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IV. NHTSA Proposal for Passenger Car and Light Truc k CAFE Standards for

MYs 2012-2016

A. Executive O o verview of NHTSA P p roposal

1. Introduction

The National Highway Traffic Safety Administration (NHTSA) is proposing to establish corporate average fuel economy standards for passenger automobiles (passenger cars) and nonpassenger automobiles (light trucks) f or model years (MY) 2012-2016. Improving vehicle fuel economy has been long and wi dely recognized as one of the key ways of achieving energy independence, energy secur ity, and a low carbon economy. 1
NHTSA’s proposed standards will require passenger c ars and light trucks to meet an estimated combined average of 34.1 mpg in MY 2016. This represents an average annual increase of 4.3 percent from the 27.3 mpg combined fuel economy level in MY 2011. NHTSA’s proposal projects total fuel savings of app roximately 61.6 billion gallons over the lifetimes of the vehicles sold in model years 2 012-2016, with corresponding net societal benefits of approximately $201.7 billion.

The significance accorded improving fuel economy re flects several factors. Conserving energy, especially reducing th e nation’s dependence on petroleum, benefits the U.S. in several ways. Impr oving energy efficiency has benefits for economic growth and the environment, a s well as other benefits, such as reducing pollution and improving security of ene rgy supply. More specifically, reducing total petroleum use decreases our economy’ s vulnerability to oil price shocks. Reducing dependence on oil imports from re gions with uncertain

1 Among the reports and studies noting this point ar e the following: John Podesta, Todd Stern and Kim Batten, “Capturing the Energy Opportunity; Creating a LowCarbon Economy,” Center for American Progress (Nove mber 2007), pp. 2, 6, 8, and 24-29, available at : http://www.americanprogress.org/issues/2007/11/pdf/ energy_chapter.pdf (last accessed August 9, 2009). Sarah Ladislaw, Kathryn Zyla, Jonathan Pershing, Fr ank Verrastro, Jenna Goodward, David Pumphrey, and Britt Staley, “A Roadmap for a Secure , Low-Carbon Energy Economy; Balancing Energy Security and Climate Change,” World Resources Insti tute and Center for Strategic and International Studies (January 2009), pp. 21-22; available at : http://pdf.wri.org/secure_low_carbon_energy_economy _roadmap.pdf (last accessed August 9, 2009). Alliance to Save Energy et al., “Reducing the Cost of Addressing Climate Change Through Energy Efficiency (2009), available at : http://Aceee.org/energy/climate/leg.htm (last acc essed August 9, 2009). John DeCicco and Freda Fung, “Global Warming on the Road; The Climate Impact of America’s Automobiles,” Environmental Defense (2006) pp. iv-v ii; available at : http://www.edf.org/documents/5301_Globalwarmingonth eroad.pdf (last accessed August 9, 2009). “Why is Fuel Economy Important?,” a webpage maintai ned by the Department of Energy and Environmental Protection Agency, available at http://www.fueleconomy.gov/feg/why.shtml (last acc essed August 9, 2009); Robert Socolow, Roberta Hotinski, Jeffery B. Greenb latt, and Stephen Pacala, “Solving The Climate Problem: Technologies Available to Curb CO 2 Emissions,” Environment , volume 46, no. 10, 2004. pages 8–19, available at : http://www.princeton.edu/~cmi/resources/CMI_Resourc es_new_files/Environ_08-21a.pdf (last accessed August 9, 2009).DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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conditions enhances our energy security. Additiona lly, the emission of CO 2 from the tailpipes of cars and light trucks is one of th e largest sources of U.S. CO 2 emissions. 2 Using vehicle technology to improve fuel economy, and thereby reducing tailpipe emissions of CO 2 , is one of the three main measures of reducing those tailpipe emissions of CO 2

. 3 The two other measures for reducing the tailpipe emissions of CO 2 are switching to vehicle fuels with lower carbon c ontent and changing driver behavior, i.e. , inducing people to drive less.

While NHTSA has been setting fuel economy standards since the 1970s, today’s action represents the first-ever joint proposal by NHTSA with another agency, the Environmental Protection Agency. As discussed in S ection I, NHTSA’s proposed MYs 2012-2016 CAFE standards are part of a joint Nation al Program, such that a large majority of the projected benefits are achieved joi ntly with EPA’s GHG rule, described in detail above in Section III of this preamble. Thes e proposed CAFE standards are

consistent with the President’s National Fuel Effic iency Policy announcement of May 19, 2009, which calls for harmonized rules for all automakers, instead of three overlapping and potentially inconsistent requirements from DOT, EPA, and the California Air Resources Board. And finally, the proposed CAFE st andards and the analysis supporting

them also respond to President’s Obama’s January 26 mem orandum regarding the setting of CAFE standards for model years 2011 and beyond.

2. Role of Ff

uel Ee conomy Ii mprovements in Pp romoting Ee nergy Ii ndependence, Ee nergy Ss ecurity, and a Ll ow Cc arbon Ee conomy

The need to reduce energy consumption is more cruci al today than it was when EPCA was enacted in the mid-1970s. U.S. energy con sumption has been outstripping U.S. energy production at an increasing rate. Net petroleum imports now account for approximately 57 percent of U.S. domestic petroleum consumption, and the share of U.S. oil consumption for transportation is approximately 71 percent. 4 Moreover, world crude oil production continues to be highly concentrated, exacerbating the risks of supply disruptions and their negative effects on both the U.S. and global economies.

Gasoline consumption in the U.S. has historically b een relatively insensitive to fluctuations in both price and consumer income, and people in most parts of the country tend to view gasoline consumption as a non-discreti onary expense. Thus, when gasoline’s share in consumer expenditures rises, th e public experiences fiscal distress. This fiscal distress can, in some cases, have macro economic consequences for the economy at large. Additionally, since U.S. oil pro duction is only affected by fluctuations in prices over a period of years, any changes in pe troleum consumption (as through

2 EPA Inventory of U.S. Greenhouse Gas Emissions and Sinks: 1990 – 2006 (April 2008), pp. ES-4, ES-8,

and 2-24. Available at

http://www.epa.gov/climatechange/emissions/usgginv _archive.html (last accessed August 9, 2009).

3 Podesta et al., p. 25; Ladislaw et al. p. 21; DeCi cco et al. p. vii; “Reduce Climate Change,” a webpa ge maintained by the Department of Energy and Environm ental Protection Agency at http://www.fueleconomy.gov/feg/climate.shtml (last accessed August 9, 2009).

4 Energy Information Administration, Petroleum Basic Statistics, updated July 2009. Available at http://www.eia.doe.gov/basics/quickoil.html (last a ccessed August 9, 2009).DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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increased fuel economy) largely flow into changes i n the quantity of imports. Although petroleum imports only account for about 2 percent of GDP, they are large enough to create a discernable fiscal drag. As a consequence , however, measures that reduce petroleum consumption, such as fuel economy standar ds, will flow directly into the balance-of-payments account, and strengthen the dom estic economy to some degree. And finally, U.S. foreign policy has been affected for decades by rising U.S. and world dependency of crude oil as the basis for modern tra nsportation systems, although fuel economy standards have only an indirect and general impact on U.S. foreign policy.

The benefits of a low carbon economy are manifold. The U.S. transportation sector is a significant contributor to total U.S. a nd global anthropogenic emissions of greenhouse gases. Motor vehicles are the second la rgest greenhouse gas-emitting sector in the U.S., after electricity generation, and acco unted for 24 percent of total U.S. greenhouse gas emissions in 2006. Concentrations o f greenhouse gases are at unprecedented levels compared to the recent and dis tant past, which means that fuel economy improvements to reduce those emissions are a crucial step toward addressing the risks of global climate change. These risks ar e well documented in section III of this

notice.

3. The National Program

NHTSA and EPA are each announcing proposed rules th at have the effect of addressing the urgent and closely intertwined chall enges of energy independence and security and global warming. These proposed rules call for a strong and coordinated federal greenhouse gas and fuel economy program for passenger cars, light-duty-trucks, and medium-duty passenger vehicles (hereafter light -duty vehicles), referred to as the National Program. The proposed rules represent a c oordinated program that can achieve substantial reductions of greenhouse gas (GHG) emis sions and improvements in fuel economy from the light-duty vehicle part of the tra nsportation sector, based on technology that will be commercially available and that can be incorporated at a reasonable cost. The agencies’ proposals will also provide regulatory certainty and consistency for the automobile industry by setting harmonized national standards. They were developed and are designed in ways that recogn ize and accommodate the serious current economic situation faced by this industry.

This joint notice is consistent with the President’ s announcement on May 19, 2009 of a National Fuel Efficiency Policy that will reduce greenhouse gas emissions and improve fuel economy for all new cars and light-dut y trucks sold in the United States, 5
and with the Notice of Upcoming Joint Rulemaking si gned by DOT and EPA on that

date. 6 This joint notice also responds to the President ’s January 26, 2009 memorandum on CAFE standards for model years 2011 and beyond, the details of which can be found in Section IV of this joint notice.

a. Building B b locks of the National Program

5 President Obama Announces National Fuel Efficiency Policy, The White House, May 19, 2009.

6 74 FR 24007 (May 22, 2009).DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

4 The National Program is both needed and possible be cause the relationship between improving fuel economy and reducing CO 2 tailpipe emissions is a very direct

and close one. CO 2 is the natural by-product of the combustion of fuel in motor vehicle engines. The more fuel efficient a vehicle is, the less fuel it burns to travel a given distance. The less fuel it burns, the less CO 2 it emits in traveling that distance. 7 Since the

amount of CO 2 emissions is essentially constant per gallon combu sted of a given type of fuel, the amount of fuel consumption per mile is di rectly related to the amount of CO 2 emissions per mile. In the real world, there is a single pool of technologies for reducing fuel consumption and CO 2 emissions. Using those technologies in the way th at minimizes fuel consumption also minimizes CO 2 emissions. While there are emission control technologies that can capture or destroy th e pollutants ( e.g. , carbon monoxide) that are produced by imperfect combustion of fuel, there is at present no such technology

for CO 2 . In fact, the only way at present to reduce tailp ipe emissions of CO 2 is by reducing fuel consumption. The National Program th us has dual benefits: it conserves energy by improving fuel economy, as required of NH TSA by EPCA and EISA; in the process, it necessarily reduces tailpipe CO 2 emissions consonant with EPA’s purposes and responsibilities under the Clean Air Act.

i. DOT’s CAFE Program

In 1975, Congress enacted the Energy Policy and Con servation Act (EPCA), mandating a regulatory program for motor vehicle fu el economy to meet the various facets of the need to conserve energy, including on es having energy independence and security, environmental and foreign policy implicat ions. EPCA allocates the responsibility for implementing the program between NHTSA and EPA as follows:

• NHTSA sets Corporate Average Fuel Economy (CAFE) st andards for passenger cars and light trucks.

• Because fuel economy performance is measured during emissions regulation testing, EPA establishes the procedures for testing , tests vehicles, collects and analyzes manufacturers’ test data, and calculates t he average fuel economy of each manufacturer’s passenger cars and light trucks . EPA determines fuel economy by the simple expedient of measuring the am ount of CO 2 emitted from the tailpipe, not by attempting to measure directly the amount of fuel consumed during a vehicle test, a difficult task to accompli sh with precision. EPA then uses

the carbon content of the test fuel 8 to calculate the amount of fuel that had to be consumed per mile in order to produce that amount o f CO 2. Finally, EPA converts that fuel consumption figure into a miles-per-gallo n figure.

• Based on EPA’s calculation, NHTSA enforces the CAFE standards

The CAFE standards and compliance testing cannot ca pture all of the real world

CO 2 emissions, because EPCA requires EPA to use the 19 75 passenger car test procedures under which vehicle air conditioners are not turned on during fuel economy

7 Panel on Policy Implications of Greenhouse Warming , National Academy of Sciences, National Academy of Engineering, Institute of Medicine, “Policy Impl ications of Greenhouse Warming: Mitigation, Adaptation, and the Science Base,” National Academi es Press, 1992, at 287.

8 This is the method that EPA uses to determine com pliance with NHTSA’s CAFE standards.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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testing. 9 CAFE standards also do not address the 5-8 percen t of GHG emissions that are

not CO 2 , i.e. , nitrous oxide (N 2 O), and methane (CH 4 ) as well as emissions of CO 2 and hydrofluorocarbons (HFCs) related to operation of t he air conditioning system.

NHTSA has been setting CAFE standards pursuant to E PCA since the enactment of the statute. Fuel economy gains since 1975, due both to the standards and market factors, have resulted in saving billions of barrel s of oil and avoiding billions of metric

tons of CO 2 emissions. In December 2007, Congress enacted the Energy Independence and Securities Act (EISA), amending EPCA to require , among other things, attributebased standards for passenger cars and light trucks . The most recent CAFE rulemaking action was the issuance of standards governing mode l years 2011 cars and trucks.

ii. EPA’s Greenhouse Gas Program

On April 2, 2007, the U.S. Supreme Court issued its opinion in Massachusetts v.

EPA

, 10 a case involving a 2003 order of the Environmental Protection Agency (EPA) denying a petition for rulemaking to regulate green house gas emissions from motor

vehicles under the Clean Air Act. 11 The Court ruled that greenhouse gases are “pollutants” under the CAA and that the Act therefo re authorizes EPA to regulate greenhouse gas emissions from motor vehicles if tha t agency makes the necessary findings and determinations under section 202 of th e Act. The Court considered EPCA only briefly, stating that the two obligations may overlap, but there is no reason to think the two agencies cannot both administer their oblig ations and yet avoid inconsistency. EPA has been working on appropriate responses that are consistent with the decision of the Supreme Court in Massachusetts v. EPA

. 12 As part of those responses, in July 2008, EPA issued an Advance Notice of Proposed Rulemaking seeking comments on the impact of greenhouse gases on the environment and o n ways to reduce greenhouse gas emissions from motor vehicles. EPA recently also p roposed to find that emissions of GHGs from new motor vehicles and motor vehicle engi nes cause or contribute to air pollution that may reasonably be anticipated to end anger public health and welfare. 13

iii. California Air Resources Board’s Greenhouse Ga s Program

In 2004, the California Air Resources Board approve d standards for new lightduty vehicles, which regulate the emission of not o nly CO 2 , but also other GHGs. Since then, thirteen states and the District of Columbia, comprising approximately 40 percent of the light-duty vehicle market, have adopted Califor nia’s standards. These standards apply to model years 2009 through 2016 and require reductions in CO2 emissions for

9 See 49 U.S.C. § sec. 32904(c).

10 127 S.Ct. 1438 (2007).

11 68 FR 52922 (Sept. 8, 2003).

12 549 U.S. 497 (2007). For further information on Massachusetts v. EPA see the July 30, 2008 Advance Notice of Proposed Rulemaking, “Regulating Greenhou se Gas Emissions under the Clean Air Act”, 73 FR 44354 at 44397. There is a comprehensive discussion of the litigation’s history, the Supreme Court’s findings, and subsequent actions undertaken by the EPA from 2007-2008 in response to the Supreme Court

remand.

13 74 FR 18886 (Apr. 24, 2009).DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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passenger cars and some light trucks of 323 g/mil i n 2009 up to 205 g/mi in 2016, and 439 g/mi for light trucks in 2009 up to 332 g/mi in 2016. In 2008, EPA denied a request by California for a waiver of preemption under the CAA for its GHG emissions standards. However, consistent with another Presid ential Memorandum of January 26, 2009, EPA reconsidered the prior denial of Californ ia’s request. 14 EPA withdrew the prior denial and granted California’s request for a waiver on June 30, 2009. 15 The granting of the waiver permits California’s emissio n standards to come into effect notwithstanding the general preemption of state emi ssion standards for new motor vehicles that otherwise applies under the Clean Air Act.

b. The President’s Announcement of National Fuel Ef ficiency Policy (May 2009)

The issue of three separate regulatory frameworks a nd overlapping requirements for reducing fuel consumption and CO 2 emissions has been a subject of much controversy and legal disputes. On May 19, 2009 Pr esident Obama announced a National Fuel Efficiency Policy aimed at both incre asing fuel economy and reducing greenhouse gas pollution for all new cars and truck s sold in the United States, while also providing a predictable regulatory framework for th e automotive industry. The policy seeks to set harmonized federal standards to regula te both fuel economy and greenhouse gas emissions while preserving the legal authoritie s of the Department of Transportation, the Environmental Protection Agency and the State o f California. The program covers model year 2012 to model year 2016 and ultimately r equires the equivalent of an average fuel economy of 35.5 mpg in 2016, if all CO 2 reduction were achieved through fuel economy improvements. Building on the MY 2011 stan dard that was set in March 2009, this represents an average of 5 percent increase in average fuel economy each year

between 2012 and 2016.

In conjunction with the President’s announcement, t he Department of Transportation and the Environmental Protection Age ncy issued on May 19, 2009, a Notice of Upcoming Joint Rulemaking to propose a st rong and coordinated fuel economy and greenhouse gas National Program for Model Year (MY) 2012-2016 light duty vehicles. Consistent, harmonized, and streamlined requirements under that program hold out the promise of delivering environmental and ene rgy benefits, cost savings, and

administrative efficiencies on a nationwide basis t hat might not be available under a less coordinated approach. The proposed National Progra m makes it possible for the standards of two different federal agencies and the standards of California and other states to act in a unified fashion in providing the se benefits. Establishing a harmonized approach to regulating light-duty vehicle greenhous e gas (GHG) emissions and fuel economy is critically important given the interdepe ndent goals of addressing climate change and ensuring energy independence and securit y. Additionally, establishing a harmonized approach may help to mitigate the cost t o manufacturers of having to comply with multiple sets of federal and state standards

14 74 FR 7040 (Feb. 12, 2009).

