model year 2000 as the start date for the granting of credits. Second, staff’s understanding of the legislative intent underlying the early credit proposal is that the legislature wanted to ensure that automakers would not be penalized for having taken aggressive steps to reduce climate change emissions prior to 2009. This would have been of particular concern if the 2009 standard required automakers to make a uniform percentage reduction against their own manufacturer-specific starting emissions.

Given that the proposed 2009 standards do not impose an automaker-specific uniform percent reduction, however, the concern that actions taken prior to the program’s adoption would adversely affect an automaker’s position is no longer warranted. Meanwhile, using model year 2000 data to set the standard against which early credits are measured can lead to undesirable outcomes no matter how the standard is structured.

6.6 Alternative Compliance Strategies

This section describes the role of alternative compliance in the climate change regulation, the criteria proposed by staff to evaluate alternative methods of compliance, the types of projects that will be considered, and how emission reductions achieved by using an alternative compliance strategy can be used to earn credits for meeting the Climate Change regulation.

6.6.A Introduction

AB 1493 requires that the regulations:

“provide flexibility, to the maximum extent feasible consistent with this section, in the means by which a person subject to the regulations ... may comply with the regulations. That flexibility shall include, but is not limited to, authorization for a person to use alternative methods of compliance with the regulations.”

Proposed criteria and guidelines for alternative methods of compliance are described below. These guidelines provide additional flexibility for manufacturers, yet are also structured in a manner that safeguards against strategies that do not meet the goals of the legislation. These goals include:

• Achieving the maximum feasible reduction of climate change emissions from passenger vehicles and light-duty trucks and other vehicles used for noncommercial personal transportation in California,

• Providing flexibility, to the maximum extent feasible, in the means by which a manufacturer may comply with those reductions, andInitial Statement of Reasons

August 6, 2004

130 • Ensuring that any alternative methods of compliance achieve equivalent or greater reductions in emissions of GHGs as the regulations.

6.6.B Purpose of Alternative Compliance Strategies

Alternative compliance strategies are intended to provide auto manufacturers with flexibility in meeting the Climate Change regulations. Greenhouse gas emission reductions achieved using an alternative compliance strategy or project will be verified by the ARB in order to qualify as alternative compliance credits. A manufacturer can then use the c redits to meet the Climate Change regulation.

As noted above, AB 1493 calls for the regulation to provide flexibility “to the maximum extent feasible consistent with this section. " Thus the use of alternative compliance strategies must not undercut the primary purpose of the regulation, which is to achieve GHG reductions from motor vehicles. Accordingly, the staff proposed alternative compliance program is limited to the vehicles that are regulated through AB 1493, and their fuels. This is to ensure that the program does not dilute the technology-forcing nature of the regulation, since the goal is to improve the vehicles themselves.

6.6.C Elements of the Staff Proposal

The following sections discuss in turn the major features of the staff proposal:

• The primary flexibility provisions (aggregating, averaging, banking and trading)

• Criteria for awarding credit to alternative compliance projects

• Eligibility considerations

• The application process

• Program approach

• Issuance and use of alternative compliance credits

• Recordkeeping, auditing and enforcement requirements.

Aggregating, Averaging, Banking and Trading Greenhouse Gas Emissions As required by the legislation, the staff proposal allows manufacturers significant flexibility in complying with the proposed emission standards. Specifically, the staff proposal would allow manufacturers to average emissions across their vehicle models, aggregate the different climate change pollutants, bank excess credits for later use, and trade credits in order to meet the climate change emission standards. In addition, manufacturers would have the ability to earn early compliance credits.

Criteria for Awarding Credit to Alternative Compliance Projects Consistent with existing credit trading programs, prior to approval, any alternative compliance strategy must meet the criteria outlined below. Under such anInitial Statement of Reasons

August 6, 2004

131 approach, if any one criterion is not met, the project would not be approved. The criteria are:

Real or Additional . Real or additional emission reductions are those that have actually occurred, not emissions that could have been emitted but were not or are avoided emissions. This means that the emission reductions result from actions taken that are beyond the course of normal activity such that the emission reductions are not considered "business as usual."

Quantifiable . Quantifiable means that the amount of the emission reductions can be measured with reasonable certainty. This would involve determination of a baseline for each project. Quantification would then involve determining the emissions associated with the alternative compliance project.

Finally, because upstream emissions play a role in the GHG emissions from mobile sources, alternative compliance projects will use a baseline that accounts for upstream emissions. For a discussion of these adjustment factors, see section 6.4 . These values will be periodically reviewed in order to ensure that they reflect changes in fuel production and distribution.

Regulatory Surplus . Emissions reductions must be surplus of any reductions required by local, state or federal regulations or measures contained in a regional air quality plan or government commitment or agreement.

Alternative compliance credits will be determined, verified, and applied to a manufacturer’s climate change obligation on an annual basis.

Enforceable . Enforceable means that the reductions can be independently verified and are legally binding. Enforcement is an essential element of any alternative compliance strategy. Projects thus must be accessible to inspection by California staff. Details regarding enforcement and record keeping are described below.

Permanen

t. Permanent means that the life of the emission reductions is reasonably established and commensurate with the proposed use of the credits. Projects should be “irreversible”; that is, the reductions achieved should not be subject to backsliding or vulnerable to changes in external conditions. .

Evaluation of Non-Climate Change Emissions/Impacts . Staff will evaluate any potential negative environmental impacts due to an alternative compliance strategy. In order to receive approval for an alternative compliance project, it must not result in any increase in criteria or toxic emissions as well as cause any other negative environmental impacts, especially in areas with environmental justice concerns.Initial Statement of Reasons

August 6, 2004

132 Leakage . Leakage occurs when a project changes the availability or quantity of a product or service that results in changes in GHG emissions elsewhere 1 . Staff will explore ways to evaluate leakage and to ensure that alternative compliance strategies do not increase GHG emissions outside the boundaries of the alternative compliance project.

6.6.D Eligibility Considerations

Project Location . Projects must be located in California to be eligible as alternative methods of compliance. This is to ensure that the ARB can easily access the project location in order to verify compliance with the alternative compliance plan.

Applicant Eligibility

. In order to ensure some level of prior project review, only companies regulated by AB 1493 (automakers) will be permitted to apply for alternative compliance credits. In fleet applications, automakers must partner with a fleet and/or a fuel provider to submit an application. In consumer applications, automakers can apply directly to the ARB.

Vehicle Eligibility . To ensure maximum focus on improvements to vehicles, only those vehicles regulated under AB 1493 are eligible for alternative compliance credits. This includes model year 2009 and later passenger vehicles and lightduty trucks, and other vehicles used for noncommercial personal transportation in California. Projects involving commercial fleets, such as taxi or delivery services, that use 2009 and later passenger vehicles and light-duty trucks would be eligible.

Project Eligibility . The ARB views vehicles and fuels as a system. Therefore to provide maximum flexibility while still focusing on improvements to the new vehicle fleet, staff proposes that eligible projects be limited to those that achieve GHG reductions through documented increased use of alternative fuels in eligible vehicles.

Staff evaluated two such scenarios. The first, which we refer to as alternative fuel vehicle projects, involves increased use of alternative fuels in bi-fuel, flex fuel and grid connected hybrid electric vehicles. The second, referred to as alternative fuel projects, involves increased use of alternative fuels in conventional vehicles. Staff has concluded that it is appropriate to grant credit for the former (alternative fuel vehicle projects) but not the latter.

1 World Resources Institute/ World Business Council for Sustainable Development . The Greenhouse Gas Protocol. A Corporate Accounting and Reporting Standard - Revised Edition. Ma rch 2004. For more information, visit www.ghgprotocol.orgInitial Statement of Reasons

August 6, 2004

133 Alternative Fuel Vehicle Projects Dedicated alternative fuel vehicles are vehicles that can only operate on an alternative fuel, such as CNG or hydrogen vehicles. Because such vehicles always use the alternative fuel, the calculation of their emissions is straightforward and are included as part of a manufacturer's baseline fleet within the climate change regulation. Such vehicles earn GHG reduction credit based on their tailpipe and upstream emission characteristics, as discussed in section 6

. Bi-fuel vehicles are vehicles that can operate on two different fuels, typically gasoline and an alternative fuel. Such vehicles have two tanks, one for gasoline and one for either natural gas or propane, depending on the vehicle. The vehicles can switch between the two fuels. In the future, we may see bi-fuel vehicles that can switch between two alternative fuels.

Flex-fuel vehicles are vehicles that that can be fueled with gasoline or, depending on the vehicle, with either methanol (M85) or ethanol (E85). The vehicles have one tank and can accept any mixture of gasoline and the alternative fuel.

Currently, due to a lack of infrastructure and cost considerations, most fleets do not use the alternative fuel in these types of vehicles. Therefore, in ARB emission control regulations the usual baseline assumption is that these vehicles are using the “dirtier” fuel and are not entitled to any credit for the use of alternative fuels.

Grid-connected hybrid electric vehicles (GHEVs) are similar to bi-fuel vehicles in that two "fuels" are used, gasoline and electricity. As with bi-fuel vehicles the climate change benefit of GHEVs is determined by the extent in which the alternative fuel (electricity) is used. There are no GHEVs in production today.

Staff proposes that a project that ensures and documents the use of an alternative, lower GHG emitting fuel in bi-fuel, flex fuel, or grid connected hybrid vehicles would be eligible for alternative compliance credits. Thus the alternative compliance program would encourage and reward fleets that use lower GHG alternative fuels rather than using conventional gasoline.

Staff recognizes that the GHG and criteria pollutant emissions associated with the production and use of alternative fuels will vary greatly depending on the specific feedstock used as well as the production and distribution methods employed. In addition, the use of crops as feedstock for alternative fuels has broader implications for land use, water supply, pesticide use, and other critical factors. It is clear that the evaluation of alternative fuel projects will need to encompass upstream as well as tailpipe emissions.

Credits may not be earned that are merely the result of shifting the same volume of fuel from one use to another. For instance, a fuel provider cannot take theInitial Statement of Reasons

August 6, 2004

134 same volume of fuel it would have used in blends and instead use it in bi-fuel vehicles. This does not achieve any net decrease in GHG emissions but could, if left unchecked, provide a manufacturer with a substantial number of credits.

Alternative Fuel Projects Alternative fuel projects are those that use different conventional fuel blends, such as increased ethanol in gasoline, to decrease GHG emissions from model year 2009 and later conventionally fueled vehicles. The staff proposal would not award credit for such projects. Given the fact that the “business as usual” ethanol content in gasoline will vary according to economics, refinery strategies and the status of the oxygenate waiver, staff believes that it would be difficult if not impossible to ensure that reductions associated with the use of such blends are real and surplus, as required under the criteria outlined above. In addition the effect of such blends on criteria air pollutants is of concern. This uncertainty persuaded staff to recommend against such an approach.

6.6.E Program Approach

The staff proposal would allow manufacturers to make use of an optional alternative compliance mechanism. Under this approach, manufacturers that demonstrate the use of alternative fuels in vehicles in a given model year will be allowed to certify vehicles in the following year based at the appropriate alternative fuel emission level.

Specifically, beginning with the 2010 model year, a manufacturer that demonstrates that a bi-fuel, fuel-flexible, dual-fuel, or grid-connected hybrid electric GHG vehicle test group will be operated in use in California on the alternative fuel may be eligible to certify those vehicles using the optional alternative compliance procedure, upon approval of the Executive Officer.

To demonstrate that bi-fuel, fuel-flexible, dual-fuel, or grid-connected hybrid electric vehicles within a GHG vehicle test group will be operated in use in California on the alternative fuel, the manufacturer shall provide data that shows the previous model year sales of such vehicles to fleets that provide the alternative fuel on-site or, for grid-connected hybrid electric vehicles, to end users with the capability to recharge the vehicle on-site. This data shall include both the total number of vehicles sales that were made to such fleets or end users with the capability to recharge the vehicle on-site and as the percentage of total GHG vehicle test group sales. The manufacturer shall also provide datademonstrating the percentage of total vehicle miles traveled by the bi-fuel, fuelflexible, dual-fuel, or grid-connected hybrid electric vehicles sold to each fleet or to end users with the capability to recharge the vehicle on-site, in the previous model year using the alternative fuel and using gasoline.Initial Statement of Reasons

August 6, 2004

135 6.6.F Application Process

In order to obtain alternative compliance credits, a manufacturer shall first submit a Climate Change Alternative Compliance Application to the ARB. The purpose of the application is to determine the fleet's baseline emissions as well as the projected reductions in GHG emissions anticipated from the alternative compliance project. The baseline emissions are those GHG emissions that would have been emitted in the absence of the alternative compliance project. ARB will use the information provided to calculate the baseline emissions and the GHG emission reductions that will result from the project.

6.6.G Issuance and Use of Alternative Compliance Credits

The proposed climate change regulations will apply to MY 2009 and later passenger cars and light duty trucks. Alternative compliance strategies can only be applied to vehicles subject to the climate change regulation, therefore, this program will take effect when these vehicles are available. Prior to that date, ARB staff will work with manufacturers to assist in developing project applications that meet the ARB's requirements.

6.6.H Recordkeeping, Auditing, and Enforcement Requirements

Fleet Programs . In cases where an automaker is partnering with a fleet, the fleet operator will be responsible for storing and maintaining data records for each vehicle and the fuel used. The ARB must also be afforded access to audit any files or records created to comply with recordkeeping requirements or require vehicle operators to submit such records to the ARB upon request. The ARB must also be afforded access to inspect the vehicles at vehicle operators' facilities. An agreement governing the ownership and liability of alternative compliance credits must be reached between the participating parties and included with the application. A tracking system will need to be established to track the banking and trading of credits. The California Climate Action Registry may also be a resource for tracking alternative compliance strategy credits.

Consumer Programs . In cases where an automaker will be selling or leasing vehicles eligible for credits directly to consumers, the automaker will be responsible for proposing a data collection plan that will represent the vehicles on the road including the miles traveled and the fuel used. Upon ARB approval of this data collection plan, automakers must submit the data to the ARB prior to receiving credits toward compliance with the climate change regulation.

Ownership and Liability of Alternative Compliance Strategy Credits . Because an automaker will need to partner with a fleet and/or fuel provider to apply for alternative compliance credits, an ownership agreement must be worked out between the participating parties and included with the application.Initial Statement of Reasons

August 6, 2004

136 California Climate Action Registry . Senate Bill (SB) 1771 (Sher, Chapter 1018, Statutes of 2000) established the California Climate Action Registry (Registry) with technical changes being made to the statute in SB 527 (Sher, Chapter 769, Statutes of 2001). The Registry is a non-profit voluntary registry for GHG emissions. The purpose of the Registry is to help companies and organizations with operations in the state to establish GHG emissions baselines against which any future GHG emission reduction requirements may be applied.

The Registry encourages voluntary actions to increase energy efficiency and decrease GHG emissions. Using any year from 1990 forward as a base year, participants can record their GHG emissions inventory. The State of California, in turn, will offer its best efforts to ensure that participants receive appropriate consideration for early actions in the event of any future state, federal or international GHG regulatory scheme. Registry participants include businesses, non-profit organizations, municipalities, state agencies, and other entities.

ARB is coordinating with the Registry and the California Energy Commission on our mobile source climate change regulations, in particular alternative compliance strategies. Projects certified by the Registry under their other programs are not automatically eligible to receive alternative compliance strategy credits under ARB's mobile source climate change regulations. However, staff is continuing to explore ways to involve the Registry in the alternative compliance strategy criteria and implementation.Initial Statement of Reasons

August 6, 2004

137 7 REGULATORY ALTERNATIVES

7.1 Less Stringent or No New Vehicle Standards

One alternative considered was to propose less stringent or no new vehicle standards. This alternative was rejected because Chapter 200, Statutes of 2002 (AB 1493) requires the Board to adopt regulations that achieve the maximum feasible and cost effective reduction of GHG emissions from new motor vehicles. The staff analysis has demonstrated that the reductions achieved under the staff proposal are both feasible and cost effective. Therefore the alternative of no or less stringent standards was rejected because it would not achieve the maximum reductions and therefore would fail to meet the statutory requirement.

7.2 More Stringent New Vehicle Standards

Staff also considered proposing more stringent vehicle standards. This could be accomplished by shortening the phase-in period, or by building into the standard some degree of early penetration of technologies that the staff technical analysis determined would not be available for widespread application in the near and/or mid term periods. Staff concluded that in either case, manufacturers would have a very difficult time incorporating the needed technologies across their fleet as rapidly as would be necessary. Comments received from manufacturers andtheir consultants on the June 14, 2004 draft staff proposal, which used a threeyear phase in schedule rather than the four-year phase in schedule recommended now, served to reinforce this point. Staff therefore rejected this alternative on the grounds that more stringent standards would not be technically feasible.

7.3 Standards for Mobile Air Conditioner Refrigerant Emissions

Staff also considered proposing standards that only regulate mobile air conditioner refrigerant emissions. While the staff analysis has shown that regulation of mobile air conditioner refrigerant emissions can achieve significant GHG reductions, staff rejected this approach for two reasons. First, this would amount to a mandate to use specific technologies or equipment, rather than a performance standard. In general staff favors performance standards, which provide manufacturers flexibility to meet any given remission reduction target in the most cost-effective manner. Second, as noted above the staff analysis has identified a variety of other vehicle technology improvements that are feasible and cost effective, and would result in greater GHG emission reductions. Therefore the alternative of mobile air conditioner refrigerant regulation also failed to meet the statutory requirement to achieve the maximum feasible and cost effective reductions.Initial Statement of Reasons

August 6, 2004

138 7.4 Summary

Staff has performed a thorough analysis of possible ways to reduce GHG emissions from motor vehicles, quantifying the emission reductions achieved and their cost. No alternatives or combination of alternatives have been identified that would be equally effective in achieving the emission reductions projected under, and less burdensome to affected private persons than, the staff proposal.Initial Statement of Reasons

August 6, 2004

139 8 ENVIRONMENTAL IMPACTS

This chapter presents the emissions impacts of the proposed regulation, along with the baseline emissions inventory. Included is a discussion of the methods used to develop the inventory and assess impacts. Also included is an assessment of the impacts on upstream emissions and other environmental media.

8.1 Baseline Inventory Development

Staff has estimated the baseline climate change emissions from light duty vehicles for calendar years 2010, 2020 and 2030. These inventories are shown in Table 8.1

- 1 . These inventories can also be expressed in terms of total CO 2 equivalent emissions based on the global warming potentials presented in Table 2.3

- 1 in section 2.3 , Global Warming Potentials. Table 8.1

- 2 shows the total CO 2 equivalent emissions in tons per day. These inventories represent what emissions from the light duty fleet are expected to be without the proposed regulation, and serve as a baseline from which to estimate the benefits of the proposed regulation. The following subsections describe how these inventories were developed and validated. Additional detail is presented in the Technical Support Document.

8.1.A CO2 and Methane

Staff has used the EMFAC2002 mobile source emissions model, version 2.2 (April 2003), to estimate the inventory for CO2 and methane. The EMFAC modelestimates the emissions of CO2 and methane based on data collected from inuse vehicle testing at ARB’s Haagen-Smit laboratory over various driving cycles that simulate real world conditions. Methane emission rates are derived from total hydrocarbon rates by the use of conversion factors based on speciation profiles.

8.1.B Nitrous Oxide

The ARB has collected N 2 O emissions data from vehicles that have been tested as part of the ARB's 16th and 17th Vehicle Surveillance Projects (VSPs) at the Haagen-Smit Laboratory in El Monte, California. The purpose of the emissions testing effort is to gain a better understanding of the factors that lead to the formation of N 2 O, and to develop applicable emission factors that can be used to develop an emissions inventory. The VSPs are conducted to measure in-use emissions from a fleet of light-duty gasoline vehicles including passenger cars and light-duty trucks up through 8,500 lb. GVWR. A total of approximately 120 light duty cars and trucks have been tested.Initial Statement of Reasons

August 6, 2004

140 Table 8.1

- 1 : Baseline Inventory for Light Duty Motor Vehicles

Calendar Year 2010 Emissions in Tons per Day 2

CH 4 CO 2 N 2 O HFCs PC/T1 (Passenger Cars and Trucks 0-3750 lb. LVW 3) 26 296,320 12 4

T2 (Trucks 3751 lb. LVW 3 - 8500 lb. GVWR 4) 11 120,760 8 1
Total Light Duty 37 417,080 20 5

Calendar Year 2020 Emissions in Tons per Day 2

CH 4 CO 2 N 2 O HFCs PC/T1 (Passenger Cars and Trucks 0-3750 lb. LVW 3) 12 341,640 7 5

T2 (Trucks 3751 lb. LVW 3- 8500 lb. GVWR 4) 7 143,510 4 2
Total Light Duty 19 485,150 11 7

Calendar Year 2030 Emissions in Tons per Day 2

CH 4 CO 2 N 2 O HFCs PC/T1 (Passenger Cars and Trucks 0-3750 lb. LVW 3) 8 390,600 5 6

T2 (Trucks 3751 lb. LVW 3- 8500 lb. GVWR 4) 5 171,670 4 2
Total Light Duty 13 562,270 9 8

2 Annual average 3 Loaded vehicle weight equals curb weight plus 300 lb. 4 It is recognized that there are a few vehicle models over 8,500 lbs. gross vehicle weight rating (GVWR) that are used for noncommercial transportation and are thus subject to the climate change regulations. Likewise, there are some vehicles weighing less that 8,500 lbs. that are used in commercial service. It does not appear possible to accurately identify these two sets of vehicles from license registration records. Because both sets of vehicles make up a very small portion of the light duty fleet, we believe that no significant error is introduced by defining the inventory as all vehicles up to 8,500 lbs.Initial Statement of Reasons

August 6, 2004

141 Table 8.1

- 2 : CO 2 Equivalent Inventory for Light Duty Motor Vehicles

2010 (tons per day) 2020

(tons per day) 2030

(tons per day) PC/T1 (Passenger Cars and Trucks 0-3750 lb. LVW 5) 305,400 350,500 400,000

T2 (Trucks 3751 lb. LVW 5- 8500 lb. GVWR 6) 124,800 146,900 175,500
Total Light Duty 430,200 497,400 575,500

Both the NO X and N 2 O emission rates measured as part of the VSPs have been used to develop the N 2 O inventory. Staff utilized statistical analysis software to develop a correlation between the grams per mile emission rate of NO X and the grams per mile emissions of N 2 O. The resulting correlation equation was then applied to the model year specific grams per mile NO X emission rates estimated by EMFAC 2002, version 2.2 (April 2003), in order to develop model year specific grams per mile N 2 O emission factors. Each model year’s N 2 O emission factor was then multiplied by an estimate of miles per day driven by those model year vehicles during the calendar year to yield a tons per day inventory for N 2 O.

8.1.C Hydrofluorocarbons

ARB staff has developed a method to estimate direct emissions of HFC-134a from vehicular AC systems in California that is based on 1) data on HFC-134a consumption by nine government and commercial fleets, 2) surveys of 966 vehicle owners on their AC system repair incidence, 3) data on repair incidence among 12,000 fleet vehicles in California, and 4) information from dismantlers. The data were used to provide estimates of the averages of the parameters in a mass balance model that equates vehicular lifetime emissions to lifetime inputs of HFC-134a. That model is expressed by:

LE = C * (1 - g + N * f)

where: LE is the lifetime (16-year) mass of refrigerant emitted from a vehicle

C is the AC system ca pacity (mass) for HFC-134a

“ 1 ” represents the initial charge at the time of manufacture g is the fraction of C recovered by the dismantler N is the number of times the vehicle is recharged during its life f is the fraction of charge C missing (lea ked or released) before each recharging

The values obtained for the model parameters are:

5 Loaded vehicle weight equals curb weight plus 300 lb. 6 Gross vehicle weight ratingInitial Statement of Reasons

August 6, 2004

142

C -- 951 grams per vehicle f -- 0

. 52 g -- .085 (assumes an average recovery of half the refrigerant present

in vehicles reaching the dismantling yards) N -- 1 recharge over 16 yrs
This analysis yields direct emissions of 1.36 kg of HFC-134a per 16-year average lifetime of an LDV in California. This is equivalent to 85 grams per year of life per vehicle, although the emissions may not be uniform through the average vehicular lifetime. However, since not all vehicles “last” 16 years, the actual average annual emission rate among in-use vehicles is slightly different. The ARB staff has estimated that rate by two methods. By taking into account the fractions of the on-road population by model year and (separately) by using HFC-134a consumption data, we arrived at 80 grams/year/vehicle.

