From: "Achanta, Chandana L." <Chandana_L._Achanta@omb.eop .gov>

To: "'james.tamm@dot.gov' (james.tamm@dot.gov)" <james. tamm@dot.gov>, "Jim.Simons@dot.gov"

<Jim.Simons@dot.gov>, "rebecca.yoon@dot.gov" <rebec ca.yoon@dot.gov>, Ed Nam/AA/USEPA/US@EPA, Robin Moran/AA/USEPA/US@EPA, "Timothy.Mullins@dot.gov" <T imothy.Mullins@dot.gov> Date: 07/27/2012 03:34 PM Subject: Summary of interagency working comments received on draft final rule under EO 12866 review



### Hello All

Please find attached initial interagency working co mments received on draft final rule “Joint Rulemaki ng to Establish Light-Duty Vehicle Greenhouse Gas Emissio n Standards and Corporate Average Fuel Economy Standards” under EO 12866 and EO 13563 review. They are for your consideration and are subject to furt her policy review. We may follow-up with additional int eragency comments soon.

Please feel free to contact us if you have any ques tions.

Thanks.
Chandana

Summary of interagency comments on draft 2017-2025 final rule under EO 12866 and EO 13563 review.pdf

From: Ed Nam/AA/USEPA/US To: "Achanta, Chandana L." <Chandana_L._Achanta@omb.eop .gov> Cc: William Charmley/AA/USEPA/US@EPA, Robin Moran/AA/US EPA/US@EPA, Steven

Silverman/DC/USEPA/US@EPA Date: 08/03/2012 06:09 PM Subject: EPA response to OMB comments

Chandana,

Thank you for the Interagency comments. Attached are our responses, as well as the relevant changes to our RIA Chapter 8.

-Ed

-Edward Nam, PhD Director, Light Duty Vehicle and Small Engine Cente r Office of Transportation and Air Quality US Environmental Protection Agency 2000 Traverwood Dr. Ann Arbor, MI 48105 734-214-4613 nam.ed@epa.gov

Responses to Interagency Comments from July 27 2012 _080312_EPAversion.docx

RIA Chp 8 08 03 2012 to OMB.docxSummary of interagency working comments received on draft final rule under EO 12866 and EO 13563

review. Subject to further policy review.

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### Below is a summary of interagency working comments received duri ng EO 12866 and EO 13563

review of the draft final rule “Joint Rulema king to Establish Light-D uty Vehicle Greenhouse Gas Emission Standards and Corporate Average Fu el Economy Standards”. They are for your consideration and subject to furt her policy review. Please contact if there are any questions.

1) Sales/Employment Analysis

In general, interagency commenters believe that the sales analysis does not currently provide an

estimate of the best or most likel y impact of the rule on vehicle sa les. Quantitative estimates of particular impacts should comply with the pr inciples of Executiv e Orders 12866 and 13563 and OMB Circular A-4, “Regulatory An alysis.” OMB Circular A-4 re quires, among other things, the use of best (i.e., most likely) estimates. OMB Ci rcular A-4 also states that agencies “should provide documentation that the analysis is base d on the best reasonably obtainable scientific, technical, and economic information available.”

These commenters believe that the agencies’ current projections of increased sales are not best or most likely estimates, and are not based on the be st available scientific , technical, or economic information. Instead, the agencies appear to re ly exclusively on the possi bility that consumers will, as a result of the rule and only as a resu lt of the rule, become more responsive to, and therefore place a greater value on, a given amount of fuel savings. While this is indeed possible, the agencies present no assessment of its likelihood in the RIA or the Preamble. The analysis also does not appear to specify how much lear ning occurs – and by how much more consumers will value fuel economy - during the2017-25 period. Furthermore, the analysis appears to implicitly assume no such learning has taken place or will take place at any time leading up to 2017. In other words, neither consistently high gasoline prices, nor the new and improved fuel economy labels on new vehicles, nor the large in crease in standards set to take place between 2012 and 2016 is assumed to have any effect on cons umer appreciation of fuel economy or their choices in the marketplace. The agencies ha ve not provided any empirical evidence or solid theoretical basis in the analyses to assume this co mbination of events and lack thereof is likely to

be the case.

OMB Circular A-4 states that “A good analysis should be transparent and [agency] results must be reproducible. [Agency] should clearly set out the basic assumptions, methods, and data underlying the analysis and discuss the uncertain ties associated with the estimates. A qualified third party reading the analysis should be able to understand th e basic elements of [agency] analysis and the way in which [agency] deve loped your estimates. Interagency commenters request that the agencies make the analysis tr ansparent and base all assumptions on empirical evidence that is reproducible by third parties.

As the analysis points out, there is some empiri cal evidence indicating that consumers appear to consistently undervalue future fuel savings, which is the reason the overall fuel savings from theSummary of interagency working comments received on draft final rule under EO 12866 and EO 13563

review. Subject to further policy review.

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### rule are higher than its costs. Elsewhere in the preamble, the reasons for this undervaluation are discussed at length, and appear, pe nding further review, to be cons istent with the literature on this subject. However, this phenomenon alone is not sufficient to expect that the rule will lead to increased vehicle sales. Thus, at a minimum, these commenters re quest an additional analysis of the effect of the rule on vehicle sales (a nd corresponding employment effects) under the alternative assumption that the market for ve hicles and for fuel economy behaves like a competitive market with the lone exception (dis cussed elsewhere in the package) that vehicle purchasers do not fully value the fuel savings over th e entire life of the vehicle. In other words, for example, this analysis would not assume, imp licitly or explicitly, any failings on the part of manufacturers to maximize profits or that consumer preference s regarding fuel economy would change as a result of the rule.

Commenters believe this analysis would be re latively simple and straightforward. The rule

would have no effect on sales in cases where co nsumers place a value on fuel savings that is greater than the increased vehicle cost. U nder the foregoing assumpti ons, those sales would

occur in the absence of the rule. Therefore no new analysis is necessa ry to represent this scenario. On the other hand, sales would decl ine in cases where consumers value the fuel savings at less than the increased vehicle cost. However, commenters believe the agencies have already analyzed the rule under this scenario, or could easily do so.

2) Additional interagency comm ent on sales analysis:

a. Interagency commenters request that the agencies explain how estimates of consumer pay back periods a ffect the sales forecasts.
b. Also, commenters request clarity on why ab solute resale values for vehicles are used in calculating pay back periods. Commenters request clarity on why they should not be incremental resale values, presumably because consumers would have owned other vehicles before purchasing new ones.