15 74 FR 32744 (July 8, 2009).DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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Bb eyond

On May 2, 2008, NHTSA published a Notice of Propose d Rulemaking entitled Average Fuel Economy Standards, Passenger Cars and Light Trucks; Model Years 2011- 2015, 73 Fed. Reg. 24352. In mid-October, the agen cy completed and released a final environmental impact statement in anticipation of i ssuing standards for those years. Based on its consideration of the public comments a nd other available information, including information on the financial condition of the automotive industry, the agency adjusted its analysis and the standards and prepare d a final rule for MYs 2011-2015. On November 14, the Office of Information and Regulato ry Affairs (OIRA) of the Office of Management and Budget cleared concluded review of the rule as consistent with the

Order. 16 However, issuance of the final rule was held in a beyance. On January 7, 2009, the Department of Transportation announced that the final rule would not be issued, saying:

The Bush Administration will not finalize its rulem aking on Corporate Fuel Economy Standards. The recent financial diffi culties of the automobile industry will require the next administr ation to conduct a thorough review of matters affecting the industry, including how to effectively implement the Energy Independence and S ecurity Act of 2007 (EISA). The National Highway Traffic Safety Admini stration has done significant work that will position the next Transp ortation Secretary to finalize a rule before the April 1, 2009 deadline. 17

a. Requests in the President’s Memorandum

In light of the requirement to prescribe standards for MY 2011 by March 30, 2009 and in order to provide additional time to consider issues concerning the analysis used to determine the appropriate level of standards for MY s 2012 and beyond, the President issued a memorandum on January 26, 2009, requesting the Secretary of Transportation

and Administrator 18 of the National Highway Traffic Safety Administrat ion NHTSA to divide the rulemaking into two parts: (1) MY 2011 standards, and (2) standards for MY 2012 and beyond.

i. CAFE Standards for Model Year 2011

The request that the final rule establishing CAFE standards for MY 2011 passenger cars and light trucks be prescribed by Ma rch 30, 2009 was based on several factors. One was the requirement that the final ru le regarding fuel economy standards for

16 Record of OIRA’s action can be found at http://ww w.reginfo.gov/public/do/eoHistReviewSearch (last accessed August 9, 2009). To find the report on th e clearance of the draft final rule, select “Depart ment of Transportation” under “Economically Significant Rev iews Completed” and select “2008” under “Select

Calendar Year.”

17 The statement can be found at http://www.dot.gov/ affairs/dot0109.htm (last accessed August 9, 2009).

18 Currently, the National Highway Traffic Safety Ad ministration does not have an Administrator. Ronal d L. Medford is the Acting Deputy Administrator. Comment [r1]: Change made at OMB’s request.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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a given model year must be adopted at least 18 mont hs before the beginning of that model year (49 U.S.C. sec. 32902(g)(2)). The other was that the beginning of MY 2011 is considered for the purposes of CAFE standard set ting to be October 1, 2010.

ii. CAFE Standards for Model Years 2012 and Beyond

The President requested that, before promulgating a final rule concerning the model years after model year 2011, NHTSA [C]onsider the appropriate legal factors under the EISA, the comments filed in response to the Notice of Proposed Rulemak ing, the relevant technological and scientific considerations, and to the extent feasible, the forthcoming report by the National Academy of Scien ces mandated under

section 107 of EISA.

In addition, the President requested that NHTSA con sider whether any provisions regarding preemption are appropriate under applicab le law and policy.

b. Implementing the President’s Memorandum

In keeping with the President’s remarks on January 26 for new national policies to address the closely intertwined issues of energy in dependence, energy security and climate change, and for the initiation of serious a nd sustained domestic and international action to address them, NHTSA has developed CAFE st andards for MY 2012 and beyond after collecting new information, conducting a care ful review of technical and economic inputs and assumptions, and standard setting method ology, and completing new analyses.

The goal of the review and re-evaluation was to ens ure that the approach used for MY 2012 and thereafter would produce standards that contribute, to the maximum extent possible under EPCA/EISA, to meeting the energy and environmental challenges and goals outlined by the President. We have sought to craft our program with the goal of creating the maximum incentives for innovation, pro viding flexibility to the regulated parties, and meeting the goal of making substantial and continuing reductions in the consumption of fuel. To that end, we have made eve ry effort to ensure that the CAFE program for MYs 2012-2016 is based on the best scie ntific, technical, and economic information available, and that such information wa s developed in close coordination with other federal agencies and our stakeholders, i ncluding the states and the vehicle

manufacturers.

We have also re-examined EPCA, as amended by EISA, to consider whether additional opportunities exist to improve the effec tiveness of the CAFE program. For example, EPCA authorizes increasing the amount of c ivil penalties for violating the

CAFE standards. 19 Further, if the test procedures used for light tr ucks were revised to provide for the operation of air conditioning durin g fuel economy testing, vehicle

19 Under 49 U.S.C. sec. § 32904(c), EPA must “ use the same procedures for passenger automobiles that the Administrator used for model year 1975 (weighte d 55 percent urban cycle and 45 percent highway cycle), or procedures that give comparable results. ”DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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manufacturers would have a regulatory incentive to increase the efficiency and reduce the weight of air conditioning systems, thereby reducin g both fuel consumption and tailpipe

emissions of CO 2

.

With respect to the President’s request that NHTSA consider the issue of preemption, NHTSA is deferring further consideratio n of the preemption issue. The agency believes that it is unnecessary to address t he issue further at this time because of

the consistent and coordinated federal standards th at would apply nationally under the proposed National Program.

The following paragraphs provide a summary addressi ng how NHTSA has complied with the President’s requests in the Janua ry 26 memorandum. NHTSA has

reviewed comments received on the MY 2011 rulemakin g and revisited its assumptions and methodologies for purposes of developing the pr oposed MY 2012-2016 standards. For any given assumption or aspect of NHTSA’s analy sis, comments rarely converged on a single position—and for many issues, NHTSA receiv ed diametrically-opposed comments from different parties—which makes it chal lenging to resolve the concerns of all parties in a single stroke. However, NHTSA has taken a fresh look at all the issues as part of its joint process with EPA, changing some a ssumptions and methodologies and validating others. The agency is confident that th e assumptions and analysis used to develop these proposed standards represent the best possible approach that is consistent with NHTSA’s statutory requirements for setting the required fuel economy standards.

The paragraphs below describe generally how the ag ency has reviewed comments on different issues related to the setting of the s tandards, and how the agency has either revised or validated its approach for the MY 2012-2 016 standards. Much more detail on how the agency addresses all of these issues is fou nd below in the rest of NHTSA’s section of this preamble, in the joint TSD, and in NHTSA’s PRIA.

How stringent should the standards be? How quickly should they increase? EPCA requires that NHTSA set its standards for each model year at the “maximum feasible average fuel economy level that t he Secretary decides the manufacturers can achieve in that model year” consi dering four factors: technological feasibility, economic practicability, the effect of other standards of the Government on fuel economy, and the need of the nation to conserv e energy. None of these factors is further defined in the statute, and “maximum feasib le average fuel economy level” is itself defined, if at all, only by reference to tho se four factors and the Secretary’s

consideration of them. 20 In addition, the agency has the authority to and traditionally does consider other relevant factors, such as the e ffect of the CAFE standards on motor vehicle safety.

In the previous CAFE rulemaking, NHTSA proposed to set standards at the point at which societal net benefits were maximized, whic h drew a number of comments from both manufacturers and environmental and public int erest groups. Manufacturers generally commented that standards should be lower than the “maximizing net benefits”

20 49 U.S.C. § sec. 32902(a).DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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alternative, due to lead time concerns and manufact urers’ difficulties in raising capital. Environmental and consumer groups, as well as a num ber of State Attorneys General,

commented that NHTSA should set standards above tha t point, with some arguing in favor of standards as high as those at the point at which total costs equaled total benefits. Commenters also emphasized that NHTSA should ensure that standards increased ratably, as required by EISA.

For this NPRM, NHTSA has analyzed the costs and ben efits of the “maximizing net benefits” alternative and other alternatives, u sing inputs that diverge substantially from those used in the analyses in the previous rul emakings to establish attribute-based standards. But the agency has not sought to use “m aximizing net benefits” as a governing principle to select the applicable fuel e conomy standard in this NPRM. NHTSA’s balancing of the statutory factors in these difficult financial times leads it to make a different conclusion this time: NHTSA is pr oposing to set standards at 34.1 mpg in MY 2016, below the point at which net benefits a re maximized, due to economic practicability concerns. The results of the altern atives analysis for the “maximizing net

benefits” alternative and the “total costs = total benefits” alternative may be found in the

DEIS and in the PRIA.

Additionally, because today’s proposed standards c over five model years, as opposed to the single model year covered by the Mar ch final rule, NHTSA is better able in this rulemaking to confirm that the standards do , in fact, increase ratably, as required by EISA.

What attribute should NHTSA use to set the standard s? In the previous rulemaking, most commenters agreed with NHTSA’s use of footprint as the vehicle attribute for setting CAFE standards. Some manufacturers commented that NHTSA should consider multiple attri butes—for example, sports car manufacturers suggested a mix of footprint and hors epower, while truck manufacturers suggested a mix of footprint and towing, hauling, o r off-road capability. Several members of Congress also supported the latter comme nt.

For this NPRM, NHTSA and EPA together reconsidered the appropriate attribute for setting CAFE and CO 2 standards, and conclude that footprint best provid es the ability address safety concerns without creating undue risk that program benefits will be lost to induced mix shifting. More information about this decision may be found in Section IV.C.5 below, in the draft joint TSD, and in NHTSA’ s PRIA.

What data should NHTSA use to develop the baseline market forecast? In the previous rulemaking, the proposed standards were based on data from only the seven largest manufacturers. Several small and limited-line manufacturers commented that either the passenger car standards s hould be based on the plans of all manufacturers subject to the standards, or some alt ernative form of standard should be set for them. Ultimately, NHTSA set the MY 2011 standa rds based on the plans of all manufacturers subject to the standards.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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However, a number of commenters also called for NH TSA to cease using manufacturer’s confidential product plans in any wa y for developing the standards. Because manufacturers request confidentiality when they submit their product plans to the agency out of competitive concerns, NHTSA is pr ohibited by regulation from releasing that information to the public. Thus, wh en NHTSA developed a baseline market forecast using information from the manufact urer’s product plans, NHTSA could not release that forecast intact for public review.

For this NPRM, in response to these concerns, NHTS A and EPA are using a baseline market file developed almost entirely from publicly-available data. Relying on adjusted MY 2008 CAFE compliance data enables the a gency to make the baseline public and helps to address transparency concerns. However, by virtue of not being based on product plans, some manufacturers’ concern s that the baseline does not

represent their

particular intentions for MYs 2012-2016 may not be addressed. These issues are explained in more detail in Section IV.C .1 below, in the draft joint TSD, and in

NHTSA’s PRIA.

Did commenters agree with NHTSA’s technology assump tions? In the previous rulemaking, manufacturers generall y commented that NHTSA had underestimated the costs of technologies and overes timated their effectiveness, and that the rate of diesel and hybrid application required by the standards was too high, too quickly. Environmental and consumer groups, and th e States Attorneys General who commented, largely argued the opposite. Environmen tal and consumer groups and the States Attorneys General also commented that NHTSA should include downweighting in its analysis for vehicles under 5,000 lbs GVWR, whi le the Insurance Institute for Highway Safety (IIHS) argued that NHTSA’s approach to restricting downweighting to only those vehicles was correct.

For this NPRM, NHTSA, with EPA, has revisited ever y one of its cost and effectiveness estimates for individual technologies . Many of the estimates used in the MY 2011 final rule have been validated, while some have changed, notably the estimates for turbocharging and downsizing, diesels, and hybr ids. Overall, the individual technology costs are lower for purposes of this NPR M than in the MY 2011 final rule due to the Indirect Cost Markup methodology developed b y EPA for this rulemaking, which results in a lower markup than the 1.5 Retail Price Equivalent (RPE) markup previously used. The considerable majority of estimates for i ndividual technology effectiveness were validated; changes largely resulted from the r edefinition of certain electrificationrelated technologies and mild hybrids.

Additionally, NHTSA is now applying downweighting/ material substitution to vehicles below 5,000 lbs GVWR, albeit in a way that , we believe, mitigates the safety concerns to some extent. These issues are explaine d in more detail in Section IV.C.2 below, in the draft joint TSD, and in NHTSA’s PRIA.

With regard to the President’s request that NHTSA consider, “to the extent feasible, the forthcoming report by the National Ac ademy of Sciences mandated underDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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section 107 of EISA,” we note that it was not feasi ble to consider this report for purposes of this NPRM because it is not scheduled to be comp leted until Fall 2009. However,

NHTSA intends to make it available in the rulemakin g docket as soon as the agency receives it, and will consider it for the final rul e.

Did commenters agree with NHTSA’s economic assumpti ons? In the previous rulemaking, NHTSA primarily receiv ed comments regarding four particular economic assumptions. Regarding fuel pr ices, many commenters supported NHTSA’s use of the AEO 2008 Reference Case, while m any commenters also argued, given high pump prices in summer 2008, that NHTSA s hould use at least the AEO High Price Case or possibly a higher estimate. Regardin g the discount rate, some commenters supported NHTSA’s use of 7 percent, while others ar gued that NHTSA should use no higher than 3 percent. Regarding the magnitude of the rebound effect, some commenters supported NHTSA’s use of a 15 percent rebound effec t, while some called for a higher number and some called for numbers as low as zero p ercent. And finally, for the social cost of carbon, some commenters supported NHTSA’s u se of a domestic value and stated that the value should be $7/ton or lower, while oth er commenters argued that NHTSA should use a global value much higher than $7/ton, although there was little consensus as to what precise number.

For this NPRM, NHTSA, with EPA, has revisited ever y one of its economic assumptions. Many of the assumptions used in the M Y 2011 final rule have been validated, while some have changed. For fuel price s, NHTSA used the AEO High Price Case in the MY 2011 final rule, but stated that its decision was based on its expectation

that the Reference Case would soon be revised to re flect higher estimates of future fuel prices. EIA did, in fact, revise the Reference Cas e upward in AEO 2009 to levels higher than the 2008 High Price Case, and NHTSA has theref ore elected to use the Reference Case for this NPRM. For the discount rate, NHTSA i s continuing to conduct and present the results of analyses using both a 3 percent and a 7 percent rate, as is EPA in its analysis. For the rebound effect, NHTSA took a fre sh look at the recent literature and developed new estimates for the rebound effect, and has used a value of 10 percent in its analysis. And for the social cost of carbon, based on the results of an interagency effort to develop an estimate that can be used by all gove rnment agencies in rulemakings that affect climate change, NHTSA has conducted analyses for this NPRM using a range of values from $5 to $56/ton, representing global SCC values. These issues are explained in Section II above, in more detail in Section IV.C.3 below, in the joint TSD, and in

NHTSA’s PRIA.

Did commenters agree with NHTSA’s analytical tools? In the previous rulemaking, although some commente rs generally supported NHTSA’s use of the CAFE modeling system developed b y DOT’s Volpe National Transportation Systems Center (Volpe Center), other commenters expressed concerns regarding the modeling system, the ways in which th e system was applied, and accessibility of the system and its inputs and outp uts.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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Technical concerns regarding the model itself cent ered on the fact that it does not apply a direct and explicit representation of the p hysical processes connecting the engineering characteristics of a given vehicle to t hat vehicle’s fuel economy. As NHTSA explained in its March 2009 Federal Register notice establishing final MY 2011 CAFE standards, full vehicle simulation could useful in developing model inputs, but not, at least in the foreseeable future, in performing forw ard-looking analysis of the future

fleet. 21 Having again reconsidered this issue, NHTSA again concludes that with proper care in developing model inputs, the Volpe model is as “physics-based” as is practical or necessary for CAFE analysis.

Some commenters also questioned the model’s struct ural assumptions about manufacturers’ compliance strategies. NHTSA has re considered this question with respect to the potential for systematic underestima tion or overestimation of compliance costs. As a result, the Volpe model has been modif ied to account for manufacturers’ ability to engage in “multi-year planning,” adding more technology than necessary for compliance in an early model year when a vehicle mo del is being redesigned in order to carry that technology forward and facilitate compli ance in later model years. This major change to the Volpe model tends to produce greater costs (and benefits) in earlier model years in order to reduce costs in later model years

.

Some commenters also questioned the model’s use of externally-specified “phasein caps” to constrain the speed at which technologi es can practicably be adopted. NHTSA has reconsidered these inputs in light of the fact that the model also assumes that most technologies can only be practicably applied d uring a vehicle redesign or (in some cases) freshening, and tentatively concludes that t hese inputs can be significantly relaxed. The analysis supporting today’s proposal therefore relies almost exclusively on the redesign- and refresh-related constraints to produc e practicable estimates of potential technology adoption rates. We are seeking comment on this change to the model’s inputs, and note that further changes to these inpu ts would impact our analysis.

Commenters had many other concerns regarding inputs to the model, such as economic inputs and technology-related estimates. Commenters often (and particularly in relation to the agency’s estimate of the social value of avoided CO 2 emissions) mistakenly attributed these concerns to the model i tself. In again reviewing commenters’ concerns regarding NHTSA’s analysis, the agency has carefully differentiated between (1) the model, (2) inputs to the model, and (3) way s in which the model is applied. We encourage commenters to do the same in reviewing th e analysis supporting today’s proposal.

Finally, some commenters expressed concern regardi ng the model’s transparency. However, as NHTSA explained in in the MY 2011 final rule, these concerns appeared to have been mistakenly applied to the model itself, a s the actual lack of transparency related only to the agency’s use of manufacturers’ product plans, which formed the basis for inputs to the model. 22 The agency had previously made publicly available the model,

21 74 FR 14371-72 (Mar. 30, 2009).

22 74 FR 14372 (Mar. 30, 2009).DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

14

source code ( i.e. , computer programming instructions), model documen tation, and sample input files. To make the model more easily accessi ble to the public, the agency began (in March 2009) placing all of this information on NHTS A’s web site. 23 In connection with today’s proposal, the agency is placing the updated model, code, and documentation on the web site, along with inputs and outputs for age ncy’s current analysis. Among those inputs are those defining the agency’s baseline est imates of the MYs 2012-2016 U.S. market for passenger cars and light trucks, as thes e inputs do not, for today’s proposal, make use of manufacturers’ confidential product pla ns.

How should NHTSA develop and fit the target curves? In the previous rulemaking, many commenters expres sed concern about the steepness of the proposed curves for passenger cars , which occurred because of the way

in which NHTSA fit the curves to the data. The mor e steep a curve is, the more rapidly mpg targets decrease as footprint increases.

For this NPRM, NHTSA reconsidered how to address t his concern and decided to propose curves that are based on a constrained line ar function rather than a constrained logistic function, that are considerably less steep than the curves proposed in the previous rulemaking. This issue is discussed in greater det ail in Section IV.C.5 below, in the joint TSD, and in NHTSA’s PRIA.

Should NHTSA set additional “backstop” standards be sides the one established by Congress? In the previous rulemaking, several commenters arg ued that NHTSA must establish absolute backstop standards for imported passenger cars and light trucks, in addition to the one for domestically-manufactured p assenger cars required by EISA. NHTSA examined its statutory authority and conclude d that only a backstop for domestic passenger cars was permissible under the statute.

For this NPRM, NHTSA has re-examined its authority , and while the agency still tentatively concludes that Congress’ intent is clea r from the text of the statute, we recognize commenters’ concerns that attribute-based standards may not absolutely guarantee the level of fuel savings currently antic ipated if market forces cause manufacturers to build larger vehicles in MYs 2012- 2016. Thus, we seek comment on on whether NHTSA should seek a change in its statutory authority. This this issue, which

iss ue is discussed in greater detail below in Section IV .C.5.

Should NHTSA classify more vehicles as passenger ca rs rather than as light trucks? In the previous rulemaking, many commenters agreed with NHTSA’s decision to move many 2WD SUVs from the light truck to the pass enger car fleet, but some commenters argued that NHTSA should go further and reclassify more light trucks as

passenger cars.