All the numbers above reflect the vehicle fleet of 2003. Evolution in design or assembly of AC systems that may be occurring now, and may continue in the future as suggested by the industry, could lead to a different set of estimates if the analysis were repeated in some future year. The current data do not allow us to estimate how the future results would differ from those shown here.

These estimates reflect only emissions from vehicles and fugitive emissions incidental to professional servicing. They do not include emissions due to wastage during “do-it-yourself (DIY)” repairs of vehicles with HFC-134a systems or due to leakage from vehicles with older R-12 systems that are recharged with HFC-134a. These extra emissions may be substantial. Unfortunately, there are no substantiated estimates of the overall importance of the excess DIY emissions.

8.2 Emissions Benefits of Proposed Regulation

The emissions benefits are based on the projected reductions in CO 2 equivalent emission rates resulting from implementation of this proposed regulation. Using the emission reductions required under the standard, as outlined in section 6

, and the proposed phase-in schedule for the regulation, ARB staff has estimated the percent reduction in CO2emissions rates by model year for those vehicles subject to the proposed regulation. Staff applied the percent reductions to the baseline CO

2emissions by model year from the EMFAC2002 mobile source emissions model, version 2.2 (Apr03) for calendar years 2020 and 2030. The reductions in CO2 emissions were then subtracted from the baseline CO2 equivalent inventory for 2020 and 2030 to obtain the adjusted CO2 equivalent inventory reflecting the impact of the proposed regulation. Total CO2 equivalent benefits were estimated by subtracting the adjusted CO2 equivalent inventory from the baseline CO2 equivalent inventory. Table 8.2

- 1 presents the baselineInitial Statement of Reasons

August 6, 2004

143 inventory from Table 8.1

- 2 , the adjusted inventory with the proposed regulation in place, and the estimated benefits of the regulation.

Table 8.2

- 1 : Light Duty Fleet CO 2 Equivalent Emissions and Reductions

Baseline Inventory without Proposed Regulation 2020 (tons per day) 2030

(tons per day) PC/T1 (Passenger Cars and Trucks 0-3750 lb. LVW 7) 350,500 400,000

T2 (Trucks 3751 lb. LVW 7- 8500 lb. GVWR 8) 146,900 175,500
Total Light Duty 497,400 575,500

Adjusted Inventory with Proposed Regulation 2020 (tons per day) 2030

(tons per day) PC/T1 (Passenger Cars and Trucks 0-3750 lb. LVW 7) 282,600 281,500

T2 (Trucks 3751 lb. LVW 7- 8500 lb. GVWR 8) 127,400 139,500
Total Light Duty 410,000 421,000

Emissions Reductions for Proposed Regulation 2020 (tons per day) 2030

(tons per day) PC/T1 (Passenger Cars and Trucks 0-3750 lb. LVW 7) 67,900 118,500

T2 (Trucks 3751 lb. LVW 7- 8500 lb. GVWR 8) 19,500 36,000
Total Light Duty 87,400 154,500

The proposed regulation will reduce climate change emissions by an estimated 87,400 CO2equivalent tons per day statewide in 2020 and by 154,500 CO2 equivalent tons per day in 2030. This translates into an 18 percent overall reduction in climate changes emissions from the light duty fleet in 2020 and a 27 percent overall reduction in 2030.

Staff estimates that baseline emissions today (2004) are 386,600 CO 2 equivalent tons per day, and in 2010 will be 430,200 CO 2 equivalent tons per day. Thus

7 Loaded vehicle weight equals curb weight plus 300 lb. 8 Gross vehicle weight ratingInitial Statement of Reasons

August 6, 2004

144 with the regulation emissions will continue to grow from today’s level through 2009 when the regulation takes effect, but emissions in 2020 and in 2030 will be lower than in 2010. Figure 8

- 1 shows this information in graphic form. Please note that there would also be a slight reduction due to the regulation in 2010, not accounted for in this figure.

Figure 8

- 1 . Motor Vehicle GHG Emissions (Excluding Upstream Emissions)

0 100000 200000 300000 400000 500000 600000 700000

2000 2005 2010 2015 2020 2025 2030 2035
Calendar YearTons Per DAy Without Regulation With Regulation

-18% -27%

8.3 Emission Impact of the Staff Proposal in a Broader Context

This staff report highlights the important potential consequences of climate change for California and its citizens. In light of these consequences, and consistent with the mandate contained in Chapter 200, Statutes of 2002 (AB 1493) the staff recommends that the Board adopt control measures to reduce GHG emissions from motor vehicles. The staff analysis concludes that the staff proposal would reduce GHG emissions from the light duty California vehicle fleet by about 87,400 tons per day in 2020 and 154,500 tons per day in 2030.

Some commenters, noting that GHG emissions from California light duty vehicles are only a fraction of total California GHG emissions and a much smaller fraction of global emissions, have asked staff to describe the impact of the staff proposal in the context of the global problem. Based on California’s relatively small contribution to global emissions, these commenters then question the value ofInitial Statement of Reasons

August 6, 2004

145 California action, stating that measures adopted in California will have no discernable effect on global climate change and thus no effect on the potential public health and environmental consequences of climate change in California. Finally, they go on to argue that California vehicle owners will bear the cost of the regulation but the benefits will accrue globally.

It is true that GHG emissions from California light duty vehicles are a small fraction of the global total. Based on inventory data from various sources, GHG emissions from California light duty vehicles are about 30 percent of California CO 2equivalent GHG emissions from all sources and about 2 percent of total United States GHG emissions. Although estimates of global GHG emissions vary greatly, it is clear that emissions from California light duty vehicles will amount to less than 1 percent of the total. Thus the proposed California regulation, viewed in isolation, will not wholly mitigate the potential consequences of climate change in California.

It does not necessarily follow, however, that California should do nothing. Rather, there are several compelling reasons to move forward with the proposed regulation, even while recognizing that by itself it will not solve the climate change problem. First of all, the proposed regulation is a “no regrets” policy that addresses climate change emissions but at the same time provides economic benefit to the state. As noted in the economic analysis, staff concludes that adoption of the proposed regulation would increase personal income and create jobs statewide. Staff believes that given the significant potential consequences of climate change for the state it is prudent to take steps that begin to address the problem while offering other direct benefits as well.

Second, California would not be acting in isolation. Other states in the United States, and other countries internationally, have already taken or are contemplating steps to address GHG emissions from a variety of sectors and sources. Thus the staff proposal should not be viewed as California acting in isolation, but rather as California stepping forward along with others to help address a problem that cannot be solved by any single jurisdiction. California’s citizens have a long history of environmental stewardship, and the proposed regulation, consistent with that history, would represent California’s commitment to be an active participant in the solution.
Moreover, California action specifically to control greenhouse gases is strongly supported by the public. The July 2004 Special Survey on Californians and the Environment , conducted by the Public Policy Institute of California, found that eight in ten Californians support a state law that requires automakers to further reduce the emission of greenhouse gases from new cars in California by 2009. Similarly high levels of support were evident in the June 2002 and July 2003 surveys.Initial Statement of Reasons

August 6, 2004

146 Finally, the longstanding technology-forcing role of California regulation should not be understated. There have been many instances where other jurisdictions have adopted motor vehicle controls that were pioneered in California. Thus there is potential for the proposed regulation to spread to other jurisdictions and thereby add momentum to the already existing set of measures that are underway around the globe. The attention focused on this rulemaking is an indication of its potentially far-reaching effects.

Climate change, being truly global in nature, raises the issue of the value of unilateral state action more squarely than many other environmental issues. When faced threats to California’s pubic health and environment, however, California citizens and public institutions have consistently demonstrated a firm resolve to take action. Staff believes that climate change should be viewed in that context and that the staff proposal thus lies squarely in California’s long tradition of environmental awareness and concern.

8.4 Fuel Cycle Emissions

The goal of the proposed regulation is to reduce climate change emissions from passenger cars and light-duty trucks. The ARB’s efforts to reduce vehicular climate change emissions will also have a positive impact on the emissions that occur during the fuel cycle. These activities, which include refining, marketing and distribution of the gasoline, produce both climate change and criteria pollutant emissions.

Staff has quantified the marginal fuel cycle emissions from conventional vehicles using information from TIAX, LLC. As discussed in Section 6.4 , the results show that the fuel cycle climate change emissions for gasoline vehicles are 31 percent of the vehicle emissions on a CO2 equivalent basis. Thus, for each gram of CO2 reduced per mile from the vehicle, an additional 0.31 gram of CO2 will be eliminated from the fuel cycle. Table 8.4

- 1 estimates the reductions in total fuel cycle climate change emissions for 2020 and 2030.

Table 8.4

- 1 : Climate Change Fuel Cycle Emission Reductions (tons per day)

2020 2030 CO 2Equivalent Emissions 27,000 47,900

In terms of criteria pollutants, the proposed regulation will also provide fuel cycle benefits. The ARB staff has quantified the emission reductions of non-methane organic gases, oxides of nitrogen, and carbon monoxide for 2020 and 2030 using data from TIAX LLC. The analysis calculates the reductions in criteria pollutant emissions using marginal fuel cycle emission factors based on an average vehicle. Table 8.4

- 2 shows the estimated reduction in criteria pollutant fuel cycleInitial Statement of Reasons

August 6, 2004

147 emissions. Please note that due to their smaller scale these reductions are show in terms of tons per year.

Table 8.4

- 2 : Criteria Pollutant Fuel Cycle Emission Reductions (tons per year)

2020 2030 Non-Methane Organic Gases 2.8 4.0 Oxides of Nitrogen 0.2 0.3 Carbon Monoxide 0.1 0.2

8.5 Energy Cost and Demand

Recent disruptions in fuel supplies have at times greatly increased California fuel prices. Technologies and strategies required by the proposed regulation to reduce climate change emissions are also expected to reduce future demand for gasoline as compared to current trends. Reduced demand will mitigate the potential impacts from shortages of cleaner-burning gasoline and thus help stabilize fuel prices. To the extent that alternative-fueled vehicles are used, this will also help reduce gasoline demand and have a positive impact on fuel cost.

8.6 Other Environmental Media

At times, the refining, marketing and distribution of gasoline adversely affects water quality due to leaks, spills, and wastewater discharge. Any reduction in fuel use will reduce the opportunity for such occurrences. Consequently, the ARB staff projects that the proposed regulation will have a positive impact on water quality.

8.7 Other Considerations

Staff is investigating the possible effect of the regulation on consumer behavior. For example, a reduction in the operating cost of vehicles may induce some motorists to drive more, which would tend to decrease the climate change benefits and might result in criteria pollutant emission above the levels estimated here. Changes in vehicle attributes, such as the initial price of the vehicle or the operating cost of the vehicle, are expected to affect consumer purchases. This too could affect the emission consequences of the regulation for both climate change and criteria pollutant emissions. The results of the staff investigation are reported in section 12

.Initial Statement of Reasons

August 6, 2004

148 9 COST EFFECTIVENESS

This section presents the methodology used to calculate the cost effectiveness of the proposed regulation to reduce climate change emissions from light-duty vehicles. Staff has calculated the cost effectiveness for calendar years 2020 and 2030, based on a comparison of the cost (annualized costs minus annualized operating cost savings) and the emission reduction benefits.

Typically, emission control regulations impose a cost. Cost effectiveness is a measure of the cost imposed per ton of reduction achieved, and thus is a useful tool to compare various possible approaches. In this instance, however, AB 1493 requires that the regulations be economical to the consumer over the life cycle of the vehicle. Consistent with this direction, the technology packages that provide the basis for the standard result in operating cost savings that exceed the capital cost, resulting in a net savings to the consumer over the lifecycle of the vehicle. This translates to a “negative” cost effectiveness value (there is a cost savings per ton reduced).

9.1 Cost Data and Emission Reductions

ARB staff estimated the net costs of this proposed regulation primarily by usingcost data from the 2004 study “Reducing Greenhouse Gas Emissions from LightDuty Motor Vehicles” done for the Northeast States Center for a Clean Air Future (NESCCAF). The initial costs are based on the expected increases in vehicle cost resulting from the technology improvements needed to meet the standards in the proposed regulation. The proposed regulation includes a phase-in schedule whereby earlier model year vehicles will meet a less stringent standard and, on average, will require less new technology than later model vehicles. ARB staff has estimated the average cost increases by model year, using data from the NESCCAF study and other sources. Staff has used these cost data, along with the assumption that average vehicle life is 16 years, to calculate the total annualized costs by calendar year. The total annualized costs are estimated to be roughly $837 million for calendar year 2020 and $1,686 million for 2030.

Staff also estimated annual savings in operating cost, again based on information provided in NESCCAF as well as other sources. The annual savings are estimated to be $5,223 million in 2020 and $9,292 million in 2030, well in excess of the annualized cost. This results in net annual savings of $4,386 million in 2020 and $7,606 million in 2030.

The cost effectiveness in dollars per ton for a given calendar year is calculated by dividing the total annualized costs for that year by the total CO 2equivalent emission reductions for that year. As detailed in section 8 of this report, the CO2 equivalent emissions benefits of the proposed regulation are 87,400 tons per day in 2020 and 154,500 tons per day in 2030. Converting these figures to annualInitial Statement of Reasons

August 6, 2004

149 totals yields 31.9 million tons per year in 2020 and 56.4 million tons per year in 2030.

9.2 Cost Effectiveness

Table 9.2

- 1 provides the cost effectiveness in calendar years 2020 and 2030 based on the annualized vehicle costs and the estimated benefits.

Table 9.2

- 1 . Cost Effectiveness 9of Proposed Regulation

2020 2030 Net Annualized Costs (Savings) $4,386 million $7,606 million Emissions Reduction (tons/year) 31.9 million 56.4 million Cost effectiveness ($/ton) -138 -135

9 In 2003 dollarsInitial Statement of Reasons

August 6, 2004

150 10 ECONOMIC IMPACTS

The climate change regulation may impact several sectors of the economy. The steps that manufacturers will need to take to comply with the regulatory standards are expected to lead to price increases for new vehicles. Many of the technological options that manufacturers choose to comply with the regulation are also expected to reduce operating costs. These two responses to the regulation have combined positive and negative impacts on California businesses and consumers. The vehicle price increase will be borne by purchasers and may negatively affect businesses. However, the operating cost savings from the use of vehicles that comply with the regulation will positively impact consumers and most businesses. Based on the staff analysis, the net effect of the regulation on the economy is expected to be small but positive.

The major tool used for the analysis of the economic impact of the proposed regulation is a model of the California economy developed by the University of California, Berkeley, named the Environmental Dynamic Revenue Analysis Model (E-DRAM). This chapter explains the legal requirements for economic analysis, the methodologies employed, and the results obtained. Technical support documents to this report further explain the economic impact analyses.

10.1 Legal Requirements

The legal requirements for economic analysis are included in the Government Code and the Health and Safety Code. This section explains the requirements that must be satisfied for economic analyses of the proposed regulations.

Section 11346.3 of the Government Code, which applies to all agencies statewide and predates AB 1493, requires State agencies to assess the potential adverse economic impacts on California business enterprises and individuals when such agencies propose to adopt or amend any administrative regulation. The assessment shall include a consideration of the impact of the proposed regulation on California jobs, business expansion, elimination or creation, and the ability of California business to compete with businesses in other states. Health and Safety Code section 43018.5(c)(2), added by AB 1493, repeated many of these criteria. That section also added two criteria specific to this regulation, namely, to evaluate economic impacts on the State’s automotive workers and affiliated businesses, and on minority and low income communities.

State agencies also are required to estimate the cost or savings to any State or local agency and school district, in accordance with instructions adopted by the Department of Finance (DOF). The estimate shall include any non-discretionary cost or savings to local agencies and the cost or savings in federal funding to the State.Initial Statement of Reasons

August 6, 2004

151 Finally, Health and Safety Code section 57005 requires the Air Resources Board to perform an economic impact analysis of submitted alternatives to a proposed regulation before adopting any major regulation. A major regulation is defined as a regulation that will have a potential cost to California business enterprises in an amount exceeding ten million dollars in any single year.

10.2 Potential Impacts on Business Creation, Elimination, or Expansion

The climate change regulation affects only light duty vehicles whose primary use is noncommercial personal transportation. Therefore, many vehicles that businesses use would not be covered under the proposed regulation. However, if the businesses purchase the same vehicles as consumers, they would be expected to pay higher prices for the vehicles but save on operating costs, as is discussed in Section 5 above. As noted in that section, staff expects that reduced operating costs will more than outweigh the effect of the increase in price over the life cycle of the vehicle.

It is very likely that savings from reduced vehicle operating costs would end up as expenditures for other goods and services. These expenditures would flow through the economy, causing expansion or creation of new businesses in several sectors. Staff's economic analysis shows that as the expenditures occur, jobs and personal income increase. Jobs increase by 3,000 in 2010, by 55,000 in 2020, and 83,000 in 2030 compared to the baseline economy that excludes the proposed regulation. Similarly, income grows by $160 million in 2010, by $5.3 billion in 2020, and $8.5 billion 2030.

The E-DRAM model was used to assess the overall impact of the regulation on California’s economy. Specifically, E-DRAM was used to estimate impacts on California's output of goods and services, personal income, and employment. The estimates of the regulation's impact on these economic factors are used to assess the potential impacts on business creation, elimination, or expansion in California. The next section describes E-DRAM.

10.2.A Environmental-Dynamic Revenue Analysis Model (E-DRAM)

The overall impact of all direct and indirect economic effects that may result from the proposed regulation are estimated using a computable general equilibrium (CGE) model of the California economy. A direct impact affects the automobile and oil industries, and their consumers. The proposed regulation may affect other economic sectors indirectly. For example, consumers may redirect the money from operating cost savings to spend on other sectors. In addition, the automobile industry would be expected to purchase goods and services from other sectors to comply with the proposed regulation. These expenditures caused by the regulation would indirectly affect the California economy.Initial Statement of Reasons

August 6, 2004

152 A CGE model simulates various economic relationships in a market economy, where prices and production adjust in response to changes caused by regulations to establish an equilibrium in markets for all goods and services and factors of production (i.e., labor and capital). The CGE model used for this analysis is a modified version of the California Department of Finance's Dynamic Revenue Analysis Model (DRAM). 10The DRAM has been used for several tax policy evaluations. The modified model accounts for environmental sectors and is called Environmental-DRAM (E-DRAM). 11 It has been used to assess the economic impacts of California’s air quality State Implementation Plans, reformulated gasoline regulations, the petroleum dependency study required by AB 2076, and other regulations.
E-DRAM describes the relationships among California producers, California consumers, government, and the rest of the world. The model consists of over 1,000 equations designed to capture the interactions among over 100 industrial sectors, 2 factors of production sectors (labor and capital), 9 consumer good sectors, 7 household sectors (classified by income level), 1 investment sector, 45 government sectors (8 federal, 21 State, and 8 local), and the rest of the world.

The impacts of regulations are estimated by changing the inputs to the model that represent regulation effects on the industry or consumer sectors. Such changes to the model enable it to assess the economic impacts of large-scale environmental regulations. The economic impact results are estimated in terms of changes in the State output of goods and services, personal income, and employment.

The data for the industrial sectors originated with the Bureau of Economic Analysis of the U.S. Department of Commerce, based on the Census of Business – a detailed survey of companies conducted in the U.S. every five years, the most recent one done in 1999. The conversion of national data to updated California data is accomplished by Impact Analysis for Planning (IMPLAN), a program that primarily utilizes state-level employment data to scale national-level industrial data down to the size of a state.

In much the same way as firms, households are also aggregated. California households are divided into categories based upon their taxable income. There are seven such categories in the model, each one corresponding to a California personal income tax marginal tax rate (0, 1, 2, 4, 6, 8, and 9.3 percent). Thus, the income for the “one-percent” household is calculated by adding up the income from all households in the one-percent bracket.

10 For a complete description of DRAM, see Peter Berck, E. Golan and B. Smith, "Dynamic Revenue Analysis for California", California Department of Finance, Summer 1996. 11 Berck, Peter, "Developing a Methodology for Assessing the Economic Impacts of Large Scale Environmental Regulations", Prepared for California Air Resources Board, February 2000.Initial Statement of Reasons

August 6, 2004

153 Similarly, the expenditure of the one-percent household on agricultural goods is calculated by adding up all expenditures on agricultural goods for these households. The total expenditure on agricultural goods is found by adding the expenditure of all households together.

Firms and households relate through factor markets and goods-and-servicesmarkets. Firms sell goods and services to households on the goods-andservices markets. Households sell labor and capital services to firms on the factor markets. There is a price in each of the factor and goods-and-services markets. Equilibrium in the factor markets and the goods-and-services markets means that prices adjust in response to changes caused by regulations to equate quantities supplied and demanded in all markets in about four years. That is, the full effects of a change take four years to work their way through the economy.

Compliance Cost Estimates Based on the implementation of a combination of these technologies in different vehicle classes, staff estimates that the proposed near term (2009-2012) regulations would increase the average retail prices of passenger cars (PC) and small trucks (T1) by $16 in 2009 to $292 in 2012, and large trucks (T2) by $36 to $308. In the mid term (2013-2016) the price increases for PC/T1 vehicles as compared to the 2009 baseline would range from $382 in 2013 to $955 in 2016, and for T2 vehicles would range from $330 to $626. The incremental retail prices for all affected vehicles would remain unchanged after 2016.

These increases are expected to be passed on to consumers in one form or another. This section annualizes these costs and estimates the corresponding operating cost savings for an analysis of impacts on the California economy. The net impact of vehicle price increases on consumers is discussed later in this section.

The new vehicles are expected to last 16 years, during which time they will provide transportation at lower operating costs, a benefit. To match the costs to the 16 years of benefits, we annualized the costs over the life of the vehicles. Annualized costs are estimated using a real discount rate of five percent based on an average of the past ten-year interest rates on car loans. Table 10.2

- 1 provides estimates of total annualized costs of the proposed climate change regulations from 2009 to 2030. The total cost was derived by multiplying new vehicle sales by the average cost increase per vehicle estimated in section 5

. The total costs to consumers vary each year from 2009 to 2030. Annualized costs of the proposed regulations are estimated to be approximately $12 million in 2010, $837 million in 2020, and $1.7 billion in 2030. The annualized cost increases over time, due to additional sales of new cars at the higher price as multiple model years are annualized over the same period. For example, the annualized cost in 2011 of $40 million reflects the annualized costs of model years 2009, 2010, and 2011. Thus the annualized costs for each year are for cumulative sales of new cars since 2009. The $837 million in annualized cost inInitial Statement of Reasons

August 6, 2004

154 2020 represents the cost, in 2020, of all complying vehicles sold from 2009 through 2020. The new vehicle sales totals are based on projected numbers of vehicles sold in that year as forecast by the EMFAC model.