3) Baseline

Interagency commenters find that the agen cies’ baseline assumption about fuel economy—that manufacturers do not make a ny increases in fuel economy beyond those required to meet 2016 CAFÉ standards—does not s eem plausible. At least in the short term consumers seemed to have been very re sponsive in their purchas ing decisions to the gas price spikes within the last few years. So long as consumers place any value on added fuel economy, manufacturers are expe cted to produce some fuel economy improvements even absent the new rule. In its October 2011 joint analysis, the agencies examined the impact of an alte rnative baseline in which manufacturers implemented all technologies that would yiel d enough fuel savings to pay for themselves within a year. This may be a more reasonable baseline, not only for analyzing the sales and employment impacts of the rule, but also for assessing the rule’s likely costs and benefits. These commenters strongly recommend that the agencies adopt the alternative non-flat baseline in the primary case.Summary of interagency working comments received on draft final rule under EO 12866 and EO 13563

review. Subject to further policy review.

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### 4) On page 88 of the first part of the original draft final regulation, EPA refers to the State of Massachusetts v. EPA decision. Interagenc y commenters note that the decision should be styled either Massachusetts v. EP A or Commonwealth of Massachusetts v. EPA. Also, the case should be cited in full here on page 88 (which is its first mention) rather than later on page 94. Also, the referen ce on page 7 of the first part of the original regulation and on page 42 of the second pa rt of the original regulation to the

Administrative Procedure s Act should be revised to drop the “s.”

5) Learning:

a. Interagency commenters request that the agencies provide the cost estimates without learning effects inco rporated. Additionally, commenters request agencies to summarize how much cost reduction (p ercentage wise) is due to learning over some representative time periods in th e analysis, such as perhaps 2021 and 2025.

6) Agency employment analysis: although we expe ct the interagency commenters to have additional comment on the employment analys is, from a presentation point of view commenters note that the job estimates are added across years. Commenters request clarity on whether they are jobs or job-years.

7) Small volume manufactures. Interagency co mmenters request that the agencies:

a) Expand the threshold for “small volume” manufacturers from 5,000 sales to 10,000 sales, consistent with NHTSA’s program under EPCA, which is not being changed in this regulation. b) Otherwise harmonize the NHTSA and EPA alternative standa rds development process. As described on P53 of the pream ble, it appears that the two agencies have chosen different cutoffs and will run separate processes for determining alternative standards. The agencies are highly enc ouraged to harmonize this process, and to follow the well-understood NHTSA proce ss for exempting and setting maximum
feasible alternative standards or small volume manufacturers.*** E.O. 12866 Review ***

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## EPA Responses to Interagency Comments on the draft **Joint Final Rulemaking for Model Year 2017-2025 GHG and CAFE Sta**  **ndards,**

**received on July 27, 2012 DRAFT Response 8-2-12** 

**Interagency Comment # 1) Sales/Employment Analysis**
In general, interagency commenters believe that the sales analysis does not currently provide an estimate of the best or most likely impact of the r ule on vehicle sales. Quantitative estimates of particular impacts should comply with the principle s of Executive Orders 12866 and 13563 and OMB Circular A-4, “Regulatory Analysis.” OMB Circular A -4 requires, among other things, the use of best (i .e., most likely) estimates. OMB Circular A-4 also state s that agencies “should provide documentation that the analysis is based on the best reasonably obtain able scientific, technical, and economic informatio n available.”

These commenters believe that the agencies’ current projections of increased sales are not best or most likely estimates, and are not based on the bes t available scientific, technical, or economic information. Instead, the agencies appear to rely e xclusively on the possibility that consumers will, as a result of the rule and only as a result of the rule , become more responsive to, and therefore place a greater value on, a given amount of fuel savings. W hile this is indeed possible, the agencies present no assessment of its likelihood in the RIA or the Prea mble. The analysis also does not appear to specify how much learning occurs – and by how much more consume rs will value fuel economy - during the2017-25 period. Furthermore, the analysis appears to implic itly assume no such learning has taken place or wil l take place at any time leading up to 2017. In other words, neither consistently high gasoline prices, nor the new and improved fuel economy labels on new veh icles, nor the large increase in standards set to take place between 2012 and 2016 is assumed to have any effect on consumer appreciation of fuel economy or their choices in the marketplace. The ag encies have not provided any empirical evidence or solid theoretical basis in the analyses to assume t his combination of events and lack thereof is likel y to be the case.

OMB Circular A-4 states that “A good analysis shoul d be transparent and [agency] results must be reproducible. [Agency] should clearly set out the b asic assumptions, methods, and data underlying the analysis and discuss the uncertainties associated w ith the estimates. A qualified third party reading the analysis should be able to understand the basic ele ments of [agency] analysis and the way in which [agency] developed your estimates. Interagency comm enters request that the agencies make the analysis transparent and base all assumptions on em pirical evidence that is reproducible by third parties.

As the analysis points out, there is some empirical evidence indicating that consumers appear to consistently undervalue future fuel savings, which is the reason the overall fuel savings from the rul e are higher than its costs. Elsewhere in the preamble, t he reasons for this undervaluation are discussed at length, and appear, pending further review, to be c onsistent with the literature on this subject. However, this phenomenon alone is not sufficient to expect that the rule will lead to increased vehicl e sales. Thus, at a minimum, these commenters request an additional analysis of the effect of the rule o n vehicle sales (and corresponding employment effects ) under the alternative assumption that the market for vehicles and for fuel economy behaves like a co mpetitive market with the lone exception (discussed*** E.O. 12866 Review ***

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elsewhere in the package) that vehicle purchasers d o not fully value the fuel savings over the entire life of the vehicle. In other words, for example, this a nalysis would not assume, implicitly or explicitly, any failings on the part of manufacturers to maximize p rofits or that consumer preferences regarding fuel economy would change as a result of the rule.

Commenters believe this analysis would be relativel y simple and straightforward. The rule would have no effect on sales in cases where consumers place a value on fuel savings that is greater than the increased vehicle cost. Under the foregoing assumpt ions, those sales would occur in the absence of the rule. Therefore no new analysis is necessary to rep resent this scenario. On the other hand, sales woul d
decline in cases where consumers value the fuel sav ings at less than the increased vehicle cost. However, commenters believe the agencies have alrea dy analyzed the rule under this scenario, or could easily do so.