23 See http://www.nhtsa.dot.gov (click on “Fuel Economy,” then “Related Links – CAFE Compliance and Effects Modeling System (Volpe Model)”) Comment [r2]: Change made at OMB’s request.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

15

For this NPRM, NHTSA has reconsidered its vehicle classification system and has not included in the proposed regulatory text an y changes to that system. However, NHTSA seeks comment on whether any changes should b e adopted for that time period or whether changes, if any, should be deferred to M Y 2017 and beyond. Classification issues are addressed in greater detail in Section I V.H below.

5. Summary of the Pp roposed MY 2012-2016 CAFE Ss tandards

NHTSA is proposing CAFE standards that are, like t he standards NHTSA promulgated in March 2009 for MY 2011, expressed as mathematical functions depending on vehicle footprint. Footprint is one m easure of vehicle size, and is determined by multiplying the vehicle’s wheelbase b y the vehicle’s average track

width. 24 Under the proposed CAFE standards, each light veh icle model produced for sale in the United States would have a fuel economy targ et. The CAFE levels that must be met by the fleet of each manufacturer would be dete rmined by computing the salesweighted harmonic average of the targets applicable to each of the manufacturer’s passenger cars and light trucks. These targets, th e mathematical form and coefficients of which are presented later in today’s notice, appear as follows when the values of the targets are plotted versus vehicle footprint:

24 See 49 CFR § 523.2 for the exact definition of “footprint.”DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

16 Figure IV.A.5-1. Final MY 2011 and Proposed MY 201 2-2016

Passenger Car Fuel Economy Targets

20 25 30 35 40 45

35 40 45 50 55 60 65 70

Footprint (sf)Target (mpg)

2011 2016

2015

2014

2013

2012DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

17 Figure IV.A.5-2. Final MY 2011 and Proposed MY 201 2-2016

Light Truck Fuel Economy Targets

20 25 30 35 40 45

35 40 45 50 55 60 65 70

Footprint (sf)Target (mpg)

2011 2016

2015

2014

2013

2012

Under these proposed footprint-based CAFE standard s, the CAFE levels required of individual manufacturers depend, as noted above, on the mix of vehicles sold. It is important to note that NHTSA’s CAFE standards and E PA’s GHG standards will both be in effect, and each will lead to increases in avera ge fuel economy and CO 2 emissions reductions. The two agencies’ standards together c omprise the National Program, and

this discussion of costs and benefits of NHTSA’s CA FE standards does not change the fact that both the CAFE and GHG standards, jointly, are the source of the benefits and costs of the National Program. Based on the forecast developed for this NPRM of th e MYs 2012-2016 vehicle fleet, NHTSA estimates that the targets shown above would result in the following average required CAFE levels: Formatted: SubscriptDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

18 Table IV.A.5-1. Average Required Fuel Economy (mpg )

under Proposed Standards

2012 2013 2014 2015 2016 Passenger Cars 33.6 34.4 35.2 36.4 38.0 Light Trucks 25.0 25.6 26.2 27.1 28.3

Combined 29.8 30.6 31.4 32.6 34.1

201 2 20 13 2 014 2 015 201 6
Passenger C ars 33 .6 34 .4

3 5.2

36.4

38 .0 Light Truck s 25 .0 25 .6

2 6.2

27.1

28 .3

Co mbined 29 .8 30 .6

3 1.4

32.6

34 .1

For the reader’s reference, these miles per gallon would be equivalent to the following gallons per 100 miles for passenger cars and light trucks:

2012 2013 2014 2015 2016 Passenger Cars 2.9762 2.907 2.8409 2.7473 2.6316 Light Trucks 4.0 3.9063 3.8168 3.8168 3.5336

NHTSA estimates that average achieved fuel economy levels will correspondingly increase through MY 2016, but that manufacturers will, on average, undercomply 25 in some model years and overcomply 26 in others, reaching a combined average fuel economy of 33.7 mpg in MY 2016. 27 Table IV.A.5-1 is the estimated required fuel economy for the proposed CAFE standar ds while Table IV.A.5-2 includes the effects of some manufacturers’ payment of CAFE fines. In addition, Section IV.G.4 below contains an analysis of the achieved levels ( and projected fuel savings, costs, and benefits) when the use of FFV credits is also assum ed.

Table IV.A.5-2. Average Achieved Fuel Economy (mpg )

under Proposed Standards

2012 2013 2014 2015 2016 Passenger Cars 32.9 34.2 35.2 36.5 37.6

25 In NHTSA’s analysis, “undercompliance” is mitigate d either through use of FFV credits, use of existin g or “banked” credits, or through fine payment. Beca use NHTSA cannot consider availability of credits i n setting standards, the estimated achieved CAFE leve ls presented here do not account for their use. In contrast, because NHTSA is not prohibited from cons idering fine payment, the estimated achieved CAFE levels presented here include the assumption that B MW, Daimler ( i.e. , Mercedes), Porsche, and, Tata ( i.e.

, Jaguar and Rover) will only apply technology up to the point that it would be less expensive to pay ci vil penalties.

26 In NHTSA’s analysis, “overcompliance” occurs throu gh multi-year planning: manufacturers apply some “extra” technology in early model years ( e.g. , MY 2014) in order to carry that technology forwar d and thereby facilitate compliance in later model years ( e.g. , MY 2016)

27 Consistent with EPCA, NHTSA has not accounted for manufacturers’ ability to earn CAFE credits for selling FFVs, carry credits forward and back betwee n model years, and transfer credits between the passenger car and light truck fleets. Formatted Table

Comment [r3]: Added at OMB’s request

Formatted Table

Formatted TableDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

19

Light Trucks 24.9 25.7 26.5 27.4 28.1

Combined 29.3 30.5 31.5 32.7 33.7

201 2 20 13 2 014 2 015 201 6
Passenger C ars 32 .9 34 .2

3 5.2

36.5

37 .6 Light Truck s 24 .9 25 .7

2 6.5

27.4

28 .1

Co mbined 29 .3 30 .5

3 1.5

32.7

33 .7

For the reader’s reference, these miles per gallon would be equivalent to the following gallons per 100 miles for passenger cars and light trucks:

2012 2013 2014 2015 2016 Passenger Cars 3.0438 2.9267 2.8398 2.7434 2.6623 Light Trucks 4.0241 3.8952 3.7713 3.6495 3.5604

NHTSA estimates that these fuel economy increases w ill lead to fuel savings totaling 61.6 billion gallons during the useful liv es of vehicles sold in MYs 2012-2016:

Table IV.A.5-3. Fuel Saved (billion gallons) under Proposed Standards

2012 2013 2014 2015 2016 Total Passenger Cars 2.5 5.3 7.5 9.4 11.4 36.0 Light Trucks 1.8 3.7 5.4 6.8 7.8 25.6

Combined 4.3 9.1 12.9 16.1 19.2 61.6

201 2 20 13 2 014 2 015 201 6 T otal
Passenger C ars 2 .5

5 .3

7.5

9.4

11 .4

3 6.0 Light Truck s 1 .8

3 .7

5.4

6.8

7 .8

2 5.6

Co mbined 4 .3

9 .1

1 2.9

16.1

19 .2

6 1.6

The agency also estimates that these new CAFE stand ards will lead to corresponding reductions of CO 2 emissions totaling 656 million metric tons (mmt) d uring

the useful lives of vehicles sold in MYs 2012-2016:

Table IV.A.5-4. Avoided Carbon Dioxide Emissions ( mmt)

under Proposed Standards

2012 2013 2014 2015 2016 Total Passenger Cars 25 56 79 99 121 381 Light Trucks 19 40 58 73 85 275

Combined 44 96 137 173 206 656

201 2 20 13 2 014 2 015 201 6 T otal
Passenger C ars 2 5

56

79

9 9

1 21

381 Light Truck s 1 9

40

58

7 3

85

275

Co mbined 4 4

96

137

17 3

2 06

656 Formatted Table

Comment [r4]: Added at OMB’s request

Formatted Table

Formatted TableDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

20 The agency estimates that these fuel economy increa ses would produce other benefits ( e.g. , reduced time spent refueling), as well as some di sbenefits ( e.g. , increase traffic congestion) caused by drivers’ tendency to increase travel when the cost of driving declines (as it does when fuel economy increases). The agency has estimated the total monetary value to society of these benefits and dis benefits, and estimates that the proposed standards will produce significant benefit s to society. NHTSA estimates that, in present value terms, these benefits would total $200 billion over the useful lives of vehicles sold during MYs 2012-2016:DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

21 Table IV.A.5-5. Present Value of Benefits ($billio n) under Proposed CAFE Standards

2012 2013 2014 2015 2016 Total Passenger Cars 7.6 17.0 24.4 31.2 38.7 119.1 Light Trucks 5.5 11.6 17.3 22.2 26.0 82.6

Combined 13.1 28.7 41.8 53.4 64.7 201.7

201 2 20 13 2 014 2 015 201 6 T otal
Passenger C ars 7 .6

17 .0

2 4.4

31.2

38 .7

11 9.1 Light Truck s 5 .5

11 .6

1 7.3

22.2

26 .0

8 2.6

Co mbined 13 .1

28 .7

4 1.8

53.4

64 .7

20 1.7

NHTSA attributes most of these benefits—about $157 billion, as noted above—to reductions in fuel consumption, valuing fuel (for s ocietal purposes) at future pretax prices in the Energy Information Administration’s (EIA’s) reference case forecast from Annual Energy Outlook (AEO) 2009. The Preliminary Regulat ory Impact Analysis (PRIA) accompanying today’s proposed rule presents a detai led analysis of specific benefits of the proposed rule.

Amount $ Value

Fuel savings 61.6 billion gallons $158.0 billion

CO 2 emissions reductions 656 million metric tons (mmt) $16.4 billion

NHTSA estimates that the necessary increases in tec hnology application will involve considerable monetary outlays, totaling $62 .5 billion in incremental outlays ( i.e.

, beyond those attributable to the MY 2011 standards) by new vehicle purchasers during

MYs 2012-2016:

Table IV.A.5-6. Incremental Technology Outlays ($b )

under Proposed CAFE Standards

2012 2013 2014 2015 2016 Total Passenger Cars 4.1 6.5 8.4 9.9 11.8 40.8 Light Trucks 1.5 2.8 4.0 5.2 5.9 19.4

Combined 5.7 9.3 12.5 15.1 17.6 60.2

201 2 20 13 2 014 2 015 201 6 T otal
Passenger C ars 4 .1

6 .5

8.4

9.9

11 .8

4 0.8 Light Truck s 1 .5

2 .8

4.0

5.2

5 .9

1 9.4

Co mbined 5 .7

9 .3

1 2.5

15.1

17 .6

6 0.2

Corresponding to these outlays and, to a much less er extent, civil penalties that some companies are expected to pay for noncomplianc e, the agency estimates that the Formatted Table

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proposed standards would lead to increases in avera ge new vehicle prices, ranging from $476 per vehicle in MY 2012 to $1,091 per vehicle i n MY 2016:DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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Table IV.A.5-7. Incremental Increases in Average N ew Vehicle Prices ($)

under Proposed CAFE Standards

2012 2013 2014 2015 2016 Passenger Cars 591 735 877 979 1,127 Light Trucks 283 460 678 882 1,0 20

Combined 476 635 806 945 1,091

201 2 20 13 2 014 2 015 201 6
Passenger C ars 59 1 7 35

877

97 9

1,1 27 Light Truck s 28 3 4 60

678

88 2

1,0 20

Co mbined 47 6 6 35

806

94 5

1,0 91

Tables IV.A.5-8 and IV.A.5-9 below present itemized costs and benefits for a 3 percent and a 7 percent discount rate, respectively , for the combined fleet (passenger cars and light trucks) in each model year and for all mo del years combined. Numbers in parentheses represent negative values. Formatted Table

Formatted Table

Comment [r5]: Tables added at OMB’s requestDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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Table IV.A.5-8. Itemized Cost and Benefit Estimate s for the Combined Vehicle Fleet, 3% Discount Rate

MY 2012 MY 2013 MY 2014 MY 2015 MY 2016 Total

Costs Technology

Costs $5,695 $9,295 $12,454 $15,080 $17,633 $60,157

Benefits

Lifetime Fuel Expenditures $10,197 $22,396 $32,715 $41,880 $50,823 $158,012

Consumer Surplus from

Additional Driving $751 $1,643 $2,389 $3,029 $3,639 $11,451

Refueling Time

Value $776 $1,551 $2,198 $2,749 $3,277 $10,550

Petroleum

Market

Externalities $559 $1,194 $1,700 $2,129 $2,538 $8,121

Congestion Costs ($460) ($934) ($1,332) ($1,657) ($1,991) ($6,376)

Noise Costs ($7) ($14) ($21) ($26) ($31) ($99)

Crash Costs ($217) ($437) ($625) ($776) ($930) ($2,985)

CO2 $1,028 $2,287 $3,382 $4,376 $5,372 $16,446

CO $0 $0 $0 $0 $0 $0

VOC $41 $80 $108 $131 $156 $518

NOX $82 $132 $155 $174 $200 $744

PM $220 $438 $621 $771 $904 $2,956

SOX $161 $345 $490 $613 $731 $2,341

Total $13,132 $28,680 $41,781 $53,394 $64,687 $201,676

Net Benefits $7,044 $18,759 $27,090 $34,710 $41,386 $128,992

Formatted: LeftDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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Table IV.A.5-9. Itemized Cost and Benefit Estimate s for the Combined Vehicle Fleet, 7% Discount Rate

MY 2012 MY 2013 MY 2014 MY 2015 MY 2016 Total

Costs Technology Costs $5,695 $9,295 $12,454 $15,080 $17,633 $60,157

Benefits

Lifetime Fuel Expenditures $7,991 $17,671 $25,900 $33,264 $40,478 $125,305

Consumer Surplus from

Additional Driving $590 $1,301 $1,896 $2,412 $2,904 $9,102

Refueling Time

Value $624 $1,249 $1,770 $2,215 $2,642 $8,500

Petroleum Market

Externalities $448 $960 $1,367 $1,712 $2,043 $6,531

Con gestion Costs ($371) ($753) ($1,074) ($1,335) ($1,606) ($5,138)

Noise Costs ($6) ($12) ($16) ($21) ($24) ($80)

Crash Costs ($173) ($352) ($503) ($626) ($749) ($2,403)

CO2 $797 $1,781 $2,634 $3,410 $4,189 $12,813

CO $0 $0 $0 $0 $0 $0

VOC $3 3 $65 $87 $106 $125 $416

NOX $60 $99 $120 $135 $156 $570

PM $170 $344 $492 $613 $721 $2,339

SOX $129 $278 $394 $493 $588 $1,882

Total $10,292 $22,631 $33,066 $42,380 $51,468 $159,837

Net Benefits $4,281 $12,832 $18,818 $24,414 $29,293 $89,638

Neither EPCA nor EISA requires that NHTSA conduct a cost-benefit analysis in determining average fuel economy standards, but too , neither precludes its use. 28 EPCA does require that NHTSA consider economic practicab ility among other factors, and NHTSA has concluded, as discussed elsewhere herein, that the standards it proposes today are economically practicable. Further valida ting and supporting its conclusion that the standards it proposes today are reasonable, a c omparison of the standards’ costs and

28 Center for Biological Diversity v. NHTSA , 508 F.3d 508 (9 th Cir. 2007) (rejecting argument that EPCA precludes the use of a marginal cost-benefit analys is that attempted to weigh all of the social benefi ts ( i.e.

, externalities as well as direct benefits to consume rs) of improved fuel savings in determining the str ingency of the CAFE standards). See also Entergy Corp. v. Riverkeeper, Inc. , 129 S.Ct. 1498, 1508 (2009) (“[U]nder Chevron , that an agency is not required to [conduct a cost-benefit analysis] does not mean that an agency is not permitted to do so.”) Formatted TableDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

26

benefits shows that the standards’ estimated benefi ts far outweigh its estimated costs. Based on the figures reported above, NHTSA estimate s that the total benefits of today’s proposed standards would be more three times the ma gnitude of the corresponding costs, such that the proposed standards would produce net benefits of nearly $138 billion over the useful lives of vehicles sold during MYs 2012-2 016.

B. Background 1. Chronology of Ee vents Ss ince the National Academy of Sciences Cc alled

for r R eforming and Ii ncreasing CAFE Ss tandards a. National Academy of Sciences I i ssues R r eport on F f uture of CAFE

P p rogram (February 2002)

i. Significantly Increasing CAFE Standards Without Mak ing them Attributebased Would Adversely Affect Safety

In the 2002 congressionally-mandated report entitle d “Effectiveness and Impact of Corporate Average Fuel Economy (CAFE) Standards, ” 29 a committee of the National Academy of Sciences (NAS) (“2002 NAS Report”) concl uded that the then-existing form of passenger car and light truck CAFE standards per mitted vehicle manufacturers to comply in part by downweighting and even downsizing their vehicles and that these

actions had led to additional fatalities. The comm ittee explained that this safety problem arose because, at that time, the CAFE standards wer e not attributed-based and thus subjected all passenger cars to the same fuel econo my target and all light trucks to the same target, regardless of their weight, size, or l oad-carrying capacity. 30 The committee said that this experience suggests that considerati on should be given to developing a new system of fuel economy targets that reflects differ ences in such vehicle attributes. Without a thoughtful restructuring of the program, there would be the trade-offs that must be made if CAFE standards were increased by any sig nificant amount. 31

In response to these conclusions, NHTSA issued att ribute-based CAFE standards for light trucks and sought legislative authority t o issue attribute-based CAFE standards for passenger cars before undertaking to raise the car standards. Congress went a step further in enacting EISA, not only authorizing the issuance of attribute-based standards, but also mandating them.

ii. Climate Change and Other E e xternalities Justify Increasing the CAFE

Standards

29 National Research Council, “Effectiveness and Impa ct of Corporate Average Fuel Economy (CAFE) Standards,” National Academy Press, Washington, DC (2002). Available at http://www.nap.edu/openbook.php?isbn=0309076013 (la st accessed August 9, 2009). The conference committee report for the Department of Transportati on and Related Agencies Appropriations Act for FY 2001 (Pub. L. 106-346) directed NHTSA to fund a stu dy by NAS to evaluate the effectiveness and impacts of CAFE standards (H. Rep. No. 106-940, p. 117-118) . In response to the direction from Congress, NAS published this lengthy report.

30 NHTSA formerly used this approach for CAFE standar ds. EISA prohibits its use after MY 2010.

31 NAS, p. 9.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

27 The NAS committee said that there are two compellin g concerns that justify a government-mandated increase in fuel economy, both relating to externalities. The first and most important concern, it argued, is the accum ulation in the atmosphere of greenhouse gases, principally carbon dioxide. 32

A second concern is that petroleum imports have be en steadily rising because of the nation’s increasing demand for gasoline without a corresponding increase in domestic supply. The high cost of oil imports poses two ris ks: downward pressure on the strength of the dollar (which drives up the cost of goods th at Americans import) and an increase in U.S. vulnerability to macroeconomic shocks that cos t the economy considerable real

output.