Table 10.2

- 1 . Estimates of Total Annual Costs of the Proposed Climate Change Regulations for 2009 through 2030 (millions of 2003 Dollars)

Model Year Annualized

Costs to Consumers of PC/T1 Annualized

Costs to Consumers of T2 Incremental

Annualized Costs to consumers of 2009+ Vehicles Cumulative

Annualized Cost

2009 $ 2 $ 1 $ 3 $ 3

2010 $ 6 $ 3 $ 9 $ 12

2011 $ 23 $ 6 $ 29 $ 40

2012 $ 35 $ 9 $ 44 $ 84

2013 $ 39 $ 11 $ 50 $ 135

2014 $ 46 $ 15 $ 61 $ 196

2015 $ 59 $ 23 $ 82 $ 279

2016 $ 77 $ 30 $ 107 $ 386

2017 $ 78 $ 31 $ 109 $ 495

2018 $ 80 $ 32 $ 112 $ 606

2019 $ 81 $ 32 $ 113 $ 719

2020 $ 82 $ 33 $ 115 $ 834

2021 $ 80 $ 32 $ 112 $ 947

2022 $ 82 $ 33 $ 115 $ 1,061

2023 $ 83 $ 33 $ 116 $1,178

2024 $ 85 $ 33 $ 118 $ 1,296

2025 $ 86 $ 34 $ 120 $ 1,413

2026 $ 87 $ 35 $ 122 $ 1,527

2027 $ 89 $ 37 $ 126 $ 1,621

2028 $ 90 $ 38 $ 128 $ 1,682

2029 $ 92 $ 39 $ 131 $ 1,704

2030 $ 93 $ 40 $ 133 $ 1,676

Source: Sales data from ARB EMFAC model.Initial Statement of Reasons

August 6, 2004

155 Many of the technologies that reduce climate change emissions will also reduce the operating costs of vehicles. Lifetime maintenance costs are also expected to remain the same or decline, depending on the technologies chosen by manufacturers. For example, improved containment of air conditioning refrigerant may reduce the need for mobile air conditioning servicing and therefore reduce maintenance costs to consumers. Due to a lack of comprehensive data, however, staff assumed no change in maintenance costs for the purpose of this analysis. Estimates of the average reduction in operating cost of the new vehicles range from about 1 percent to 31 percent for PC/LDT1, and about 2 percent to 26 percent for LDT2. Table 10.2

- 2 provides estimates of annual operating cost savings from 2009 through 2030. Data used to derive estimated reductions in operating cost are generated from the EMFAC model. The analysis assumes a gasoline price of $1.74 per gallon, taken from the 2004 California Energy Commission (CEC) Integrated Energy Policy Report. As shown in Table 10.2

- 2 , for every dollar of the cost, the regulation could save $5 to $11 for the consumers. Figure 10

- 1 illustrates the savings to costs ratio in graphic form.Initial Statement of Reasons

August 6, 2004

156 Table 10.2

- 2 . Estimates of Total Annual Value of New Vehicle Operating Cost Savings (millions of 2004 Dollars)

Model Year Operating

Cost Savings (millions of 2004$) Saving to

Cost Ratio

2009 $27 9.2 2010 $124 10.3 2011 $415 10.4 2012 $921 11.0 2013 $1,407 10.5 2014 $1,913 9.8 2015 $2,464 8.9 2016 $3,050 7.9 2017 $3,620 7.3 2018 $4,172 6.9 2019 $4,706 6.5 2020 $5,223 6.2 2021 $5,734 6.0 2022 $6,194 5.8 2023 $6,635 5.6 2024 $7,055 5.4 2025 $7,451 5.3 2026 $7,913 5.2 2027 $8,286 5.1 2028 $8,640 5.1 2029 $8,976 5.2 2030 $9,292 5.5

Overall, purchasers of new vehicles in 2009 and beyond would experience a significant reduction in their operating cost.Initial Statement of Reasons

August 6, 2004

157 Figure 10

- 1 : Statewide Costs and Benefits of the Proposed Climate Change Regulations

Economic Impacts Higher vehicle prices provide a means to estimate the direct expenditures that will be incurred by California businesses, governments, and individuals to meet the requirements of the proposed climate change regulations. These expenditures would in turn bring about additional (indirect) changes in the California economy that may change the overall costs of the regulation to the economy. Increased vehicle prices, for example, may result in a reduction of demand for other goods and services as consumers use more of their money to



### Statewide Costs and Benefits of Pavley

Vehicles

$0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 $9,000 $10,00020092012201520182021202420272030Annualized Costs and Benefits (millions of dollars)

Total Annualized Costs

Annual Value of Operating Cost Savings (in millions of 2003$)Initial Statement of Reasons

August 6, 2004

158 pay for the price increase. California firms may respond by cutting back production and decreasing employment. On the other hand, in response to the proposed regulations automobile manufacturers are expected to choose technologies that reduce vehicle operating costs, leaving consumers with additional money to spend on products and services. This would, in turn, induce firms supplying those products and services to expand their production and increase their hiring of workers. A third type of effect occurs when purchase of the new vehicles directly lowers demand for the petroleum refining and gasoline distribution sectors.

The changes caused by the proposed regulations will affect industries both negatively and positively. The net effect on the California economy of these activities hinges on the extent to which products and services are obtained locally. Using the E-DRAM model of the California economy, staff estimated the net effects of these activities on affected industries and the overall economy. The California industries and individuals affected most by the proposed climate change regulations are those engaged in the production, distribution, sales, service, and use of light-duty passenger vehicles as well as the refining and distribution of gasoline.

Table 10.2

- 3

, Table 10.2

- 4 and Table 10.2

- 5 summarize the impacts of the proposed climate change regulations on the California economy for fiscal years 2010, 2020, and 2030 respectively. Since the E-DRAM model is built to reproduce the economic conditions of fiscal year 1998/99, we first extrapolatedthe model out to 2010 based on State population, personal income, and industryspecific forecasts 12 . Higher vehicle prices were then adjusted to fiscal year 2010, 2020, and 2030.

The results of the E-DRAM simulation show that the changes caused by the proposed regulations would reduce the California economic output by roughly $40 million (0.002 percent) in 2010, $2.5 billion (0.08 percent) in 2020, and $4.8 billion (0.1 percent) in 2030. Personal income, however, would increase by roughly $160 million (0.01 percent) in 2010, $5.3 billion (0.3 percent) in 2020, and $8.5 billion (0.3 percent) in 2030. As a result, California net employment impact due to the proposed regulation would also increase by over 3,000 jobs (0.02 percent) in 2010, 55,000 (0.3 percent) in 2020, and 83,000 (0.4 percent) in 2030.
Table 10.2

- 3 . Economic Impacts of the Proposed Climate Change Regulations on the California Economy in Fiscal Year 2010 (2003$) California Economy Without Climate Change Regulations With Climate

Change Regulations Difference % of Total

12 For a more detail description of the E-DRAM extrapolation to “out years”, see “Benefits of Reducing Demand for Gasoline and Diesel,” a joint report to California Air Resources Board and California Energy Commission prepared by Arthur D. Little, Inc. , March, 2002.Initial Statement of Reasons

August 6, 2004

159 Output (Billions) $2,228.06 $2,228.02 - $0.04 - 0.002 Personal Income (Billions) $1,451.01 $1,451.17 + $0.16 + 0.01 Employment (thousands) 16,354 16,357 + 3 + 0.02

Table 10.2

- 4 . Economic Impacts of the Proposed Climate Change Regulations on the California Economy in Fiscal Year 2020 (2003$) California Economy Without Climate Change Regulations With Climate

Change Regulations Difference % Total

Output (Billions) $3,078.02 $3,075.49 - $2.53 - 0.08 Personal Income (Billions) $2,009.54 $2,014.81 + $5.27 + 0.3 Employment (thousands) 18,661 18,716 + 55 + 0.3

Table 10.2

- 5 . Economic Impacts of the Proposed Climate Change Regulations on the California Economy in Fiscal Year 2030 California Economy Without Climate Change Regulations With Climate

Change Regulations Difference % Total

Output (Billions) $4,241.54 $4,236.71 - $4.83 - 0.1 Personal Income (Billions) $2,781.44 $2,789.91 + $8.47 + 0.3 Employment (thousands) 21,763 21,846 + 83 + 0.4

These results indicate that higher vehicle prices result in consumers redirecting other expenditures. Consumers would spend more on the purchase of motor vehicles, thus having less money to spend on the purchase of other goods and services. Since most automobile manufacturing occurs outside of the State, the increased consumer expenditures on motor vehicles would be a drain on the California economy. The reduction in operating costs that results from improved vehicle technology would, however, reduce consumer expenditures and would therefore leave California consumers with more disposable income to spend on other goods and services. Businesses that serve local markets are most likely to benefit from the increase in consumer expenditures. The increase would in turn boost the California economy, resulting in the creation of additional jobs.

10.3 Potential Impact on California Business Competitiveness

Automobile manufacturing in California represents a small fraction of the State’s economy, about 0.27 percent. The California businesses impacted by this regulation tend to be affiliated businesses such as gasoline service stations, automobile dealers, and automobile repair shops. Affiliated businesses are mostly local businesses. These businesses compete within the State and generally are not subject to competition from out-of-state businesses. Therefore, the proposed regulations are not expected to impose significant competitive disadvantages on affiliated businesses.Initial Statement of Reasons

August 6, 2004

160 10.4 Potential Costs to Local and State Agencies

There are about 420,000 State and local agency-owned vehicles in California, or 1.74 percent of the total state fleet of about 24 million vehicles, according to a report from California Energy Commission 13 . A typical agency-owned vehicle is driven an average of 12,500 miles each year. This usage rate is very similar to those of private consumers. The staff analysis indicates that for individual consumers, the increased initial cost is more than offset by operating cost savings over the life of the vehicle. Therefore, staff expects that the same would hold true for public agencies--savings from the lower operating costs of the proposed regulation would outweigh the higher price that the State and local agencies would pay for vehicles in 2009 and later.

Lower fuel consumption by the new complying vehicles would affect gasoline and vehicle sales tax revenues. Gasoline taxes include fixed state and federal excise taxes, and the state sales tax. If tax rates remain the same, staff estimates that gasoline excise and sales tax revenues will decline by about $36 million in 2010 compared to the no regulation scenario, of which about $8 million will be offset by increased sales taxes from higher priced vehicles. In 2020, fuel taxes would decline by $1.3 billion compared to a no regulation scenario, of which about $132 million will be offset by increased vehicle sales tax revenues. Though not quantified, it is expected that a considerable percentage of the increase in personal income due to the proposed regulations would be expended on goods subject to local sales tax

10.5 Potential Impact on Individual Consumers

To provide perspective on the potential impact of the proposed regulations on the monthly cash flow for typical purchasers of new vehicles, staff considered a vehicle-financing period of five years at an interest rate of 5 percent. Table 9.5-1 provides estimates of potential increases in monthly loan payments and decreases in operating cost based on the average increase to vehicle prices for the PC/LDT1 and LDT2 categories when the regulation is fully phased-in (2016). Operating cost savings are estimated based on the EMFAC model estimates of the annual average vehicle miles traveled in the vehicle’s first five years of life. According the EMFAC model, the classes of vehicles belonging to the PC/LDT1 and LDT2 categories travel, on average, about 15,000 annually during the first five years.

As shown in Table 10.5-1 below, the proposed regulations are expected to increase the average monthly payment for a typical consumer by about $11.89 for the PC/LDT1 category and $18.12 for the LDT2 category. Concurrently,

13 California Alternative Fuels Infrastructure Program Evaluation 2003, California Energy Commission Report # 600- 03-018Initial Statement of Reasons

August 6, 2004

161 typical consumers would benefit from monthly operating cost savings ranging from about $23.62 to $24.65 for the PC/LDT1 and LDT2 categories, respectively, resulting in net savings on a monthly basis of $6.54 for the PC/LDT1 and $11.73 for the LDT2.

It should be noted that most vehicles still retain a significant portion of their original value after a five-year financing period. For example, passenger cars retain about 37 to 46 percent of their original value while trucks retain about 46 to 59 percent. These values tend to effectively reduce the increase in monthly payments if they are realized after the completion of the loan payments. Even without the realization of the residual value, the monthly savings from new vehicle operations exceeds the increase in monthly loan payments for both the PC/LDT1 and LDT2 categories.

Table 10.5 -1. Potential Impact on Monthly Loan Payment and Operating Savings for New Vehicles Description PC/LDT1 LDT2 Average Increase in New Car Price $630 $960 Increase in Monthly Loan Payment $11.89 $18.12 Monthly Operating Savings $23.62 $24.65 Net Monthly Savings $11.73 $6.54

A similar analysis is presented for used vehicles is presented in section 11 (Impacts on Minority and Low Income Communities).

10.6 Conclusion

The proposed climate change regulation has a net positive impact on the State's economy. The regulation may lead to a net creation or expansion of businesses, and could increase jobs in California. Because those businesses that are affected are local, there will not be any impact on the ability of California business to compete with businesses in other states. State and local agencies will not be adversely impacted and are likely to realize a net reduction in their cost of fleet operations.Initial Statement of Reasons

August 6, 2004

162 11 IMPACTS ON MINORITY AND LOW INCOME COMMUNITIES

This section provides information on the ARB's activities to involve minority and low-income communities in the development of the climate change regulations. Staff also has assessed whether the regulation would impose economic or environmental impacts on minority or low income communities.

11.1 ARB Environmental Justice Policy

The ARB has made the achievement of environmental justice an integral part of its activities. State law defines environmental justice as the fair treatment of people of all races, cultures, and incomes with respect to the development, adoption, implementation, and enforcement of environmental laws, regulations, and policies.

The Board approved Environmental Justice Policies and Actions (Policies) on December 13, 2001. These Policies establish a framework for incorporating environmental justice into the ARB's programs consistent with the directives of State law. The Policies apply to all communities in California, but recognize that environmental justice issues have been raised more in the context of low-income and minority communities.

As the ARB developed the climate change regulations, staff worked closely with community leaders involved with environmental justice as well as with environmental and public health organizations to maintain an ongoing dialogue and thus successfully implement the ARB's environmental justice policies.

11.2 AB 1493 Requirements

Assembly Bill 1493 emphasizes the importance of considering the economic impacts of the climate change regulations on communities in an environmental justice context. The bill specifically directs ARB to,

"consider the impact the regulations may have on the economy of the state, including, but not limited to...the ability of the state to maintain and attract businesses in communities with the most significant exposure to air contaminants, localized air contaminants, or both, including, but not limited to, communities with minority populations or low-income populations, or both."

In addition, the bill requires ARB to report to the Legislature and the Governor on:

“the impact of the regulations on communities in the state with the most significant exposure to air contaminants or toxic air contaminants, or both,including, but not limited to, communities with minority populations or lowincome populations, or both.”Initial Statement of Reasons

August 6, 2004

163 The bill also recognizes the importance of engaging these communities throughout the entire regulatory development process and includes specific requirements that the ARB

"conduct public workshops in the state, including, but not limited to, public workshops in three of the communities in the state with the most significant exposure to air contaminants or localized air contaminants, or both,including, but not limited to, communities with minority populations or lowincome populations, or both."

In order to accomplish the Board's over-arching environmental justice goals, the ARB has actively engaged communities with environmental justice concerns. These efforts have also served to meet the specific requirements set forth in the bill.

11.2.A Outreach to Minority and Low Income Communities

As ARB developed the climate change regulations, staff benefited from the support of community leaders working for environmental justice. Staff successfully identified a core group of leaders in communities with environmental justice concerns who were willing to work with staff to ensure the development of effective and defensible regulations. This core group of environmental justice representatives included environmental, health-based and environmental justice organizations. It was important to ensure that issues specifically impacting communities with environmental justice concerns were identified and addressed. Members of this core group regularly attended ARB workshops and Board hearings in order to have accurate information about our climate change activities. For those unable to attend the scheduled workshops and hearings, staff sent targeted emails with information prior to each workshop followed by a summary of the meeting specifically addressing issues that may be of concern to these communities.

In order to get communities intimately involved in the entire regulatory development process, staff made it a priority to attend local environmental justice community meetings. At these meetings, staff provided general background information on climate change and updated the groups on the ARB's climate change activities and potential issues that might arise. Provided below is a list of meetings staff attended:Initial Statement of Reasons

August 6, 2004

164 Date Organization February 27, 2003 Los Angeles Environmental Justice Forum July 22, 2003 Oakland Environmental Justice Meeting October 30, 2003 California League of Conservation Voters Education Fund Environmental Justice Forum May 13, 2004 Partnership for the Public Health, Environmental Justice Sub-Committee Meeting May 20, 2004 Bluewater Network Environmental Justice Forum "Global Warming, Air Quality and Environmental Justice: Finding Common Ground" June 10, 2004 3 rd Street Celebration, North Richmond June 26, 2004 Multi Cultural Celebration, North Richmond

Staff will continue to attend local environmental justice meetings in the Bay Area, Los Angeles area and the Central Valley. Staff has also worked with environmental and health based organizations to coordinate outreach messages and materials for communicating with these communities. In addition, all of the ARB climate change fact sheets were translated into Spanish and staff developed additional fact sheets and outreach materials that specifically address climate change in an environmental justice context.

11.2.B Public Workshops

Staff not only attended local community meetings, but also conducted workshops in communities with environmental justice concerns. The dates of all the workshops were as follows:

Date Location February 18, 2004 Huntington Park July 6, 2004 Oakland July 8, 2004 Fresno July 13, 2004 Pacoima

The first workshop, held in Huntington Park in February 2004, allowed staff to receive input from community members prior to the development of a draft proposal. Working with a core group of stakeholders, a panel was put together for this workshop to provide attendees with an overview of climate change and how it may impact their community. This panel included staff from the Union of Concerned Scientists, Redefining Progress and a volunteer from the American Lung Association. In addition, staff invited Mr. Carlos Porras of Citizens for a Better Environment to emcee the workshop. This provided a good link between the panel, ARB staff and the community. This first workshop was beneficial and established the groundwork for subsequent efforts. Staff continued to work with the stakeholder group to plan the followup workshops to ensure that they were effective and met the needs of the specific audiences.Initial Statement of Reasons

August 6, 2004

165 The three workshops in July opened with someone from the local community providing introductory remarks and then focused on the ARB's draft staff proposal. The opening remarks in Oakland were provided by Mr. Henry Clark of the West Oakland Toxics Coalition, in Fresno by Mr. Rey Leon of the Latino Issues Forum and in Pacoima by Assemblymember Montañez. Having local community members and leader participate in the workshops was greatly appreciated and added value and a local context to ARB's presence in these communities.

There were a number of different comments and concerns expressed at each workshop. Communities were interested in our authority to regulate GHG emissions from other transportation sources, primarily heavy-duty diesel trucks. In Oakland, they were also concerned about controlling diesel emissions from ships and ports. In response, staff pointed out that AB 1493 focused specifically on passenger cars and trucks but that the ARB has many other programs to control diesel emissions from heavy-duty trucks. In addition, the West Coast Governors’ Global Warming Initiative is looking into controlling other sources of GHG emissions.

There were also questions at several workshops regarding localized impacts of GHG emissions. Staff pointed out that although GHG emissions themselves are not harmful, the resulting climate change impacts can have important consequences. Most attendees were interested in the work that Redefining Progress is doing to research the impacts of climate change on communities and are interested in getting involved in the process and seeing the results of that study.

Community members recognized and understood the impacts to used car prices and were interested in seeing a comparable assessment of the prices of new cars. Therefore, staff has included in the final staff report the annual increase in the cost of a new car and the annual savings in operating costs. In addition, the used car analysis will be done based on a 5-year loan rather than the eight years used previously to assess these costs and savings.

There were comments made at the Oakland workshop regarding staff's projections of GHG emissions out to 2020 and 2030 that pointed out that in 2030 the emissions begin to increase again due to growth and the increasing number of vehicle miles traveled. It was stated that in order to reduce GHG emissions, the ARB should implement policies that get people out of their cars and encourages them to use public transit, to walk and to use other alternative means of transportation. Although these are excellent ways to reduce GHG emissions, and programs that achieve these goals are an important and necessary step in reducing GHG emissions, the mandate provided by AB 1493 is focused on technical improvements to the vehicles and cannot include these types of programs. Although the ARB as well as the local air districts and localInitial Statement of Reasons

August 6, 2004

166 governments support and encourage these alternative modes of transportation through non-monetary incentive programs, the ARB cannot impose any regulatory mandates to achieve these goals at this time.

There were also several comments asking about subsidies for low-income households to purchase the more expensive technologies. ARB staff stated that although this idea has appeal, our staff analysis found that the cost increase of both new and used vehicles would not be overly burdensome and due to lower operating costs would be paid back to the consumer in a reasonable timeframe.

There was some discussion of the impacts of this regulation on criteria pollutants. Staff noted that although there will be some decrease in criteria pollutant emissions due to less fuel production and distribution, these benefits will be small. In addition, there is a link between climate change, hotter days and increased asthma, but this regulation by itself will not eliminate climate change and its consequences. Rather, it represents California’s commitment to work along with others to address this critical issue. California is particularly vulnerable to the adverse impacts of climate change due to our expansive coastline, limited water supply and valuable agricultural industry.

In general, community leaders were very supportive of the work ARB is doing to take steps to reduce GHG emissions.

11.3 Potential Environmental Impacts

The staff analysis concluded that the climate change regulation will have a negligible impact on criteria pollutant emissions. However, to the degree that there are upstream benefits associated with reduced petroleum shipping, storage and distribution, emissions will be reduced. Many of these shipping and storage facilities are located in low income and minority communities. Distribution of petroleum takes place along freeway corridors near communities often identified with environmental justice concerns. Staff therefore has not identified any mechanisms by which the climate change regulation would result in a disproportionate negative impact on low income or minority communities. In fact, the upstream emission reductions are likely to provide benefits to these communities.

11.4 Potential Economic Impacts

Staff has evaluated the economic effects of the climate change regulation on lowincome and minority communities. For residents in these communities who purchase new vehicles, the economic effects of the regulations would be nodifferent than in any other community. However, because residents in lowincome communities tend to purchase used vehicles at a higher rate than residents in middle and high income communities, staff evaluated the effects of the regulation on the used vehicle market and, more specifically, on residents inInitial Statement of Reasons

August 6, 2004

167 low-income communities that purchase used vehicles. Staff invites comment on other possible economic impacts.

In section 12.6 of this report staff evaluated the broader impacts of the regulation on job and business creation in representative San Diego communities with environmental justice concerns. The evaluation concluded that the regulations would likely result in an increase in jobs and business creation.

11.4.A Potential Impact on a Typical Low-income Household

The proposed climate change regulation is likely to require changes in vehicle technology that will increase the price of new vehicles sold in California. This increase in turn is expected to increase the price of used vehicles. Low-income households often purchase used vehicles. In this analysis, California households of three members with an annual family income of $15,000 or less are considered to be economically disadvantaged. 14According to the 2001 National Household Travel Survey, low-income households with an average annual income of $20,000 (closest bracket to poverty level of $15,000) tend to purchase vehicles with an average age of 10 to 12 years 15

. The impact on low-income used car buyers was assessed by considering the annual vehicle price increase as a percent of income. The analyses showed that the proposed regulations should not have a significant impact on low-income households that purchase used cars.

11.4.B Approach

The approach used to assess the potential impact of the proposed regulations on typical low-income purchasers of used vehicles is outlined as follows:

(1) Changes in prices of used vehicles caused by the proposed regulations for vehicles associated with the PC/LDT1 and LDT2 categories were estimated using historical retention value. For example, a $500 increase in the price of a new vehicle belonging to the PC/LDT1 category is expected to increase the price of a 10-year-old vehicle by $115 assuming a retention value of 23 percent.

(2) Changes in prices of used vehicles were annualized over the remaining life of the vehicles. For example, an $115 increase in the price of a 10- year-old PC/LDT1 used vehicle is equivalent to a $22 annual cost increase for the vehicle over its median remaining useful life of 8 years.