## EPA Response:

• These comments from interagency commenters imply th at the methodology utilized by the agencies to assess vehicle sales is novel and n ew, and has not been through the rigorous interagency review process required by Exe cutive Order 12866, and these comments also imply the methodology does not meet t he guidance of OMB Circular A4. The methodology utilized has been used by NHTSA in three previous CAFE rulemakings and in the joint EPA-NHTSA rulemaking f or MY2012-2016 GHG and CAFE
standards.

o The methodology utilized by the agencies for this M Y2017-2025 final rule has been through interagency reviews that were successf ully concluded by OMB at least 7 previous times over the past ten years, as listed below

 MY 2005-2007 CAFE Light-Truck Final Rule – Final Ec onomic Assessment - pp. VII-13 to VII-15

 MY 2008-2011 CAFE Light-Truck Proposal – PRIA pp VI I-8 to VII-12

 MY 2008-2011 CAFE Light-Truck Final Rule – 71FR1759 1, FRIA pp. VII-11

to VII-18

 MY 2011-2015 CAFE Proposal – 73FR24451, PRIA pp VII -41 to VII-52

 MY 2011 CAFE Final Rule – 74FR14738, FRIA pp VII-12 to VII-17

 MY 2012-2016 CAFE/GHG Proposal – 74FR49608-49609, 7 4FR49720- 49721, NHTSA PRIA pp. 336-340, EPA DRIA pp 8-1 to 8 -4

 MY 2012-2016 CAFE/GHG Final Rule – 74FR22517-22519, 74FR25649- 25651, NHTSA FRIA pp. 346-354, EPA FRIA pp 8-1 to 8 -4

o In a number of these rulemakings, NHTSA forecasted a decrease in vehicle sales, while in others NHTSA, or EPA and NHTSA, projected an increase in vehicle sales. We are utilizing the same basic methodology in this final rule. Given that the methodology used in the previous four rulemakings s eems to have met the E.O. and Circular directives (since OMB concluded review on all of those rulemakings), we do not understand interagency comm enters’ statements that the same assessment methodology suddenly does not m eet those directives.
We believe that it does.*** E.O. 12866 Review ***

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### • While the 2012-2016 final rule estimated potential impacts on vehicle sales only utilizing a 5-year fuel savings time frame, EPA also has incl uded a 3-year and 7-year time frames in the draft FRM to show what could happen to vehic le sales under both a shorter and longer timeframe for the consumer at the time of ve hicle purchase. All three of these time frames (3, 5, 7 years) were analyzed using bot h a 3% and a 7% discount rate.

• In response to the interagency comments, EPA will i nclude a discussion in the final rule of where the 'balance point' is, with respect to th e impact of the time horizon the average consumer would need to consider in when mak ing a vehicle purchase decision for the impact on vehicle sales to be zero, and thu s if the time horizon is less then this value, we would project the impact of the rule woul d be to decrease vehicle sales, and if the time horizon is longer than the balance point, the projected impact of the rule
would be to increase vehicle sales. This discussio n would be in addition to the existing presentation of vehicle sales impacts utilizing a 3 -, 5-, and 7-year time horizon.



## Interagency Comment # 2) Additional interagency co **mment on sales analysis**
a. Interagency commenters request that the agencies explain how estimates of consumer pay back periods affect the sales forecasts. b. Also, commenters request clarity on why absolute resale values for vehicles are used in calculating pay back periods. Commenters request clarity on why they should not be incremental resale values, presumably because consumers would have owned other vehicles before purchasing new ones.



## EPA Response:

EPA’s vehicle sales analysis compares two effects. On the one hand, the vehicles designed to meet the standards will become more expensive, whic h would, by itself, discourage sales. This increas e in costs has other effects on consumers as well: i f vehicle prices increase, consumers will face high er insurance costs and sales tax, and additional finan ce costs if the vehicle is bought on credit. In ad dition,
the resale value of the vehicles will increase. EP A only uses the incremental increases in cost (e.g. technology cost, insurance and sales tax increases) of the vehicle as a result of the rule in assessin g the
additional resale value of the vehicle. On the oth er hand, the vehicles will have improved fuel econo my and thus lower operating costs. The question EPA is addressing in this final rule is - which of the se effects dominates for potential vehicle buyers when they are considering a purchase will determine the effect on sales? Assessing the net effect of these two competing effects is uncertain, as it rests on how consumers value fuel savings at the time of purchas e among a variety of other factors.

As discussed in the draft Final Rule, EPA uses the price elasticity of demand of -1 for vehicles as the basis for our vehicle sales impact estimates, w e assumed that the consumer would take into account both the higher vehicle purchase costs as well as s ome of the fuel savings benefits when deciding whether to purchase a new vehicle based upon the ve hicles’ “effective price”. The incremental cost increase of a new vehicle would be offset by reduce d fuel expenditures over a certain period of time (i.e., the “payback period”). For the purposes of this rulemaking, EPA uses a five-year payback peri od, which is consistent with the length of a typical ne w light-duty vehicle loan, and is similar to the av erage time that a new vehicle purchaser holds onto the ve hicle, but we report results with three and seven*** E.O. 12866 Review ***

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year payback periods. The longer the payback perio d that consumers consider in the vehicle purchase decision, the greater the value of the fuel savings . The greater the value or fuel savings, the more likely consumers will purchase a new vehicle. Thus, if co nsumers consider longer payback periods, this will
lead to an increase in vehicle sales.



## Interagency Comment # 3) Baseline
Interagency commenters find that the agencies’ base line assumption about fuel economy—that manufacturers do not make any increases in fuel eco nomy beyond those required to meet 2016 CAFÉ standards—does not seem plausible. At least in the short term consumers seemed to have been very responsive in their purchasing decisions to the gas price spikes within the last few years. So long as consumers place any value on added fuel economy, ma nufacturers are expected to produce some fuel economy improvements even absent the new rule. In i ts October 2011 joint analysis, the agencies examined the impact of an alternative baseline in w hich manufacturers implemented all technologies that would yield enough fuel savings to pay for the mselves within a year. This may be a more reasonabl e baseline, not only for analyzing the sales and empl oyment impacts of the rule, but also for assessing the rule’s likely costs and benefits. These commenters strongly recommend that the agencies adopt the alternative non-flat baseline in the primary case.



## EPA Response:

• Interagency commenters have incorrectly stated that the joint NPRM included a joint analysis which examined an alternative baseline tha t would include technologies that would pay back within one year. Only NHTSA include d such a sensitivity assessment.
EPA did not include such an assessment because our review of the historical data and the empirical evidence in the literature does not support such a hypothetical scenario

• EPA provides a lengthy justification for a flat bas eline (relative to MY 2016) in both the preamble and Draft RIA for the NPRM, as well as in the draft final rule preamble and
Final RIA. We summarize that information below:

o EPA Trends data for 1986-2003, when fuel economy st andards and fuel prices were relatively stable, show that there was no over compliance except by some Japanese manufacturers who over complied simply bec ause they were making smaller vehicles that naturally over complied with a flat standard.

o The historical evidence is clear that fuel economy levels rise only based on either higher standards or rising fuel prices.

o In the context of the baseline question, there woul d be no standards to promote higher fuel economy beyond 2016, and AEO fuel price projections for 2017-2025 are very similar to today’s levels.

o A “non-flat” baseline would mean that market-driven fuel economy would go beyond the 35.5 mpg level established by the 2016 s tandard.

• EPA requested public comment on the flat baseline

o 5 commenters supported a flat baseline

 ACEEE, EDF, ICCT, NRDC, and Sierra Club. We includ e the excerpts from these comments in the Appendix to this response.

o No commenter supported a non-flat baseline*** E.O. 12866 Review ***

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### o No interagency commenter is questioning the AEO pro jection of future fuel prices, which projection supports use of a flat bas eline

• EPA/NHTSA briefed the interagency group on this iss ue on June 14, 2012 and on our approach for the final rule, and we received little feedback at the briefing.