To determine how much the fuel economy standards s hould be increased, the committee urged that all social benefits be conside red. That is, it urged not only that the dollar value of the saved fuel be considered, but a lso that the dollar value to society of the resulting reductions in greenhouse gas emissions an d in dependence on imported oil

should be calculated and considered. The committee said that if it is possible to assign dollar values to these favorable effects, it become s possible to make at least crude comparisons between the socially beneficial effects of measures to improve fuel economy on the one hand, and the costs (both out-of-pocket and more subtle) on the other.

iii. Reforming the CAFE Program Could Address Inequity A rising from the

CAFE Structure

The 2002 NAS report expressed concerns about increa sing the standards under the CAFE program as currently structured. While rai sing CAFE standards under the existing structure would reduce fuel consumption, d oing so under alternative structures “could accomplish the same end at lower cost, provi de more flexibility to manufacturers, or address inequities arising from the present” str ucture. 33

To address those structural problems, the report s uggested various possible reforms. The report found that the “CAFE program m ight be improved significantly by converting it to a system in which fuel targets dep end on vehicle attributes.” 34 The report noted further that under an attribute-based approac h, the required CAFE levels could vary among the manufacturers based on the distribution o f their product mix. NAS stated that targets could vary among passenger cars and among t rucks, based on some attribute of these vehicles such as weight, size, or load-carryi ng capacity. The report explained that a particular manufacturer’s average target for passen ger cars or for trucks would depend upon the fractions of vehicles it sold with particu lar levels of these attributes. 35

2. NHTSA i I ssues Ff inal Rr ule Ee stablishing Aa ttribute- Bb ased CAFE

Ss tandards for MY 2008-2011 Ll ight Tt rucks (March 2006)

32 NAS, pp. 2, 13, and 83.

33 NAS, pp. 4-5 (Finding 10).

34 NAS, p. 5 (Finding 12).

35 NAS, p. 87. Formatted: Font: Not Bold, UnderlineDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

28 The 2006 final rule reformed the structure of the C AFE program for light trucks by introducing an attribute-based approach and usin g that approach to establish higher CAFE standards for MY 2008-2011 light trucks. 36 Reforming the CAFE program enables it to achieve larger fuel savings, while en hancing safety and preventing adverse economic consequences.

As noted above, under Reformed CAFE, fuel economy standards were restructured so that they are based on a vehicle at tribute, a measure of vehicle size called “footprint.” It is the product of multiplying a ve hicle’s wheelbase by its track width. A target level of fuel economy was established for ea ch increment in footprint (0.1 ft 2 ). Trucks with smaller footprints have higher fuel eco nomy targets; conversely, larger ones have lower targets. A particular manufacturer’s co mpliance obligation for a model year is calculated as the harmonic average of the fuel e conomy targets for the manufacturer’s vehicles, weighted by the distribution of the manuf acturer’s production volumes among the footprint increments. Thus, each manufacturer is required to comply with a single overall average fuel economy level for each model y ear of production.

Compared to Unreformed (non-attributed-based) CAFE, Reformed CAFE enhances overall fuel savings while providing vehic le manufacturers with the flexibility they need to respond to changing market conditions. Reformed CAFE also provides a more equitable regulatory framework by creating a l evel playing field for manufacturers, regardless of whether they are full-line or limited -line manufacturers. We were particularly encouraged that Reformed CAFE will con fer no compliance advantage if

vehicle makers choose to downsize some of their fle et as a CAFE compliance strategy, thereby reducing the adverse safety risks associate d with the Unreformed CAFE program.

3. Ninth Circuit Issues Dd ecision re Final Rule for MY 2008-2011 Light Trucks (November 2007)

On November 15, 2007, the United States Court of A ppeals for the Ninth Circuit

issued its decision in Center for Biological Diversity v. NHTSA

, 37 the challenge to the MY 2008-11 light truck CAFE rule. The court held t hat EPCA permits, but does not require, the use of a marginal cost-benefit analysi s. The court specifically emphasized

NHTSA’s discretion to decide how to balance the sta tutory factors – as long as that balancing does not undermine the fundamental statut ory purpose of energy conservation.

However, the Court found that NHTSA had been arbitr ary and capricious in the following respects:

• NHTSA’s decision that it could not monetize the b enefit of reducing CO 2 emissions for the purpose of conducting its margina l benefit-cost analysis; • NHTSA’s lack, in the Court’s view, of a reasoned explanation for its decision not to establish a “backstop” ( i.e ., a fixed minimum CAFE standard applicable to manufacturers);

36 71 FR 17566 (Apr. 6, 2006).

37 508 F.3d 508. Field Code ChangedDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

29 • NHTSA’s lack, again in the Court’s view, of a rea soned explanation for its decision not to revise the regulatory definitions f or the passenger car and light truck categories of automobiles so that some vehicles cur rently classified as light trucks are instead classified as passenger cars; • NHTSA’s decision not to subject most medium- and heavy-duty pickups and most medium- and heavy-duty cargo vans ( i.e ., those between 8,500 and 10,000 pounds gross vehicle weight rating (GVWR,) to the C AFE standards; • NHTSA’s decision to prepare and publish an Enviro nmental Assessment (EA) and making a finding of no significant impact notwithstanding what the Court found to be an insufficiently broad range of altern atives, insufficient analysis of the climate change effects of the CO 2 emissions, and limited assessment of cumulative impacts in its EA under the National Environmental Policy Act (NEPA).

The Court did not vacate the standards, but instead said it would remand the rule to NHTSA to promulgate new standards consistent wit h its opinion “as expeditiously as possible and for the earliest model year practicabl e. 38 Under the decision, the standards established by the April 2006 final rule would rema in in effect unless and until amended by NHTSA. In addition, it directed the agency to p repare an Environmental Impact

Statement.

4. Congress Ee nacts Energy Security and Independence Act of 2007 (December 2007)

As noted above in Section I.B., EISA significantly changed the provisions of EPCA governing the establishment of future CAFE sta ndards. These changes made it necessary for NHTSA to pause in its efforts so that it could assess the implications of the amendments made by EISA and then, as required, revi se some aspects of the proposals it had been developing ( e.g., the model years covered and credit issues).

5. NHTSA Proposes CAFE Standards for MYs 2011-2015 (April 2008)

The agency cannot set out the exact level of CAFE t hat each manufacturer would have been required to meet for each model year unde r the passenger car or light truck standards since the levels would depend on informat ion that would not be available until the end of each of the model years, i.e., the final actual production figures for each of those years. The agency can, however, project what the industry-wide level of average fuel economy would have been for passenger cars and for light trucks if each

38 The deadline in EPCA for issuing a final rule esta blishing, for the first time, a CAFE standard for a model year is 18 months before the beginning of tha t model year. 49 U.S.C. sec. 32902(g)(2). The same deadline applies to issuing a final rule amending a n existing CAFE standard so as to increase its stri ngency. Given that the agency has long regarded October 1 a s the beginning of a model year, the statutory dead line for increasing the MY 2009 standard was March 30, 2 007, and the deadline for increasing the MY 2010 standard is March 30, 2008. Thus, the only model y ear for which there was sufficient time at the time of the Court’s decision to gather all of the necessary information, conduct the necessary analyses and complete a rulemaking was MY 2011. As noted earlie r in this notice, however, EISA requires that a new standard be established for that model year.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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manufacturer produced its expected mix of automobil es and just met its obligations under the proposed “optimized” standards for each model y ear.

Passenger

cars mpg Light trucks

mpg MY 2011 31.2 25.0

MY 2012 32.8 26.4

MY 2013 34.0 27.8

MY 2014 34.8 28.2

MY 2015 35.7 28.6

The combined industry-wide average fuel economy (in miles per gallon, or mpg) levels for both cars and light trucks, if each manu facturer just met its obligations under the proposed “optimized” standards for each model y ear, would have been as follows:

Combined mpg

MY 2011 27.8

MY 2012 29.2

MY 2013 30.5

MY 2014 31.0

MY 2015 31.6

The annual average increase during this five year p eriod would have been approximately 4.5 percent. Due to the uneven distr ibution of new model introductions during this period and to the fact that significant technological changes could be most readily made in conjunction with those introduction s, the annual percentage increases were greater in the early years in this period.

6. Ninth Circuit Rr evises its Dd ecision re Ff inal r R ule for MY 2008-2011

Ll ight t T rucks (August 2008)

In response to the Government petition for rehearin g, the Ninth Circuit modified its decision by replacing its direction to prepare an EIS with a direction to prepare either a new EA or, if necessary, an EIS. 39

7. NHTSA r R eleases Ff inal e E nvironmental i I mpact s S tatement (October 2008)

On October 17, 2008, EPA published a notice announ cing the availability of NHTSA’s final environmental impact statement (FEIS) for this rulemaking. 40
Throughout the FEIS, NHTSA relied extensively on fi ndings of the United Nations Intergovernmental Panel on Climate Change (IPCC) an d the U.S. Climate Change

39 See CBD v. NHTSA , 538 F.3d 1172 (9 th Cir. 2008).

40 73 FR 61859 (Oct. 18, 2008).DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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Science Program (USCCSP). In particular, the agenc y relied heavily on the most recent, thoroughly peer-reviewed, and credible assessments of global climate change and its impact on the United States: the IPCC Fourth Assess ment Report Working Group I4 and II5 Reports, and reports by the USCCSP that include Scientific Assessments of the Effects of Global Climate Change on the United States and Synthesis and Assessment Products.

In the FEIS, NHTSA compared the environmental impac ts of its preferred

alternative and those of reasonable alternatives. It considered direct, indirect, and cumulative impacts and describes these impacts to i nform the decisionmaker and the public of the environmental impacts of the various alternatives.

Among other potential impacts, NHTSA analyzed the direct and indirect impacts related to fuel and energy use, emissions, includin g carbon dioxide and its effects on temperature and climate change, air quality, natura l resources, and the human environment. Specifically, the FEIS used a climate model to estimate and report on four direct and indirect effects of climate change, driv en by alternative scenarios of GHG emissions, including: 1. Changes in CO 2 concentrations; 2. Changes in global mean surface temperature; 3. Changes in regional temperature and precipitatio n; and 4. Changes in sea level.

NHTSA also considered the cumulative impacts of th e proposed standards for MY 2011-2015 passenger cars and light trucks, toget her with estimated impacts of NHTSA’s implementation of the CAFE program through MY 2010 and NHTSA’s future CAFE rulemaking for MYs 2016-2020.

8. Department of Transportation Decides not to Issu e MY 2011-2015 final Rule (January 2009)

On January 7, 2009, the Department of Transportatio n announced that the Bush Administration would not issue the final rule, notwithstanding the Office of Information and Regulatory Affairs’ completion of r eview of the rule under Executive Order 12866, Regulatory Planning and Revi ew, on November 14,

2008. 41

9. The President Requests NHTSA to Issue Final Rule for MY 2011

Only (January 2009)

As explained above, in his memorandum of January 26 , 2009, the President requested the agency to issue a final rule adopting CAFE standards for MY 2011 only. Further, the President requested NHTSA to establish standards for MY 2012 and later after considering the appropriate legal factors, th e comments filed in response to the May 2008 proposal, the relevant technological and scien tific considerations, and, to the extent

41 The statement can be found at http://www.dot.gov/ affairs/dot0109.htm (last accessed August 9, 2009).DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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feasible, a forthcoming report by the National Acad emy of Sciences assessing automotive technologies that can practicably be used to improv e fuel economy.

10. NHTSA Issues Final Rule for MY 2011 (March 2009 )

a. Introduction

NHTSA’s review and analysis of comments on its prop osal led the agency to make many changes to its methods for analyzing pote ntial MY 2011 CAFE standards, as

well as to the data and other information to which the agency has applied these methods. The following are some of the more prominent change s:

• After receiving, reviewing, and integrating updated product plans from vehicle manufacturers, NHTSA revised its forecast of the fu ture light vehicle market.

• NHTSA changed the methods and inputs it used to rep resent the applicability, availability, cost, and effectiveness of future fue l-saving technologies.

• NHTSA based its fuel price forecast on the AEO 2008 High Case price scenario

instead of the AEO 2008 Reference Case.

• NHTSA reduced mileage accumulation estimates ( i.e., vehicle miles traveled) to levels consistent with this increased fuel price fo recast.

• NHTSA applied increased estimates for the value of oil import externalities.

• NHTSA included all manufacturers—not just the large st seven—in the process used to fit the curve and estimate the stringency a t which societal net benefits are

maximized.

• NHTSA tightened its application of the definition o f “nonpassenger automobiles,” causing a reassigning of over one million vehicles from the light truck fleet to the passenger car fleet, and lowering the average fuel economy for cars due to the inclusion of vehicles previously categorized as tru cks, as well as the average fuel economy for trucks because the truck category then had a larger proportion of

heavier trucks.

• NHTSA fitted the shape of the curve based on “exhau stion” of available technologies instead of on manufacturer-level optim ization of CAFE levels.

These changes affected both the shape and stringenc y of the attribute-based standards. Taken together, the last three of the a bove changes reduced the steepness of the curves defining fuel economy targets for passen ger cars, and also less significantly reduced the steepness of the light truck curves.

b. Standards

The final rule established footprint-based fuel eco nomy standards for MY 2011 passenger cars and light trucks, where each vehicle manufacturer’s required level of CAFE was based on target levels of average fuel eco nomy set for vehicles of different

sizes and on the distribution of that manufacturer’ s vehicles among those sizes. The curves defining the performance target at each foot print reflect the technological and economic capabilities of the industry. The target for each footprint is the same for all manufacturers, regardless of differences in their o verall fleet mix. Compliance would beDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

33

determined by comparing a manufacturer’s harmonical ly averaged fleet fuel economy levels in a model year with a required fuel economy level calculated using the manufacturer’s actual production levels and the tar gets for each footprint of the vehicles that it produces.

The agency analyzed seven regulatory alternatives, one of which maximizes net

benefits within the limits of available information and was known at the time as the “optimized standards.” The optimized standards wer e set at levels, such that, considering all of the manufacturers together, no other alterna tive is estimated to produce greater net benefits to society. Upon a considered analysis of all information available, including all information submitted to NHTSA in comments, the age ncy adopted the “optimized

standard” alternative as the final standards for MY 2011. 42 By limiting the standards to levels that can be achieved using technologies each of which are estimated to provide benefits that at least equal its costs, the net ben efit maximization approach helped, at the time, to assure the marketability of the manufactur ers’ vehicles and thus economic practicability of the standards. Providing this as surance assumed increased importance in view of current and anticipated conditions in the i ndustry in particular and the economy in general. As was widely reported in the public d omain throughout that rulemaking, and as shown in public comments, the national and globa l economies raised serious concerns. Even before those recent developments, t he automobile manufacturers were already facing substantial difficulties. Together, these problems made NHTSA’s economic practicability analysis particularly impor tant and challenging in that rulemaking.

The agency could not set out the exact level of CAF E that each manufacturer would be required to meet for MY 2011 under the pas senger car or light truck standards because the levels will depend on information that will not be available until the end of that model year, i.e., the final actual production figures for that year. However, the following levels were projected for what the indust ry-wide level of average fuel economy will be for passenger cars and for light trucks if each manufacturer produced its expected mix of automobiles and just met its obligations und er the “optimized” standards.

Passenger cars mpg Light trucks mpg

MY 2011 30.2 24.1

The combined industry-wide average fuel economy (in miles per gallon, or mpg) levels for both cars and light trucks, if each manu facturer just met its obligations under the “optimized” standards, were projected as follow s:

Combined

mpg mpg

increase over prior

year MY 2011 27.3 2.0

42 The agency notes, for NEPA purposes, that the “opt imized standard” alternative adopted as the final standards corresponds to the “Optimized Mid-2” scen ario described in Section 2.2.2 of the FEIS.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

34 In addition, per EISA, each manufacturer’s domestic passenger fleet is required in MY 2011 to achieve 27.5 mpg or 92 percent of the CA FE of the industry-wide combined fleet of domestic and non-domestic passenger cars 43 for that model year, whichever is higher. This requirement resulted in the following projected alternative minimum standard (not attribute-based) for domestic passeng er cars:

Domestic passenger cars mpg

MY 2011 27.8

c. Credits

NHTSA also adopted a new Part 536 on use of “credit s” earned for exceeding applicable CAFE standards. Part 536 implements the provisions in EISA authorizing NHTSA to establish by regulation a credit trading p rogram and directing it to establish by regulation a credit transfer program. 44 Since its enactment, EPCA has permitted manufacturers to earn credits for exceeding the sta ndards and to apply those credits to compliance obligations in years other than the mode l year in which it was earned. EISA extended the “carry-forward” period to five model y ears, and left the “carry-back” period at three model years. Under Part 536, credit holde rs (including, but not limited to, manufacturers) will have credit accounts with NHTSA , and will be able to hold credits, apply them to compliance with CAFE standards, trans fer them to another “compliance category” for application to compliance there, or t rade them. A credit may also be cancelled before its expiry date, if the credit hol der so chooses. Traded and transferred credits will be subject to an “adjustment factor” t o ensure total oil savings are preserved, as required by EISA. EISA also prohibits credits e arned before MY 2011 from being transferred, so NHTSA has developed several regulat ory restrictions on trading and transferring to facilitate Congress’ intent in this regard.

11. Energy Policy and Conservation Act, as amended Amended by the Energy Independence and Security Act

NHTSA’s statutory authority and obligations under the Energy Policy and Conservation Act of 1975 (EPCA), as amended by the Energy Independence and Security Act of 2007 (EISA), is discussed at length above in Section I.B.1.

C. Development and f F easibility of the p P roposed s S tandards

1. How Ww as the Bb aseline Vv ehicle Ff leet Dd eveloped?

43 Those numbers set out several paragraphs above.

44 Congress required that DOT establish a credit “tra nsferring” regulation, to allow individual

manufacturers to move credits from one of their fle ets to another ( e.g. , using a credit earned for exceeding the light truck standard for compliance with the do mestic passenger car standard). Congress allowed D OT to establish a credit “trading” regulation, so that credits may be bought and sold between manufacture rs and other parties.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

35 a. Why D d o the Agencies Establish a Baseline Vehicle Fleet?

In order to determine what levels of stringency are feasible in future model years, the agencies must project what vehicles will exist in those model years, and then evaluate what technologies can feasibly be applied to those vehicles in order to raise their fuel economy and lower their CO 2 emissions. The agencies therefore establish a bas eline vehicle fleet representing those vehicles, based on the best available information. Each agency then developed a separate reference fleet, a ccounting (via their respective models)

for the effect that the MY 2011 CAFE standards have on the baseline fleet. This reference fleet is then used for comparisons of tec hnologies’ incremental cost and effectiveness, as well as the other relevant compar isons in the rule.

b. What Data D d id the Agencies U u se to Construct the Baseline, and H h ow
D d id t T hey D d o S s o?

