March 4, 2010

MEMORANDUM

TO: Docket EPA-HQ-OAR-2009-0472

SUBJECT: Economy-Wide Impacts of Greenhouse Gas Tailpipe Standards

EPA has undertaken an analysis of the economy-wide impacts of the greenhouse gas emissions

(GHG) tailpipe standards as an exploratory exercise that EPA believes could provide additional 

insights into the potential impacts of the rule. This analysis updates the work done for the rule to 

reflect the final rulemaking estimates of vehicle costs, fuel savings, and world oil prices. The 

results presented in this memo were not a factor regarding the appropriateness of the GHG 

tailpipe standards. It is important to note that the results of this modeling exercise are dependent 

on the assumptions associated with how consumers will respond to increases in higher vehicle 

costs and improved vehicle fuel economy as a result of the rule. Please see Preamble Section 

III.H of the rule for a discussion of the underlying distinctions and implications. 

It is anticipated that the GHG tailpipe standards would have impacts on the U.S. economy that 

extend beyond the transportation sector. The price of light-duty vehicles would increase with 

this rule. This rule would also lower the demand for transportation fuels, resulting in fuel 

savings to vehicle users and a lower overall world oil price. This combination of effects—price 

increases for vehicles and lower demand and world oil prices—would impact all sectors of the 

economy that use light-duty vehicles and fuels as intermediate inputs (e.g., delivery vehicles) to 

produce final goods. Households would also be impacted indirectly as consumers of final goods, 

and directly as consumers of fuels and light-duty vehicles. 

It is important to note, however, that these potential impacts do not represent additional benefits 

or costs from the regulation. Instead, they represent the effects on the U.S. economy as its direct 

benefits and costs are transmitted through changes in prices in the affected markets, including 

those for vehicles and their components, fuel, and the various resources used to supply them.

To estimate the impacts of this rule on U.S. Gross Domestic Product (GDP) and personal 

consumption, EPA has used an economy-wide, computable general equilibrium (CGE) model. 

The economy-wide model used in this analysis is the Intertemporal General Equilibrium Model 

(IGEM).1 IGEM is a model of the U.S. economy with an emphasis on the economy’s energy and 

environmental aspects. IGEM is a dynamic model which depicts growth of the economy due to 

capital accumulation, technical change and population change. The model utilizes a unified 

accounting framework consistent with the National Income and Product Accounts and the 

 

1

The model is developed and run by Dale W. Jorgenson Associates for EPA. Model Homepage: 

http://www.dja.insightworks.com/
Industry Classification System. It is a detailed multi-sector model covering thirty-five industries, 

consisting of five energy and thirty non-energy sectors. The model ensures market balances 

(supply equals demand) in value and quantity terms, including limits placed on private 

investment dictated by domestic and foreign saving behavior and by the fiscal policies of federal, 

state and local governments. Capital accumulation in the model arises from the saving and 

investment behavior of households and businesses and provides an essential input to production 

and consumption. Households in the model make choices regarding present and future 

consumption (i.e., saving) and make choices regarding the allocation of time between labor and 

leisure. The model covers all aspects of long-run growth including the supply of capital, labor, 

imported and intermediate inputs to production; the rates and directions of exogenous and 

endogenous technical change for each producing sector; and the degrees of substitutability

among inputs and commodities in production and final demand (consumption, investment, 

governments and foreign trade). The substitution possibilities for both producers and consumers 

in IGEM are driven by model parameters that are based on observed market behavior revealed 

over the past forty to fifty years. 

In order to model this rule, the CGE model uses outputs of the transportation sector models as 

inputs to determine the economy-wide impacts of this rule. Specifically, the model uses 

information from other models on incremental costs of vehicle technologies, reduction in fuel 

consumption, and impacts on the world oil price. The incremental cost of vehicle technologies is 

used to generate a percentage change in vehicle cost that is applied to the IGEM motor vehicles 

sector. Since cars and light duty trucks make up approximately 50% of the motor vehicles 

sector, the cost increases represented here only apply to that portion of the IGEM sector. The 

data on reduction in fuel consumption are used as inputs to IGEM in order to reduce the amount 

of refined petroleum sector output required by the transportation sector and other sectors in the 

model.2 Finally, the estimates of reductions in the world oil price are directly used to reduce the 

oil price in the model. The changes in world oil price are estimated using the Energy Security

Oil Premium Model maintained by Oak Ridge National Laboratory, which is discussed in more 

detail in Chapter 4 of the Technical Support Document (TSD).