• Based on our lengthy rationale, unanimously support ive public comments, and lack of any persuasive, empirically based rationale for a n on-flat baseline, EPA declines to change its assumption of a flat baseline based on t he hypothetical arguments of one or more interagency commenters.



## Interagency Comment # 4 On page 88 of the first part of the original draft final regulation, EPA refers to the State of Massac husetts v. EPA decision. Interagency commenters note that t he decision should be styled either Massachusetts
v. EPA or Commonwealth of Massachusetts v. EPA. Als o, the case should be cited in full here on page 88 (which is its first mention) rather than later on p age 94. Also, the reference on page 7 of the first part of the original regulation and on page 42 of the secon d part of the original regulation to the Administra tive Procedures Act should be revised to drop the “s.”



## EPA Response:

EPA appreciates these suggestions, and we will make the changes to these citations.



## Interagency Comment # 5) Learning
a. Interagency commenters request that the agencies provide the cost estimates without learning effects incorporated. Additionally, commenters requ est agencies to summarize how much cost reduction (percentage wise) is due to learning over some representative time periods in the analysis, such as perhaps 2021 and 2025.



## EPA Response:

For the MYs 2017-2025 final rule, EPA is following the same methodology toward learning as used in the MYs 2012-2016 final rule and the propos al to this rule. This is also the same methodology as used in the MYs 2014-2018 Heavy-duty GHG final rule and is essentially the same methodology as used in more then a dozen mobile source rulemakings fina lized by EPA since the mid-1990s. The approach utilized in the draft final rule is supported by th e economic literature, as detailed in this final ru le, and in the 2012-2016 final rule. In the proposal to this rule, we requested comment on our learning impacts and received nothing substantive that questioned th e presence of learning in the auto industry. The only comment we received was from the Alliance of A utomobile Manufacturers and their concern was not about learning effects, but rather about the di fficulty in estimating technology costs so far into the future. EPA has included sensitivities in the prop osal and for the final rule showing the costs of th e rule should learning effects be both 50% higher and 50% lower. We present the results in Chapter 3 of the draft and final RIAs (where we also present several other sensitivities surrounding technology costs). Lastly, the interagency commenters provide no evide nce to support a sensitivity assessment which includes no impact of manufacturer learning-by-doin g, which is an approach that is clearly not*** E.O. 12866 Review ***

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supported by the economic literature, For these rea sons, EPA does not agree that presenting costs estimates without incorporating learning effects wo uld be appropriate.

Regarding the cost reduction due to learning from 2 021 to 2025, to perform such an analysis properly would be very time consuming as it would r equire manipulating our modeling approach and rerunning the OMEGA model several times. In general though, we believe that the result would not be large given that the majority of our technologies a re well along the flat portion of the learning curv e in the 2021-2025 timeframe. The primary technologies that are still on the steep portion of the curve would be EV/PHEV battery packs and the second level of lower rolling resistance tires (LRRT2). As regards LRRT2, the penetration rates are high but t he costs are only on the order of $40-$70 so would have little impact on the cost of the rule. As reg ards EV/PHEV, the effects on costs would be larger given the magnitude of the technology costs, but the pene tration rates are so low as to have little impact o n the cost of the rule.



## Interagency Comment # 6
Agency employment analysis: although we expect the interagency commenters to have additional comment on the employment analysis, from a presenta tion point of view commenters note that the job estimates are added across years. Commenters reques t clarity on whether they are jobs or job-years.



## EPA Response:

EPA estimates employment impacts of the rule based upon the amount of labor that will required to install the new technologies on new veh icles to achieve the fuel economy standards. Jobyears is a way to calculate the amount of work need ed to complete a specific task. For example, a job

year is one year of work for one person; a new cons truction job that lasts five years is five job-year s. Job years is a more precise measure than jobs because a n individual job may last for six months or a year or forever. We agree with the commenter that we shoul d report employment impacts in job years, as it a more precise measure of the projected employment im pacts and it corresponds more closely to the
estimates of the increase in the amount of labor fr om the rule. We will make the necessary clarifications to the package.



## Interagency Comment # 7) Small volume manufactures
Interagency commenters request that the agencies: a) Expand the threshold for “small volume” manufact urers from 5,000 sales to 10,000 sales, consistent with NHTSA’s program under EPCA, which is not being changed in this regulation. b) Otherwise harmonize the NHTSA and EPA alternativ e standards development process. As described on P53 of the preamble, it appears that the two age ncies have chosen different cutoffs and will run separate processes for determining alternative stan dards. The agencies are highly encouraged to harmonize this process, and to follow the well-unde rstood NHTSA process for exempting and setting
maximum feasible alternative standards or small vol ume manufacturers.



## EPA Response:*** E.O. 12866 Review ***

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Sales Threshold EPA has historically, under the Clean Air Act, eval uated production exclusively in the U.S. market for establishing thresholds for provisions for smal ler companies. This is because companies’ domestic activities are obviously the most relevant metric f or assessing the amount of lead time they need to meet standards which apply exclusively to motor veh icle domestic operation. The EISA threshold of 10,000 sales is for the worldwide market. EPA esta blished the 5,000 vehicle U.S. sales threshold as t he cutpoint for defining small volume manufacturers in the MY 2012-2016 rule after detailed discussions with potential SVMs. The MY 2012-2016 rule exempted these manufacturers with a requirement that the SVMs make a good faith effort to purchase credi ts. Aston Martin, Lotus, and McLaren currently qualify for the SVM provisions under the MY 2012-20 16 program (5,000 vehicle sales). These companies are similarly situated for purposes of these rules (technology needed to meet standards, lead time needed, inability to average across fleet, small nu mber of vehicle platforms, etc), and using a metric which does not treat the companies similarly would raise significant issues of legal arbitrariness. EPA proposed to continue using the 5,000 U.S. sales threshold to define eligibility for the MY 2017-2025 SVM program. Departing from the threshol d would have created in inconsistency between the MY 2012-2016 program and the MY 2017-2025 progr am. EPA received only supportive comments from SVMs regarding this proposal; EPA did not rece ive any public comments supporting the use of a 10,000 worldwide sales threshold for the SVM GHG pr ogram. The interagency comment above mistakenly suggests t hat changing the threshold from U.S. sales of 5,000 vehicles to world-wide sales of 10,0 00 vehicles would be an expansion of the criteria. The opposite is true. . Of the three eligible companie s under the GHG program, Lotus would no longer be eligible as an SVM under the GHG program because th e worldwide sales of its parent company, Proton, are over 10,000 vehicles. Changing the criteria wo uld effectively revoke Lotus’s SVM eligibility. Th e change was not proposed and we did not receive comm ents recommending it. Therefore, Lotus would be excluded without any notice or opportunity for c omment, as well as substantive arbitrariness as not e above. Note that there are minimal practical conse quences of the small manufacturer metric under the CAFE program. Lotus has often paid fines to compl y with CAFE, and they do not have company specific standards. Further, California has adopted EPA’s S VM provisions in their entirety including the 5,000 vehicle U.S. sales threshold, again with support fr om the SVMs. EPA believes the recommended change to be unjustified by the record. Put another way, harmonization in and of itself cannot justify an otherwise arbitrary decision or excuse procedural e rror.