As explained in the Technical Support Document (TSD ) prepared jointly by NHTSA and EPA, both agencies used a baseline vehicl e fleet constructed beginning with EPA fuel economy certification data for the 2008 mo del year, the most recent for which final data is currently available from manufacturer s. This data was used as the source for MY 2008 production volumes and some vehicle enginee ring characteristics, such fuel economy ratings, engine sizes, numbers of cylinders , and transmission types.

Some information important for analyzing new CAFE s tandards is not contained in the EPA fuel economy certification data. EPA st aff estimated vehicle wheelbase and track widths using data from Motortrend.com and Edm unds.com. This information is necessary for estimating vehicle footprint, which i s required for the analysis of footprintbased standards. Considerable additional informati on regarding vehicle engineering characteristics is also important for estimating th e potential to add new technologies in response to new CAFE standards. In general, such i nformation helps to avoid “adding” technologies to vehicles that already have the same or a more advanced technology. Examples include valvetrain configuration ( e.g. , OHV, SOHC, DOHC), presence of cylinder deactivation, and fuel delivery ( e.g. , MPFI, SIDI). To the extent that such engineering characteristics were not available in c ertification data, EPA staff relied on data published by Ward’s Automotive, supplementing this with information from internet

sites such as Motortrend.com and Edmunds.com. NHTS A staff also added some more detailed engineering characteristics ( e.g , type of variable valve timing) using data

available from ALLDATA® Online. Combined with the certification data, all of this information yielded a MY 2008 baseline vehicle flee t.

After the baseline was created the next step was to project the sales volumes for 2011-2016 model years. EPA used projected car and truck volumes for this period from Energy Information Administration’s (EIA’s) 2009 An nual Energy Outlook (AEO). 45

45 Available at

http://www.eia.doe.gov/oiaf/aeo/index.html. The a gencies have also used fuel price forecasts from AEO2009. Both agencies regard AEO a credible source not only of such forecasts, but al so of many underlying forecasts, including forecasts o f the size the future light vehicle market.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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However, AEO projects sales only at the car and tru ck level, not at the manufacturer and model-specific level, which are needed in order to estimate the effects new standards will have on individual manufacturers. Therefore, EPA p urchased data from CSMWorldwide and used their projections of the number of vehicles of each type predicted to be sold by manufacturers in 2011-2015. 46 This provided the year-by-year percentages of cars and trucks sold by each manufacturer as well a s the percentages of each vehicle segment. Although it was, therefore, necessary to assume the same manufacturer and segment shares in 2016 as in 2015, 2016 estimates f rom CSM should be available for the final rule. Using these percentages normalized to the AEO projected volumes then provided the manufacturer-specific market share and model-specific sales for model years 2011-2016.

The processes for constructing the MY 2008 baseline vehicle fleet and subsequently adjusting sales volumes to construct t he MY 2011-2016 baseline vehicle fleet are presented in detail in Chapter 1 of the d raft Joint Technical Support Document accompanying today’s notice.

c. How is T t his Different F f rom NHTSA’s Historical Approach and Why is

t T his Approach Preferable?

As discussed above in Section II.B.3, NHTSA has hi storically based its analysis of potential new CAFE standards on detailed product plans the agency has requested from manufacturers planning to produce light vehicl es for sale in the United States. In contrast, the current market forecast is based prim arily on information sources which are all either in the public domain or available commer cially. There are advantages to this approach, namely transparency and the potential to reduce some errors due to manufacturers’ misunderstanding of NHTSA’s request for information. There are also disadvantages, namely that the current market forec ast does not represent certain changes likely to occur in the future vehicle fleet as oppo sed to the MY 2008 vehicle fleet, such as vehicles being discontinued and newly introduced. On balance, however, the agencies have carefully considered these advantages and disa dvantages of using a market forecast derived from public and commercial sources rather t han from manufacturers’ product plans, and conclude that the advantages outweigh th e disadvantages.

Nevertheless, the agencies are hopeful that manufac turers will, in the future, agree to make public their plans regarding model years th at are very near, such as MY 2010 or perhaps MY 2011, so that this information can be in corporated into an analysis that is available for public review and comment. In any ev ent, because NHTSA and EPA are releasing market inputs used in the agencies’ respe ctive analyses, manufacturers, suppliers, and other automobile industry observers and participant can submit comments on how these inputs should be revised, as can all o ther reviewers. More information on the advantages and disadvantages of the current app roach and the agencies’ decision to

follow it is available in Section II.B.3.

46 EPA also considered other sources of similar infor mation, such as J.D. Powers, and concluded that CSM was better able to provide forecasts at the requisi te level of detail for most of the model years of i nterest.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

37 d. How is T t his Baseline Different Quantitatively from the Base line t T hat

NHTSA u U sed for the MY 2011 (March 2009) Final Rule?

As discussed above, the current baseline was develo ped from adjusted MY 2008 compliance data and covers MYs 2011-2016, while the baseline that NHTSA used for the MY 2011 CAFE rule was developed from confidential m anufacturer product plans for MY 2011. This section describes, for the reader’s comparison, some of the differences

between the current baseline and the MY 2011 CAFE r ule baseline.

Estimated vehicle sales : The sales forecasts, based on the Energy Informatio n Administration’s (EIA’s) Annual Energy Outlook 2009 (AEO 2009), used in the current baseline indicate that the total number of light vehicles expected to be sold during MYs 2011-2015 is 77 million, or about 15.4 million vehicles annually. NHTSA’s MY 2011 final rule forecast, based on AEO 2008, of the total number of light vehicles lik ely to be sold during MY 2011 through MY 2015 was 83 million, or about 16.6 milli on vehicles annually. Light trucks are expected to make up 40 percent of the MY 2011 b aseline market forecast in the current baseline, compared to 42 percent of the bas eline market forecast in the MY 2011 final rule. These changes in both the overall size of the light vehicle market and the relative market shares of passenger cars and light trucks reflect changes in the economic forecast underlying AEO, and changes in AEO’s forec ast of future fuel prices.

The figures below attempt to demonstrate graphical ly the difference between the variation of fuel economy with footprint for passen ger cars under the current baseline and MY 2011 final rule, and for light trucks under the current baseline and MY 2011 final rule, respectively. Figures IV.C.1-1 and 1-2 show the variation of fuel economy with footprint for passenger car models in the current b aseline and in the MY 2011 final rule, while Figures IV.C.1-3 and 1-4 show the variation o f fuel economy with footprint for light truck models in the current baseline and in t he MY 2011 final rule. However, it is difficult to draw meaningful conclusions by compari ng figures from the current baseline

with those of the MY 2011 final rule. In the curre nt baseline the number of make/models, and their associated fuel economy and footprint, are fixed and do not vary over time—this is why the number of data points in the current baseline figures appears smaller as compared to the number of data points in the MY 2011 final rule baseline. In contrast, the baseline fleet used in the MY 2011 fi nal rule varies over time as vehicles (with different fuel economy and footprint characte ristics) are added to and dropped from the product mix.

Figure IV.C.1-1. Planned Fuel Economy vs. Footprin t, Passenger Cars in Current

BaselineDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

38 10 15 20 25 30 35 40 45 50 55 60 65 70

35 40 45 50 55 60 65 70 75

Footprint (sf)Fuel Economy(mpg)DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

39

Figure IV.C.1-2. Planned Fuel Economy vs. Footprin t, Passenger Cars in MY 2011

Final Rule

10 15 20 25 30 35 40 45 50 55 60 65 70

35 40 45 50 55 60 65 70 75 80

Footprint (sf)Fuel Economy (mpg)DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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Figure IV.C.1-3. Planned Fuel Economy vs. Footprin t, Light Trucks in Current

Baseline

10 15 20 25 30 35 40 45 50 55 60 65 70

35 40 45 50 55 60 65 70 75 80

Footprint (sf)Fuel Economy (mpg)DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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Figure IV.C.1-4. Planned Fuel Economy vs. Footprin t, Light Trucks in MY 2011

Final Rule

10 15 20 25 30 35 40 45 50 55 60 65 70

35 40 45 50 55 60 65 70 75 80

Footprint (sf)Fuel Economy (mpg)

Estimated manufacturer market shares : NHTSA’s expectations regarding manufacturers’ marke t shares (the basis for which is discussed below) have also changed since t he MY 2011 final rule. These changes are reflected below in Table IV.C.1-1, whic h shows the agency’s sales forecasts for passenger cars and light trucks under the curre nt baseline and the MY 2011 final

rule. 47

47 As explained below, although NHTSA normalized each manufacturer’s overall market share to produce a realistically-sized fleet, the product mix for each manufacturer that submitted product plans was pres erved. The agency has reviewed manufacturers’ product plan s in detail, and understands that manufacturers do not sell the same mix of vehicles in every model year.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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Table IV.C.1-1. Sales Forecasts (Production for U. S. Sale in MY 2011, Thousand Units)

Current Baseline MY 2011 Final Rule Manufacturer Passenger Nonpassenger Passenger Nonpassenger Chrysler 194 403 707 1,216

Ford 1,230 944 1,615 1,144

General Motors 1,156 1,314 1,700 1,844

Honda 996 571 1,250 470 Hyundai 570 127 655 221

Kia 48 302 98

Nissan 794 421 789 479 Toyota 1,474 1,059 1,405 1,094

Other Asian 631 212 441 191 European 888 399 724 190
Total 8,235 5,547 9,286 6,849

Dual-fueled vehicles : Manufacturers have also, during and since MY 2008, indicated plans to sell more dual-fueled or flexible-fuel vehicles (FFVs) in MY 2011 than indicated in the current baseline of adjusted MY 2008 compliance data. FFVs create a potential market for alternatives to petroleum-based gasoline and diesel fuel. For purposes of determining compliance with CAFE standards, the fuel economy of a FFV is, subject to limitations, adjusted upward to account for this potential. 49 However, NHTSA is precluded from “taking credit” for the compliance flexibility by a ccounting for manufacturers’ ability to earn and use credits in setting the level of the st andards.” 50 Some manufacturers plan to produce a considerably greater share of FFVs than c an earn full credit under EPCA. The projected average FFV share of the market in MY 201 1 is 6 percent for the current baseline, versus 17 percent for the MY 2011 final r ule.

Estimated achieved fuel economy levels : Because manufacturers’ product plans also reflect s imultaneous changes in fleet mix and other vehicle characteristics, the relation ship between increased technology utilization and increased fuel economy cannot be is olated with any certainty. To do so would require an apples-to-apples “counterfactual” fleet of vehicles that are, except for technology and fuel economy, identical—for example, in terms of fleet mix and vehicle performance and utility. The current baseline mark et forecast shows industry-wide average fuel economy levels somewhat higher in MY 2 011 than shown in the MY 2011 final rule. Under the current baseline, average fu el economy for MY 2011 is 26.7 mpg, versus 26.5 mpg under the baseline in the MY 2011 f inal rule.

48 Kia is not listed in the table for the MY 2011 fin al rule because it was considered as part of Hyunda i for purposes of that analysis ( i.e. , Hyundai-Kia).

49 See 49 U.S.C. sec. §§ 32905 and 32906.

50 49 U.S.C. sec. § 32902(h).DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

43 These differences are shown in greater detail below in Table IV.C.1-2, which shows manufacturer-specific CAFE levels (not counti ng FFV credits that some manufacturers expect to earn) from the current base line versus the MY 2011 final rule baseline (from manufacturers’ 2008 product plans) f or passenger cars and light trucks. Table IV.C.1-3 shows the combined averages of these planned CAFE levels in the respective baseline fleets. These tables demonstr ate that, while the difference at the industry level is not so large, there are significa nt differences in CAFE at the

manufacturer level between the current baseline and the MY 2011 final rule baseline. For example, while Honda and Hyundai are essentiall y the same under both, Toyota and

Nissan show increased combined CAFE levels under th e current baseline (by 2.4 and 0.8 mpg respectively), while Chrysler, Ford, and GM sho w decreased combined CAFE levels under the current baseline (by 1.1, 1.8, and 1.0 mp g, respectively) relative to the MY

2011 final rule baseline.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

44

Table IV.C.1-2. Current Baseline Planned CAFE Leve ls in MY 2011 versus MY 2011 Final Rule Planned CAFE Levels (Passenger and Nonpassenger)

Current baseline CAFE

levels MY 2011 planned CAFE

levels Manufacturer Passenger Nonpassenger Passenger Nonpassenger

BMW 27.2 23.1 27.0 23.0 Chrysler 28.4 21.8 28.2 23.1

Ford 28.2 20.5 29.3 22.5

Subaru 29.1 25.6 28.6 28.6

General Motors 28.5 20.9 30.3 21.4

Honda 33.8 25.3 32.3 25.2 Hyundai 31.5 24.3 31.7 26.0

Tata 24.6 19.5 24.7 23.9

Kia 51 31.7 23.7

Mazda 52 31.0 26.7

Daimler 27.3 21.0 25.2 20.6

Mitsubishi 30.0 23.8 29.3 26.7

Nissan 31.9 21.5 31.3 21.4

Porsche 26.2 20.0 27.2 20.0

Ferrari 53 16.2

Maserati 54 18.2

Suzuki 30.5 23.3 28.7 24.0 Toyota 35.4 24.8 33.2 22.7 Volkswagen 28.6 20.2 28.5 20.1 Total/Average 30.8 2 2.3 30.4 22.6

51 Again, Kia is not listed in the table for the MY 2 011 final rule because it was considered as part of Hyundai for purposes of that analysis ( i.e. , Hyundai-Kia).

52 Mazda is not listed in the table for the MY 2011 f inal rule because it was considered as part of Ford for purposes of that analysis.

53 EPA did not include Ferrari in the current baselin e based on the conclusion that including them would not impact the results, and therefore Ferrari is no t listed in the table for the current baseline.

54 EPA did not include Maserati in the current baseli ne based on the conclusion that including them woul d not impact the results, and therefore Maserati is n ot listed in the table for the current baseline.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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Table IV.C.1-3. Current Baseline Planned CAFE Leve ls in MY 2011 versus MY

2011 Final Rule Planned CAFE Levels (Combined)

Manufacturer Current

baseline MY 2011 Final

Rule baseline

BMW 25.6 26.0 Chrysler 23.6 24.7

Ford 24.2 26.0

Suba ru 27.5 28.6

General Motors 23.9 24.9

Honda 30.1 30.0 Hyundai 29.9 30.0

Tata 21.1 24.4

Kia 29.3

Mazda 30.2

Daimler 24.7 23.6

Mitsubishi 29.1 29.1

Nissan 27.3 26.6

Porsche 23.2 22.0

Ferrari 16.2

Maserati 18.2

Suzuki 28.6 27.8 Toyota 30.0 2 7.6 Volkswagen 26.2 27.1 Total/Average 26.7 26.5

Tables IV.C.1-4 through 1-6 summarize other differ ences between the current baseline and manufacturers’ product plans submitted to NHTSA in 2008 for the MY 2011 final rule. These tables present average vehi cle footprint, curb weight, and powerto-weight ratios for each manufacturer represented in the current baseline and of the seven largest manufacturers represented in the prod uct plan data, and for the overall industry. The tables containing product plan data do not identify manufacturers by name, and do not present them in the same sequence.

Tables IV.C.1-4a and 1-4b show that the current ba seline reflects a slight decrease in overall average passenger vehicle size relative to the manufacturers’ plans. This is a reflection of the market segment shifts underlying the sales forecasts of the current

baseline.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

46 Table IV.C.1-4a. Current Baseline Average MY 2011 Vehicle Footprint (Square Feet)

Manufacturer PC LT Avg.

BMW 45.4 49.7 46.9 Chrysler 46.4 54.0 51.5

Ford 46.2 57.9 51.3

Subaru 43.1 46.3 44.4

General

Motors 46.2 59.6 53.4

Honda 44.3 49.4 46.2 Hyundai 44.7 48.8 45.5

Tata 50.3 48.0 48.8

Kia 45.2 51.6 46.7

Mazda 44.3 46.9 44.7

Daimler 46.6 53.3 49.0

Mitsubishi 43.8 46.4 44.1

Nissan 45.2 55.4 48.8

Porsche 38.6 51.0 43.6

Suzuki 41.0 47.2 42.3 Toyota 44.0 51.1 47.0 Volkswagen 43.4 52.6 45.4 Industry Average 45.0 54.4 48.8

Table IV.C.1-4b. MY 2011 Final Rule Average Planne d MY 2011 Vehicle Footprint (Square Feet)

PC LT Avg

. Manufacturer 1 46.7 58.5 52.8

Manufacturer 2 46.0 5.4 47.1

Manufacturer 3 44.9 52.8 48.4

Manufacturer 4 45.4 55.8 49.3

Manufacturer 5 45.2 57.5 50.3

Manufacturer 6 48.5 54.7 52.4

Manufacturer 7 45.1 49.9 46.4 Industry Average 45.6 55.1 49.7

Tables IV.C.1-5a and 1-5b show that the current bas eline reflects a decrease in overall average vehicle weight relative to the manufacturer s’ plans. As above, this is most likely a reflection of the market segment shifts underlyin g the sales forecasts of the current

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Table IV.C.1-5a. Current Baseline Average MY 2011 Vehicle Curb Weight (Pounds)

Manufacturer PC LT Avg.

BMW 3,535 4,612 3,900 Chrysler 3,498 4,506 4,178

Ford 3,516 4,596 3,985

Subaru 3,155 3,801 3,435

General Motors 3,495 5, 030 4,311

Honda 3,021 4,064 3,401 Hyundai 3,135 4,080 3,307

Tata 3,906 5,198 4,717

Kia 3,034 4,057 3,284

Mazda 3,236 3,744 3,316

Daimler 3,450 5,123 4,045

Mitsubishi 3,238 3,851 3,312

Nissan 3,242 4,535 3,690

Porsche 3,159 4,907 3,874

S uzuki 2,870 3,843 3,080 Toyota 3,112 4,186 3,561 Volkswagen 3,479 5,673 3,959 Industry Average 3,280 4,538 3,786

Table IV.C.1-5b. MY 2011 Final Rule Average Planne d MY 2011 Vehicle Curb Weight (Pounds)

PC LT Avg.