14 U.S. Department of Labor and U.S. Department of Health and Human Services, Poverty Guidelines 15 2001 National Household Travel Survey, the U.S. Department of Transportation, http://nhts.ornl.gov/2001/html_files/introduction.shtmlInitial Statement of Reasons

August 6, 2004

168 (3) The annualized cost increase was compared with the median income of typical low-income households to assess the extent of the impact on typical low-income household purchasers of used vehicles.

11.4.C Assumptions

The following assumptions were used to estimate the potential economic impacts of the proposed regulations on typical low-income households:

(1) The proposed regulations would increase the average price of a PC/LDT1 by about $630 and the average price of a LDT2 by $960 when the regulation is fully phased in (2016).

(2) Most low-income households purchase vehicles that are at least 10 years old. This assumption is based on the information obtained from the 2001 National Household Travel Survey.

(3) A 10-year-old used PC/LDT1 has a retention value of about 23 percent. A 10-year-old LDT2 has a retention value of about 32 percent.

(4) A real discount rate of 10 percent was used for this analysis. The inflation-adjusted interest rate on car loans was about 5 percent in the past 10 years 16 . A 5 percent risk premium was added to the historical car loan rate to reflect a higher risk associated with financing used vehicles.

(5) New passenger cars and trucks (PC/LDT1) are expected to have median useful life of 16 years, and new large trucks and minivans (LDT2) have a median useful life of 19 years 17 . Based on the data from EMFAC, a 10-year-old car has a median remaining useful life of 8 years and a 10-yearold truck has a median remaining useful life of 11 years.

(6) California households of three with an annual family income of $15,000 or less are considered to be economically disadvantaged 18

. (7) Low-income households do not typically experience savings from reduction in operating cost during the first 10 years of the proposed regulations.

16 Historical car loan data, Federal Reserve Statistical release, http://www.federalreserve.gov/releases/g19/hist/cc_hist_tc.html Historical Consumer Price Index, U.S. Department of Labor, Bureau of Labor Statistics, http://research.stlouisfed.org/fred2/data/CPIAUCNS.txt 17 Please see “Draft Technology and Cost Assessment for Proposed Regulations to Reduce Vehicle Climate change Emissions Pursuit to AB 1493,” Air Resources Board. 18 U.S. Census Bureau, Poverty 2003Initial Statement of Reasons

August 6, 2004

169 11.4.D Results

Typical California low-income households are affected by the proposed climate change regulations to the extent that the implementation of the regulations would alter their annual disposable income. Using the previously stated assumptions, staff estimated that the increase in annual costs of used vehicle ranges from 0.2 to 0.3 percent of the annual family income of $15,000 for a low-income household, as shown in the table. This represents a minor change in the average income of typical low-income households.

The analysis discussed here assumes that low-income households would be able to finance the increase in used car prices either from their own income or from borrowing. As shown in Table 11.4

- 1 , the increase in used car prices would be $145 for vehicles belonging to the PC/LDT1 category and $307 for vehicles belonging to the LDT2 category. It is thus possible that some low-income households may have difficulty raising additional funds to purchase their vehicles. We believe this case is not typical as 70 percent of vehicles owned by households with family income of less than $15,000 are passenger cars 19

. These households are likely to replace their vehicles with similar vehicles. Therefore, the additional costs of used cars to most low-income households would be about $145. This amounts to about 0.2 percent of their annual income.

Table 11.4

- 1 . Potential Impacts of Proposed Regulation on Low-Income Households Description PC/LDT1 LDT2 Increase in New Vehicle Prices $630 $960 Increase in Used Vehicle Prices $145 $307 Median Remaining useful life (years) 8 11
Annualized Cost of Used Vehicle $27 $47 Poverty Income Level $15,000 $15,000 % Change 0.2 0.3

The climate change regulation may cause vehicle prices to increase, but the lowincome purchasers of used vehicles are not likely to face the increase for several years. When they do pay higher prices for their vehicle, they will see a significant reduction in vehicle operating costs. The savings far outweigh the annualized cost of purchasing the vehicle (price increase spread over the years of ownership). Purchase costs may increase by a small percentage of their income, but will be more than offset by the operating cost savings, as discussed in the next section.

19 2001 National Household Travel Survey.Initial Statement of Reasons

August 6, 2004

170 11.4.E Potential Impact on Monthly Loan Payment and Operating

Savings

To assess the potential impact of the proposed regulations on the monthly cashflow of typical low-income purchasers of used vehicles, we consider a vehiclefinancing period of three years at an interest rate of 10 percent. Table 11.4

- 2 below table provides estimates of the potential increases in monthly payments and decreases in operating cost savings for the PC/LDT1 and LDT2 categories. As shown in the table, the proposed regulations are expected to increase the average monthly payment for a typical low-income household from about $4.68 for the PC/LDT1 category and by $9.91 for the LDT2 category. Concurrently, typical low-income consumers would benefit from monthly operating cost savings ranging from about $14.11 (LDT2) to $14.34 (PC/LDT1), resulting in a net monthly savings of $9.43 for PC/LDT1 and $4.43 for LDT2. The vehicle miles traveled are estimated using EMFAC accrual rates for 10-year-old vehicles and discounting by 20 percent to reflect the fact that low-income consumers tend to drive somewhat less than the average for the population.

It should be noted here that most used vehicles still retain a significant portion of their value after a three-year financing period. These values tend to effectively reduce the increase in monthly payments if they are realized after the completion of the loan payments. Even without the realization of the residual value, monthly savings from vehicles impacted by the regulation exceed the increase in monthly loan payments for both the PC/LDT1 and LDT2 categories.

Table 11.4

- 2 . Potential Impact on Monthly Loan Payment and Operating Cost Savings for Used Vehicles

Description PC/LDT1 LDT2 Average Increase in Used Vehicle Price $145 $307 Increase in Monthly Loan Payment $4.68 $9.91 Monthly Operating Cost Savings $14.11 $14.34 Net Monthly Savings $9.43 $4.43

* Example baseline consumption based on 0.0348 gallons/mile for PC/LDT1 and 0.0495 gallons/mile for LTD2

.Initial Statement of Reasons

August 6, 2004

171 12 OTHER CONSIDERATIONS

This chapter describes several approaches that supplement the standard economic analysis presented in Section 10 . The methods used in this chapter rely on recent tools and studies that provide additional insight into the potential impacts of the regulation. Using those tools and studies to investigate possible secondary impacts of the regulation, this section presents additional perspectives on the potential impact of the proposed regulation on fleet mix, emissions, the State’s economy, small businesses, and low-income households. The methods discussed in this chapter are in the early stages of development relative to the standard analysis presented in Section 10 . As such, it is expected that these methods will be further refined.

12.1 Consumer Response Effects on Emissions and State Economy

The ARB’s climate change regulation will increase new vehicle prices, starting with model year 2009. In addition to an increase in price, however, it is expected that many of the technologies that manufacturers employ to lower GHG emissions to comply with the regulation will, as an outgrowth, result in vehicles with lower operating costs than comparable pre-regulation vehicles. AB 1493 requires ARB to evaluate such operating costs as a component of owner or operator life-cycle costs. Changes in vehicle prices and other attributes may affect consumer purchase decisions and could affect how consumers subsequently use vehicles. For example, not all consumers would be willing to pay more for the vehicle that they might have otherwise purchased. Some may purchase a different vehicle commensurate with their budget. Others may wait until the following year, or respond in some other way. Still other consumers may highly value the reduction in operating cost, in which case the vehicle would be more attractive. Such decision changes, referred to as consumer response, can affect the California vehicle fleet mix and possibly emissions.

12.1.A Background

A model, known as CARBITS, was used to estimate consumer response (i.e., the estimated change in the type and number of vehicles sold) to changes in vehicle attributes. The model is fully explained in the Technical Support Document. The attribute changes considered are a vehicle price increase necessary to cover the estimated compliance costs of the climate change regulation, and a reduction in vehicle operating costs which is an outgrowth of the technology employed to reduce GHG emissions.

The CARBITS model is a consumer choice model and was developed by the Institute of Transportation Studies at the University of California, Davis. The ultimate objective of the modeling effort is to investigate the potential fleet mix changes and any criteria pollutant impact that may result as a side effect of the climate change regulation. The results show that even if there is a consumerInitial Statement of Reasons

August 6, 2004

172 response to potential price increases and changes in operating costs, the staff proposal would have a negligible effect on tailpipe criteria pollutant emissions.

Consumer response may manifest itself in different ways. The consumer response to the regulations is defined as the difference in the California fleet mix between the forecasted baseline and the regulation scenarios. The baseline scenario is a depiction of the passenger vehicle fleet in the absence of the climate change regulation.

While vehicle prices are likely to go up with respect to the regulatory scenarios, the operating costs are expected to be lower. As a consequence of the price increase, consumers could respond by purchasing fewer new vehicles and holding on to their current vehicles a bit longer. Such a shift in vehicle holdings would lead to aging of the vehicle fleet. The aging of the fleet could result in older, relatively higher polluting cars staying in service longer than they would have remained otherwise. This delay in fleet turnover could slow the progress that California is making in reducing criteria pollutant emissions from mobile sources. On the other hand, the reduction in operating cost could make new vehicles more attractive, creating a factor that would increase new vehicle sales. This would lessen and potentially more than offset the impact of any price effects. The purpose of the CARBITS model is to quantitatively investigate the possible magnitude and direction of such changes.

12.1.B Impacts on Vehicle Prices and Operating Costs

Using the cost estimates from section 5 of this report, staff developed a regulatory scenario to use as inputs to CARBITS in an effort to estimate consumer response to changes in price and operating cost. Table 12.1

- 1 shows the baseline vehicle prices for the fourteen vehicle classes that the model uses. Table 12.1

- 2 shows the estimated average price increase needed to cover manufacturer compliance cost. This estimated price increase takes into account the phase-in of the standard and the fact that not all vehicles will need to be modified in order for each manufacturer to comply with the standard. The derivation of these estimates is described in section 6

. Table 12.1

- 3 shows the price increase in percentage terms. These price changes are calculated for the near-term phase (2009-2012) of the regulation as well as the mid-term (2013- 2016) phase. A combination of near and mid-term price changes were calculated for some years based on the assumption that the regulation will be phased in over a period of years. Starting in 2016, when the mid-term technologies are fully phased in, the price changes remain the same.

The costs presented in section 5 were estimated for 5 vehicle classes. However, CARBITS uses 14 vehicle classes. To translate the costs from 5 to 14 classes, staff assumed that vehicles of similar size will have the same price and operating cost changes. For example, mini, sub-compact, and compact cars fit in the same class as the small car category in the cost estimates presented in section 5 andInitial Statement of Reasons

August 6, 2004

173 therefore see the same price change. Similarly, staff assumes that operating cost would decrease by the same percentage for the mini, sub-compact, and compact cars.

Table 12.1

- 1 . Predicted Baseline Vehicle Prices by CARBITS Classes ($2003)
Cars: Mini Subcompact Compact Midsize Large Luxury Sport

2009 $14,787 $16,612 $16,830 $21,931 $25,195 $47,761 $22,129 2010 $14,850 $16,612 $16,910 $22,010 $25,274 $47,839 $22,193 2011 $14,899 $16,612 $16,975 $22,069 $25,333 $47,899 $22,241 2012 $14,931 $16,612 $17,022 $22,108 $25,372 $47,937 $22,274 2013 $14,947 $16,612 $17,054 $22,127 $25,392 $47,958 $22,290 2014 $14,947 $16,612 $17,070 $22,127 $25,392 $47,958 $22,290 2015 $14,947 $16,612 $17,070 $22,127 $25,392 $47,958 $22,290 2016 $14,947 $16,612 $17,070 $22,127 $25,392 $47,958 $22,290 2017 $14,947 $16,612 $17,070 $22,127 $25,392 $47,958 $22,290 2018 $14,947 $16,612 $17,070 $22,127 $25,392 $47,958 $22,290 2019 $14,947 $16,612 $17,070 $22,127 $25,392 $47,958 $22,290 2020 $14,947 $16,612 $17,070 $22,127 $25,392 $47,958 $22,290

Table 12.1

- 1 . (Continued) Predicted Baseline Vehicle Prices by CARBITS Classes ($2003)

Trucks: Small

pickups Large

pickups Minivans Standard

vans Mid

SUVs Large

SUVs Mini

SUVs 2009 $14,485 $19,816 $26,248 $23,817 $28,583 $37,054 $19,353 2010 $14,564 $19,858 $26,312 $23,859 $28,663 $37,096 $19,433 2011 $14,623 $19,890 $26,361 $23,891 $28,721 $37,127 $19,491 2012 $14,663 $19,911 $26,394 $23,912 $28,761 $37,149 $19,531 2013 $14,682 $19,921 $26,410 $23,922 $28,780 $37,158 $19,550 2014 $14,682 $19,921 $26,410 $23,922 $28,780 $37,158 $19,550 2015 $14,682 $19,921 $26,410 $23,922 $28,780 $37,158 $19,550 2016 $14,682 $19,921 $26,410 $23,922 $28,780 $37,158 $19,550 2017 $14,682 $19,921 $26,410 $23,922 $28,780 $37,158 $19,550 2018 $14,682 $19,921 $26,410 $23,922 $28,780 $37,158 $19,550 2019 $14,682 $19,921 $26,410 $23,922 $28,780 $37,158 $19,550 2020 $14,682 $19,921 $26,410 $23,922 $28,780 $37,158 $19,550Initial Statement of Reasons

August 6, 2004

174 Table 12.1

- 2

. Climate Change Regulation Scenario, Vehicle Price Changes 2009 – 2020 ($2003)

Cars: Mini Subcompact Compact Midsize Large Luxury Sport

2009 $20 $20 $20 $9 $9 $9 $20 2010 $65 $65 $65 $30 $30 $30 $65 2011 $244 $244 $244 $112 $112 $112 $244 2012 $367 $367 $367 $167 $167 $167 $367 2013 $409 $409 $409 $200 $200 $200 $409 2014 $465 $465 $465 $248 $248 $248 $465 2015 $568 $568 $568 $344 $344 $344 $568 2016 $710 $710 $710 $490 $490 $490 $710 2017 $710 $710 $710 $490 $490 $490 $710 2018 $710 $710 $710 $490 $490 $490 $710 2019 $710 $710 $710 $490 $490 $490 $710 2020 $710 $710 $710 $490 $490 $490 $710

Table 12.1

- 2(Continued) Climate Change Regulation Scenario, Vehicle Price Changes 2009 – 2020 ($2003)

Trucks: Small

pickups Large

pickups Minivans Standard

vans Mid SUVs Large SUVs Mini

SUVs 2009 $9 $60 $64 $60 $9 $60 $9 2010 $22 $157 $164 $157 $22 $157 $22 2011 $47 $336 $351 $336 $47 $336 $47 2012 $73 $521 $544 $521 $73 $521 $73 2013 $138 $609 $615 $609 $138 $609 $138 2014 $247 $732 $707 $732 $247 $732 $247 2015 $486 $982 $886 $982 $486 $982 $486 2016 $727 $1,232 $1,064 $1,232 $727 $1,232 $727 2017 $727 $1,232 $1,064 $1,232 $727 $1,232 $727 2018 $727 $1,232 $1,064 $1,232 $727 $1,232 $727 2019 $727 $1,232 $1,064 $1,232 $727 $1,232 $727 2020 $727 $1,232 $1,064 $1,232 $727 $1,232 $727Initial Statement of Reasons

August 6, 2004

175 Table 12.1

- 3

. Climate Change Regulation Scenario, Percentage Change in Vehicle Price 2009 - 2020
Cars: Mini Subcompact Compact Midsize Large Luxury Sport

2009 0.1% 0.1% 0.1% 0.0% 0.0% 0.0% 0.1% 2010 0.4% 0.4% 0.4% 0.1% 0.1% 0.1% 0.3% 2011 1.6% 1.4% 1.4% 0.5% 0.4% 0.2% 1.1% 2012 2.4% 2.1% 2.1% 0.7% 0.6% 0.3% 1.6% 2013 2.6% 2.4% 2.3% 0.9% 0.8% 0.4% 1.8% 2014 3.0% 2.7% 2.6% 1.1% 0.9% 0.5% 2.0% 2015 3.7% 3.3% 3.2% 1.5% 1.3% 0.7% 2.5% 2016 4.6% 4.1% 4.0% 2.1% 1.9% 1.0% 3.1% 2017 4.6% 4.1% 4.0% 2.1% 1.9% 1.0% 3.1% 2018 4.6% 4.1% 4.0% 2.1% 1.9% 1.0% 3.1% 2019 4.6% 4.1% 4.0% 2.1% 1.9% 1.0% 3.1% 2020 4.6% 4.1% 4.0% 2.1% 1.9% 1.0% 3.1%

Table 12.1

- 3(Continued) Climate Change Regulation Scenario, Percentage Change in Vehicle Price 2009 - 2020

Trucks: Small

pickups Large

pickups Minivans Standard

vans Mid SUVs Large SUVs Mini

SUVs 2009 0.1% 0.3% 0.2% 0.2% 0.0% 0.2% 0.0% 2010 0.1% 0.8% 0.6% 0.6% 0.1% 0.4% 0.1% 2011 0.3% 1.6% 1.3% 1.4% 0.2% 0.9% 0.2% 2012 0.5% 2.5% 2.0% 2.1% 0.2% 1.4% 0.4% 2013 0.9% 3.0% 2.2% 2.5% 0.5% 1.6% 0.7% 2014 1.6% 3.5% 2.6% 3.0% 0.8% 1.9% 1.2% 2015 3.2% 4.8% 3.2% 4.0% 1.6% 2.6% 2.4% 2016 4.8% 6.0% 3.9% 5.0% 2.4% 3.2% 3.6% 2017 4.8% 6.0% 3.9% 5.0% 2.4% 3.2% 3.6% 2018 4.8% 6.0% 3.9% 5.0% 2.4% 3.2% 3.6% 2019 4.8% 6.0% 3.9% 5.0% 2.4% 3.2% 3.6% 2020 4.8% 6.0% 3.9% 5.0% 2.4% 3.2% 3.6%

Section 5 presented data on operating cost reductions due to the proposed regulation. The reductions were translated to the 14 CARBITS classes and are presented in Table 12.1

- 4 . Because the regulation is phased in over the years, the operating costs reductions account for the portion of the fleet that would become compliant with the proposed regulation in each year.Initial Statement of Reasons

August 6, 2004

176 Table 12.1

- 4 . Climate Change Regulation Scenario, Percentage Reduction in Fuelrelated Operating Cost 2009 - 2020
Cars: Mini Subcompact Compact Midsize Large Luxury Sport

2009 1.0% 1.0% 1.0% 0.9% 0.9% 0.9% 1.0% 2010 3.3% 3.3% 3.3% 2.9% 2.9% 2.9% 3.3% 2011 11.3% 11.3% 11.3% 10.1% 10.1% 10.1% 11.3% 2012 16.0% 16.0% 16.0% 14.4% 14.4% 14.4% 16.0% 2013 17.0% 17.0% 17.0% 15.4% 15.4% 15.4% 17.0% 2014 18.0% 18.0% 18.0% 16.6% 16.6% 16.6% 18.0% 2015 19.5% 19.5% 19.5% 18.4% 18.4% 18.4% 19.5% 2016 21.0% 21.0% 21.0% 20.6% 20.6% 20.6% 21.0% 2017 21.0% 21.0% 21.0% 20.6% 20.6% 20.6% 21.0% 2018 21.0% 21.0% 21.0% 20.6% 20.6% 20.6% 21.0% 2019 21.0% 21.0% 21.0% 20.6% 20.6% 20.6% 21.0% 2020 21.0% 21.0% 21.0% 20.6% 20.6% 20.6% 21.0%

Table 12.1

- 4(Continued) Climate Change Regulation Scenario, Percentage Reduction in Fuel-related Operating Cost 2009 - 2020 Trucks: Small

pickups Large

pickups Minivans Standard

vans Mid SUVs Large SUVs Mini

SUVs 2009 3.3% 2.4% 2.9% 2.4% 3.3% 2.4% 3.3% 2010 9.5% 6.9% 8.3% 6.8% 9.5% 6.8% 9.5% 2011 20.3% 14.6% 17.8% 14.6% 20.3% 14.6% 20.3% 2012 22.3% 16.4% 19.7% 16.4% 22.3% 16.4% 22.2% 2013 24.0% 18.3% 21.4% 18.3% 23.9% 18.3% 23.9% 2014 26.3% 21.3% 23.9% 21.3% 26.3% 21.3% 26.3% 2015 26.3% 21.3% 23.9% 21.3% 26.3% 21.3% 26.3% 2016 26.3% 21.3% 23.9% 21.3% 26.3% 21.3% 26.3% 2017 26.3% 21.3% 23.9% 21.3% 26.3% 21.3% 26.3% 2018 26.3% 21.3% 23.9% 21.3% 26.3% 21.3% 26.3% 2019 26.3% 21.3% 23.9% 21.3% 26.3% 21.3% 26.3% 2020 26.3% 21.3% 23.9% 21.3% 26.3% 21.3% 26.3%

These percentage operating cost savings were then converted into cent per mile savings. The results are shown in Table 12.1

- 5

.Initial Statement of Reasons

August 6, 2004

177 Table 12.1

- 5

. Operating Cost Savings, Cents Per Mile
Cars: Mini Subcompact Compact Midsize Large Luxury Sport

2009 0.0 0.0 0.1 0.1 0.1 0.1 0.1 2010 0.2 0.2 0.2 0.2 0.2 0.2 0.2 2011 0.5 0.5 0.6 0.6 0.7 0.7 0.8 2012 0.8 0.8 0.9 0.9 1.0 1.0 1.1 2013 0.8 0.8 0.9 0.9 1.0 1.1 1.2 2014 0.9 0.9 1.0 1.0 1.1 1.1 1.2 2015 0.9 0.9 1.0 1.1 1.3 1.3 1.3 2016 1.0 1.0 1.1 1.3 1.4 1.4 1.4 2017 1.0 1.0 1.1 1.3 1.4 1.4 1.4 2018 1.0 1.0 1.1 1.3 1.4 1.4 1.4 2019 1.0 1.0 1.1 1.3 1.4 1.4 1.4 2020 1.0 1.0 1.1 1.3 1.4 1.4 1.4

Table 12.1

- 5 . (Continued) Operating Cost Savings, Cents Per Mile

Trucks: Small

pickups Large

pickups Minivans Standard

vans Mid SUVs Large SUVs Mini

SUVs 2009 0.1 0.1 0.2 0.2 0.2 0.2 0.1 2010 0.3 0.3 0.4 0.4 0.5 0.4 0.4 2011 0.7 0.7 0.8 0.8 0.9 0.8 0.7 2012 1.0 1.0 1.1 1.2 1.3 1.2 1.0 2013 1.1 1.1 1.2 1.3 1.4 1.3 1.1 2014 1.1 1.2 1.2 1.4 1.4 1.4 1.1 2015 1.2 1.3 1.3 1.5 1.5 1.6 1.2 2016 1.2 1.5 1.4 1.7 1.6 1.7 1.3 2017 1.2 1.5 1.4 1.7 1.6 1.7 1.3 2018 1.2 1.5 1.4 1.7 1.6 1.7 1.3 2019 1.2 1.5 1.4 1.7 1.6 1.7 1.3 2020 1.2 1.5 1.4 1.7 1.6 1.7 1.3

12.1.C Impacts on Vehicle Sales, Fleet Size, and Average Age

The impacts of the proposed regulation were assessed by forecasting a baseline future fleet mix that assumes that, absent the regulation, vehicle prices and operating costs change only slightly in real terms. This baseline then is compared to a regulatory scenario that takes into account the estimated price and operating cost changes resulting from the regulation. Table 12.1

- 6 shows vehicle sales, the size of the fleet, and the average age of the fleet under the baseline and regulation scenarios.Initial Statement of Reasons

August 6, 2004

178 Table 12.1

- 6 . Results of Baseline and Climate Change Regulation Scenarios

Year Baseline Scenario Regulation Scenario

Vehicle Sales (x1000) Fleet Size

(x1000) Average

Age (years) Vehicle

Sales (x1000) Fleet Size

(x1000) Average

Age (years) 2009 1,687 26,875 9.17 1,689 26,845 9.17 2010 1,710 27,608 9.28 1,717 27,582 9.27 2011 1,728 28,302 9.38 1,745 28,281 9.36 2012 1,754 29,158 9.48 1,774 29,133 9.45 2013 1,775 29,837 9.59 1,786 29,815 9.56 2014 1,804 30,736 9.71 1,805 30,706 9.68 2015 1,849 31,805 9.84 1,835 31,768 9.81 2016 1,879 32,658 9.95 1,840 32,611 9.93 2017 1,926 33,677 10.05 1,882 33,615 10.04 2018 1,966 34,759 10.16 1,913 34,688 10.16 2019 2,005 35,629 10.25 1,947 35,549 10.26 2020 2,049 36,708 10.34 1,988 36,629 10.36

Table 12.1

- 7 shows the differences in sales, fleet mix, and average age of fleet between the baseline and regulation scenarios. The full analysis is presented in the Technical Support Document.
Table 12.1

- 7 . Climate Change Regulation Impacts on Vehicle Sales, Fleet Size, and Fleet Age
Years Changes in Sales Changes in Fleet Size Changes in Average Age (years) In Thousands Percent

Change In

Thousands Percent

Change 2009 3 0.2% 0 0.0% 0.00 2010 7 0.4% 0 0.0% 0.00 2011 18 1.0% 1 0.0% -0.01 2012 19 1.1% -2 0.0% -0.02 2013 11 0.6% -12 0.0% -0.03 2014 2 0.1% -13 0.0% -0.03 2015 -13 -0.7% -15 0.0% -0.03 2016 -37 -1.9% -25 -0.1% -0.02 2017 -43 -2.2% -29 -0.1% -0.01 2018 -52 -2.6% -42 -0.1% -0.01 2019 -54 -2.7% -54 -0.2% 0.01 2020 -61 -3.0% -58 -0.2% 0.02Initial Statement of Reasons

August 6, 2004

179 As can be seen by reviewing the table, in the initial years of the regulation the model predicts a sales increase. This implies that the negative effect on consumer demand brought about by the estimated price increase is more than offset by an increase in consumer demand due to the attractiveness of vehicles with reduced operating cost. As the more stringent second stage of the regulation is phased in, the model predicts that the combined effect of the changes in vehicle attributes would be a slight decrease in vehicle sales. As noted above, these are preliminary estimates and staff will continue to refine this work.