Alternative Standards Development Process As noted in the proposal (see 75 FR 74989), EPA rev iewed the data and application requirements of existing case-by-case approaches in cluding CAFE, CARB, and the European Union programs, and we believe EPA has harmonized as much as possible with these programs given what we
need to make a determination under the CAA. It is critical that EPA have the information needed to efficiently establish case-by-case standards that m eet CAA requirements and provide maximum leadtime to the SVM. EPA proposed timing that would al ign with a MY 2017 start date. Under the CAFE program, the timing of establishing alternative sta ndards is uncertain. Manufacturers are not require d to pay fines while their applications are under rev iew by NHTSA. Also, manufacturers may opt to pay fines in lieu of pursuing an alternative standard u nder CAFE. Fine paying is not an option under the CAA. Also, EPA’s process allows standards to be establis hed for up to five years at a time, providing addit ional certainty for the manufacturer. SVMs are fully supportive of the process proposed b y EPA noting “The SVM provisions should be promulgated as proposed.” SVMs also noted in their comments that the proposed approach “would align EPA’s approach with that of NHTSA, the EU, an d CARB.” As with the eligibility criteria, there h as*** E.O. 12866 Review ***

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been no public notice regarding the recommended cha nge and no reason to dramatically change our approach. Finally, CARB has already adopted EPA’s SVM provisions.*** E.O. 12866 Review ***

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## Appendix A: Excerpts from all public comments regar **ding the issue of the use of a "flat" versus an increasing baseline** 

**International Council on Clean Transportation (ICCT ) comments, pages 18-19** 

**6) Baseline Assumption Sensitivity Case** 
There is a difference between how EPA and NHTSA han dled the modeled Reference Fleet Scenario. EPA projects that in the absence of the p roposed GHG and CAFE standards, the
reference case fleet in MY 2017–2025 would have fle etwide GHG emissions performance n o b e tt er t h an t h at p ro j ec t ed t o b e n ecess a ry t o mee t t he MY 2016 s tan d a rds

. 22



### While NHTSA used the same baseline assumptions for their primary analyses, they also conducted a sensitivity analysis with an alternativ e baseline, which assumed that fuel

eco n omy w o ul d co nt i nu e t o i n cre a se a f t er 2016 w i t ho ut re gulat io n. 23 

### NHT SA s tat ed:

“The assumption is that the market would drive manu facturers to put techno l ogies into their vehicles that they believe consumers wou ld value and be willing to pay
for.”



### Again, while sensitivity analyses can illuminate th e impacts of important uncertainties, th ere is little or no evidence supporting this particular ca se. Except during the oil crisis in the 1970s and a brief period for passenger cars in the late 2 010s, the market has never driven improvements in vehicle fuel economy. Even these tw o examples are not relevant to the current situation. The demand for higher fuel econo my in the 1970s was driven p ri ma ri l y b y fears of oil unavailability and ongoing future incr eases in fuel price. The modest increase in passenger cars in the late 2010s followed 20 years of unchanging CAFE standards. Thus, NHTSA’s sensitivity analysis inappropriately calcul ates a lower estimate of net benefits of the
rul e.

The proposed 2017

--- 25 standards follow aggressive increases in standards from 2011 through 2016. Further, the change to a f oo tpr i nt

--- ba sed standard means that all manufacturers must increase the efficiency of their vehicles to comply , even manufacturers of p ri ma ri l y s mall er vehi cles. Thus, t he 2012

--- 16 s tan d a rds h a ve al re a dy drive n t he ma r k e t b eyo n d t he l eve l of efficie n cy i t w o ul d h a ve de man ded i n t he ab se n ce of s tan d a rds

.

The re a so n w hy efficie n cy s tan d a rds a re effec t ive an d n eeded is co n s u mer disco unt i ng of uncertain, future fuel savings, as explained above. Efficiency standards move the ma r k e t fro m the level of efficiency demanded by loss averse con sumers to the level of efficiency desired by society. It will be many years after 2016 before ad ditional technology development and lower cost will finally fall to the level demanded by con sumers from the higher level demanded by society through efficiency standards. The historica l precedent is that it took 20 years of unchanging CAFE standards combined with high real a nd nominal fuel prices before the market started to demand additional fuel economy for passe nger cars in the lat e 2000s.*** E.O. 12866 Review ***

10



### I **CCT r ec**  **omm en**  **ds t h**  **at t he**  **sen siti**  **v it**  **y a**  **n al**  **y sis for mar**  **ke t** 

**-- dri**  **ven i**  **nc r**  **e a**  **se s i**  **n effici**  **ency after**
**2016 be removed from the Fi nal Rule.**  

## American Council for an Energy Efficient Economy (A **CEEE) comments, pages 2-3**

**Baseline and Other Scenarios** The agencies’ baseline scenario assumes that fuel e conomy remains at 2016 levels absent the proposed new standards. However, NHTSA also “examin es the impact of an alternative ‘market-driven’ baseline, which allows for some increases in fuel e conomy due to ‘voluntary overcompliance’ beyond the MY 2016 levels” (NPRM p.75167). NHTSA requests comment on this alternative baseline.
There is little historical basis for a scenario in which there is a sustained increase in fuel economy in the absence of increases in standards. P ublic interest in fuel economy does shift with fuel prices, but even that interest typically has follow ed from large, rapid changes in price and has been short-lived. The fuel prices on which the various a gency analyses are largely based are EIA projection s and do not contain dramatic increases in price. Und er these conditions, manufacturers not constrained by fuel economy standards historically have employe d technological advances to increase vehicle power and acceleration, rather than to improve fuel econo my. Incorrect specification of the baseline scenario wi ll lead to an incorrect valuation of the proposed standards. An alternative baseline such as the one considered by NHTSA will reduce manufacturers’ costs to meet the standards, because some of the added technology required to meet the standard will already appear in the baseline. A t the same time, the benefits attributable to the
standards will decline. The net effect is a reducti on in the cost-effectiveness of the standards, beca use the most cost-effective technologies are the ones t hat will appear in the alternative baseline scenari o, leaving the more expensive technologies for the rul e to bring into the market. The same issue arises from EIA’s AEO 2012 Early Rel ease (EIA 2012), which projects an increase in new vehicle fuel economy after 2016 without adop tion of the proposed rule, and without major increases in fuel prices. Roughly one-quarter of th e reduction in new vehicles’ fuel consumption that would result from the proposed standards appears in the AEO 2012 Reference Case. Hence it is all the more important that NHTSA clarify that the baseline scenario used in the NPRM should be the basis for evaluating the benefits of the final rule. The agencies state: “Because both input and output sheets from our modeling are public, stakeholders can verify and check EPA’s and NHTSA’s modeling, and perform their own analyses with these datasets.” (NPRM p.74904). We were unable to find the relevant OMEGA output sheets, however.
These should be made available.
Recommendations 

### Clarify that the baseline scenario used to evaluate the benefits of the rule will not assume “voluntary over-compliance” by manufacturers after 2016. Make available on the EPA web site the OMEGA output s for the various scenarios
considered.