Manufacturer 1 3,197 4,329 3, 692

Manufacturer 2 3,691 4,754 4,363

Manufacturer 3 3,293 4,038 3,481

Manufacturer 4 3,254 4,191 3,510

Manufacturer 5 3,547 5,188 4,401

Manufacturer 6 3,314 4,641 3,815

Manufacturer 7 3,345 4,599 3,865 Industry Average 3,380 4,687 3,935

Tables IV.C.1-6a and IV.C.1-6b show that the curre nt baseline reflects a decrease in average performance relative to that of the manu facturers’ product plans. This decreased performance is most likely a reflection o f the market segment shifts underlying the sales forecasts of the current baseline, that i s, an assumed shift away from higher performance vehicles. Formatted: Font: 12 pt

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Table IV.C.1-6a. Current Baseline Average MY 2011 Vehicle Power-to-Weight Ratio (hp/lb)

Manufacturer PC LT Avg.

BMW 0.072 0.061 0.068 Chrysler 0.055 0.052 0.053

Ford 0.058 0.053 0.056

Subaru 0.062 0.057 0.059

General Motors 0.056 0.056 0.056

Honda 0.057 0.054 0.056 Hyundai 0.051 0.055 0.052

Tata 0.077 0.057 0.064

Kia 0.050 0.056 0.051

Mazda 0.051 0.053 0.052

Daimler 0.066 0.056 0.062

Mitsubishi 0.053 0.056 0.053

Nissan 0.058 0.057 0.058

Porsche 0.105 0.073 0.092

Suzuki 0.049 0.062 0.052 Toyota 0.052 0.062 0.056 Volkswagen 0.058 0.052 0.056 Industry Average 0.056 0.056 0.056

Table IV.C.1-6b. MY 2011 Final Rule Average Planne d MY 2011 Vehicle Power-toWeight Ratio (hp/lb)

PC LT Avg.

Manufacturer 1 0.065 0.058 0.060

Manufacturer 2 0.061 0.065 0.062

Manufacturer 3 0.053 0.059 0.056

Manufacturer 4 0.060 0.058 0.059

Manufacturer 5 0.060 0.057 0.059

Manufacturer 6 0.063 0.065 0.065

Manufacturer 7 0.053 0.055 0.053 Industry Average 0.060 0.059 0.060

As discussed above, the agencies’ market forecast for MY 2012-2016 holds the performance and other characteristics of individual vehicle models constant, adjusting the size and composition of the fleet from one model ye ar to the next.

Refresh and redesign schedules (for application in NHTSA’s modeling) : Expected model years in which each vehicle model wi ll be redesigned or freshened constitute another important aspect of NH TSA’s market forecast. As discussed in Section IV.C.2.c below, NHTSA’s analysis support ing the current rulemaking times the addition of nearly all technologies to coincide with either a vehicle redesign or a Formatted ... [1]

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49

vehicle freshening. Product plans submitted to NHT SA preceding the MY 2011 final

rule contained manufacturers’ estimates of vehicle redesign and freshening schedules and NHTSA’s estimates of the timing of the five-year re design cycle and the two- to threeyear refresh cycle were made with reference to thos e plans. In the current baseline, in contrast, estimates of the timing of the refresh an d redesign cycles were based on

historical dates— i.e. , counting forward from known redesigns occurring i n or prior to MY 2008 for each vehicle in the fleet and assigning refresh and redesign years accordingly. After applying these estimates, the s hares of manufacturers’ passenger car and light truck estimated to be redesigned in MY 20 11 were as summarized below for the

current baseline and the MY 2011 final rule. Table IV.C.1-7 below shows the percentages of each manufacturer’s fleets expected to be redesi gned in MY 2011 for the current baseline. Table IV.C.1-8 presents corresponding est imates from the market forecast used by NHTSA in the analysis supporting the MY 2011 fin al rule (again, to protect confidential information, manufacturers are not ide ntified by name).

Table IV.C.1-7. Current Baseline, Share of Fleet R edesigned in MY 2011

Manufacturer PC LT Avg.

BMW 32% 40% 34% Chrysler 0% 11% 8%

Ford 12% 7% 10%

Subaru 0% 51% 22%

General Motors 20% 2% 11%

Honda 31% 33% 32% Hyundai 20% 0% 16%

Tata 28% 100% 73%

Kia 35% 87% 48%

Mazda 0% 0% 0%

Daimler 0% 0% 0%

Mitsubishi 0% 56% 7%

Nissan 4% 18% 9%

Porsche 0% 100% 41%

Suzuki 8% 21% 11% Toyota 4% 24% 12% Volkswagen 2 3% 0% 18% Industry Average 15% 17% 15%DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

50

Table IV.C.1-8. MY 2011 Final Rule, Share of Fleet Redesigned in MY 2011

PC LT Avg.

Manufacturer 1 19% 0% 11%

Manufacturer 2 34% 27% 29%

Manufacturer 3 5% 0% 3%

Manufacturer 4 7% 0% 5%

Manufacturer 5 19% 0% 11%

Manufacturer 6 34% 28% 33%

Manufacturer 7 27% 28% 28%

Overall 20% 9% 15%



### PC LT Ave.
Company 1 19% 0% 11% Company 2 34% 27% 29% Company 3 5% 0% 3%
Company 4 7% 0% 5% Company 5 19% 0% 11%
Company 6 34% 28% 33%
Company 7 27% 28% 28%

Overall 20% 9% 15%

We continue, therefore, to estimate that manufactur ers’ redesigns will not be uniformly distributed across model years. This is in keeping with standard industry practices, and reflects what manufacturers actually do–NHTSA has observed that manufacturers in fact do redesign more vehicles in some years than in others. NHTSA staff have closely examined manufacturers’ planned redesign schedules, contacting some manufacturers for clarification of some plans, and confirmed that these plans remain unevenly distributed over time. For example, altho ugh Table 8 shows that NHTSA expects Company 2 to redesign 34 percent of its pas senger car models in MY 2011, current information indicates that this company wil l then redesign only (a different) 10 percent of its passenger cars in MY 2012. Similarl y, although Table 8 shows that NHTSA expects four of the largest seven light truck manufacturers to redesign virtually no light truck models in MY 2011, current informati on also indicates that these four manufacturers will redesign 21-49 percent of their light trucks in MY 2012.

e. How does Manufacturer Product Plan Data Factor i nto the Baseline Used in this Proposal?

As discussed in Section II.B.4 above, while the age ncies received updated product plans in Spring 2009 in response to NHTSA’s request , the baseline data used in this proposal is not informed by these product plans, be cause they contain confidential business information the agencies are legally requi red to protect from disclosure, and because the agencies have concluded that, for purpo ses of this NPRM, a transparent baseline is preferable. Formatted TableDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

51 However, as also discussed above, NHTSA has conduct ed a separate analysis that does make use of these product plans, contained in NHTSA’s PRIA. NHTSA performed this separate analysis for purposes of comparison o nly. NHTSA used the publicly available baseline for all analysis related to the development and evaluation of the proposed new CAFE standards.

2. How were the Technology Inputs Developed?

As discussed above in Section II.E, for developing the technology inputs for the MY 2012-2016 CAFE and GHG standards, the agencies p rimarily began with the technology inputs used in the MY 2011 CAFE final ru le and in the July 2008 EPA ANPRM, and then reviewed, as requested by President Obama in his January 26 memorandum, the technology assumptions that NHTSA u sed in setting the MY 2011

standards and the comments that NHTSA received in r esponse to its May 2008 Notice of Proposed Rulemaking. In addition, the agencies sup plemented their review with updated information from more current literature, new produ ct plans and from EPA certification testing. More detail is available regarding how th e agencies developed the technology inputs for this NPRM above in Section II.E, in Chap ter 3 of the Draft Joint TSD, and in

Section V of NHTSA’s PRIA.

a. What Technologies does NHTSA Consider?

Section II.E.1 above describes the fuel-saving tech nologies considered by the agencies that manufacturers could use to improve th e fuel economy of their vehicles during MYs 2012-2016. The majority of the technolo gies described in this section are readily available, well known, and could be incorpo rated into vehicles once production decisions are made. As discussed, the technologies considered fall into five broad categories: engine technologies, transmission tech nologies, vehicle technologies, electrification/accessory technologies, and hybrid technologies. Table IV.C.2-1 below lists all the technologies considered and provides the abbreviations used for them in the Volpe model, 55 as well as their year of availability, which for p urposes of NHTSA’s analysis means the first model year in the rulemaki ng period that the Volpe model is allowed to apply a technology to a manufacturer’s f leet. 56 Year of availability recognizes that technologies must achieve a level of technical viability before they can be implemented in the Volpe model, and are thus a mean s of constraining technology use until such time as it is considered to be technolog ically feasible. For a more detailed description of each technology and their costs and effectiveness, we refer the reader to Chapter 3 of the joint TSD and Section V of NHTSA’s PRIA.

55 The abbreviations are used in this section both fo r brevity and for the reader’s reference if they wi sh to refer to the expanded decision trees and

, the model input and output sheets, [etc.]

, which are available in

Docket No. NHTSA-2009-0059 and on NHTSA’s website. [in the docket or on the website]

. 56 A date of 2011 means the technology can be applied in all model years, while a date of 2014 means the technology can only be applied in model years 2014 through 2016.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

52

Table IV.C.2-1. List of technologies , abbreviations, and year of availability in NHTSA’s analysis

Technology Model Abbreviation Year Available

Low Friction Lubricants LUB 2011
Engine Friction Reduction EFR 2011
VVT - Coupled Cam Phasing (CCP) on SOHC CCPS 2011

Discrete Variable Valve Lift (DVVL) on SOHC DVVLS 2011
Cylinder Deactivation on SOHC DEACS 2011
VVT - Intake Cam Phasing (ICP) ICP 2011
VVT – Dual Cam Phasing (DCP) DCP 2011

Discrete Variable Valve Lift (DVVL) on DOHC DVVLD 2011
Continuously Variable Valve Lift (CVVL) CVVL 2011
Cylinder Deactivation on DOHC DEADD 2011
Cylinder Deactivation on OHV DEACO 2011
VVT - Coupled Cam Phasing (CCP) on OHV CCPO 2011

Discrete Variable Valve Lift (DVVL) on OHV DVVLO 2011

Conversion to DOHC with DCP CDOHC 2011
Stoichiometric Gasoline Direct Injection (GDI) SGDI 2011

Combustion Restart CBRST 2014
Turbocharging and Downsizing TRBDS 2011

Exhaust Gas Recirculation (EGR) Boost EGRB 2013
Conversion to Diesel following CBRST DSLC 2011
Conversion to Diesel following TRBDS DSLT 2011
6-Speed Manual/Improved Internals 6MAN 2011
Improved Auto. Trans. Controls/Externals IATC 2011
Continuously Variable Transmission CVT 2011
6/7/8-Speed Auto. Trans with Improved Internals NAUTO 2011

Dual Clutch or Automated Manual Transmission DCTAM 2011
Electric Power Steering EPS 2011
Improved Accessories IACC 2011
12V Micro-Hybrid MHEV 2011
Belt Integrated Starter Generator BISG 2011
Crank Integrated Starter Generator CISG 2011
Power Split Hybrid PSHEV 2011
2-Mode Hybrid 2MHEV 2011
Plug-in Hybrid PHEV 2011

Mass Reduction 1 (1.5%) MS1 2011

Mass Reduction 2 (3.5% – 8.5%) MS2 2014
Low Rolling Resistance Tires ROLL 2011
Low Drag Brakes LDB 2011
Secondary Axle Disconnect 4WD SAX 2011
Aero Drag Reduction AERO 2011 Formatted: Font: 10 pt

Formatted TableDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

53 Technology Model

Abbreviation Year

Available

Low Friction Lubricants LUB 2011
Engine Friction Reduction EFR 2011
VVT - Coupled Cam Phasing (CCP) on SOHC CCPS 2011

Discrete Variable Valve Lift (DVVL) on SOHC DVVLS 2011
Cylinder Deactivation on SOHC DEACS 2011
VVT - Intake Cam Phasing (ICP) ICP 2011
VVT – Dual Cam Phasing (DCP) DCP 2011

Discrete Variable Valve Lift (DVVL) on DOHC DVVLD 2011
Continuously Variable Valve Lift (CVVL) CVVL 2011
Cylinder Deactivation on DOHC DEADD 2011
Cylinder Deactivation on OHV DEACO 2011
VVT - Coupled Cam Phasing (CCP) on OHV CCPO 2011

Discrete Variable Valve Lift (DVVL) on OHV DVVLO 2011

Conversion to DOHC with DCP CDOHC 2011
Stoichiometric Gasoline Direct Injection (GDI) SGDI 2011

Combustion Restart CBRST 2014
Turbocharging and Downsizing TRBDS 2011

Exhaust Gas Recirculation (EGR) Boost EGRB 2013
Conversion to Diesel following CBRST DSLC 2011
Conversion to Diesel following TRBDS DSLT 2011
6-Speed Manual/Improved Internals 6MAN 2011
Improved Auto. Trans. Controls/Externals IATC 2011
Continuously Variable Transmission CVT 2011
6/7/8-Speed Auto. Trans with Improved Internals NAUTO 2011

Dual Clutch or Automated Manual Transmission DCTAM 2011
Electric Power Steering EPS 2011
Improved Accessories IACC 2011
12V Micro-Hybrid MHEV 2011
Belt Integrated Starter Generator BISG 2011
Crank Integrated Starter Generator CISG 2011
Power Split Hybrid PSHEV 2011
2-Mode Hybrid 2MHEV 2011
Plug-in Hybrid PHEV 2011

Mass Reduction 1 (1.5%) MS1 2011

Mass Reduction 2 (3.5% – 8.5%) MS2 2014
Low Rolling Resistance Tires ROLL 2011
Low Drag Brakes LDB 2011
Secondary Axle Disconnect 4WD SAX 2011
Aero Drag Reduction AERO 2011 For purposes of this NPRM and as discussed in great er detail in the joint TSD, NHTSA and EPA carefully reviewed the list of techno logies used in the agency’s analysis for the MY 2011 final rule. Given the rel atively short amount of time, from aDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

54

technology-development perspective, that has elapse d since March 2009 and this NPRM, NHTSA and EPA concluded that the considerable major ity of technologies were correctly defined and continued to be appropriate f or use in the analysis supporting the proposed standards. However, some refinements were made as discussed below

.

Specific to its modeling, NHTSA has revised eight o f the technologies used in the current analysis from those considered in the MY 20 11 final rule. Specifically, two technologies which were previously unavailable in t he MY 2011 time frame are now available (in the extended MY 2012-2016 period); on e technology has been combined with another; one is newly introduced; three have r evised names and/or definitions; and one has been deleted entirely. These changes are d iscussed further below, and NHTSA seeks comment on both these changes and the validat ion of the unchanged technology assumptions and estimates.

Availability : In the MY 2011 final rule, two of the engine tec hnologies—EGR

boost and combustion restart—were unavailable becau se they were not considered technologically feasible until beyond that rulemaki ng time frame. While both were described and discussed in the MY 2011 final rule, neither was applied in the modeling process that supported those standards. 57 In this analysis, EGR boost becomes available in MY 2013, and combustion restart in MY 2014, so b oth are being applied by the Volpe model, as needed, in this analysis.

Merging of technologies : In the MY 2011 final rule, higher voltage and im proved alternator (HVIA) was used to represent changes in the design of the alternator, effectively optimizing it for higher efficiency (in stead of for low cost as is typically done). For purposes of this analysis, the HVIA tec hnology is no longer represented individually, but instead has been incorporated int o a new-to-this-analysis technology called belt integrated starter generator, or BISG, as discussed next.

New technology : In the MY 2011 final rule, two levels of mild hy brid technology were defined: a 12 volt micro-hybrid (MHEV) system , which utilized a belt-driven starter generator operating at 12 volts, and the mo re capable integrated starter generator technology (ISG) operating at higher voltages (100 volts). ISG envisioned both belt and crank configured starter generator systems. In the current proposal, and in an effort to offer a broader spectrum of more diversified mild h ybrid technologies for the modeling process to choose from, NHTSA has added the BISG te chnology to the electrification decision tree, and redefined the ISG technology to be a crank mounted version of ISG, accordingly renamed to CISG. The BISG technology is a belt-coupled system like the 12 volt MHEV, but it operates at a higher voltage ( e.g. , 42 volts) and thus can make use of regenerative braking, as well as potentially adding some limited motive power. Since BISG is a higher voltage system, optimization of the alternat or occurs as part of the BISG

57 As an additional note, since combustion restart w as unavailable in the MY 2011 time frame, the technology titled diesel following combustion resta rt (DSLC), which as the name indicates was only applied after combustion restart, was also unavaila ble. Accordingly, DSLC, which was described and
discussed in the MY 2011 final rule, is now availab le in the current analysis.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

55

technology application; hence the HVIA technology i s no longer needed as a separate technology. Additionally, the CISG technology is n ow defined as a crank mounted system that operates at higher voltages (100 volts) than BISG, yet at lower voltage than the strong hybrids (300 volts) that make greater us e of regenerative braking and provide greater motive power capability. Thus, three level s of mild hybrid technology exist in the current proposal, as opposed to the two levels offe red in the MY 2011 final rule.

Revisions and Deletions : The Mass Reduction/Material Substitution technol ogies have been revised for the current proposal. In the MY 2011 final rule, the Volpe model

used three levels of material substitution technolo gies, referred to as MS1, MS2, and MS5, which were progressively applied to vehicles w ith curb weights in excess of 5,000 pounds (2,268 kg) so as to reduce weight by up to a 5 percent maximum. In keeping with the agency’s desire to limit potential negative imp acts to safety performance as a result of vehicle weight reduction, material substitution was not applied to vehicles with curb weights below 5,000 pounds. In contrast, in the cu rrent analysis, and in keeping with some manufacturer’s stated plans to decrease overal l fleet weights regardless of subclass or curb weight, NHTSA now defines two Mass Reductio n/Material Substitution technologies as follows.

The Mass Reduction 1.5 percent (MS1) represents a 1.5 percent weight decrease through material substitution applicable to all veh icle subclasses, regardless of curb weight, that can be applied throughout the rulemaki ng period (and at refresh or redesign cycle times). This technology is similar to the MS 1 technology used in the prior analysis in terms of the scale of the weight reduction (1 ve rsus 1.5 percent), the methods and techniques manufacturers are anticipated to use in achieving the reductions, and when in the product cycle the model applies it (at refresh or redesign).

A second technology, Mass Reduction 3.5 – 8.5 perc ent (MS2), has also been defined. The MS2 technology is unavailable until M Y 2014, and can only be applied by the Volpe model at a product redesign cycle. MS2 a ssumes a 3.5 to 8.5 percent weight reduction dependent on subclass (with the smaller/l ighter subclasses receiving the lowest amounts of reduction, 3.5 percent, and the larger/h eavier vehicles the 8.5 percent) via the types of more intrusive and complex mass reduction associated with a complete vehicle redesign. 58 MS2 is cumulative to MS1, as it is only applied a fter MS1, therefore the maximum weight reduction that can occur for smaller subclass vehicles is 5 percent, while large cars, truck, and SUVs could experience 10 percent weight reductions. Restricting weight reduction on smaller vehicle to lower limits, and vice versa for larger vehicles, is intended to mitigate or minimize the p otential safety consequences from the modeled weight reductions. Postponing the availabi lity of the technology until MY 2014 recognizes the lead time required to implement plat form redesigns that would be necessary for these levels of weight reduction and mass reduction. NHTSA seeks comment on the agency’s use of a two-step process, with the higher applications of MS in MYs 2014 and beyond, and the process of applying sm aller mass reductions to lighter

58 Examples of such weight savings associated with n ew platform introductions have been provided in confidential product plan information provided by s ome manufacturers.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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vehicles and higher reductions to heavier vehicles for the purpose of maintaining safety neutrality.