Impacts on U.S. GDP

In order to use IGEM to estimate the real U.S. GDP impacts of this rule, we analyzed the impact 

of changes in the costs of light-duty vehicles, changes in fuel consumption from the shift to a 

lower GHG-emitting vehicle stock, and the impacts of changes in the demand for motor fuels on 

fuel prices. See the Regulatory Impact Analysis (RIA) Chapter 4 for additional information on 

the change in vehicle technology costs, RIA Chapter 6.3 for details on changes in fuel demand, 

and RIA Chapter 8.2 for a discussion on the monopsony effect. It is important to note that the 

economy-wide analysis does not include a representation of a number of additional benefits (e.g. 

reducing greenhouse gas and non-GHG emissions, reducing refueling time), and thus the GDP 

impacts presented here do not incorporate the results of a complete cost benefit analysis. Table 1 

and Figure 1 show the Reference Case GDP and GDP with this rule from 2012 through 2050.

 

2

For the economy-wide analysis, the change in fuel consumption projected in Section 6 was modeled 

relative to the AEO 2009 baseline projections. Thus, the Reference Case used in the economy-wide analysis differs 

from the baseline used in other sections of this rule. 
Table 1 Annual GDP Impacts Associated with This Rule (Billions of 2007 dollars)

YEAR REFERENCE CASE 

GDP GDP WITH RULE % CHANGE FROM REFERENCE CASE

2012 $15,582 $15,610 0.18%

2016 $17,214 $17,254 0.23%

2020 $18,920 $19,005 0.45%

2030 $24,315 $24,503 0.77%

2040 $30,459 $30,718 0.85%

2050 $37,904 $38,244 0.90%

Gross Domestic Product

0

5

10

15

20

25

30

35

40

45

2012 2016 2020 2030 2040 2050

Trillion (2007$)

Reference Case

LD Tailpipe Standard

Figure 1 Gross Domestic Product

In the Reference Case, GDP rises from approximately $15.6 trillion in 2012 to $17.2 trillion in 

2016, $18.9 trillion in 2020, $24.3 trillion in 2030, $30.5 trillion in 2040, and $37.9 trillion in 

2050. With this rule, GDP rises from approximately $15.6 trillion in 2012, to $17.3 trillion in 

2016, $19.0 trillion in 2020, $24.5 trillion in 2030, $30.7 trillion in 2040, and $38.2 trillion in 

2050.

The fuel savings and lower world oil prices that result from this rule lead to lower prices 

economy-wide, even when the impact of higher vehicle costs are factored into this analysis. 
Lower prices allow for additional purchases of investment goods which, in turn, lead to a larger 

capital stock. These price reductions also allow higher levels of real government spending while 

improving U.S. competitiveness thus promoting increased exports relative to the growth driven 

increase in imports. As a result, GDP is expected to increase as a result of this rule. 

Impacts on U.S. Consumption

In addition to showing the impacts of the GHG vehicle rule on U.S. GDP, EPA also shows the 

impacts on real U.S. personal consumption expenditures. Table 2 and Figure 2 show the 

Reference Case consumption and consumption with this rule from 2012 through 2050. 

Table 2 Consumption Impacts of the Rule (Billions of 2007 dollars)

YEAR REFERENCE CASE 

CONSUMPTION

CONSUMPTION WITH 

RULE

% CHANGE FROM 

REFERENCE CASE

2012 $9,559 $9,559 -0.01%

2016 $10,669 $10,687 0.18%

2020 $11,764 $11,806 0.36%

2030 $14,945 $15,083 0.92%

2040 $18,804 $19,040 1.26%

2050 $23,165 $23,505 1.47%

Consumption

0

5

10

15

20

25

2012 2016 2020 2030 2040 2050

Trillion (2007$)

Base Case

LD Tailpipe Standard

Figure 2 Consumption
In the Reference Case, consumption rises from approximately $9.6 trillion in 2012 to $10.7

trillion in 2016, $11.8 trillion in 2020, $14.9 trillion in 2030, $18.8 trillion in 2040, and $23.2 

trillion in 2050. With this rule, consumption rises from approximately $9.6 trillion in 2012 to 

$10.7 trillion in 2016, $11.8 trillion in 2020, $15.1 trillion in 2030, $19.0 trillion in 2040, and 

$23.5 trillion in 2050. The consumption impacts on a per household basis are presented in Table 

3 and Figure 3Table .

Higher vehicle costs are projected to reduce household consumption slightly in the first few 

years of the rule implementation. Over time, fuel savings increase and the price of world oil 

decreases, which leads to lower prices economy-wide. As a result, household consumption 

increases over the long term. 

Table 3 Consumption Impacts of This Rule per Household (2007$)

YEAR REFERENCE CASE 

CONSUMPTION

CONSUMPTION WITH 

RULE

CHANGE FROM 

REFERENCE CASE

2012 $77,251 $77,246 -0.01%

2016 $82,016 $82,161 0.18%

2020 $86,174 $86,483 0.36%

2030 $98,140 $99,046 0.92%

2040 $112,607 $114,024 1.26%

2050 $127,556 $129,426 1.47%

Consumption Per Household

0

20

40

60

80

100

120

140

2012 2016 2020 2030 2040 2050

Thousand (2007$)

Reference Case

LD Tailpipe Standard
Figure 3 Consumption per Household

See the attached spreadsheet for additional information.