## Natural Resource Defense Council (NRDC) Comments, p **age 18**

A. Baseline Projection NRDC supports the baseline forecast for MY 2017 and beyond that assumes manufacturers
meet but do not exceed the MY 2016 standards. Volun tary overcompliance—in which manufacturers apply efficiency technology in excess of what is needed to meet the MY 2016 standard—is possible but too uncertain to be incorp orated in a baseline projection. Rapidly*** E.O. 12866 Review ***

11



### rising fuel prices are potentially a reason for ove rcompliance but during periods of only modest average annual price increases, overcomplian ce was not widespread. In the 1990’s
and early 2000’s, real motor gasoline prices rose at an avera ge rate of 4 percent per year 41 

### yet
full-line manufacturers, such as the GM, Ford and Chrysler, a pplied just enough technology to

meet the standards. 42 

### From 2017 to 2035, EIA projects motor gasoline pric es that increase at a lower rate of about 1 percent per year. 43 

### With the projected low rate of annual price growth, the modification of the 2016 baseline is unjustifie d.

Further, NRDC disagrees with NHTSA that a sensitivi ty analysis of voluntary overcompliance is warranted, and we recommend that it be excluded fro m the final rule. The voluntary overcompliance analysis is counter-productive to th e goals of maximizing petroleum reductions as required by EPCA.

If, in future rulemakings, the baseline was altered to account for voluntary overcompliance— assuming it can be reasonably justified as highly l ikely—NHTSA would be inclined to set a lower standard than what could be achieved with appropria te cost-effective technology application. The achievement of overcompliance assumes that low- cost efficiency technologies are applied by manufacturers first (NHTSA assumes a 1-year payb ack). The remaining technologies to be driven by the standard would therefore be more expe nsive, increasing the costs associated
with the standards. The standards themselves would also be associated with lower benefits because the savings from lower-cost technologies wo uld be assigned to the market instead of the standard. The resulting reduced benefit-to-cost ratio would be a dampening force on efforts to maximize fuel efficient technology adopt ion and could push down the standard stringency.

If, during this scenario of a weaker standard, auto makers did not overcomply, U.S. petroleum consumption would be higher and counter to the mand ate of EPCA. To avoid this situation,
NHTSA and EPA should continue to use a baseline tha t assumes automakers do not overcomply. This ensures that standards are set as strong as possible, and it provides greater certainty that needed oil consumption and GHG emission reductions will be achieved.



## EDF Comments, page 9

**B. F LAT**  

### 2016 B **ASELINE** 

### EDF supports EPA’s proposal to assume the reference case fleet in MY 2017–2025 would have fleet wide GHG emissions performance no better than that projected to be necessary to meet the MY 2016 standards. Because EP A is using AEO2011 fuel price forecasts, which project relatively stable fuel pri ces over the next 15 years, it is
reasonable to assume that manufacturers will not ov ercomply with the 2016 standards and/or consumers will not demand fuel economy great er than the 2016 standard. It is also reasonable to assume that fleetwide overcompliance will not occur because any voluntary overcompliance by one company would generate credits th at could be sold to other companies to*** E.O. 12866 Review ***

12



### substitute for their more expensive compliance tech nologies. Therefore, the ability to buy and sell credits would eliminate any over-compliance fo r the overall fleet.



## Sierra Club Comments, page 7

**Use a flat baseline in assessing post 2016 fuel eff iciency:**  NHTSA is taking comment on the notion that the post-2016 baseline for vehicle standards should assume “market driven” improvements in fuel economy absent standards and account for those impr ovements in the baseline. 23 The Knittel study, referenced above, in addition to the historic trend are evidence
that absent standards automakers will not increase gas mileage. Leading up to 2008, automakers were not prepared for increasing fuel prices and sh ifting consumer preferences. The consequences to the auto industry and the economy w ere devastating.

NHTSA’s consideration that new vehicle labels that will provide consumers with more detailed information on mileage and savings and that this wi ll influence consumer choices 24 is insufficient basis for using a baseline that presumes automakers will apply technologies to meaningfully improve gas mileage beyond 2016 absent strong final 2017-2025 s tandards. While some automakers may voluntarily “over-comply” with the 2012-16 program due to market forces, over- compliance in one segment of a fleet (cars for example) could be used to offset lower mileage vehicles such as larger pickups and SUVs. In addition, because the complian ce with the program allows for banking, trading and carry-forward and backward credits, any presump tion that automakers will improve fuel economy after 2016 could be part of a compliance strategy t hat includes the 2012-16 model years or planned compliance with these proposed standards. 25 Over-compliance across the entire fleet heading int o the mid-term review included in the NPRM would support strengthening the overall program. The agencies should use a flat baseline beyond 2016. 26MY 2017 and Later - Regulatory Impact Analysis

8-1 

### Chapter 8: Vehicle Sales and Employment Impacts

8.1 Vehicle Sales Impacts

8.1.1 How Vehicle Sales Impacts were Estimated for this R ule

The vehicle sales impacts discussed in Section III. H.11.a of the preamble and presented below in Table 8.1-1 and Table 8.1-2 were derived using the following methodology. For additional discussion of the assu mptions used in the vehicles sales impacts, see Section III.H.11 of the preamble and TSD Chapte r 4.2.12. The analysis conducted for this rule does not have the precision to examine effects on individual manufacturers or different
vehicle classes.

The analysis compares two competing effects. On th e one hand, as a result of this rule, the vehicles will become more expensive, whic h would, by itself, discourage sales. On the other hand, the vehicles will have improved fue l economy and thus lower operating costs,
which makes them more attractive to consumers. As discussed in Preamble III.H.1.a, there are many competing hypotheses for why private marke ts not providing what appear to be cost-effective energy-saving technologies, for vehi cles as well as for other energyconservation technologies. There are few empirical studies testing these hypotheses, though. As discussed more fully in Preamble III.H.11.a, it is possible that enacting this rule can contribute to increased vehicle sales by encouragin g coordination among automakers to improve fuel economy that would not happen in the absence of the rule . The results presented in this analysis depend on the assumption that priv ate markets will not themselves provide all the fuel economy that this rule will require, but t hat it is possible the rule may nevertheless lead to vehicles that consumers will buy in greater numbers than in the absence of the rule.

The parameters of this analysis are discussed in gr eater detail in TSD Chapter 4.2.13. These include baseline vehicle prices for MY 2011, insurance costs, finance rates, and sales

taxes.