The MS5 technology used in the MY 2011 final rule is deleted.

Additionally, for purposes of this NPRM, NHTSA has revised the applicability of the diesel technologies to restrict it to vehicles with engines of 6 cylinders or more. NHTSA seeks comment on its decision not to apply di esel technologies to vehicles with 4-cylinder engines. NHTSA also seeks comment on th e revised costing methodology for diesel technologies.

Besides these eig ht , all other technologies considered in this analysi s were also considered in the analysis for the MY 2011 final ru le, and although the costs and effectiveness estimates may have been revised as di scussed further below, the other technologies remain otherwise unchanged for the pur poses of this analysis in terms of their definition, functionality, and configuration. Thus, with this catalog of technologies as a starting point, NHTSA could then review and co nsider effectiveness and cost estimates for each technology, and, through the Vol pe model analysis, how a manufacturer might feasibly apply these technologie s to their MY 2012-2016 vehicles in order to achieve compliance with the proposed stand ards.

b. How D d id NHTSA Determine the Costs and Effectiveness of E e ach of These Technologies for U u se in its Modeling Analysis?

Building on NHTSA’s estimates developed for the MY 2011 CAFE final rule and EPA’s Advanced Notice of Proposed Rulemaking, which relied on the 2008 Staff Technical Report, 59 the agencies took a fresh look at technology cost and effectiveness values for purposes of the joint proposal under the National Program. This joint work is reflected in Chapter 3 of the Draft Joint TSD and i n Section II of this preamble, which is

summarized below. For more detailed information on the effectiveness and cost of fuelsaving technologies, please refer to Chapter 3 of t he joint TSD and Section V of

NHTSA’s PRIA.

Generally speaking, while NHTSA and EPA found that much of the cost

information used in NHTSA’s MY 2011 final rule and EPA’s 2008 staff report was consistent to a great extent, the agencies, in reco nsidering information from many sources, revised several component costs of several major technologies: turbocharging/downsizing, mild and strong hybrids, diesels, SGDI, and Valve Train Lift Technologies. These are discussed at length in the joint TSD and in NHTSA’s PRIA. Additionally, most effectiveness estimates used in the both the MY 2011 final rule and the 2008 EPA staff report were determined to be acc urate and were carried forward without significant change into this rulemaking. W hen NHTSA and EPA’s estimates for effectiveness diverged slightly due to differences in how agencies apply technologies to vehicles in their respective models, we report the ranges for the effectiveness values used

59 EPA Staff Technical Report: Cost and Effectivenes s Estimates of Technologies Used to Reduce LightDuty Vehicle Carbon Dioxide Emissions. EPA420-R-08 -008, March 2008.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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in each model. For much more information on the co sts and effectiveness of individual technologies, we refer the reader to Chapter 3 of t he joint TSD and Section V of

NHTSA’s PRIA.

NHTSA notes that, in developing technology cost and effectiveness estimates, the agencies have made every effort to hold constant as pects of vehicle performance and utility typically valued by consumers, such as hors epower, carrying capacity, and towing and hauling capacity. For example, NHTSA includes in its analysis technology cost and effectiveness estimates that are specific to perfor mance passenger cars ( i.e. , sports cars), as compared to non-performance passenger cars. Whe n commenting on the agencies’ technology cost and effectiveness estimates, NHTSA urges commenters either to place any related comments within the same context, or ex plain any assumptions or estimates regarding increases or decreases in vehicle perform ance or utility. Additionally, NHTSA

seeks comment on the extent to which commenters bel ieve that the agencies have been successful in holding constant these elements of ve hicle performance and utility in developing the technology cost and effectiveness es timates.

Additionally, NHTSA notes that the technology costs included in this NPRM take into account only those associated with the initial build of the vehicle. The agencies seek comments on the additional lifetime costs, if any, associated with the implementation of advanced technologies, including warranty, maintena nce and replacement costs, such as the replacement costs for low rolling resistance ti res, low friction lubricants, and hybrid batteries, and maintenance costs for diesel aftertr eatment components.

While the agencies believe that the ideal estimates for the final rule would be based on tear down studies or BOM approach and subj ected to a transparent peerreviewed process, NHTSA and EPA are confident that the thorough review conducted, led to the best available conclusion regarding tech nology costs and effectiveness estimates for the current rulemaking and resulted i n excellent consistency between the agencies’ respective analyses for developing the CA FE and CO 2 standards.

NHTSA seeks comment on the incremental cost and eff ectiveness estimates employed by the agency in the Volpe modeling analysis for this NPRM, examples of which are provided in table form below. These example Tables present effectiveness and cost estimates which are incremental in nature, accordin g to the decision trees used in the Volpe modeling analysis. Thus, the effectiveness a nd cost estimates are not absolute to a single baseline vehicle, but are incremental to the technology that precedes it. Comment [r6]: Added in response to interagency

comment.

Comment [r7]: Added in response to interagency

comment.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

58Test entryTable IV.C.2-2. Technology Effectiveness EstimatesEmployed in the Volpe Model for CertainTechnologies Formatted: Font: 12 pt

Formatted: Font: 12 pt, BoldDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

59Test entryTable IV.C.2-3. Technology Cost Estimates Employedin the Volpe Model for Certain Technologies Formatted: Font: 12 pt, BoldDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

60 Formatted: CenteredDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

61 c. How D d oes NHTSA U u se These Assumptions in its Modeling Analysis?DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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NHTSA’s analysis, using the Volpe model, relies on several inputs and data files to conduct the compliance analysis, as discussed fu rther below and in Section V of the PRIA. For the purposes of applying technologies, t he Volpe model primarily uses three data files, one that contains data on the vehicles expected to be manufactured in the model years covered by the rulemaking, one that ide ntifies the appropriate stage within the vehicle’s life-cycle for the technology to be a pplied, and one that contains data/parameters regarding the available technologie s the model can apply. These inputs

are discussed below.

As discussed above, the Volpe model begins with an initial state of the domestic vehicle market, which in this case is the market fo r passenger cars and light trucks to be sold during the period covered by the proposed stan dards. The vehicle market is defined on a model-by-model, engine-by-engine, and transmis sion-by-transmission basis, such that each defined vehicle model refers to a separat ely defined engine and a separately

defined transmission.

For the current proposal, which covers MYs 2012-201 6, the light vehicle (passenger car and light truck) market forecast was developed jointly by NHTSA and EPA staff using MY 2008 CAFE compliance data. The MY 2008 compliance data includes about 1,100 vehicle models, about 400 spec ific engines, and about 200 specific transmissions, which is a somewhat lower level of d etail in the representation of the vehicle market than that used by NHTSA in recent CA FE analyses. 60 However, within

the limitations of information that can be made ava ilable to the public, it provides the foundation for a realistic analysis of manufacturer -specific costs and the analysis of attribute-based CAFE standards, and is much greater than the level of detail used by many other models and analyses relevant to light ve hicle fuel economy. 61

In addition to containing data about each vehicle, engine, and transmission, this file contains information for each technology under consideration as it pertains to the specific vehicle (whether the vehicle is equipped w ith it or not), the model year the vehicle is undergoing redesign, and information abo ut the vehicle’s subclass for purposes of technology application. In essence, the model c onsiders whether it is appropriate to apply a technology to a vehicle.

Is a vehicle already equipped, or can it not be equ ipped, with a particular technology?

60 The market file for the MY 2011 final rule, which included data for MYs 2011-2015, had 5500 records, or rows, about 5 times what we are using in this an alysis of the MY 2008 certification data. However, both market files had the same number of fields, or rows

. 61 Because CAFE standards apply to the average perfor mance of each manufacturer’s fleet of cars and ligh t trucks, the impact of potential standards on indivi dual manufacturers cannot be credibly estimated wit hout analysis of fleets manufacturers can be expected to produce in the future. Furthermore, because requi red

CAFE levels under an attribute-based CAFE standard depend on manufacturers’ fleet composition, the stringency of an attribute-based standard cannot be predicted without performing analysis at this leve l of

detail.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

63 The market forecast file provides NHTSA the ability to identify, on a technology by technology basis, which technologies may already be present (manufactured) on a particular vehicle, engine, or transmission, or whi ch technologies are not applicable (due to technical considerations) to a particular vehicl e, engine, or transmission. These identifications are made on a model-by-model, engin e-by-engine, and transmission-bytransmission basis. For example, if the market for ecast file indicates that Manufacturer X’s Vehicle Y is manufactured with Technology Z, th en for this vehicle Technology Z will be shown as used. Additionally, NHTSA has det ermined that some technologies are only suitable or unsuitable when certain vehicle, e ngine, or transmission conditions exist. For example, secondary axle disconnect is only suit able for 4WD vehicles, and cylinder deactivation is unsuitable for any engine with fewe r than 6 cylinders, while CVTs can only be applied to unibody vehicles. Similarly, co mments received to the 2008 NPRM indicated that cylinder deactivation could not be a pplied to vehicles equipped with manual transmissions, due primarily to driveability and NVH concerns. The Volpe model employs “engineering constraints” to address issues like these, which are a programmatic method of controlling technology appli cation that is independent of other constraints. Thus, the market forecast file would indicate that the technology in question should not be applied to the particular vehicle/eng ine/transmission ( i.e. , is unavailable). Since multiple vehicle models may be equipped with an engine or transmission, this may affect multiple models. In using this aspect of th e market forecast file, NHTSA ensures the Volpe model only applies technologies in an app ropriate manner, since before any application of a technology can occur, the model ch ecks the market forecast to see if it is either already present or unavailable.

NHTSA seeks comment on whether this approach is rea sonable and ensures that technologies are applied in an appropriate manner.

Is a vehicle being redesigned or refreshed?

Manufacturers typically plan vehicle changes to coi ncide with certain stages of a vehicle’s life cycle that are appropriate for the c hange, or in this case the technology being applied. In the automobile industry there ar e two terms that describe when technology changes to vehicles occur: redesign and refresh ( i.e. , freshening). Vehicle redesign usually refers to significant changes to a vehicle ’s appearance, shape, dimensions, and powertrain. Redesign is traditiona lly associated with the introduction of “new” vehicles into the market, often characterized as the “next generation” of a vehicle, or a new platform. Vehicle refresh usually refers to less extensive vehicle modificat ions, such as minor changes to a vehicle’s appearance, a moderate upgrade to a powertrain system, or small changes to the vehicle’s feature o r safety equipment content. Refresh is traditionally associated with mid-cycle cosmetic ch anges to a vehicle, within its current generation, to make it appear “fresh.” Vehicle ref resh generally occurs no earlier than two years after a vehicle redesign, or at least two years before a scheduled redesign. For the majority of technologies discussed today, manuf acturers will only be able to applyDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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them at a refresh or redesign, because their applic ation would be significant enough to involve some level of engineering, testing, and cal ibration work. 62

Some technologies ( e.g. , those that require significant revision) are near ly always applied only when the vehicle is expected to be red esigned, like turbocharging and engine downsizing, or conversion to diesel or hybridizatio n. Other technologies, like cylinder deactivation, electric power steering, and aerodyna mic drag reduction can be applied either when the vehicle is expected to be refreshed or when it is expected to be redesigned, while a few others, like low friction l ubricants, can be applied at any time, regardless of whether a refresh or redesign event i s conducted. Accordingly, the model will only apply a technology at the particular poin t deemed suitable. These constraints are intended to produce results consistent with man ufacturers’ technology application practices. For each technology under consideration , NHTSA stipulates whether it can be applied any time, at refresh/redesign, or only at r edesign. The data forms another input to the Volpe model. NHTSA develops redesign and refre sh schedules for each of a manufacturer’s vehicles included in the analysis, e ssentially based on the last known redesign year for each vehicle and projected forwar d in a 5-year redesign and a 2-3 year refresh cycle, and this data is also stored in the market forecast file. We note that this approach is different than NHTSA has employed previ ously for determining redesign and refresh schedules, where NHTSA included the redesig n and refresh dates in the market forecast file as provided by manufacturers in confi dential product plans. The new approach is necessary given the nature of the new b aseline which as a single year of data does not contain its own refresh and redesign cycle cues for future model years, and to ensure the complete transparency of the agency’s an alysis. Vehicle redesign/refresh assumptions are discussed in more detail in Section V of the PRIA and in Chapter 3 of

the TSD. NHTSA seeks comment on the approach to refresh an d redesign developed by the agency for this proposal. NHTSA seeks comment on its application for this pro posal of refresh and redesign schedules to manufacturers’ vehicles counting from the last known redesign in or prior to the baseline fleet, a s compared to its approach in the MY

2011 final rule.

Once the model has concluded that a technology shou ld be applied to a vehicle, the model must evaluate which technology should be applied. This will depend on the vehicle subclass to which the vehicle is assigned; what technologies have already been applied to the vehicle ( i.e. , where in the “decision tree” the vehicle is); whe n the technology is first available ( i.e. , year of availability); whether the technology is still available ( i.e. , “phase-in caps”); and the costs and effectiveness of the technologies being considered. Technology costs may be reduced, in tu rn, by learning effects, while technology effectiveness may be increased or reduce d by synergistic effects between technologies. In the technology input file, NHTSA has developed a separate set of

62 For example, applying material substitution throug h weight reduction, or even something as simple as low rolling-resistance tires, to a vehicle will lik ely require some level of validation and testing to ensure that the vehicle may continue to be certified as co mpliant with NHTSA’s Federal Motor Vehicle Safety Standards (FMVSS). Weight reduction might affect a vehicle’s crashworthiness; low rolling-resistance tires might change vehicle’s braking characteristic s or how it performs in crash avoidance tests.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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technology data variables for each of the twelve ve hicle subclasses. Each set of variables is referred to as an “input sheet,” so for example, the subcompact input sheet holds the technology data that is appropriate for the subcomp act subclass. Each input sheet contains a list of technologies available for membe rs of the particular vehicle subclass. The following items are provided for each technolog y: the name of the technology, its abbreviation, the decision tree with which it is as sociated, the (first) year in which it is available, the upper and lower cost and effectivene ss (fuel consumption reduction) estimates, the learning type and rate, the cost bas is, its applicability, and the phase-in

values.

To which vehicle subclass is the vehicle is assigne d?

As part of its consideration of technological feasi bility, the agency evaluates whether each technology could be implemented on all types and sizes of vehicles, and whether some differentiation is necessary in applyi ng certain technologies to certain types and sizes of vehicles, and with respect to th e cost incurred and fuel consumption

and CO 2 emissions reduction achieved when doing so. The 2 002 NAS Report differentiated technology application using ten veh icle “classes” (4 cars classes and 6 truck classes), 63 but did not determine how cost and effectiveness v alues differ from class to class. NAS’s purpose in separating vehicles int o these classes was to create groups of “like” vehicles, i.e. , vehicles similar in size, powertrain configuratio n, weight, and consumer use, and for which similar technologies ar e applicable. NHTSA similarly differentiates vehicles by “subclass” for the purpo se of applying technologies to vehicles and assessing their incremental costs and effective ness. NHTSA assigns each vehicle manufactured in the rulemaking period to one of 12 subclasses: for passenger cars, Subcompact, Subcompact Performance, Compact, Compac t Performance, Midsize, Midsize Performance, Large, and Large Performance; and for light trucks, Small SUV/Pickup/Van, Midsize SUV/Pickup/Van, Large SUV/P ickup/Van, and Minivan.

For this NPRM as for the MY 2011 final rule, NHTSA divides the vehicle fleet into subclasses based on model inputs, and applies subclass-specific estimates, also from model inputs, of the applicability, cost, and effec tiveness of each fuel-saving technology. Therefore, the model’s estimates of the cost to imp rove the fuel economy of each vehicle model depend upon the subclass to which the vehicle model is assigned.

Each vehicle’s subclass is stored in the market for ecast file. When conducting a compliance analysis, if the Volpe model seeks to ap ply technology to a particular vehicle,

it checks the market forecast to see if the technol ogy is available and if the refresh/redesign criteria are met. If these condit ions are satisfied, the model determines the vehicle’s subclass from the market data file, w hich it then uses to reference another input called the technology input file. NHTSA revi ewed its methodology for dividing vehicles into subclasses for purposes of technology application that it used in the MY 2011 final rule, and concluded that the same method ology would be appropriate for this NPRM for MYs 2012-2016, but the agency invites comm ents on the method of assigning

63 The NAS classes included subcompact cars, compact cars, midsize cars, large cars, small SUVs, midsize SUVs, large SUVs, small pickups, large pickups, and minivans.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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vehicles to subclasses for the purposes of technolo gy application in the CAFE model, and on the issue of technology-application subclasses g enerally. The subclasses and the methodology for dividing vehicles among them are di scussed in more detail in Section V of the PRIA and in Chapter 3 of the TSD.

For the reader’s reference, the subclasses and exam ple vehicles from the market forecast file are provided in the tables below.

Passenger Car Subclasses Example (MY 2008) Vehicles Class Example vehicles Subcompact Chevy Aveo, Honda Civic Subcompact Performance Mazda Miata, Saturn Sky Compact Chevy Cobalt, Nissan Sentra and Altima Compact Performance Audi S4 Quattro, Mazda RX8 Midsize Chevy Camaro (V6), Toyota Camry, Honda Accord, Hyundai Azera Midsize Performance Chevy Corvette, Ford Mustang (V 8), Nissan G37 Coupe Large Audi A8, Cadillac CTS and DTS Large Performance Bentley Arnage, Daimler CL600

Light Truck Subclasses Example (MY 2008) Vehicles Class Example vehicles

Minivans Dodge Caravan, Toyota Sienna

Small SUV/Pickup/Van Ford Escape & Ranger, Nissan Rogue,

Midsize SUV/Pickup/Van Chevy Colorado, Jeep Wrangler 4-door, Volvo XC70, Toyota Tacoma Large SUV/Pickup/Van Chevy Silverado, Ford Econoline, Toyota Sequoia

What technologies have already been applied to the vehicle ( i.e. , where in the “decision trees” is it)?