The changes in the fleet mix affect the average age of the fleet. If fewer new cars are sold and consumers hold on to their older cars, the fleet gets older. That is, the average age of vehicles on the road could increase. As Table 12.1

- 7 shows, the fleet aging associated with the regulatory scenario is minimal. It stays either unchanged, as illustrated by 2009 and 2017, or goes up or down by at most 0.03 years, or about 11 days.

The assumptions for this analysis do not consider other reductions in operating costs that may be associated with the regulation such as the potential elimination of a mobile air conditioning service event through improved refrigerant containment strategies that manufacturers may choose to employ. Further, the model does not consider the potential increase in the price of used vehicles in response to new vehicle price increases associated with the regulation. Both of these effects would be expected to translate into a further increase in the sales of new vehicles. Finally, the model does not take into account changes to other vehicle attributes associated with the regulation that consumers may value, such as the environmental benefits. Because the model does not take into account such factors that would serve to increase sales, ARB staff believes that the model may understate the sale of new vehicles with respect to the regulatory scenario.

12.1.D Impacts on Criteria Emissions

Changes in the fleet size and age would affect criteria emissions. Newer cars emit less, and will produce a steady decline in most vehicle pollutants as new vehicles replace existing ones. If the fleet ages, then the rate of emission reduction from the fleet could slow. Older cars tend to be driven less, however, implying that the emissions may not significantly change. The model results indicate small changes to the fleet. The small changes were input into EMFAC model to estimate the emissions. The emissions impacts assessments are shown in Table 12.1

- 8

, Table 12.1

- 9 , and Table 12.1

- 10 below. The tables show projected changes in ROG, NOx and PM10 emissions.Initial Statement of Reasons

August 6, 2004

180 Table 12.1

- 8 . Climate Change Regulation Consumer Response, Changes in ROG Emissions (tons/day)

Year Vintages Baseline ROG (tpd) Regulation

ROG (tpd) Difference

(tpd)

2020 1975-2008 197.70 196.67 -1.03 2020 2009-2020 33.26 33.47 0.21 2020 Total 230.96 230.14 -0.82

Table 12.1

- 9 . Climate Change Regulation Consumer Response, Changes in NOx Emissions (tons/day)

Year Vintages Baseline NOx (tpd) Regulation

NOx (tpd) Difference

(tpd)

2020 1975-2008 157.24 156.51 -0.73 2020 2009-2020 32.96 32.97 0.01 2020 Total 190.20 189.48 -0.72

Table 12.1

- 10 . Climate Change Regulation Consumer Response, Changes in PM10 Emissions (tons/day)

Year Vintages Baseline PM10 (tpd) Regulation

PM10 (tpd) Difference

(tpd)

2020 1975-2008 17.23 17.15 -0.08 2020 2009-2020 25.52 25.55 0.03 2020 Total 42.75 42.70 -0.05

As can be seen from the tables, the regulation is predicted to slightly decrease criteria pollutant emissions in 2020, but only by a very small amount. In considering and interpreting these results, staff believes that the increase in vehicle sales in the early years of the regulation results in a small acceleration in the retirement of higher polluting older cars from the pre-regulation period. This results in slightly lower fleet emissions. On the other hand, the slight projected decrease in sales in the later years of the regulation results in a longer average life for the much less polluting cars of 2009-2020 vintage. This will tend to increase emissions from that group, but to a lesser extent because the newer cars are cleaner than the older cars. The net effect is a very small, but positive, effect on emissions and air quality.Initial Statement of Reasons

August 6, 2004

181 12.2 Alternative Approach to Assessing Consumer Response

The CARBITS model considers many factors at the household analytical level in predicting fleet change. Staff also investigated a simplified alternative approach that uses an aggregate sales response factor, known as price elasticity of demand, to assess the consumer response and emission implications of vehicle price increases due to the proposed regulation. This simplified approach was developed as a screening tool and to provide a cross-check against the CARBITS results.

The ratio of a percentage change in sales to a percentage change in price is referred to as price elasticity of demand. Price elasticity of demand is the most commonly used measure of consumers’ sensitivity to price. It measures the change in demand for a good or service caused by a given change in price. Table 12.2

- 1 provides estimates of the price elasticity of demand for automobiles by various sources.

Table 12.2

- 1 . Estimated Price Elasticity of Demand for Automobiles

Estimator Price Elasticity of Demand Source CARBITS -1.4 ITS, UCD NERA/Sierra -1.0 GM Study of ZEV Mandate, Volume II Mackinac -1.2 to -1.5 (short-run) -0.2 (Long-run) The Mackinac Center for Public Policy, Michigan

Patrick McCarty -0.87 MIT Press, 1996 David Greene -1.0 Kleit, Andrew 1990 Range -0.2 to -1.5

ARB staff, after reviewing a number of these studies, selected for this screening exercise a sales elasticity of minus one (-1) as an approximate average of the observed values. A sales elasticity of -1 means that the percentage decrease in new vehicle sales is equal to the percentage increase in price. Thus, for the percent increases in price given in Table 12.2

- 2 , sales of new vehicles would decrease by the same amount.

Table 12.2

- 2 . Percentage Price and Sales Changes by Vehicle Class
Vehicle Type Change in Price Change in

Sales Passenger Cars (All) 2.7 - 2.7 Trucks (0-3750 lb. Loaded Vehicle Weight 20 ) 3.1 - 3.1 Trucks (3751-5750 lb. Loaded Vehicle Weight 20 ) 2.5 - 2.5 Trucks (5751 lb. Loaded Vehicle Weight 20- 8500 lb. GVWR21 2.2 - 2.2

20 Loaded vehicle weight (LVH) equals curb weight plus 300 lb. 21 Gross vehicle weight ratingInitial Statement of Reasons

August 6, 2004

182 A comparison of the sales changes projected by this screening analysis (from Table 12.2

- 2 ) versus the sales changes predicted by CARBITS (from Table 12.1

- 7 ) shows that the screening results are in general agreement with the CARBITS results for the fully phased in regulation (2015 and beyond).

It is important to note that this simplified approach assumes that the estimated price increase is applied to every vehicle in the fleet. In fact, as is shown in section 6.2 , not all vehicles need to be modified in order for all manufacturers to comply with the regulation, particularly during the phase-in periods. Thus this methodology, which staff developed for screening purposed and to compare to the CARBITS results, is an overestimate of the actual impact. Staff also notes that this methodology does not take into account the effect of any desirable changes in vehicle attributes, such as a reduction in operating cost or more attractive environmental performance, that may be associated with the price increase.

12.3 Effects of Regulation on Vehicle Miles Traveled

The climate change regulation is designed to reduce emissions of GHGs. As noted above, many of the technologies employed by manufacturers to reduce climate change emissions will, as an outgrowth, reduce the operating cost of the vehicle. All other factors being equal, economic theory suggests that people will drive more as operating costs decline. Thus a decrease in the cost of driving may lead to an increase vehicle miles traveled (VMT), lessening the GHG emission reductions associated with the climate change regulation as well as potentially increasing emissions of criteria pollutants relative to a baseline scenario. This section evaluates the possible impact of the proposed regulatory scenario with respect to increases in VMT due to reduced operating costs.

ARB staff has carried out two separate analyses of the effect of operating cost on vehicle miles traveled. The first incorporates the results to date of UC Irvine econometric studies, applying VMT increases potentially associated with lower operating cost to affected vehicles according to their ages in calendar years 2020 and 2030, then comparing these to a baseline case. The econometric analysis does not account for certain other factors that influence travel decisions, especially those related to the available transportation system in urban areas. A second analysis was performed is to estimate the change in travel demand when vehicle operating costs decline in the context of the transportation system in the South Coast Air Basin. The second analysis uses travel demand model outputs from the Southern California Association of Governments, comparing scenarios with changes in fuel cost assumptions to baseline cases in 2020 and 2030.

12.3.A Background

The phenomenon where measures designed to reduce the use of a product actually produce some incentives to increase its use is known as the “reboundInitial Statement of Reasons

August 6, 2004

183 effect”. This effect has been studied in the context of energy efficiency, where, for example, more efficient air conditioners tend to be used more often. The economics literature also contains a number of studies of the effect of gasoline prices on driving, based on national data. The rebound effect associated with the cost of driving, however, is sensitive to household income and traffic conditions, and there are no California-specific studies of this effect. Staff does not believe that the national studies are necessarily representative of California. California has higher income and worse traffic conditions than other states, which would reduce the tendency for consumers to increase driving due to reduced operating costs. A few pennies of fuel savings per mile may not induce much driving in areas where people already drive all they need. If driving occurs in congested areas, the time cost of driving is high. It has been demonstrated that any cost savings must be quite large to compensate for the time cost. That is, people value their time highly enough that a few pennies in operating cost savings per mile is not going to encourage them to drive more.

To reflect the rebound effect, if any, in emission calculations, myriad technical and analytical issues need to be addressed. The ARB and CEC commissioned a study by the University of California at Irvine (UCI). The purpose of the study is to evaluate the potential impact of reduced operating costs on vehicles miles traveled in California in response to a scenario consistent with the proposed regulation (i.e., increased prices for new vehicles with lower operating costs).

Most studies consider only the operating cost effects on VMT. They ignore the effects of increased initial cost of purchasing a vehicle. The increase in the purchase price works in the opposite direction as the lower operating cost and can cancel additional driving. The results of the UCI study suggest that savings from reduced operating costs are directed towards the increased vehicle payments due to the higher vehicle price.

As noted above, the literature has addressed the "rebound effect" extensively, but the studies are generally national in scope and do not consider factors that are specific to California (e.g., very heavy traffic congestion and high personal income). Most studies attempt to explain VMT on the basis of a number of factors, including the fuel price per mile. These studies either use aggregatedata or disaggregate data. Aggregate data are either in the form of pure timeseries (one observation per year) or a combined cross-sectional and time series referred to as aggregate panel (e.g., one observation per state per year). Greene (1992) is a good example of an aggregate time series study. Using U.S. time series data for 1957-1989, Greene estimates the rebound effect to be between 5 and 15 percent for both the short-run and long-run, with a best estimate of 12.7 percent. He also finds some evidence that the rebound effect declines over time. Haughton and Sarkar (1996) provide an example of an aggregate panel study. This study uses both U.S. time series data from 1970- 1991 and cross-sectional data for all of the 50 states plus the District ofInitial Statement of Reasons

August 6, 2004

184 Columbia. They estimate a rebound effect of 16 percent in the short-run, and 22- 23 percent in the long-run.

A number of recent studies have used disaggregate data to estimate the rebound effect. Disaggregate data are data on individuals, either in the form of a cross section of data in a single year or a panel covering multi-year observations on the same people. A review of the literature by Greene, Kahn, and Gibson (1999) finds that disaggregate studies show a wider range in their estimates of the rebound effect than aggregate studies. Estimates of the rebound effect from these studies range from zero to about 50 percent. Using disaggregate data, Goldberg (1998) finds a rebound effect of zero when accounting for simultaneity between the vehicle purchase and vehicle usage decision. Pickrell and Schimek (1999) estimate a rebound effect of 4 percent when controlling for ownership levels and hence for fuel efficiency. Using a series of large micro data sets covering six years from 1979 and 1994, Greene, Kahn, and Gibson (1999) find along-run rebound effect of 23 percent, with a range of 17 percent for threevehicle households to 28 percent for one-vehicle households.

The nationally-based literature thus offers an estimated range of zero to 50 percent for the rebound effect. The UCI study found, however, that when California household income and transportation conditions are accounted for, the rebound estimate is very small. The study provided short-run and long-runestimates as well as a dynamic estimate which collectively considers the shortrun (one year) and the long-run (two to four years) effects for a specific change in operating cost in a specific year. The dynamic rebound effect for the year 2020 calculated for this analysis is 3.08 percent according to the equations reported in the UCI study. Using this dynamic rebound effect estimate and a 25 percent reduction in operating costs would yield an increase in VMT of 0.77 percent (25 x 0.0308). Table 12.3

- 1 reports the short-run and long-run rebound effect estimates by UCI. These estimates are based on the model estimates which include income. Real income growth is assumed at 1.6 percent per year based on historical data, causing the short-run and long-run effects to diminish over the years. That is, as operating costs become a smaller portion of total income, any cost change becomes less significant with respect to driving decisions.Initial Statement of Reasons

August 6, 2004

185 Table 12.3

- 1 . Rebound Effect - Preliminary Estimates for California

Year Income

(2003$) Short

Run (%) Long Run

(%)

2009 $37,926 1.55 7.17 2010 $38,553 1.47 6.82 2011 $39,189 1.40 6.49 2012 $39,839 1.33 6.16 2013 $40,496 1.26 5.84 2014 $41,167 1.19 5.54 2015 $41,847 1.13 5.24 2016 $42,539 1.06 4.96 2017 $43,242 1.00 4.69 2018 $43,958 0.95 4.43 2019 $44,685 0.89 4.17 2020 $45,423 0.84 3.93 2021 $46,173 0.79 3.70 2022 $46,938 0.74 3.48 2023 $47,714 0.69 3.27 2024 $48,502 0.65 3.06 2025 $49,304 0.61 2.87 2026 $50,121 0.57 2.68 2027 $50,948 0.53 2.51 2028 $51,791 0.49 2.34 2029 $52,647 0.46 2.18 2030 $53,519 0.42 2.03

The main concern regarding the rebound effect is its ability to reduce the intended effects of the climate change regulation. Increased driving would offset some of the GHG emission reductions and would also offset some of the reductions in upstream criteria pollutant emissions. To estimate the extent of the rebound effects on emissions, staff used ARB's EMFAC model.

12.3.B Analysis Using Econometric Study

As noted above, ARB has contracted with Dr. Kenneth Small at the University of California, Irvine (UC Irvine) to undertake a study of how changes in vehicle operating costs affect changes in travel. As part of the study, Dr. Small developed a methodology to calculate dynamic rebound. The ARB staff used this methodology to calculate a dynamic rebound in 2020 of 3.08 percent. Staff used this dynamic rebound with the estimated percent change in operating cost by model year to estimate the percent VMT increase in 2020.

To examine the impact of the rebound effect on emissions, ARB staff ran the EMFAC model to reflect these adjustments to VMT. We used the EMFAC2002Initial Statement of Reasons

August 6, 2004

186 mobile source emissions model, version 2.2 (April 2003), to estimate the emissions changes resulting from changes in travel brought about by the rebound effect. VMT in EMFAC is the product of vehicle population times accrual rate. The accrual rate is the miles traveled per year per vehicle for each vehicle class. Staff adjusted the accrual rates for model year 2009 and newer vehicles in the classes subject to the proposed regulation to reflect the estimated percent VMT increase. The emissions from these runs were compared to baseline runs to assess the rebound impact. Results for the vehicle classes subject to the proposed regulation are shown in Table 12.3

- 2

.

Table 12.3

- 2 . Impacts of Rebound Effect, Total Light Duty Fleet < 8500 lbs. GVWR 22VMT and Emissions (tons per day)
CY2020 Baseline Adjusted % Difference VMT 23 1,020,478 1,025,761 0.52% ROG 230.95 230.70 -0.11% NOx 190.20 190.78 0.30% PM10 42.74 43.01 0.63% CO 2096.98 2104.83 0.37% CO 2 485,150 487,550 0.49%

Again, this methodology assumes that all vehicles are modified in response to the regulation. Thus this approach will tend to overestimate the rebound impact.

12.3.C Analysis Using Travel Demand Model

The response of motorists to changes in vehicle operating cost occurs in the context of the transportation systems available to them. In California’s urban areas, highway networks are often constrained by traffic congestion, which has bearing on decisions regarding when, where, how and even whether to travel. Many of the factors that affect these decisions are incorporated in travel demand models, which are the principal tools used by transportation planners to forecast travel activity within the limits of regional transportation systems.

Travel demand models contain a series of sequential calculations and iterative feedback loops through four principal steps: (1) the generation of person trips, (2) the distribution of trips among likely origins and destinations, (3) transportation mode choice, and (4) the assignment of vehicle trips to the transportation system. Among the variables considered in the mode choice step is the cost of motor vehicle operation, including the price of fuel. Because mode choice and travel time outputs

22 Gross vehicle weight rating 23 Vehicle miles traveled in thousands of milesInitial Statement of Reasons

August 6, 2004

187 are linked back to trip distribution, operating costs also affect the relative attractiveness of travel destinations and the miles driven to access goods and services. Fuel cost is one among the many variables affecting travel demand, and transportation modelers have found its impact to be relatively minor. Indeed the time cost involved with additional travel, especially in congested conditions, mitigates the travel-inducing effect of reduced operating cost.

To examine the rebound effect in the context of urban travel demand, ARB worked with modeling staff at the Southern California Association ofGovernments (SCAG), who operate the travel demand model for the sixcounty region of southern California. Use of the SCAG model enabled staff to examine the emission impacts of changes in both the amount and the speed of motor vehicle travel, relative to the cost of gasoline per mile traveled. For purposes of this analysis, ARB staff used travel model outputs of vehicle miles of travel (VMT) and the distribution of speed by vehicle class for the South Coast Air Basin. 24

For calendar year 2020, SCAG staff ran the travel demand model for baseline cases that assume an automobile operating cost of 12.76 cents per mile in 1989 dollars. Automobile operating costs include gasoline at 8.14 cents per mile and maintenance costs at 4.62 cents per mile. SCAG staff then ran several separate scenarios with varying decreases in the assumed cost of gasoline (maintenance costs were kept constant). Among the scenarios for 2020, a SCAG model run assumed a 17.3 percent reduction in gasoline cost. This figure represents a hypothetical 25 percent gasoline cost reduction applied to the 69 percent of light and medium duty VMT that will be driven in the (post-2008) vehicles subject to AB 1493 requirements in 2020.

To estimate emissions, ARB staff applied the VMT and speed distribution outputs from the SCAG model runs by vehicle class, through the scenario generator in EMFAC2002 (version 2.2, April 2003). EMFAC output was generated under each scenario for the South Coast Air Basin, annual average. Results for the light duty fleet affected by the proposed regulation are shown in Table 12.3

- 3

.

24 The SCAG travel models produce a distribution of VMT by speed for light and medium duty vehicles combined, and a separate distribution for heavy duty trucks. EMFAC2002 applies speed correction factors specific to vehicle class in its emissions calculation. Although heavy duty vehicles will not be directly affected by regulations established pursuant to AB 1493, their relative travel speed in urban areas, and thus their emissions, would be affected by additional light duty travel. Thus, a travel demand model analysis enables ARB staff to consider these broader emissions impacts.Initial Statement of Reasons

August 6, 2004

188 Table 12.3

- 3 . Impacts of Fuel Cost Reduction: Travel Demand Model Analysis South Coast Air Basin, Total Light Duty Fleet < 8500 lbs. GVWR 25VMT and Emissions (tons per day)
CY2020

Baseline Adjusted % Difference VMT 360,900 363,173 0.63% ROG 86.20 86.33 0.15% NOx 70.23 70.61 0.54% PM10 15.03 15.14 0.73% CO 772.35 776.70 0.56% CO 2 169,000 170,250 0.74%

Among vehicle classes affected by proposed regulation, the results from SCAG indicate an elasticity of VMT to fuel cost of about –0.04. Emissions impacts are minor, and vary from VMT impacts due to altered speed distributions and the emissions processes not tied to miles traveled.

In 2002, the Bay Area Metropolitan Transportation Commission (MTC) used its travel demand model to conduct a sensitivity test of the responsiveness of VMT to travel cost per mile, with similar results. In the MTC analysis the gasoline cost per mile was decreased by 25 percent in calendar year 2025. Daily VMT increased as a result by 0.66 percent, showing an elasticity of VMT to fuel cost of about –0.03.

12.4 Combined Effect on Criteria Pollutant Emissions

The staff analysis evaluated three pathways by which the proposed regulation could affect criteria pollutant emissions. In Section 8.4 staff considered the impact of the higher efficiency of the regulated vehicles on upstream emissions. In section 12.1 staff considered the possible effects of changes in vehicle attributes on vehicle sales, and hence on the composition of the fleet and its resulting emissions. In section 12.3 staff estimated the possible emission impact of changes in travel due to the likely reduced operating cost of regulated vehicles.

In the draft staff proposal staff did not present an estimate of the combined effect of all of these pathways, due to the developmental nature of the fleet turnover and rebound analyses and the complexity of the interactions between fleet age and VMT. In order to provide as complete a picture as possible of the environmental effect of the staff proposal, however, staff believes that it is useful to present our best estimate of the overall impact of the proposal on criteria pollutant emissions. This section therefore outlines staff’s current thinking regarding the combined effect of all pathways. For this evaluation, the two

25 Gross vehicle weight ratingInitial Statement of Reasons

August 6, 2004

189 methodologies used to determine the combined effect on emissions in 2020

were:

• Adding the emission impacts from the analysis of vehicle sales impacts and VMT effects as described in sections 12.1.D and 12.3.B above.