The analysis starts with the reference prices for v ehicles. The starting vehicle value ($27,953 average) in 2010$ for model year 2011 has added to it the costs of meeting the MY 2016 standards, to develop baseline “prices” for MY 2017-25. We assume that these costs are fully passed along to consumers. This assumption i s appropriate for cost increases in perfectly competitive markets. In less than perfec tly competitive markets, though, it is likely that the cost increase is split between consumers a nd automakers, and possibly suppliers, and the price is not likely to increase as much as cost s. 1 Thus, the assumption of full cost passthrough may be an overestimate, and price may not i ncrease as much as estimated here. For the costs of meeting the MY 2016 standards over the period 2017-25, we interpolate linearly between the MY 2016 costs in the MY 2012-16 rule ($ 948 average) and the costs of achieving the MY 2016 standards in MY 2021 and 2025 described in RIA Table 3.9-1.

The next step in the analysis uses the per-vehicle technology cost estimates developed in OMEGA and described in Chapter 5 of this RIA. As above, we assume that this full cost is passed along into price. For the vehicle sales est imate, we adjust this cost increase for other Deleted:
,
Deleted: , and Economy-Wide

Deleted: will itself encourage consumer awareness of and appreciation for more

Deleted: , through

Deleted: process

Deleted: social learningChapter 8

8-2

effects on the consumer. We assume that the consum er holds onto this vehicle for 5 years and then sells it. This period is consistent with the length of a typical new light-duty vehicle loan, and is similar to the average time that a new vehic le purchaser holds onto the vehicle; it has also been used by NHTSA in previous CAFE rulemaking s. A The higher vehicle price is likely to lead to an increase in sales tax, insuran ce, and vehicle financing costs, as well as
increases in the resale value of the vehicle. Thes e factors weigh against each other: the higher sales tax and insurance costs increase costs to consumers; the higher resale value allows consumers to recover a portion of these cost s; and the effects of financing depend on the interest rate available for borrowing relative to the discount rate.

The increase in insurance costs is estimated from t he average value of collision plus comprehensive insurance as a proportion of average new vehicle price. TSD Chapter 4.2.13 describes our sources. The present value of 5 year s of insurance is 8% of the initial vehicle costs with a 3% discount rate, and 7.4% with a 7% d iscount rate.

The average sales tax, as described in TSD Chapter 4.2.13, is estimated to be 5.46 percent. This value is assumed to be a one-time co st incurred when the vehicle is purchased.

As described in TSD 4.2.12, the finance rates come from estimates provided by Global Insight and range, in real terms, between 3.7 and 5 .4 percent between 2017 and 2025; we use the estimated rate for each year. One commonly cit ed figure for the proportion of auto purchases using financing is 70 percent; 2 applying that fraction to this cost increase resul ts in an addition of 2 to 7 percent in financing costs wi th a 3 percent discount rate, and a reduction of 4 to 9 percent for a 7 percent discount rate.

The average resale price of a vehicle after 5 years is based on an estimate from Consumer Reports in 2008 that the average vehicle d epreciates about 65 percent 3 over 5 years, producing a resale value of 35 percent of th e original price. Because the consumer can recover that amount after 5 years, it reduces the e ffect of the increased cost of the vehicle. Discounted to a present value at a 3 percent intere st rate, the increase in price should be worth about 30 percent to the vehicle purchaser (25 perce nt at a 7 percent discount rate). This approach is premised on the idea that the resale va lue of a vehicle is directly proportional to the initial value, and that proportion does not cha nge.

The adjustment factors are the sum of the effects o f sales tax, insurance costs, finance costs, and resale value, and vary from 0.84 to 0.89 with a 3 percent discount rate, and from 0.81 to 0.85 with a 7 percent discount rate. These are multiplied by the technology cost increase to estimate the change in vehicle price.

A As discussed further in Chapter 8.1.2.5, there is not a consensus in the literature on how consumers consider fuel economy in their vehicle purchases. Results a re inconsistent, possibly due to fuel economy not b eing a major focus of many of the studies, and possibly du e to sensitivity of results to modeling and data us ed. A survey by Greene (Greene, David L. “How Consumers V alue Fuel Economy: A Literature Review.” EPA Report EPA-420-R-10-008, March 2010 (Docket EPA-HQ- OAR-2009-0472-11575)) finds that estimates in the literature of the value that consumers place on fue l economy when buying a vehicle range from negative
– consumers would pay to reduce fuel economy – to more than 1000 times the value o f fuel savings.MY 2017 and Later - Regulatory Impact Analysis

8-3 The fuel cost savings are based on the assumption t hat vehicle buyers consider five years’ worth of fuel savings when contemplating a v ehicle purchase, with sensitivity analyses using three and seven years. The analysis is done for each model year , using post-tax fuel savings (because vehicle owners only see post-tax p rices) and including rebound impacts

. Chapter 5.4 of this RIA discusses the source of agg regate fuel savings, in dollars, for each model year by year. These values are divided by th e total number of the vehicles produced to get per-vehicle savings per year for the first five years of the vehicle’s life. This method ignores the few vehicles of the new model year that are scrapped. Because incorporating scrappage would reduce the denominator, and thus in crease per-vehicle fuel savings, it underestimates per-vehicle fuel savings by a small amount. For each model year, the first five years of fuel savings (or three or seven years for sensitivity analysis) are discounted and summed to produce the present value of fuel savings for that vintage vehicle. For instance, the 2017 fuel savings per vehicle are the present v alue in year 2017 of fuel savings estimated for 2017 through 2021 for the five-year estimate; t hrough 2019 for the three-year estimate; and through 2023 for the seven-year estimate.

The fuel cost savings are subtracted from the incre ase in costs associated with the rule to get the “effective” price change, an estimate of how potential vehicle buyers perceive the balancing between increased up-front costs and futu re fuel savings. The higher cost leads consumers to purchase fewer new vehicles, but the f uel savings can counteract this effect. This calculation uses an elasticity of demand for n ew vehicles of -1: 4 that is, an increase of 1% in the price of a new vehicle will lead to a 1% reduction in new vehicle sales. This elasticity is generally considered to be a short-ru n elasticity, reflecting the immediate impacts of an immediate price change on vehicle sales. For a durable good such as an auto, the elasticity may be smaller in the long run: though people may be able to change the timing of their purchase when price changes in the short run, they must eventually make the investment. Using a smaller elasticity would reduce the magnitu de of the estimates presented here for vehicle sales, but it would not change the directio n. A short-run elasticity is more valid for initial responses to changes in price, but, over ti me, a long-run elasticity may better reflect behavior; thus, the results presented for the initi al years of the program may be more appropriate for modeling with the short-run elastic ity than the later years of the program. A
search of the literature has not found studies more recent than the 1970s that specifically investigate long-run elasticities. B This change in effective price as a percent of th e average price of a new vehicle, with the elasticity of dema nd of -1, is the negative of the percent change in vehicle purchases. The net effect of thi s calculation on vehicle purchases is in
Table 8.1-1. Positive numbers indicate increases i n vehicle sales; negative numbers indicate
decreases.

