March 4, 2010

MEMORANDUM TO: Docket EPA - HQ - OAR- 2009 - 0472 SUBJECT: Economy -Wide Impacts of Greenhouse Gas Tailpipe Standards EPA has undertaken an analy sis of the econom y- wide impacts of the greenhouse gas emissions (GHG ) tailpipe standards as an e xploratory exercise that EPA believes could provide additional insights into the potential impacts of the rule

. This analy sis 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 res pond to increases in higher vehicle costs and improved vehicle fuel econom y as a result of the rule . Please see Preamble Section III.H of the rule for a discussion of the underl yi ng distinctions and implications. It is anticipated that the GHG tailpipe standards would have impacts on the U.S. econom y 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 v ehicle 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 econom y that use light

- duty vehicles and fuels as intermediate inputs (e.g., de livery vehicles ) to produce final goods. Households would also be impacted indirectl y as consumers of final goods, and directl y 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. econom y 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 econom y- wide, computable general equilibrium (CGE) model. The econom y- wide model used in this analy sis is the Intertemporal General Equilibrium Model (IGEM). 1 IGEM is a model of the U.S. econom y with an emphasis on the economy ’s energy and environmental aspects. I GEM is a dy namic model which depicts growth of the econom y due to capit al 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 Sy stem
. 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 behavio r and b y 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 c overs 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 I GEM 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 rul e , the CGE model uses outputs of the transportation sector model s as inputs to determine the economy

- wide impacts of this rule

. Specificall y, the model uses information from other models on incremental costs of vehicle technologies , reduction in fuel cons umption , 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 onl y apply to that portion of the IGEM sector. The data on reduction in fuel consumption are used as inputs to I GEM in order to reduce the amount of refined petroleum sector output required b y 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 Oi l Premium Model maintained by Oak Ridge National L aboratory , which is discussed in more detail in Chapter 4 of the Technical Support Document ( TSD )

. 

## Imp acts on U.S. GDP In order to use IGEM to estimate the real U.S. GDP impacts of this rule , w e anal yz ed th e 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 Analy sis (RIA) Ch apter 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 econom y- wide anal ys is does not include a representation of a number of additional benefits (e.g. reducing greenhouse gas and non - GHG emission s, reducing refueling time) , and thus the GDP impacts presented here do not incorporate the results of a complete cost benefit anal ys is. Tabl e 1 and Figure 1 show the Reference Case GDP and GDP with this rule from 2012 through 2050.

2 For the economy

- wide analysi s, 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 WI TH 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%



### Gr oss Domest ic P roduct

0 5 10 15 20 25 30 35 40 45

2012 2016 2020 2030 2040 2050Trillion (2007$) Re fe re nc e C as e LD T ailp ip e Standar d

Figure 1 Gross Domestic Product In the Reference Case, GDP rises from appro ximately $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 econom y- wide, even when the impact of higher vehicle costs are factored into this analy sis.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

. 

## Imp acts on U.S. Consumption In addition to showing the impacts of the GHG vehicle rule on U.S. GDP, E PA also shows the impacts on real U.S. personal consumption expenditures. Table 2 and Figure 2 show the Reference Case c onsumption and c onsumption with this rule from 20 12 through 20 5 0.

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

CONSUMPTI ON CONSUMPTI ON 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% 

### Consumpt io n

0 5 10 15 20 25

2012 2016 2020 2030 2040 2050Trillion (2007$) Bas e C

as e LD T ailp ip e Standar d

F igure 2 ConsumptionIn the Reference Case, c onsumption 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 . W ith th is rule, c onsumption 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 p resented in Table 3 and Figure 3 Table

. Higher vehicle costs are projected to reduce household consumption slightly in the first few ye ars of the rule implementation. Over time, fuel savings increase and the price of world oil decreas es, 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

CONSUMPTI ON CONSUMPTI ON 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%



### Consumpt io n Per Ho usehol d

0 20 40 60 80 100 120 140

2012 2016 2020 2030 2040 2050Thousand (2007$) Re fe re nc e C as e LD T ai lpipe Standar dFigure 3 Consumption per Household

See the attac hed spreadsheet for additional information.