• Adjusting EMFAC to reflect both the changes in new sales as determined in section 12.1.C and the mileage accrual adjustments reflected in section 12.3.B

. By any measure, the combined impact is small. Table 12.4

- 1 below shows the combined changes in terms of tons per day, and also in terms of the percent change from baseline emissions from the regulated light duty fleet. As the table shows, looking at the combined effect of all possible mechanisms that would impact fleetwide emissions, ROG and NOx emissions are expected to decrease by a combined total of approximately 1 ton per day, or less than half of one percent. PM 10 emissions would increase by approximately 0.2 tons per day, again about 1 percent, primarily due to increased tire and brake wear associated with increased VMT.
Table 12.4

- 1 . Estimated Emissions Impact of Rebound Effect, Fleet Turnover and Fuel Cycle Benefits, Calendar Year 2020 Criteria Pollutant Tons Per Day

ROG NOx PM10

Baseline Emissions 231 187 43

Rebound Effect -0.25 0.58 0.27 (July EMFAC Analysis with UC Irvine methodology)

Fleet Turnover Changes -0.82 -0.72 -0.05 (July EMFAC Analysis with CARBITS inputs)

Fuel Cycle Changes -0.00763 -0.00055 -0.00003 (TIAX estimates from Tom Evashenk)

Combined Impacts (additive) -1.08 -0.14 0.22

Combined Impacts (one EMFAC run) -0.75 -0.48 0.18

Percent change (additive) -0.47% -0.07% 0.51%

Percent change (EMFAC) -0.33% -0.26% 0.42%
Staff notes that it is likely that any change to new vehicle sales would also change VMT, but this interactive relationship was not considered for thisInitial Statement of Reasons

August 6, 2004

190 evaluation. Because our analysis indicates that any changes in vehicle sales and VMT due to the regulation are relatively small, any error related to the interaction of the two effects will likewise be relatively small. The larger the change in vehicle sales and VMT, the greater the potential for error in using these methodologies.

12.5 Manufacturer Response

The economic impact analysis of the climate change regulation presented in section 10 provides conservative estimates. The results are conservative in that the analysis assumes that the compliance costs of the regulation will not change over time. It further assumes that the costs will be passed on to consumers in their entirety beginning the first year and continue on with no additional changedue to innovation, and no distribution of costs to different vehicle classes or nonprice methods of recovering costs.

Staff adopted this approach because there is a lack of quantitative information available to quantify the impact of the factors listed above. Nevertheless, there is ample evidence that automobile marketers use a variety of price and non-price tools in an effort to optimize sales. The purpose of this section is to provide a qualitative assessment of the options that are available to automobile manufacturers, and that they have used historically, to maintain sales while simultaneously complying with various regulatory requirements.

Staff reviewed consultant reports from ITS and the literature to assess the information available on these points. Staff believes, based on its review, that the increases in vehicle prices due to the regulation could well be less than the estimates provided in section 5 . Staff's main findings with respect to strategies that automobile manufacturers may employ to comply with regulatory requirements are presented here and are discussed in more detail in the Technical Support Document to this report.

To comply with the climate change regulation, automobile manufacturers have a number of options. The option that they choose will depend on costs, sales strategy, market conditions, and consumer preferences. Whichever way they choose to respond, it is likely that the automobile manufacturers will employ methods that soften the impact of compliance costs on vehicle sales. They can use marketing tools and technology-based cost decreases over time to bring down the compliance costs to a fraction of what the consumer response analysis assumed. Manufacturers have complied in the past with regulations that increase vehicle production cost. Review of such cases helps to shed light on manufacture response. This section provides findings from a review of regulatory compliance costs in the automobile market over the past three decades.

The climate change regulations discussed in this staff proposal address automotive emissions. We therefore reviewed past compliance costs associatedInitial Statement of Reasons

August 6, 2004

191 with emission control regulations. Because the industry response to other regulatory regimes may shed light on general trends, we also reviewed the response of automobile manufacturers and their customers to two other disparate cases of increased cost: the regulation of automotive safety and fuel consumption. We found that when put in a historical perspective, the economic impact analysis outlined here can easily be characterized as a conservative scenario. Specifically, our historical review found that:

• Average, per-vehicle actual compliance costs are considerably higher in the initial years of regulatory implementation than in subsequent years. The cost of compliance tends to decline with passing years, due to the influence of economies of scale, learning curve effects and technological innovation. The cost of airbag systems, for example, dropped by 75 percent over the first 15 years of compliance.

• Automobile manufacturers do not typically pass along 100 percent of increased compliance costs as higher retail prices in the first year of compliance. One conservative estimate by an industry analyst indicates that automobile manufacturers absorb 100 percent of compliance cost increases in the first year, then pass along roughly two thirds of that cost in the following year, and the balance in later years.

• Automobile manufacturers do not recover the same proportion of compliance cost increases across all product lines. Instead, the relevant price increases focus on the vehicle classes and customers seen as least sensitive to such changes. Typically, higher price increases for popular and high-end models cross-subsidize lower price increases to “economy-class” models.

• Automobile manufacturers use methods other than price increases to recoup compliance cost increases, including changes in “standard” vehicle content and adjustments to incentive packaging and financing terms.

• If consumers regard compliance-related improvements as valuable, new vehicle sales may increase, despite increased prices. In the European Union, sales of diesel vehicles have doubled despite an average price that is $1567 higher than comparable gasoline-fueled vehicles.

These findings on the options available to manufacturers to comply with regulations help put the economic impact analysis into perspective. In short, the estimated impacts would likely be on the high side and furthermore do not consider the ongoing reductions due to further improvements.

12.6 Impact on Businesses in Low Income and Minority Communities

Businesses in low-income and minority communities (communities) in the State may be impacted by the proposed regulation. AB 1493 directs the Board to

assess:
"The ability of the State to maintain and attract businesses in the communities with the most significant exposure to air contaminants,Initial Statement of Reasons

August 6, 2004

192 localize air contaminants, or both, including, but not limited to, communities with minority populations, or low-income populations, or both."

In section 10 staff presents its analysis of the direct effect of the regulation. Here staff again explores the use of new approaches to examine possible indirect impacts.

For the purposes of this analysis, communities in the San Diego area were used as a surrogate to characterize the potential impacts of the regulations on affiliated businesses in communities statewide. Specifically, communities as designated by the San Diego County Air Pollution Control District (SDCAPCD) for environmental justice programs were selected as a surrogate to represent the impacts of the proposed climate change regulations on communities with minority population, or low-income population, or both across the State. San Diego County comprises 291 ZIP Code areas. Of these, 37 are designated by the SDCAPCD as environmental justice communities. San Diego County is home to approximately 3 million Californians or about 8.3 percent of California’s population in 2003 26 . The income distribution in the county roughly mirrors the income distribution for the entire State 27 . It should be noted that the SDCAPCD employs a broad definition for designating environmental justice communities, encompassing much of the district. Narrower definitions such as those based on lower income level would lead to a reduction in the estimated impacts on low income and minority communities as presented in this analysis. The potential economic impacts were assessed on businesses that are linked to automobiles, such as automobile dealers, gasoline stations, and automobile repair.

The reduction in operating cost due to the proposed regulation is expected to save consumers, including consumers in low income and minority communities, a significant amount of money. This analysis shows that the regulation may result in a reduction in employment growth in some businesses affiliated with the automobile industry, such as gasoline service stations. However, the potential reductions are likely to be more than offset by the creation of jobs elsewhere in unaffiliated (non-automotive) businesses, where consumers will spend their savings from the reduced operating costs of the new vehicles.

12.6.A Affiliated Businesses

Table 12.6

- 1 provides a list of the types of affiliated businesses used in this analysis. The businesses evaluated were selected as those determined to be most likely to be impacted due to their direct relationship with automobile sales, service, and operation.

26 California Statistical abstract, Department of Finance, 2003. 27 2000 Census Bureau, U.S. Department of Commerce.Initial Statement of Reasons

August 6, 2004

193 Table 12.6

- 1 . Socioeconomic Profile of Industries Affiliated with the Automobile Industry for the San Diego ZIP Codes Considered in our Analysis. (2003 Data)
SIC Code Industry Number of Businesses Total

Employment Total Sales

(million $) 5541 Gasoline service stations 293 1,964 287 5599 Automotive dealers 37 198 24 7537 Automobile transmission

repair shops 91 342 23

7539 Automotive repair shops 342 1,431 114 7549 Automotive services 251 1,402 84 Total 1,014 5,337 532 Source: Dun and Bradstreet Marketplace Database, Dun and Bradstreet data were adjusted to reflect employment and sales data for all businesses.
Staff identified 1,014 businesses in communities in San Diego County that may be directly affected by the proposed climate change regulations. These businesses employ over 5,300 people and generate over $500 million in annual sales. These businesses, in aggregate, generate about $100,000 per employee as calculated by dividing total sales by total employment.

To estimate the impacts of the regulation, changes in revenues caused by the proposed regulations for each affiliated industry were estimated. Then, profitability ratios published by Dun and Bradstreet 28were used to estimate the impact on their profits. Sales-to-employment ratios were derived from the data, and used to estimate the impact on employment in each affected industry.

The affiliated business may experience some sales reduction because of vehicle price increases due to the proposed regulation. For purposes of this analysis staff used a price increase of $630 for 2016 and thereafter. This corresponds to roughly the average of the fully phased in estimated cost increases for PC/LDT1 and LDT 2 vehicles. This increase represents about 2.5 percent increase on an average new vehicle price of $25,000, which would reduce sales by 2.5 percent assuming a price elasticity of -1.0 29 . Staff chose the elasticity from literature reviews 30 . Further assumptions were made that new vehicles have 6 percent market penetration rate per year based on vehicle expected life of 16 years, and their operating cost declines by 25 percent. Because vehicle prices would increase, and people tend to maintain their cars more often in an attempt to retain the value of their car, staff assumed that the revenues of some of the affiliated business would increase such that the demand for automotive services and repairs increases by one percent.

28 Industry Norms and Key Business Ratios, One Year desktop Edition, Dun and Bradstreet, 2003. 29 See Klein, T.M., E. Hertz, and S. Borener (1991), A Collection of Recent Analyses of Vehicle Weight and Safety, Technical Report No. DOT HS 677, National Highway Traffic Safety Administration, Washington, DC. 30 Paul S McCarthy, Market Price and Income Elasticities of New Vehicle Demands, The Review of Economics and Statistics, Vol. 78, No. 3 (August 1996), pp 543-547Initial Statement of Reasons

August 6, 2004

194 12.6.B Potential Impacts on Affiliated Businesses

This section presents the estimated impact of the proposed regulation on the profitability of affiliated (automotive) businesses. As discussed below, staff expects that any negative impacts on affiliated businesses would be more than offset by positive impacts on the broader economy, due to increased purchasing power.
Using the assumptions noted above, staff estimated the impact on profitability of affiliated businesses. To provide a “maximum impact” estimate, this analysis assumes that the entire fleet is made up of regulated vehicles. Impacts in the initial years, as regulated vehicles enter into the fleet, would be less. As shown in Table 12.6

- 2 , the impact on profitability would be the most severe on gasoline service stations. When regulated vehicles make up the entire fleet (which will not occur until 2020 and beyond) the affected service stations would experience an estimated decline of $72 million in revenues and $502,000 in profits as compared to the no regulation scenario. This finding reflects a reduction in the growth of profitability rather than an actual decline. The profitability impact on other affiliated businesses would be negligible. No change is expected on the profitability of automotive dealers. That is because the loss in profit associated with a 2.3 percent loss of sales volume is estimated to be roughly equivalent to the increase in their profits associated with a 2.3 percent price increase.

Table 12.6

- 2 . Impact on Profitability of Affiliated Businesses Industry Changes in Revenues Profit as %

of Revenues Changes in

Profitability Service stations ($71,725,000) 0.7 ($502,000) Automotive dealers* 0 0.9 0 Automobile transmission repair shops $227,000 4.3 $9,800

Automotive repair shops $1,137,000 2.3 $26,100 Automotive services $837,000 2.3 $19,300 Total ($69,524,000) ($446,800) *Dealers’ loss of sales volume was roughly compensated by the increase in vehicle prices.

12.6.C Potential Impact on Employment

This section discusses the potential impact on employment in affiliated businesses. It likewise provides a “maximum impact” analysis that assumes that the entire fleet consists of regulated vehicles. In addition, as noted below, any negative impacts are expected to be more than offset by gains in other sectors.Initial Statement of Reasons

August 6, 2004

195 Table 12.6

- 3 provides ratios of revenue per employee and per business for affected businesses. For example, a typical service station in communities of San Diego County earns about $1 million in revenues annually or $146,000 per employee. On average, an affiliated business generated about $525,000 in revenues per year or about $100,000 per employee.

Table 12.6

- 3 . Affiliated Businesses’ Revenue Per Employee and Per Business in San Diego Communities Industry Revenue Per Employee Revenue Per Business Service stations $146,000 $1,000,000 Automotive dealers $123,000 $660,000 Automobile transmission repair shops $66,000 $250,000

Automotive repair shops $79,000 $330,000 Automotive services $60,000 $330,000 Typical Business $100,000 31 $525,000 31

Table 12.6

- 4 provides an assessment of the impact of the proposed regulations on jobs in affiliated businesses in communities in San Diego County. As shown in the table, when the entire fleet consists of regulated vehicles service stations are expected to have approximately 491 fewer jobs than in the no regulation scenario. This is not an actual loss of existing jobs when the regulation is in full effect, but rather a reduction from what the levels would otherwise be in the future. The estimated reduction in jobs is an indicator of a slight reduction in service station business growth due to the regulation. This employment reduction is likely to be partially offset by the creation of 31 jobs in other affiliated businesses. In addition, the reduction in operating cost is expected to save consumers a significant amount of money. Depending upon where the consumers direct their expenditures, many unaffiliated businesses such as food service, wholesale trade, etc. will benefit from the proposed regulations, as discussed in section 10

. Staff believes that the numbers of jobs created by these unaffiliated businesses will significantly exceed the number of new jobs foregone at service stations. San Diego County has a population of 3,017,200 (8.3 percent of the state) according to California Department of Finance. To estimate the job gains in communities in San Diego, the 55,000 increase in statewide jobs from the regulation in 2020, as estimated in section 10 , can be apportioned to San Diego based on population. The communities have a population of about 2 million, or two-thirds of the total. Apportioning the total to these communities would mean a gain of about 3,000 jobs. This more than outweighs the reduction of 460 in these communities and results in a net increase of more than 2,500 new jobs because of the proposed climate change regulation.

31 Derived from the revenue and number of business data in Table 12.6

- 1

.Initial Statement of Reasons

August 6, 2004

196 Table 12.6

- 4 . Net Impact of the Proposed Regulations on Jobs and Affiliated Businesses In San Diego Communities

Industry Number of Jobs Relative to No Regulation ) Business Creation

(Elimination) Relative to No Regulation Service stations (491) (72) Automotive dealers 0 0 Automobile transmission repair shops 3 1

Automotive repair shops 14 3 Automotive services 14 3 Impact on affiliated businesses (460) (65) Impact on other businesses 3,000 487 Net Impact 2,540 422

12.6.D Potential Impact on Business Creation, Expansion and

Elimination

As shown in Table 12.6

- 4 , the proposed regulations, when fully embodied in the fleet, are estimated to result in the equivalent of 72 fewer service stations in communities of San Diego County than under the no regulation scenario. Seven affiliated businesses, however, will be created. The proposed regulations are also expected to result in the creation or expansion of 487 unaffiliated equivalent businesses, depending upon where the consumers redirect their savings from the reduction in operating cost. Overall, the number of businesses created or expanded is expected to exceed the number of businesses eliminated by 422. This magnitude of business elimination may be an overestimate because the service stations draw revenues from other on-site activities such as vehicle repair and convenience stores. These profit centers may keep them in business in spite of reduced fuel sales.

12.7 Effect of Increased Fuel Price

Many of the measures that manufacturers will employ to achieve climate change emission reductions will result in reduced vehicle operating costs, due to the fact that the vehicles will be more efficient. These operating cost savings in turn feedinto the staff analysis of the economic impact of the regulation and its costeffectiveness.

The dollar value to consumers of a given motor vehicle GHG reduction and any associated increase in vehicle efficiency will vary depending on the price of fuel. Throughout the staff report analysis the staff has assumed a fuel price of $1.74 per gallon for gasoline and $1.73 per gallon for diesel. These prices are the inflation adjusted equivalent of the values used in the California EnergyInitial Statement of Reasons

August 6, 2004

197 Commission (CEC) Integrated Energy Policy Report (CEC, 2004). These values are roughly consistent with 3-year historic California fuel prices.

Several commenters have noted that these assumed fuel prices do not correspond to current conditions, and have suggested that staff assess the extent to which its findings and conclusions would change given higher fuel prices. This approach is intended to take into account the possibility that future fuel prices may be consistently higher than past historic averages, due to international political factors as well increasing demand in China, India and other rapidly growing emerging economies. In response to these comments staff has replicated relevant portions of the analysis using an assumed fuel price of $2.30 per gallon, which is intended to be more representative of recent prices.

12.7.A No Effect on the Standard

Almost all of the technology packages evaluated by staff paid for themselves over the lifecycle of the vehicle at the assumed fuel price of $1.74 per gallon. The choice of the technology packages to use for setting the near term and mid term standards was driven more by technical lead time and developmental constraints rather than by payback concerns. Thus although using a fuel price of $2.30 per gallon reduces the payback period and increases the net present value to consumers for all technology packages, this change by itself would not allow staff to set a more stringent standard. Rather, the limiting factor on the standard is the availability of technology packages for widespread deployment.

12.7.B Positive Effect on Economic Impacts
The primary staff analysis concluded that at a fuel price of $1.74 per gallon the GHG reduction technologies would more than pay for themselves over the life of the vehicle, and the regulation as a whole would have small but overall positive effects on the California economy. As would be expected, if fuel prices are $2.30 per gallon rather than $1.74 per gallon, net benefits increase both for individual consumers and for the state as a whole. The specific impacts are summarized in Table 2.3

- 1 and then discussed below.Initial Statement of Reasons

August 6, 2004

198 Table 12.7

- 1 . Effect of Increased Fuel Price on Economic Impacts

Variable @ $1.74 per gallon @$2.30 per gallon Individual Consumer: Net Monthly Savings, New Vehicle* $6.53 to $11.73 $14.48 to $19.32 Net Monthly Savings, Used Vehicle** $4.43 to $9.43 $9.05 to $13.98

California Economy, 2020 Annualized Savings $5.2 billion $6.9 billion Change in Output -$2.5 billion -$3.3 billion Change in Personal Income +$5.3 billion +$7.0 billion Change in Jobs +55,000 +74,000

*Loan Payment (5 year loan) minus Operating Cost Savings **Loan Payment (3 year loan) minus Operating Cost Savings Value

Purchasers of new vehicles Section 10.5 showed the effect of the regulation on monthly expenses for purchasers of new vehicles. That analysis looked at the increase in monthly loan payment, assuming a 5 year loan, that would result from the average increase in vehicle prices associated with the fully phased in regulation. The analysis then factored in the monthly decrease in operating expenses associated with the modeled technology package. The analysis concluded that the average net monthly savings for purchasers of new vehicles would range from $6.53 to $11.73.

As is shown in Table 12.7

- 1 , if future fuel prices average $2.30 per gallon, then the monthly savings increase to a range of $14.48 to $19.32.

Purchasers of used vehicles For purchasers of used vehicles the staff analysis calculated the increase in loan payment assuming a three year loan. The analysis concluded that purchasers of used vehicles would have a monthly net benefit ranging from $4.43 to $9.43. If future fuel prices average $2.30 per gallon that monthly net benefit will increase to a range of $9.05 to $13.98.

California economy Section 10.2 showed the effect of the regulation on the California economy. The analysis concluded that the regulation would have a small but positive effect on the economy as a whole, with a slight decrease in output but slight increases in personal income and employment. As is shown in Table 12.7

- 1 , using an assumed fuel price of $2.30 per gallon slightly increases all of these impacts. Using 2020 as an example, annualized savings to vehicle owners would be $6.9 billion rather than $5.2 billion. The decrease in output would be $3.3 billion rather than $2.5 billion, the increase in personal income would be $7.0 billion rather than $5.3, and the increase in jobs would be 74,000 rather than 55,000. All of these changes appear to be proportional; that is, the percent change inInitial Statement of Reasons

August 6, 2004

199 each impact corresponds closely to the percent change in fuel price (about 32 percent).

12.8 Summary and Conclusions

The economic impact analysis presented in section 10 considers vehicle price increases and operating cost decreases resulting from the climate change regulation. The economic impact analysis is based on the staff assessment that the lower vehicle operating cost resulting from the regulation will be sufficiently attractive to new car buyers to compensate for the vehicle price increase, and results in vehicle sales that are unchanged from the levels that would have been the case without the regulation.

In this section, staff assessed what the consequences would be if one assumes that the changes in vehicle attributes do affect sales. Staff analyzed the potential effect of price and operating cost changes on sales, fleet size, and fleet age using a consumer choice model, CARBITS, developed by researchers at the University of California, Davis. The results show that the net effect of increased new vehicle prices and lower operating costs is a tendency to increase sales in the near term, and slightly decrease sales in the longer term as the more stringent second step of the regulation is fully phased in. This effect had no significant impact on criteria pollutant emissions.

We also evaluated potential adverse environmental impacts associated with increased VMT due to lower operating costs. Our analysis indicates that the benefits of reduced climate change emission from the regulation will not be negated significantly by any increase in driving that lower operating costs may induce.

Automotive related businesses in communities with low income and minority households may be impacted and some future growth in those areas may be foregone. An increase in the overall economic activity because of lowered operating costs of vehicles would, however, be expected to create sufficient number of jobs to more than offset any reductions.

Staff concludes that the standard economic analysis presented in section 10 is a conservative one that errs on the side of overestimating the cost impacts of the regulation. We have also made an effort to apply additional tools in our analysis as discussed in this section. Though these tools are continuing to be further developed, they are valuable in providing further insight with respect to the proposed regulation. Specifically, considering other issues such as the impact of the regulation on vehicle sales via a consumer choice model as well as the rebound effect also suggests that the regulation would not be expected to have any significant adverse impacts on the California economy, the environment or the consumer. Minority and low-income communities are expected to benefit from the operating cost savings that will be redirected to non-affiliatedInitial Statement of Reasons

August 6, 2004

200 businesses. Generally, the economic impacts of the proposed climate change regulation tend to be positive. The magnitude of positive effects for individual vehicle owners and for the economy as a whole will increase if future fuel prices exceed recent historical averages.Initial Statement of Reasons

August 6, 2004

201 13 SUMMARY AND STAFF RECOMMENDATION

California has a long history of environmental leadership. This tradition of environmental leadership continues to this day. In 2002, recognizing that global warming would impose compelling and extraordinary impacts on California, the legislature adopted and the Governor signed AB 1493. That bill directs the California Air Resources Board (Board) to adopt regulations to achieve the maximum feasible and cost-effective reduction of GHG emissions from motor vehicles. This Initial Statement of Reasons presents the staff proposal that will be considered by the Board at its September 2004 public hearing.