B E.g., Hymans, Saul H. “Consumer Durable Spending: Explanation and Prediction.” Brookings Papers on Economic Activity 1 (1970): 173-206. http://www.brookings.edu/~/media/Files/Programs/ES/ BPEA/1970_2_bpea_papers/1970b_bpea_hymans_ackley _juster.pdf finds a short-run elasticity of auto ex penditures (not sales) with respect to price of 0.7 8 50 1.17, and a long-run elasticity of 0.3 to 0.46.Chapter 8

8-4

Table 8.1-1 New Vehicle Sales Impacts Taking into Account Five Years of Fuel Savings

CHANGE IN VEHICLE SALES, 3% % CHANGE CHANGE IN VEHICLE SALES, 7% % CHANGE

2017 47,800 0.3% 37,600 0.2% 2018 110,700 0.7% 88,900 0.6% 2019 192,400 1.2% 158,100 1.0% 2020 290,900 1.8% 242,200 1.5% 2021 439,900 2.7% 368,800 2.3% 2022 486,900 3.0% 398,500 2.4% 2023 535,700 3.2% 430,700 2.6% 2024 600,300 3.5% 477,600 2.8% 2025 760,000 4.4% 615,600 3.6% TOTAL 3,464,600 2.4% 2,818,000 1.9%

Table 8.1-1 shows vehicle sales increasing in all y ears, due to five years of fuel savings exceeding the adjusted technology costs for all years.

Because of the uncertainties over the number of yea rs of fuel savings that consumers will take into consideration when buying new vehicl es, we have replicated the above analysis for three- and seven-year payback periods. These r esults are presented in Table 8.1-2 and Table 8.1-3, below, respectively.

Table 8.1-2 New Vehicle Sales Impacts Taking into A ccount Three Years of Fuel Savings

CHANGE IN VEHICLE SALES, 3% % CHANGE CHANGE IN VEHICLE SALES, 7% % CHANGE

2017 1,700 0.0% -1,300 0.0% 2018 12,700 0.1% 6,300 0.0% 2019 41,300 0.3% 30,700 0.2% 2020 80,200 0.5% 64,600 0.4% 2021 134,800 0.8% 111,600 0.7% 2022 94,100 0.6% 67,300 0.4% 2023 61,200 0.4% 30,800 0.2% 2024 40,900 0.2% 6,000 0.0% 2025 113,300 0.7% 70,400 0.4% TOTAL 580,200 0.4% 386,300 0.3%

Table 8.1-2 shows the same calculations under the a ssumption that consumers consider only three years of fuel savings when cons idering new vehicles. Sales increase for every year, except, in 2017, the sales impacts are essentially zero. Sales increases are smaller than those for the five-year payback scenario. There is a break even payback period point atMY 2017 and Later - Regulatory Impact Analysis

8-5 which the impact on sales would be zero. That poin t, for 2025 model year vehicles, would be 2.7 years assuming a 3% discount rate and 2.8 years assuming a 7% discount rate. EPA anticipates that with the new fuel economy label an d increasing consumer experience with the benefits of improved fuel economy as a result of th e MY 2012-2016 light-duty vehicle standards, that consumers will be likely to value f uel economy more than with a 2.7 or 2.8 year payback period.

Table 8.1-3 New Vehicle Sales Impacts Taking into A ccount Seven Years of Fuel Savings

CHANGE IN VEHICLE SALES, 3% % CHANGE CHANGE IN VEHICLE SALES, 7% % CHANGE

2017 88,500 0.6% 69,400 0.4% 2018 197,000 1.3% 156,300 1.0% 2019 326,400 2.1% 262,800 1.7% 2020 479,200 3.0% 389,300 2.4% 2021 711,400 4.4% 580,900 3.6% 2022 834,500 5.1% 670,100 4.1% 2023 954,500 5.7% 758,000 4.6% 2024 1,096,000 6.5% 864,900 5.1% 2025 1,326,100 7.7% 1,058,100 6.1% TOTAL 6,013,600 4.1% 4,809,800 3.3%

Table 8.1-3 shows the same calculations under the a ssumption that consumers consider seven years of fuel savings when consideri ng new vehicles. Sales increase for every year, and by more than under the three- or five-yea r payback scenarios.

These calculations focus on changes in effective price as the explanatory va riable for changes in aggregate new vehicle sales. This is a simplification, since consumers typically
consider a number of factors in addition to effecti ve price when they decide on purchasing vehicles. Some of the factors that might affect co nsumer vehicle purchases include changing market conditions and changes in vehicle characteri stics that might accompany improvements in fuel economy. These complications add consider able uncertainty to our vehicle sales impact analysis. Also, the analysis looks at an average consumer and does not take into
account that individual consumer circumstances—such as how much they drive each year— could vary, thereby influencing the purchase patter ns of vehicles. Deleted: This calculation focusesChapter 8

8-6 References

1 See, for instance, Gron, Ann, and Deborah Swenson, 2000. “Cost Pass-Through in the U.S. Automobile Market,” Review of Economics and Statist ics 82: 316-324 (Docket EPA-HQOAR-20 1 0-07 99 -0 6 7 5 ).

2 Bird, Colin. “Should I Pay Cash, Lease or Finance My New Car?”, http://www.cars.com/go/advice/Story.jsp?section=fin &story=should-i-paycash&subject=loan-quick-start&referer=advice&aff=sa cbee , July 12, 2011, citing CNW Marketing Research. Accessed 9/27/11. (Docket EPA-HQ-OAR-2010-0799-0683).

3 Consumer Reports, August 2008,“What That Car Reall y Costs to Own,” http://www.consumerreports.org/cro/cars/pricing/wha t-that-car-really-costs-to-own-4- 08/overview/what-that-car-really-costs-to-own-ov.ht m , accessed April 23, 2009 (Docket EPA-HQ-OAR-20 1 0-07 99 -0 684 ).

4 Kleit A.N., 1990, “The Effect of Annual Changes in Automobile Fuel Economy Standards,” Journal of Regulatory Economics 2: 151-172 (Docket EPA-HQ-OAR- 2010-0799 -0 672 ); McCarthy, Patrick S., 1996. “Market Price and Incom e Elasticities of New Vehicle
Demands.” Review of Economics and Statistics 78: 54 3-547 (Docket EPA-HQ-OAR- 2010-
0799 -06 73 ); Goldberg, Pinelopi K., 1998. “The Effects of the Corporate Average Fuel Efficiency Standards in the US,” Journal of Industr ial Economics 46(1): 1-33 (Docket EPAHQ-OAR- 2010-0799 -0 666 ); Greene, David L., “Feebates, Footprints and High way Safety,” Transportation Research Part D 14 (2009): 375-384 (Docket EPA-HQ-OAR-- 0685 ). Deleted: 9

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