13.1 Summary of Staff Proposal

The staff proposal recommends that one standard be established for passenger cars and the lightest trucks (PC and LDT1), and a separate standard for heavier trucks (LDT2). Staff proposes setting near-term standards, phased in from 2009 through 2012, and mid-term standards, phased in from 2013 through 2016. The proposed standards, expressed in terms of CO2 equivalent grams per mile, are shown in Table 13.1

- 1 below:

Table 13.1

- 1 . Proposed Standards

CO 2 -equivalent emission standard by vehicle category

(g/mi) Tier Phase-in Year

PC/LDT1 LDT2

20% 2009 323 439 40% 2010 301 420 70% 2011 267 390 Near-term

100% 2012 233 361

20% 2013 227 355 40% 2014 222 350 70% 2015 213 341 Mid-term

100% 2016 205 332

To maintain simplicity, staff proposes to use the upstream emissions for vehicles that use conventional fuels as a “baseline” against which to compare the relative merits of alternative fuel vehicles. Therefore, the emissions standards as shown above do not directly reflect upstream emissions. Rather, when certifying gasoline or diesel-fuel vehicles manufacturers would report only the “direct” or, “on vehicle” emissions. For alternative fuel vehicles, exhaust CO 2emissions values will be adjusted in order to compensate for the differences in upstream emissions. This approach simplifies the regulatory treatment of gasoline vehicles, while at the same time allowing for appropriate treatment of alternative fuel vehicles.Initial Statement of Reasons

August 6, 2004

202 Small Volume, Independent Low Volume, and Intermediate Volume manufacturers would not be required to comply with the climate change requirements until the final year of the phase-in (2016). Beginning in 2016, these smaller manufacturers would be required to meet the average CO 2 equivalent emissions of all 2012 comparable vehicles produced by the major vehicle manufacturers, beginning in 2016. A specialty low volume vehicle that utilizes a powertrain from a major manufacturer from the same model year would be considered compliant with the GHG emission standards if it adopted the package without modifications. Should a comparable vehicle not be available from a large manufacturer, the small volume manufacturer would be required to meet the 2012 emission standard for large volume manufacturers in 2016 and beyond. As an option, these small volume vehicles could meet the fleet average for large manufacturers.

ARB staff proposes that (1) credit for early emission reductions should be available for model years 2000 through 2008, with manufacturers allowed to opt in to the program during any model year during this timeframe, and (2) the baseline against which manufacturer emissions are measured should be the fully phased in near term standard. Staff has proposed that the fully phased in near term standard for passenger cars and T1 trucks should be 233 grams per mile CO2 equivalent, and for T2 trucks should be 361 grams per mile. Thus under the staff early credit proposal a manufacturer’s fleet average emissions, for model years beginning with their first year of participation through 2008, would be compared to the 2012 standards. If a manufacturer has fleet average emissions below the standard for a specific model year, the manufacturer would earn credit.

The staff proposed alternative compliance program is limited to the vehicles that are regulated through AB 1493, and their fuels. The major features of the staff proposal are:

• Projects must be located in California to be eligible as alternative methods of compliance.

• Only companies regulated by AB 1493 (automakers) will be permitted to apply for alternative compliance credits.

• Only those vehicles regulated under AB 1493 are eligible for alternative compliance credits. This includes model year 2009 and later passenger vehicles and light-duty trucks and other vehicles used for noncommercial personal transportation in California.

• Staff proposes that eligible projects be limited to those that achieve GHG reductions through documented increased use of alternative fuels in eligible vehicles.

13.2 Staff Recommendation

Staff recommends that the Board adopt section 1961.1, title 13, California Code of Regulations and incorporated test procedures, and amend sections 1900,Initial Statement of Reasons

August 6, 2004

203 1961 and the incorporated “California Exhaust Emission Standards and Test Procedures for 2001 and Subsequent Model Passenger Cars, Light-Duty Trucks, and Medium-Duty Vehicles". The regulation is set forth in the Proposed Regulation Order in Appendix A.Initial Statement of Reasons

August 6, 2004

204Initial Statement of Reasons

August 6, 2004

205 LIST OF ACRONYMS AND ABBREVIATIONS

A4: 4-speed automatic transmission A5: 5-speed automatic transmission A6: 6-speed automatic transmission AB 1493: Assembly Bill 1493 AdvHEV: Advanced hybrid ARB: California Air Resources Board AMT: Automated Manual Transmission CCP: Coupled cam phasing CH 4 : Methane CNG: Compressed natural gas CO 2 : Carbon dioxide CVVL: Continuous variable valve lift CVT: Continuously variable transmission DCP: Dual cam phasing DeAct: Cylinder deactivation dHCCI Diesel homogeneous charge compression ignition DMV: California Department of Motor Vehicles DOHC: Dualoverhead cam DVVL: Discrete variable valve lift DVVLd: Discrete variable valve lift, includes dual cam phasing DVVLi: Discrete variable valve lift, includes intake valve cam phasing eACC: Improved electric accessories EAT: Electronically assisted turbocha rging EGR: Exhaust gas recirculation ehCVA: Electrohydraulic camless valve actuation emCVA: Electromagnetic camless valve actuation EHPS: Electrohydraulic power steering EPS: Electric power steering EMFAC: ARB Emission Factors model (EMFAC2002 v.2.2 April 23, 2003) EWP: Electric water pump FDC: Fixed displacement compressor FWD: Front-wheel drive GDI-S: Stoichiometric gasoline direct injection GDI-L: Lean-burn gasoline direct injection gHCCI Gasoline homogeneous charge compression ignition GVWR: Gross vehicle weight rating GWP: Global warming potential HC: Hydrocarbons HEV: Hybrid-electric vehicle HFC: Hydrofluorocarbon hp: Horsepower HSDI: High-speed (diesel) direct injection ICP: Intake cam phaser ImpAlt. Improved efficiency alternatorInitial Statement of Reasons

August 6, 2004

206 ISG: Integrated starter-generator system ISG-SS: Integrated starter-generator system with start-stop operation L4: In-line four-cylinder MAC: Mobile Air Conditioning ModHEV: Moderate hybrid NMOG: Non-methane organic gas N 2 O: Nitrous oxide NOx : Oxides of nitrogen R-134a: R efrigerant 134a, tetrafluoroethane (C 2 H 2 F 4 ) R-152a: Refrigerant 152a, difluoroethane (C 2 H 4 F 2 ) RPE: Retail price equivalent TRR: Tire rolling resistance Turbo: Turbocharging V6: Vee-formation six-cylinder V8: Vee-formation eight-cylinder VDC: Variable dis placement compressor 4WD: Four-wheel-drive 42V ISG: 42-volt integrated starter-generator systemInitial Statement of Reasons

August 6, 2004

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214Initial Statement of Reasons

August 6, 2004

215 APPENDIX A: PROPOSED AMENDMENTS

1. Proposed Regulation Order: Amendments to Sections 1900 and 1961, and adoption of new Section 1961.1, Title 13, California Code of Regulations

Attached

2. Proposed amendments to California Exhaust Emission Standards And Test Procedures For 2001 And Subsequent Model Passenger Cars, Light -Duty Trucks, And Medium -Duty Vehicles

Copies of the Test Procedures are available on the ARB Internet site for this rulemaking at http://www.arb.ca.gov/regact/grnhsgas/grnhsgas.htm , or may also be obtained by contacting the agency contact person for this rulemaking, Mr. Chuck Shulock, at 916-322-6964 or cshulock@arb.ca.gov

.Initial Statement of Reasons

August 6, 2004

216Date of Release: 8/6/04; 45-day Notice version A- 1

Board Hearing: 9/23/04 APPENDIX A

PROPOSED REGULATION ORDER

Amendments to Sections 1900 and 1961, and Adoption of new Section 1961.1, Title 13, California Code of Regulations

Set forth below are the proposed amendments to title 13 of the California Code of Regulations. Proposed amendments are shown in underline to indicate additions and strikeout to indicate deletions.

§ 1900. Definitions.

(a) [No change.]

(b) In addition to the definitions incorporated under subdivision (a), the following definitions shall govern the provisions of this chapter.

Definitions (b)(1) through (7). [No change.]

( 8 21 ) “Independent low volume manufacturer” means a manufacturer with California annual sales of less than 10,000 new passenger cars, light-duty trucks and medium-duty vehicles following aggregation of sales pursuant to this section 1900(b)( 8 21 ). Annual sales shall be determined as the average number or sales sold for the three previous consecutive model years for which a manufacturer seeks certification; however, for a manufacturer certifying for the first time in California, annual sales shall be based on projected California sales for the model year. A manufacturer’s California sales shall consist of all vehicles or engines produced by the manufacturer and delivered for sale in California, except that vehicles or engines produced by the manufacturer and marketed in California by another manufacturer under the other manufacturer’s nameplate shall be treated as California sales of the marketing manufacturer. The annual sales from different firms shall be aggregated in the following situations: ( 1 A) v V ehicles produced by two or more firms, one of which is 10% or greater part owned by another; or ( 2 B ) v Vehicles produced by any two or more firms if a third party has equity ownership of 10% or more in each of the firms; or

( 3 C ) v Vehicles produced by two or more firms having a common corporate officer(s) who is (are) responsible for the overall direction of the companies; or (4 D ) v V ehicles imported or distributed by all firms where the vehicles are manufactured by the same entity and the importer or distributor is an authorized agent of the entity.

( 9 19 ) “Intermediate volume manufacturer” means any pre-2001 model year manufacturer with California sales between 3,001 and 60,000 new light- and medium-duty vehicles per model year based on the average number of vehicles sold by the manufacturer each model year from 1989 to 1993; any 2001 through 2002 model year manufacturer with California sales between 4,501 and 60,000 new light- and medium-duty vehicles per model year based on the averageDate of Release: 8/6/04; 45-day Notice version A- 2

Board Hearing: 9/23/04 number of vehicles sold by the manufacturer each model year from 1989 to 1993; and any 2003 and subsequent model year manufacturer with California sales between 4,501 and 60,000 new light- and medium-duty vehicles based on the average number of vehicles sold for the three previous consecutive model years for which a manufacturer seeks certification. For a manufacturer certifying for the first time in California, model year sales shall be based on projected California sales. A manufacturer’s California sales shall consist of all vehicles or engines produced by the manufacturer and delivered for sale in California, except that vehicles or engines produced by the manufacturer and marketed in California by another manufacturer under the other manufacturer’s nameplate shall be treated as California sales of the marketing manufacturer. For purposes of applying the 2005 and subsequent model year zero-emission vehicle requirements for intermediate-volume manufacturers under section 1962(b), the annual sales from different firms shall be aggregated in the case of (1) vehicles produced by two or more firms, each one of which either has a greater than 50% equity ownership in another or is more than 50% owned by another; or (2) vehicles produced by any two or more firms if a third party has equity ownership of greater than 50% in each firm.

For purposes of applying the 2009 and subsequent model year Greenhouse Gas requirements for intermediate volume manufacturers under section 1961.1, the annual sales from different firms shall be aggregated in the following situations: (1) vehicles produced by two or more firms, each one of which either has a greater than 10% equity ownership in another or is more than 10% owned by another; or (2) vehicles produced by any two or more firms if a third party has equity ownership of greater than 10% in each firm.

( 10 20 ) “Large volume manufacturer” means any 2000 and subsequent model year manufacturer that is not a small volume manufacturer, or an independent low volume manufacturer, or an intermediate volume manufacturer.

( 11 8 ) “Light-duty truck” means any 2000 and subsequent model motor vehicle certified to the standards in section 1961(a)(1) rated at 8,500 pounds gross vehicle weight or less, and any other motor vehicle rated at 6,000 pounds gross vehicle weight or less, which is designed primarily for purposes of transportation of property or is a derivative of such a vehicle, or is available with special features enabling off-street or off-highway operation and use.

(12) “Medium-duty passenger vehicle” means any medium-duty vehicle with a gross vehicle weight rating of less than 10,000 pounds that is designed primarily for the transportation of persons. The medium-duty passenger vehicle definition does not include any vehicle which: (1) is an “incomplete truck” i.e., is a truck that does not have the primary load carrying device or container attached; or (2) has a seating capacity of more than 12 persons; or (3) is designed for more than 9 persons in seating rearward of the driver’s seat; or (4) is equipped with an open cargo area of 72.0 inches in interior length or more. A covered box not readily accessible from the passenger compartment will be considered an open cargo area, for purposes of this definition.

( 13 9 ) “Medium-duty vehicle” means any pre-1995 model year heavy-duty vehicle having a manufacturer’s gross vehicle weight rating of 8,500 pounds or less; any 1992 through 2006 model-year heavy-duty low-emission, ultra-low-emission, super-ultra-low-emission orDate of Release: 8/6/04; 45-day Notice version A- 3

Board Hearing: 9/23/04 zero-emission vehicle certified to the standards in section 1960.1(h)(2) having a manufacturer’sgross vehicle weight rating of 14,000 pounds or less; any 1995 through 2003 model year heavyduty vehicle certified to the standards in section 1960.1(h)(1) having a manufacturer’s gross vehicle weight rating of 14,000 pounds or less; and any 2000 and subsequent model heavy-duty low-emission, ultra-low-emission, super-ultra-low-emission or zero-emission vehicle certified to the standards in Section 1961(a)(1) or 1962 having a manufacturer’s gross vehicle weight rating between 8,501 and 14,000 pounds.

( 14 10 ) "Modified part" means any aftermarket part intended to replace an ori ginal equipment emission-related part and which is not functionally identical to the original equipment part in all respects which in any way affect emissions, excluding a consolidated part.

( 15 11 ) "Motorcycle engine" means an engine which is used to propel a new, street-use motorcycle.

(16) [Reserved.]

( 17 12 ) “Passenger car” means any motor vehicle designed primarily for transportation of persons and having a design capacity of twelve persons or less.

( 18 17 ) “Reactivity adjustment factor” means a fraction applied to the NMOG emissions from a vehicle powered by a fuel other than conventional gasoline for the purpose of determininga gasoline-equivalent NMOG level. The reactivity adjustment factor is defined as the ozoneforming potential of clean fuel vehicle exhaust divided by the ozone-forming potential of gasoline vehicle exhaust.

( 19 13 ) "Recall" means: Subparagraphs (16)(A) and (B). [No change.]

( 20 14 ) "Replacement part" means any aftermarket part intended to replace an doriginal equipment emissions-related part and which is functionally identical to the original equipment part in all respects which in any way affect emissions (including durability), or a consolidated part.

( 21 15 ) “Subgroup” means a set of vehicles within an engine family distinguishable by characteristics contained in the manufacturer’s application for certification.

( 22 18 ) “Small volume manufacturer” means, with respect to the 2001 and subsequent model-years, a manufacturer with California sales less than 4,500 new passenger cars, light-duty trucks, medium-duty vehicles, heavy-duty vehicles and heavy-duty engines based on the average number of vehicles sold for the three previous consecutive model years for which a manufacturer seeks certification as a small volume manufacturer ; however, for manufacturers certifying for the first time in California model-year sales shall be based on projected California sales. A manufacturer’s California sales shall consist of all vehicles or engines produced by the manufacturer and delivered for sale in California, except that vehicles or engines produced by theDate of Release: 8/6/04; 45-day Notice version A- 4

Board Hearing: 9/23/04 manufacturer and marketed in California by another manufacturer under the other manufacturer’s nameplate shall be treated as California sales of the marketing manufacturer. Except as provided in the next paragraph, beginning with the 2009 model year, the annual sales from different firms shall be aggregated in the following situations: (1) vehicles produced by two or more firms, one of which is 10% or greater part owned by another; or (2) vehicles produced by any two or more firms if a third party has equity ownership of 10% or more in each of the firms; or (3) vehicles produced by two or more firms having a common corporate officer(s) who is (are) responsible for the overall direction of the companies; or (4) vehicles imported or distributed by all firms where the vehicles are manufactured by the same entity and the importer or distributor is an authorized agent of the entity.

For purposes of compliance with the zero-emission vehicle requirements, heavy-duty vehicles and engines shall not be counted as part of a manufacturer’s sales. For purposes of applying the 2005 and subsequent model year zero-emission vehicle requirements for small-volume manufacturers under section 1962(b), the annual sales from different firms shall be aggregated in the case of (1) vehicles produced by two or more firms, each one of which either has a greater than 50% equity ownership in another or is more than 50% owned by another; or (2) vehicles produced by any two or more firms if a third party has equity ownership of greater than 50% in each firm.

Note: Authority cited: Sections 39600, 39601, 43013, 43018, 43101, and 43104 Health and Safety Code. Reference: Sections 39002, 39003, 39010, 39500, 40000, 43000, 43013, 43018.5, 43100, 43101, 43101.5, 43102, 43104, 43106, and 43204, Health and Safety Code.Date of Release: 8/6/04; 45-day Notice version A- 5

Board Hearing: 9/23/04 § 1961. Exhaust Emission Standards and Test Procedures - 2004 and Subsequent Model Passenger Cars, Light-Duty Trucks, and Medium-Duty Vehicles.

Introduction. [No change.]

Sections (a) through (c). [No change.]

(d) Test Procedures. The certification requirements and test procedures for determining compliance with the emission standards in this section are set forth in the “California Exhaust Emission Standards and Test Procedures for 2001 and Subsequent Model Passenger Cars, Light-Duty Trucks, and Medium-Duty Vehicles,” as amended May 28, 2004 [INSERT DATE OF AMENDMENT] , and the “California Non-Methane Organic Gas Test Procedures,” as amended July 30, 2002, which are incorporated herein by reference. In the case of hybrid electric vehicles and on -board fuel-fired heaters, the certification requirements and test procedures for determining compliance with the emission standards in this section are set forth in the “California Exhaust Emission Standards and Test Procedures for 2005 and Subsequent Model Zero-Emission Vehicles, and 2001 and Subsequent Model Hybrid Electric Vehicles, in the Passenger Car, Light-Duty Truck and Medium-Duty Vehicle Classes,” incorporated by reference in section 1962.

Section (e). [No change.]

Note: Authority cited: Sections 39500, 39600, 39601, 43013, 43018, 43101, 43104 and 43105, Health and Safety Code. Reference: Sections 39002, 39003, 39667, 43000, 43009.5, 43013, 43018, 43100, 43101, 43101.5, 43102, 43104, 43105, 43106, 43107, 43204, and 43205 .5 , Health and Safety Code.Date of Release: 8/6/04; 45-day Notice version A- 6

Board Hearing: 9/23/04 Adopt new Section 1961.1, Title 13, Article 2, within Chapter 1, Division 3, California Code of Regulations, to read as follows: (Note: the entire text of section 1961.1 set forth below is new language proposed to be added to the California Code of Regulations.)

§ 1961.1. Greenhouse Gas Exhaust Emission Standards and Test Procedures - 2009 and Subsequent Model Passenger Cars, Light-Duty Trucks, and Medium-Duty Vehicles.

(a) Greenhouse Gas Emission Requirements. The greenhouse gas emission levels from new 2009 and subsequent model year passenger cars, light-duty trucks, and medium-duty passenger vehicles shall not exceed the following requirements. Light-duty trucks from 3751 lbs. LVW – 8500 lbs. GVW that are certified to the Optional LEV II NOx Standard in section 1961(a)(1) are exempt from these greenhouse gas emission requirements, however, passenger cars, light-duty trucks 0-3750 lbs. LVW, and medium-duty passenger vehicles are not eligible for this exemption.

(1) Fleet Average Greenhouse Gas Requirements for Passenger Cars, Light-Duty Trucks, and Medium-Duty Passenger Vehicles.

(A) The fleet average greenhouse gas e xhaust mass emission values from passenger cars, light-duty trucks, and medium-duty passenger vehicles that are produced and delivered for sale in California each model year by a large volume manufacturer shall not exceed:Date of Release: 8/6/04; 45-day Notice version A- 7

Board Hearing: 9/23/04 FLEET AVERAGE GREENHOUSE GAS

EXHAUST MASS EMISSION REQUIREMENTS FORPASSENGER CAR, LIGHT-DUTY TRUCK, AND MEDIUMDUTY PASSENGER VEHICLE WEIGHT CLASSES 1

(4,000 mile Durability Vehicle Basis) Fleet Average Greenhouse Gas Emissions (grams per mile CO 2 -equivalent) Model Year All PCs;

LDTs 0-3750 lbs. LVW LDTs 3751 lbs. LVW - 8500 lbs. GVW; MDPVs

2009 323 439

2010 301 420

2011 267 390

2012 233 361

2013 227 355

2014 222 350

2015 213 341

2016+ 205 332

1 Each manufacturer shall demonstrate compliance with these values in accordance with section 1961.1(a)(1)(B).

(B) Calculation of Fleet Average Greenhouse Gas Value.

1. Basic Calculation.

a. Each manufacturer shall calculate both a “city” grams per mile average CO 2-equivalent value for each GHG vehicle test group and a “highway” grams per mile average CO 2-equivalent value for each GHG vehicle test group, including vehicles certified in accordance with section 1960.5 and vehicles certified in accordance with section 1961(a)(14), using the following formula. Greenhouse Gas emissions used for the “city” CO 2 -equivalent value calculation shall be measured using the “FTP” test cycle (40 CFR, Part 86, Subpart B). Greenhouse Gas emissions used for the “highway” CO 2 -equivalent value calculation shall be based on emissions measured using the Highway Test Procedures.

CO 2 -Equivalent Value = CO 2 + 296 x N2O + 23 x CH 4 - A/C Direct Emissions Allowance - A/C Indirect Emissions Allowance

A manufacturer may use N 2 O = 0.006 grams per mile in lieu of measuring N 2 O exhaust emissions.Date of Release: 8/6/04; 45-day Notice version A- 8

Board Hearing: 9/23/04

b. A/C Direct Emissions Allowance. A manufacturer may use the following A/C Direct Emission Allowances, upon approval of the Executive Officer, if that manufacturer demonstrates that the corresponding requirements are met. Such demonstration shall include specifications of the components used and an engineering evaluation that verifies the estimated lifetime emissions from the components and the system. A manufacturer shall also provide confirmation that the number of fittings and joints has been minimized and components have been optimized to minimize leakage.

i. A “low-leak air conditioning system” shall be defined as one that meets all of the following criteria: A. All pipe and hose connections are equipped with multiple o-rings, seal washers, or metal gaskets only (e.g., no single o-rings); B. All hoses in contact with the refrigerant must be ultra-low permeability barrier or veneer hose on both the high-pressure and the low-pressure sides of the system (e.g., no rubber hoses); and C. Only multiple-lip compressor shaft seals shall be used (with either compressor body o-rings or gaskets).

ii. For an air conditioning system that uses HFC-134a as the refrigerant: A. An A/C Direct Emissions Allowance of 3.0 CO 2 -equivalent grams per mile shall apply if the system meets the criteria for a “low-leak air conditioning system.” B. An A/C Direct Emissions Allowance of 3.0 CO 2 -equivalent grams per mile shall apply if the manufacturer demonstrates alternative technology that achieves equal or lower direct emissions than a “low-leak air conditioning system.” C. An A/C Direct Emissions Allowance greater than 3.0 CO 2 - equivalent grams per mile may apply for an air conditioning system that reduces refrigerant leakage further than would be obtained from a “low-leak air conditioning system.” A maximum A/C Direct Emissions Allowance of 6.0 CO 2-equivalent grams per mile may be earned for an air conditioning system that has 100 percent containment of refrigerant during “normal operation.” To obtain an A/C Direct Emissions Allowance greater than 3.0 CO 2 - equivalent grams per mile, the manufacturer must provide an engineering evaluation that supports the allowance requested.

iii. For an air conditioning system that uses HFC-152a, CO 2 refrigerant, or any refrigerant with a GWP of 150 or less: An A/C Direct Emissions Allowance shall be calculated using the following formula:

A/C Direct Emissions Allowance = A – (B x C)Date of Release: 8/6/04; 45-day Notice version A- 9

Board Hearing: 9/23/04

where: A = 9 CO 2 -equivalent grams per mile (the lifetime vehicle emissions expected from an air conditioning system that uses refrigerant HFC-134a);

1300 GWP g/mi equivalent CO 9 B 2 ×

− =

where: B is the lifetime vehicle emissions expected from an air conditioning system that uses a refrigerant with a GWP of 150 or less, and

“GWP” means the GWP of this refrigerant; and

C = 1, except for an air conditioning system that meets the criteria of a “low-leak air conditioning system.”

For an air conditioning system that meets or exceeds the criteria of a “low-leak air conditioning system,” the following formula shall apply:



## ( ) credit 0.12 1 C ×

− =

where: “credit” equals 3.0 CO 2-equivalent grams per mile for a “low-leak air conditioning system” that meets the criteria of section 1961.1(a)(1)(B)1.b.i., or

“credit” equals a value greater than 3.0 CO 2 -equivalent grams per mile for an air conditioning system that reduces refrigerant leakage further than would be obtained from a “low-leak air conditioning system.” A maximum credit of 6.0 CO 2 -equivalent grams per mile may be earned for an air conditioning system that has 100 percent containment of refrigerant during normal operation. To obtain a credit greater than 3.0 CO 2 - equivalent grams per mile, the manufacturer must provide an engineering evaluation that supports the credit requested.

c. A/C Indirect Emissions Allowance. A manufacturer may use the following A/C Indirect Emissions Allowances, upon approval of the Executive Officer, if the manufacturer demonstrates using data or an engineering evaluation that the air conditioning system meets the corresponding requirements. A manufacturer may use the following A/C Indirect Emissions Allowances for other technologies, upon approval of the Executive Officer, if that manufacturer demonstrates that the air conditioning system achieves equal or greater CO 2 -equivalent grams per mile emissions reductions.Date of Release: 8/6/04; 45-day Notice version A- 10

Board Hearing: 9/23/04 i. An allowance of 5.0 CO 2 -equivalent grams per mile per 100ccs of

compressor displacement shall be given for an air conditioning system optimized for energy efficiency by utilizing state-of-the-art high efficiency components, managed outside and recirculated air balance to achieve comfort, demisting, and safety requirements, based on such factors as temperature, humidity, pressure, and level of fresh air in the passenger compartment, and an externally controlled compressor (such as an externally controlled variable displacement or variable speed compressor or an externally controlled fully cycling fixed displacement compressor) that adjusts evaporative temperature to minimize the necessity of reheating cold air to satisfy occupant comfort.

ii. An allowance of 0.2 CO 2 -equivalent grams per mile per 100ccs of compressor displacement shall be given for an air conditioning system equipped with a refrigerant having a GWP of 150 or less.

d. Upstream Greenhouse Gas Emission Adjustment Factors for Alternative Fuel Vehicles. A grams per mile average CO 2 -equivalent value for each GHG vehicle test group certifying on a fuel other than conventional gasoline, including vehicles certified in accordance with section 1960.5 and vehicles certified in accordance with section 1961(a)(14), shall be calculated as follows:

(CO 2 + A/C Indirect Emissions) x (Fuel Adjustment Factor) + 296 x N 2 O + 23 x CH 4 + A/C Direct Emissions

where:

A/C Indirect Emissions = 9.0 CO 2 -equivalent grams per mile per 100ccs of

compressor displacement – A/C Indirect Emissions Allowance as calculated per section 1961.1(a)(1)(B)1.c.

A/C Direct Emissions = 9 CO 2-equivalent grams per mile – A/C Direct Emissions Allowance as calculated per section 1961.1(a)(1)(B)1.b.

The Fuel Adjustment Factors are:

Fuel Fuel Adjustment Factor Natural Gas 1.03 LPG 0.89 E85 0.74Date of Release: 8/6/04; 45-day Notice version A- 11

Board Hearing: 9/23/04

e. Calculation of CO 2 -Equivalent Emissions for Hydrogen Internal Combustion Engine Vehicles and for Electric and Hydrogen ZEVs. The grams per mile average CO 2-equivalent value for each GHG vehicle test group certifying to ZEV standards, including vehicles certified in accordance with section 1960.5 and vehicles certified in accordance with section 1961(a)(14), shall be:

A/C Direct Emissions + 130 CO 2-equivalent grams per mile for electric ZEVs, A/C Direct Emissions + 290 CO 2-equivalent grams per mile for hydrogen internal combustion engine vehicles, and A/C Direct Emissions + 210 CO 2-equivalent grams per mile for hydrogen ZEVs.

where: A/C Direct Emissions = 9 CO 2-equivalent grams per mile – A/C Direct Emissions

Allowance as calculated per section 1961.1(a)(1)(B)1.b.

2. Calculation of Greenhouse Gas Values for Bi-Fuel Vehicles, Fuel-Flexible Vehicles, Dual-Fuel Vehicles, and Grid-connected Hybrid Electric Vehicles. For bi-fuel, fuelflexible, dual-fuel, and grid-connected hybrid electric vehicles, a manufacturer shall calculate a grams per mile average CO 2 -equivalent value for each GHG vehicle test group, in accordance with section 1961.1(a)(1)(B)1., based on exhaust mass emission tests when the vehicle is operating on gasoline.

a. Optional Alternative Compliance Mechanisms. Beginning with the 2010model year, a manufacturer that demonstrates that a bi-fuel, fuel-flexible, dual-fuel, or gridconnected hybrid electric GHG vehicle test group will be operated in use in California on the alternative fuel may be eligible to certify those vehicles using this optional alternative compliance procedure, upon approval of the Executive Officer.

i. To demonstrate that bi-fuel, fuel-fle xible, dual-fuel, or gridconnected hybrid electric vehicles within a GHG vehicle test group will be operated in use in California on the alternative fuel, the manufacturer shall provide data that shows the previous model year sales of such vehicles to fleets that provide the alternative fuel on-site or, for grid-connected hybrid electric vehicles, to end users with the capability to recharge the vehicle on-site. This data shall include both the total number of vehicles sales that were made to such fleets or end users with the capability to recharge the vehicle on-site and as the percentage of total GHG vehicle test group sales. The manufacturer shall also provide data demonstrating the percentage of total vehicle miles traveled by the bi-fuel, fuel-flexible, dual-fuel, or grid-connected hybrid electric vehicles sold to each fleet or to end users with the capability to recharge the vehicle on-site in the previous model year using the alternative fuel and using gasoline.

ii. For each GHG vehicle test grou p that receives approval by the Executive Officer under section 1961(a)(1)(B)2.a.i., a grams per mile CO 2 - equivalent value shall be calculated as follows:

CO 2-equivalent value = 

## [ ] ( ) 

## [ ]

D B A

- 1 C B A ×

× + × ×Date of Release: 8/6/04; 45-day Notice version A- 12

Board Hearing: 9/23/04

where: A = the percentage of previous model year vehic les within a GHG vehicle test group that were operated in use in California on the alternative fuel during the previous calendar year;

B = the percentage of miles traveled by “A” during the previous calendar year ;

C = the CO 2 -equivalent value for the GHG vehicle test group, as calculated in section 1961.1(a)(1)(B)1, when tested using the alternative fuel; and

D = the CO 2 -equivalent value for the GHG vehicle test group, as calculated in section 1961.1(a)(1)(B)1, when tested using gasoline.

3. Calculation of Fleet Average Greenhouse Gas Values.

a. Each manufacturer’s PC and LDT1 fleet average Greenhouse Gas value for the total number of PCs and LDT1s produced and delivered for sale in California, including vehicles certified in accordance with section 1960.5 and vehicles certified in accordance with section 1961(a)(14), shall be calculated as follows:

[0.55 x ( Σ City Test Group Greenhouse Gas Values) + 0.45 x ( Σ Highway Test Group Greenhouse Gas Values)] ÷ Total Number of PCs and LDT1s Produced, Including ZEVs and HEVs

where: City Test Group Greenhouse Gas Value = [(Total Number of Vehicles in a Test Group - Σ Number of Vehicles in Optional GHG Test Vehicle Configurations) x “worst-case” calculated CO 2 -equivalent value + Σ (Number of vehicles in Optional GHG Test Vehicle Configurations x applicable calculated CO 2 -equivalent value)] measured using the FTP test cycle; and

Highway Test Group Greenhouse Gas Value = [(Total Number of Vehicles in a Test Group - Σ Number of Vehicles in Optional GHG Test Vehicle Configurations) x “worstcase” calculated CO 2-equivalent value + Σ (Number of vehicles in Optional GHG Test Vehicle Configurations x applicable calculated CO 2 -equivalent value)] measured using the Highway Test Procedures.

b. Each manufacturer’s LDT 2 and MDPV fleet average Greenhouse Gas value for the total number of LDT2s and MDPVs produced and delivered for sale in California, including vehicles certified in accordance with section 1960.5 and vehicles certified in accordance with section 1961(a)(14), shall be calculated as follows:Date of Release: 8/6/04; 45-day Notice version A- 13

Board Hearing: 9/23/04 [0.55 x ( Σ City Test Group Greenhouse Gas Values) + 0.45 x ( Σ Highway Test Group Greenhouse Gas Values)] ÷ Total Number of LDT2s and MDPVs Produced, Including ZEVs and HEVs

where: City Test Group Greenhouse Gas Value =[(Total Number of Vehicles in a Test Group - Σ Number of Vehicles in Optional GHG Test Vehicle Configurations) x “worst-case” calculated CO 2 -equivalent value + Σ (Number of vehicles in Optional GHG Test Vehicle Configurations x applicable calculated CO 2 -equivalent value)] measured using the FTP test cycle; and

Highway Test Group Greenhouse Gas Value = [(Total Number of Vehicles in a Test Group - Σ Number of Vehicles in Optional GHG Test Vehicle Configurations) x “worstcase” calculated CO 2-equivalent value + Σ (Number of vehicles in Optional GHG Test Vehicle Configurations x applicable calculated CO 2 -equivalent value)] measured using the Highway Test Procedures.

(C) Requirements for Intermediate Volume Manufacturers.

1. Before the 2016 model year, comp liance with this section 1961.1 shall be waived for intermediate volume manufacturers.

2. For each intermediate volume manufacturer, the manufacturer’s baseline fleet average greenhouse gas value for PCs and LDT1s and baseline fleet average greenhouse gas value for LDT2s and MDPVs shall be calculated, in accordance with section 1961.1(a)(1)(B) using its 2002 model year fleet.

3. In 2016 and subsequent model years, an intermediate volume manufacturer shall either:

a. not exceed a fleet average greenhouse g as emissions value of 233 g/mi for PCs and LDT1s and 361 g/mi for LDT2s and MDPVs, or

b. not exceed a fleet average greenhouse gas value of 0.75 times the baseline fleet average greenhouse gas value for PCs and LDT1s and 0.82 times the baseline fleet average greenhouse gas value for LDT2s and MDPVs, as calculated in section 1961.1(a)(1)(C)2.

4. If a manufacturer's average annual California sales exceed 60,000 units of new PCs, LDTs, MDVs and heavy-duty engines based on the average number of vehicles sold for the three previous consecutive model years, the manufacturer shall no longer be treated as a intermediate volume manufacturer and shall comply with the fleet average requirements applicable to large volume manufacturers as specified in section 1961.1(a)(1) beginning with the fourth model year after the last of the three consecutive model years.

5. If a manufacturer’s average annual California sales fall below 60,001 units of new PCs, LDTs, MDVs and heavy-duty engines based on the average number of vehicles sold for the three previous consecutive model years, the manufacturer shall be treated as aDate of Release: 8/6/04; 45-day Notice version A- 14

Board Hearing: 9/23/04 intermediate volume manufacturer and shall be subject to the requirements for intermediate volume manufacturers beginning with the next model year.

(D) Requirements for Small Volume Manufacturers and Independent Low Volume Manufacturers.

1. Before the 2016 model year, compliance with this section 1961.1 shall be waived for small volume manufacturers and independent low volume manufacturers.

2. At the beginn ing of the 2013 model year, each small volume manufacturer and independent low volume manufacturer shall identify all 2012 model year vehicle models, certified by a large volume manufacturer that are comparable to that small volume manufacturer or independent low volume manufacturer’s 2016 model year vehicle models, based on horsepower and horsepower to weight ratio. The small volume manufacturer and independent low volume manufacturer shall demonstrate to the Executive Officer the appropriateness of each comparable vehicle model selected. Upon approval of the Executive Officer, s/he shall provide to the small volume manufacturer and to the independent low volume manufacturer the CO 2 - equivalent value for each 2012 model year vehicle model that is approved. The small volume manufacturer and independent low volume manufacturer shall calculate an average greenhouse gas emissions value for each its greenhouse gas vehicle test groups based on the CO 2-equivalent values provided by the Executive Officer.

3. In the 2016 and subsequent model years, a small volume manufacturer and an independent low volume manufacturer shall either:

a. not exceed the fleet average greenhouse gas emissions value calculated for each GHG vehicle test group for which a comparable vehicle is sold by a large volume manufacturer, in accordance with section 1961.1(a)(1)(D)2; or

b. not exceed a fleet average greenhouse gas emissions value of 233 g/mi for PCs and LDT1s and 361 g/mi for LDT2s and MDPVs; or

c. upon approval of the Executive O fficer, if a small volume manufacturer demonstrates a vehicle model uses an engine, transmission, and emission control system that is identical to a configuration certified for sale in California by a large volume manufacturer, those small volume manufacturer vehicle models are exempt from meeting the requirements in paragraphs 3.a. and b. of this section.

4. If a manufacturer's average annual California sales exceed 4,500 units of new PCs, LDTs, MDVs and heavy-duty engines based on the average number of vehicles sold for the three previous consecutive model years, the manufacturer shall no longer be treated as a small volume manufacturer and shall comply with the fleet average requirements applicable to larger volume manufacturers as specified in section 1961.1(a)(1) beginning with the fourth model year after the last of the three consecutive model years.

5. If a manufacturer's average annual California sales exceed 10,000 units of new PCs, LDTs, MDVs and heavy-duty engines based on the average number of vehicles sold for the three previous consecutive model years, the manufacturer shall no longer be treated as anDate of Release: 8/6/04; 45-day Notice version A- 15

Board Hearing: 9/23/04 independent low volume manufacturer and shall comply with the fleet average requirements applicable to larger volume manufacturers as specified in section 1961.1(a)(1) beginning with the fourth model year after the last of the three consecutive model years.

6. If a manufacturer’s average annual California sales fall below 4,501 units of new PCs, LDTs, MDVs and heavy-duty engines based on the average number of vehicles sold for the three previous consecutive model years, the manufacturer shall be treated as a small volume manufacturer and shall be subject to the requirements for small volume manufacturers beginning with the next model year.

(b) Calculation of Greenhouse Gas Credits/Debits.

(1) Calculation of Greenhouse Gas Credits for Passenger Cars, Light-Duty Trucks, and Medium-Duty Passenger Vehicles.

(A) In the 2000 through 2008 model years, a manufacturer that achieves fleet average Greenhouse Gas values lower than the fleet average Greenhouse Gas requirement applicable to the 2012 model year shall receive credits for each model year in units of g/mi determined as:

[(Fleet Average Greenhouse Gas Requirement for the 2012 model year)

- (Manufacturer’s Fleet Average Greenhouse Gas Value)] x (Total No. of Vehicles Produced and Delivered for Sale in California, Including ZEVs and HEVs).

(B) In 2009 and subsequent model years, a manufacturer that achieves fleet average Greenhouse Gas values lower than the fleet average Greenhouse Gas requirement for the corresponding model year shall receive credits in units of g/mi Greenhouse Gas determined as:

[(Fleet Average Greenhouse Gas Requirement) - (Manufacturer’s Fleet Average Greenhouse Gas Value)] x (Total No. of Vehicles Produced and Delivered for Sale

in California, Including ZEVs and HEVs).

(2) A manufacturer with 2009 and subsequent model year fleet average Greenhouse Gas values greater than the fleet average requirement for the corresponding model year shall receive debits in units of g/mi Greenhouse Gas equal to the amount of negative credits determined by the aforementioned equation. For the 2009 and subsequent model years, the total g/mi Greenhouse Gas credits or debits earned for PCs and LDT1s and for LDT2s and MDPVs shall be summed together. The resulting amount shall constitute the g/mi Greenhouse Gas credits or debits accrued by the manufacturer for the model year.

(3) Procedure for Offsetting Greenhouse Gas Debits.

(A) A manufacturer shall equalize Greenhouse Gas emission debits by earning g/mi Greenhouse Gas emission credits in an amount equal to the g/mi Greenhouse Gas debits, orDate of Release: 8/6/04; 45-day Notice version A- 16

Board Hearing: 9/23/04 by submitting a commensurate amount of g/mi Greenhouse Gas credits to the Executive Officer that were earned previously or acquired from another manufacturer. For 2012 and for 2016 and subsequent model years, manufacturers shall equalize emission debits by the end of the following model year. For the 2009, 2010 and 2011 model years, a manufacturer shall equalize Greenhouse Gas debits for PCs , LDTs, and MDPVs within four model years and prior to the end of the 2013 model year. For the 2013, 2014 and 2015 model years, a manufacturer shall equalize Greenhouse Gas debits for PCs, LDTs, and MDPVs within four model years and prior to the end of the 2017 model year. If emission debits are not equalized within the specified time period, the manufacturer shall be subject to the Health and Safety Code section 43211 civil penalty applicable to a manufacturer which sells a new motor vehicle that does not meet the applicable emission standards adopted by the state board. The cause of action shall be deemed to accrue when the emission debits are not equalized by the end of the specified time period. For the purposes of Health and Safety Code section 43211, the number of passenger cars and LDT1s not meeting the state board’s emission standards shall be determined by dividing the total amount of g/mi Greenhouse Gas emission debits for the model year by the g/mi Greenhouse Gas fleet average requirement for PCs and LDTs 0 -3750 lbs. LVW applicable for the model year in which the debits were first incurred. For the purposes of Health and Safety Code section 43211, the number of LDT2s and MDPVs not meeting the state board’s emission standards shall be determined by dividing the total amount of g/mi Greenhouse Gas emission debits for the model year by the g/mi Greenhouse Gas fleet average requirement for LDTs 3751 lbs. LVW – 8500 lbs. GVW and MDPVs applicable for the model year in which the debits were first incurred.

(B) Greenhouse Gas emission credits earned in the 2000 through 2011 model years shall be treated as if they were earned in the 2011 model year and shall retain full value through the 2012 model year. Greenhouse Gas emission credits earned in the 2012 through 2015 model years shall be treated as if they were earned in the 2015 model year and shall retain full value through the 2016 model year. Greenhouse Gas emission credits earned in the 2016 and subsequent model years shall retain full value through the subsequent model year. The value of any credits earned in the 2000 through 2011 model years that are not used to equalize debits accrued in the 2009 through 2012 model years shall be discounted by 50% at the beginning of the 2014 model year, shall be discounted to 25% of its original value if not used by the beginning of the 2015 model year, and will have no value if not used by the beginning of the 2016 model year. The value of any credits earned in the 2012 through 2015 model years that are not used to equalize debits accrued in the 2012 through 2016 model years shall be discounted by 50% at the beginning of the 2018 model year, shall be discounted to 25% of its original value if not used by the beginning of the 2019 model year, and will have no value if not used by the beginning of the 2020 model year. Any credits earned in the 2016 and subsequent model years that are not used to equalize the previous model year’s debit shall be discounted by 50% at the beginning of the second model year after being earned, shall be discounted to 25% of its original value if not used by the beginning of the third model year after being earned, and will have no value if not used by the beginning of the fourth model year after being earned.

(c) Test Procedures. The certification requirements and test procedures for determining compliance with the emission standards in this section are set forth in the “California Exhaust Emission Standards and Test Procedures for 2001 and Subsequent ModelDate of Release: 8/6/04; 45-day Notice version A- 17

Board Hearing: 9/23/04 Passenger Cars, Light-Duty Trucks, and Medium-Duty Vehicles,” incorporated by reference in section 1961(d). In the case of hybrid electric vehicles and on -board fuel-fired heaters, the certification requirements and test procedures for determining compliance with the emission standards in this section are set forth in the “California Exhaust Emission Standards and Test Procedures for 2005 and Subsequent Model Zero-Emission Vehicles, and 2001 and Subsequent Model Hybrid Electric Vehicles, in the Passenger Car, Light-Duty Truck and Medium-Duty Vehicle Classes,” incorporated by reference in section 1962.

(d) Abbreviations. The following abbreviations are used in this section 1961.1:

“ccs” mean cubic centimeters. "CH 4 " means methane. "CO 2 " means carbon dioxide. “E85” means a blend of 85 percent ethanol and 15 percent gasoline. “FTP” means Federal Test Procedure. "GHG" means greenhouse gas. “g/mi” means grams per mile. “GVW” means gross vehicle weight. “GVWR” means gr oss vehicle weight rating. “GWP” means the global warming potential. “HEV” means hybrid-electric vehicle. “LDT” means light-duty truck. “LDT1” means a light-duty truck with a loaded vehicle weight of 0-3750 pounds. “LDT2” means a “LEV II” light-duty truck with a loaded vehicle weight of 3751 pounds to a gross vehicle weight of 8500 pounds. “LEV” means low

-emission vehicle. “LPG” means liquefied petroleum gas. “LVW” means loaded vehicle weight. “MDPV” means medium-duty passenger vehicle. “MDV” means medium

-duty vehicle. “mg/mi” means milligrams per mile. “N 2 O” means nitrous oxide. “PC” means passenger car. “SULEV” means super-ultra-low-emission vehicle. “ULEV” means ultra -low -emission vehicle. “ZEV” means zero-emission vehicle.

(e) Definitions Specific to this Section. The following definitions apply to this section 1961.1:

(1) “A/C Direct Emissions” means any refrigerant released from a motor vehicle's air conditioning system.

(2) “A/C Indirect Emissions” means any increase in m otor vehicle exhaust CO 2 emissions that can be attributed to the operation of the air conditioning system.Date of Release: 8/6/04; 45-day Notice version A- 18

Board Hearing: 9/23/04 (3) “GHG Vehicle Test Group” means vehicles that have an identical test group, vehicle make and model, transmission class and driveline, aspiration method (e.g., naturally aspirated, turbocharged), camshaft configuration, valvetrain configuration, and inertia weight class.

(4) “Greenhouse Gas” means the following gases: carbon dioxide, methane, nitrous oxide, and hydrofluorocarbons.

(5) “Grid-Con nected Hybrid Electric Vehicle” means a hybrid electric vehicle that has the capacity for the battery to be recharged from an off-board source of electricity and has some all-electric range.

(6) “GWP” means the 100-year global warming potential specified in IPCC (Intergovernmental Panel on Climate Change) 2000: Emissions Scenarios. N. Nakicenovic et. al. editors, Special Report of Working Group III of the IPCC, Cambridge University Press, Cambridge UK, ISBN 0-521-80493-0.

(7) “Normal Operation” of an air conditioning system means typical everyday use of the A/C system to cool a vehicle. “Normal Operation” does not include car accidents, dismantling of an air conditioning system, or any other non-typical events.

(8) “Optional GHG Test Vehicle Configuratio n” means any GHG vehicle configuration that is selected for testing by the manufacturer as allowed by section G.2.3 of the “California Exhaust Emission Standards and Test Procedures for 2001 and Subsequent Model Passenger Cars, Light-Duty Trucks, and Medium-Duty Vehicles,” other than the worst-case configuration.

(9) “Variable Displacement Compressor” means a compressor in which the mass flow rate of refrigerant is adjusted independently of compressor speed by the control system in response to cooling load demand.

(10) “Variable Speed Compressor” means a compressor in which the mass flow rate of refrigerant can be adjusted by control of the compressor input shaft speed, independent of vehicle engine speed. For example, a variable speed compressor can have electric drive, hydraulic drive, or mechanical drive through a variable speed transmission.

(11) “Worst-Case” means the vehicle configuration within each test group that is expected to have the highest CO 2 -equivalent value, as calculated in section 1961.1(a)(1)(B)1.

(f) Severability. Each provision of this section is severable, and in the event that any provision of this section is held to be invalid, the remainder of this article remains in full force and effect.

Note: Authority cited: Sections 39500, 39600, 39601, 43013, 43018, 43018.5, 43101, 43104 and 43105, Health and Safety Code. Reference: Sections 39002, 39003, 39667, 43000, 43009.5, 43013, 43018,Date of Release: 8/6/04; 45-day Notice version A- 19

Board Hearing: 9/23/04 43018.5, 43100, 43101, 43101.5, 43102, 43104, 43105, 43106, 43204, 43205, and 43211, Health and Safety Code.