NHTSA’s methodology for technology application anal ysis developed out of the approach taken by NAS in the 2002 Report, and evalu ates the application of individual technologies and their incremental costs and effect iveness. Incremental costs and effectiveness of individual technologies are relati ve to the prior technology state, which

means that it is crucial to understand what technol ogies are already present on a vehicle

in order to determine correct incremental cost and effectiveness values. The benefit of the incremental approach is transparency in account ing, insofar as when individual technologies are added incrementally to individual vehicles, it is clear and easy to determine how costs and effectiveness adds up as te chnology levels increase.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

67 To keep track of incremental costs and effectivenes s and to know which technology to apply and in which order, the Volpe m odel’s architecture uses a logical sequence, which NHTSA refers to as “decision trees, ” for applying fuel economyimproving technologies to individual vehicles. In the MY 2011 final rule, NHTSA worked with Ricardo to modify previously-employed d ecision trees in order to allow for a much more accurate application of technologies to vehicles. For purposes of the NPRM, NHTSA reviewed the technology sequencing arch itecture and updated, as appropriate, the decision trees used in the analysi s reported in the final rule for MY 2011.

In general, and as described in great detail in the MY 2011 final rule and in Section V of the current PRIA, each technology is a ssigned to one of the five following categories based on the system it affects or impact s: engine, transmission, electrification/accessory, hybrid or vehicle. Each of these categories has its own decision tree that the Volpe model uses to apply technologie s sequentially during the compliance analysis. The decision trees were designed and con figured to allow the Volpe model to apply technologies in a cost-effective, logical ord er that also considers ease of implementation. For example, software or control l ogic changes are implemented before replacing a component or system with a completely r edesigned one, which is typically a much more expensive option. In some cases, and as appropriate, the model may combine the sequential technologies shown on a decision tre e and apply them simultaneously, effectively developing dynamic technology packages on an as-needed basis. For example, if compliance demands indicate, the model may elect to apply LUB, EFR, and ICP on a dual overhead cam engine, if they are not already present, in one single step. An example simplified decision tree for engine tech nologies is provided below; the other simplified decision trees may be found in Chapter 3 of the joint TSD and in the PRIA. Expanded decision trees are available in the docket for this NPRM.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

68 Figure IV.C.2-1. Engine Technology (EngMod) Decisi on TreeDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

69DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

70 Each technology within the decision trees has an in cremental cost and an

incremental effectiveness estimate associated with it, and estimates are specific to aDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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particular vehicle subclass (see the tables in Sect ion V of the PRIA). Each technology’s incremental estimate takes into account its positio n in the decision tree path. If a technology is located further down the decision tre e, the estimates for the costs and effectiveness values attributed to that technology are influenced by the incremental estimates of costs and effectiveness values for pri or technology applications. In essence, this approach accounts for “in-path” effectiveness synergies, as well as cost effects that occur between the technologies in the same path. W hen comparing cost and

effectiveness estimates from various sources and th ose provided by commenters in the previous CAFE rulemakings, it is important that the estimates evaluated are analyzed in the proper context, especially as concerns their li kely position in the decision trees and other technologies that may be present or missing. Not all estimates available in the public domain or offered for the agencies’ consider ation during the comment period can be evaluated in an “apples-to-apples” comparison wi th those used by the Volpe model, since in some cases the order of application, or in cluded technology content, is

inconsistent with that assumed in the decision tree

.

The MY 2011 final rule discussed in detail the revi sions and improvements made to the Volpe model and decision trees during that r ulemaking process, including the improved handling and accuracy of valve train techn ology application and the development and implementation of a method for acco unting path-dependent correction factors in order to ensure that technologies are ev aluated within the proper context. The

reader should consult the MY 2011 final rule docume nts for further information on these modeling techniques, all of which continued to be u tilized in developing this proposal. 64
To the extent that the decision trees have changed for purposes of this NPRM, it was due not to revisions in the order of technology applica tion, but rather to redefinitions of technologies or addition or subtraction of technolo gies. NHTSA seeks comment on the

decision trees described here and in the PRIA.

Is the next technology available in this model year ?

As discussed above, the majority of technologies co nsidered are available on vehicles today, and thus will be available for appl ication in the rulemaking time frame. Some technologies, however, will not become availab le for purposes of NHTSA’s analysis until later in the rulemaking time frame. When the model is considering whether to add a technology to a vehicle, it checks its yea r of availability—if the technology is available, it may be added; if it is not available, the model will consider whether to switch

to a different decision tree to look for another te chnology, or will skip to the next vehicle in a manufacturer’s fleet. The year of availabilit y for each technology is provided above

in Table IV.C.2-1.

Has the technology reached the phase-in cap for thi s model year?

64 See, e.g. , 74 FR 14238-46 (Mar. 30, 2009) for a full discuss ion of the decision trees in NHTSA’s MY 2011 final rule, and Docket No. NHTSA-2009-0062-000 3.1 for an expanded decision tree used in that rulemaking.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

72 Besides the refresh/redesign cycles used in the Vol pe model, which constrain the rate of technology application at the vehicle level so as to ensure a period of stability following any modeled technology applications, the other constraint on technology application employed in NHTSA’s analysis is “phase- in caps.” Unlike vehicle-level cycle settings, phase-in caps constrain technology application at the vehicle manufacturer

level. 65 They are intended to reflect a manufacturer’s ove rall resource capacity available for implementing new technologies (such as engineer ing and development personnel and financial resources), thereby ensuring that resourc e capacity is accounted for in the modeling process. At a high level, phase-in caps a nd refresh/redesign cycles work in conjunction with one another to avoid the modeling process out-pacing an OEM’s limited pool of available resources during the rulemaking t ime frame, especially in years where many models may be scheduled for refresh or redesig n. This helps to ensure technological feasibility and economic practicabili ty in determining the stringency of the

standards.

NHTSA has been developing the concept of phase-in c aps over the course of the last several CAFE rulemakings, as discussed in grea ter detail in the MY 2011 final rule, 66
and in Section V of the PRIA and Chapter 3 of the j oint TSD. The MY 2011 final rule employed non-linear phase-in caps (that is, caps th at varied from year to year) that were designed to respond to comments raising lead-time c oncerns in reference to the agency’s proposed MY 2011-2015 standards, but because the fi nal rule covered only one model year, many phase-in caps for that model year were l ower than had originally been proposed. NHTSA emphasized that the MY 2011 phase- in caps were based on assumptions for the full five year period of the pr oposal (2011-2015), and stated that it would reconsider the phase-in settings for all year s beyond 2011 in a future rulemaking analysis.

For purposes of the current proposal for MYs 2012-2 016, as in the MY 2011 final rule, NHTSA combines phase-in caps for some groups of similar technologies, such as valve phasing technologies that are applicable to d ifferent forms of engine design (SOHC, DOHC, OHV), since they are very similar from an engineering and implementation standpoint. When the phase-in caps for two technologies are combined, the maximum total application of either or both to any manufacturer’s fleet is limited to the value of the cap. 67 In contrast to the phase-in caps used in the MY 2 011 final rule, NHTSA has increased the phase-in caps for most of t he technologies, as discussed below.

65 While phase-in caps are expressed as specific perc entages of a manufacturer’s fleet to which a technology may be applied in a given model year, ph ase-in caps cannot always be applied as precise lim its, and the Volpe model in fact allows “override” of a cap in certain circumstances. When only a small portion of a phase-in cap limit remains, or when th e cap is set to a very low value, or when a manufac turer has a very limited product line, the cap might prev ent the technology from being applied at all since any application would cause the cap to be exceeded. Th erefore, the Volpe model evaluates and enforces eac h phase-in cap constraint after it has been exceeded by the application of the technology (as opposed to evaluating it before application), which can result in the described overriding of the cap.

66 74 FR 14268–14271 (Mar. 30, 2009)

67 See 74 FR 14270 (Mar 30, 2009) for further discussion and examples.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

73 In developing phase-in cap values for purposes of t he current proposal, NHTSA initially considered the fact that many of the tech nologies commonly applied by the model, those placed near the top of the decision tr ees, such as low friction lubes, valve phasing, electric power steering, improved automati c transmission controls, and others, have been commonly available to manufacturers for s everal years now. Many technologies, in fact, precede the 2002 NAS Report, which estimated that such technologies would take 4 to 8 years to penetrate t he fleet. Since the current proposal would take effect in MY 2012, nearly 10 years beyon d the NAS report, and extends to MY 2016, and in the interest of harmonization with EPA’s proposal, NHTSA tentatively determined that higher phase-in caps were likely ju stified. Additionally, NHTSA considered the fact that manufacturers, as part of the agreements supporting the National Program, appear to be anticipating higher technolog y application rates than those used in the MY 2011 final rule. This also supported higher phase-in caps for purposes of the proposal.

Thus, while phase-in caps for the MY 2011 final rul e reached a maximum of 50 percent for a couple of technologies and generally fell in the range between 0 and 20 percent, phase-in caps for this NPRM for the majori ty of technologies are set to reach 85 or 100 percent by MY 2016, although more advanced t echnologies like diesels and strong hybrids reach only 15 percent by MY 2016.

Theoretically, significantly higher phase-in caps, such as those used in the current proposal as compared to those used in the MY 2011 f inal rule, should result in higher levels of technology penetration in the modeling re sults. Reviewing the modeling output does not, however, indicate unreasonable levels of technology penetration for the proposed standards. 68 NHTSA believes that this is due to the interactio n of the various changes in methodology for the current proposal—cha nges to phase-in caps are but one of a number of revisions to the Volpe model and its inputs that could potentially impact the rate at which technologies are applied in this proposal as compared to prior rulemakings. Other revisions that could impact app lication rates include the use of transparent CAFE certification data in baseline fle et formulation and the use of other data for projecting it forward, 69 or the use of a multi-year planning programming te chnique to apply technology retroactively to earlier-MY vehicl es, both of which may have a direct impact on the modeling process. Conversely the mod el and inputs remain unchanged in other areas that also could impact technology appli cation, such as in the refresh/redesign cycle settings, estimates used for the technologies , both of which remain largely unchanged from the MY 2011 final rule. These chang es together make it difficult to predict how phase-in caps should be expected to fun ction in the new modeling process.

Thus, after reviewing the output files, NHTSA tenta tively concludes that the higher phase-in caps, and the resulting technology application rates produced by the Volpe model, at both the industry and manufacturer level, are appropriate for this proposal, achieving a suitable level of stringency without requiring unrealistic or

68 [cite for public access to modeling output]

69 The baseline fleet sets the starting point, from a technology point of view, for where the model beg ins the technology application process, so changes have a direct impact on the net application of technolo gy.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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unachievable penetration rates. However, the agenc y will consider comments received on this approach in determining what phase-in caps to employ in the analysis for the final rule, and may change the caps in response to commen ts and/or further analysis. One additional question the agency has, which may be pr imarily academic at this point, is what impact lower phase-in caps, such as those used in earlier rulemakings, would have on compliance costs (and whether they might counter -intuitively increase costs by forcing more expensive technologies). NHTSA seeks comment on the revised phase-in caps as compared to the MY 2011 final rule, and par ticularly on whether, combined with the refresh and redesign assumptions, they help to ensure sufficient lead time for manufacturers to make the technology changes requir ed by the proposed standards. Readers are invited to review and assess the phase- in caps listed and described more fully in Section V of the PRIA, along with the applicatio n and penetration rates found in the Volpe model’s output files, and after making their own assessment, provide comment and recommendations to the agency as appropriate.

Is the technology less expensive due to learning ef fects?

Historically, NHTSA did not explicitly account for the cost reductions a manufacturer might realize through learning achieve d from experience in actually applying a technology. Since working with EPA to d evelop the 2008 NPRM for MYs 2011-2015, and with Ricardo to refine the concept f or the March 2009 MY 2011 final rule, NHTSA has accounted for these cost reductions through two kinds of mutually exclusive learning, “volume-based” and “time-based” which it continues to use in this proposal, as discussed below.

In the 2008 NPRM, NHTSA applied learning factors to technology costs for the first time. These learning factors were developed using the parameters of learning threshold, learning rate, and the initial cost, and were based on the “experience curve” concept which describes reductions in production co sts as a function of accumulated production volume. The typical curve shows a relat ively steep initial decline in cost which flattens out to a gentle downwardly sloping l ine as the volume increase to large values. In the NPRM, NHTSA applied a learning rate discount of 20 percent for each successive doubling of production volume (on a per manufacturer basis), and a learning threshold of 25,000 units was assumed (thus a techn ology was viewed as being fully learned out at 100,000 units). The factor was only applied to certain technologies that were considered emerging or newly implemented on th e basis that significant cost improvements would be achieved as economies of scal e were realized ( i.e. , the technologies were on the steep part of the curve).

In the MY 2011 final rule, NHTSA continued to use t his learning factor, referring to it as volume-based learning since the cost reduc tions were determined by production volume increases, and again only applied it to emer ging technologies. However, and in response to comments, NHTSA revised its assumptions on learning threshold, basing them instead on an industry-wide production basis, and increasing the threshold to 300,000 units annually.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

75 Commenters to the 2008 NPRM also described another type of learning factor which NHTSA decided to adopt and implement in the M Y 2011 final rule. Commenters described a relatively small negotiated cost decrea se that occurred on an annual basis through contractual agreements with first tier comp onent and systems suppliers for readily available, high volume technologies commonl y in use by multiple OEMs. Based on the same experience curve principal, however at production volumes that were on the flatter part of the curve (and thus the types of vo lumes that represent annual industry volumes), NHTSA adopted this type learning and refe rred to it as time-based learning. An annual cost reduction of 3 percent in the second and each subsequent year, which was consistent with estimates from commenters and suppo rted by work Ricardo conducted for NHTSA, was used in the final rule.

In developing this proposal, NHTSA and EPA have rev iewed both types of learning factors, and the thresholds (300,000) and reduction rates (20 percent for volume, 70 3 percent for time-based) they rely on, and as imp lemented in the MY 2011 final rule, and agreed that both factors continue t o be accurate and appropriate; each agency has thus implemented time- and volume-based learning in their analyses. Noting that only one type of learning can be applied to an y single technology, if any learning is applied at all, the agencies reviewed each to deter mine which learning factor was appropriate. Volume-based learning is applied to t he higher complexity hybrid technologies, while no learning is applied to techn ologies likely to be affected by commodity costs (LUB, ROLL) or that have loosely-de fined BOMs (EFR, LDB), as was the case in the MY 2011 final rule. Chapter 3 of t he joint TSD shows the specific learning factors that NHTSA has applied in this ana lysis for each technology, and discusses learning factors and each agencies’ use o f them further. NHTSA seeks comment on its use of learning factors, including t he types, the thresholds, and the reduction rates proposed , and particularly on

. the revisions to the learning (time- and volume-based) logic as compared to the MY 2011 fina l rule.

Is the technology more or less effective due to syn ergistic effects?

When two or more technologies are added to a partic ular vehicle model to improve its fuel efficiency and reduce CO 2 emissions, the resultant fuel consumption reduction may sometimes be higher or lower than the product of the individual

effectiveness values for those items. 71 This may occur because one or more technologies applied to the same vehicle partially address the s ame source (or sources) of engine, drivetrain or vehicle losses. Alternately, this ef fect may be seen when one technology

70 NHTSA will conduct a sensitivity analysis on the v olume-based learning value of 20 percent for the fi nal

rule. [Added in response to interagency comment]

71 More specifically, the products of the differences between one and the technology-specific levels of effectiveness in reducing fuel consumption. For ex ample, not accounting for interactions, if technolo gies A and B are estimated to reduce fuel consumption by 1 0% ( i.e ., 0.1) and 20% ( i.e. , 0.2) respectively, the “product of the individual effectiveness values” wo uld be 1 – 0.1 times 1 – 0.2, or 0.9 times 0.8, whi ch equals 0.72, corresponding to a combined effectiven ess of 28% rather than the 30% obtained by adding 10% to 20%. The “synergy factors” discussed in thi s section further adjust these multiplicatively com bined

effectiveness values. Formatted: Font: 10 pt, HighlightDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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shifts the engine operating points, and therefore i ncreases or reduces the fuel consumption reduction achieved by another technolog y or set of technologies. The difference between the observed fuel consumption re duction associated with a set of technologies and the product of the individual effe ctiveness values in that set is referred to for purposes of this rulemaking as a “synergy.” Synergies may be positive (increased fuel consumption reduction compared to the product of the individual effects) or negative (decreased fuel consumption reduction). An example of a positive synergy might be a vehicle technology that reduces road loads at highw ay speeds ( e.g. , lower aerodynamic drag or low rolling resistance tires), that could e xtend the vehicle operating range over which cylinder deactivation may be employed. An ex ample of a negative synergy might be a variable valvetrain system technology, which r educes pumping losses by altering the profile of the engine speed/load map, and a six-spe ed automatic transmission, which shifts the engine operating points to a portion of the engine speed/load map where pumping losses are less significant. As the comple xity of the technology combinations is increased, and the number of interacting technologi es grows accordingly, it becomes increasingly important to account for these synergi es.

NHTSA and EPA determined synergistic impacts for th is rulemaking using EPA’s “lumped parameter” analysis tool, which EPA d escribed at length in its March 2008 Staff Technical Report. 72 The lumped parameter tool is a spreadsheet model that represents energy consumption in terms of average p erformance over the fuel economy test procedure, rather than explicitly analyzing sp ecific drive cycles. The tool begins with an apportionment of fuel consumption across se veral loss mechanisms and accounts for the average extent to which different technolog ies affect these loss mechanisms using estimates of engine, drivetrain and vehicle charact eristics that are averaged over the EPA fuel economy drive cycle. Results of this analysis were generally consistent with those of full-scale vehicle simulation modeling performed in 2007 by Ricardo, Inc.

For the current rulemaking, NHTSA used the lumped p arameter tool as modified

in the MY 2011 CAFE final rule. NHTSA modified the lumped parameter tool from the version described in the EPA Staff Technical Report in response to public comments received in its rulemaking. The modifications incl uded updating the list of technologies

and their associated effectiveness values to match the updated list of technologies used in the final rule. NHTSA also expanded the list of sy nergy pairings based on further consideration of the technologies for which a compe tition for losses would be expected.

These losses are described in more detail in Sectio n V of the PRIA.

NHTSA and EPA incorporate synergistic impacts in th eir analyses in slightly different manners. Because NHTSA applies technolog ies individually in its modeling analysis, NHTSA incorporates synergistic effects be tween pairings of individual technologies. The use of discrete technology pair incremental synergies is similar to that in DOE’s National Energy Modeling System (NEMS). 73 Inputs to the Volpe model

72 EPA Staff Technical Report: Cost and Effectiveness Estimates of Technologies Used to Reduce Lightduty Vehicle Carbon Dioxide Emissions; EPA420-R-08- 008, March 2008.

73 U.S. Department of Energy, Energy Information Admi nistration, Transportation Sector Module of the National Energy Modeling System: Model Documentatio n 2007 , May 2007, Washington, DC, DOE/EIA-DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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incorporate NEMS-identified pairs, as well as addit ional pairs from the set of technologies considered in the Volpe model.

NHTSA notes that synergies that occur within a deci sion tree are already addressed within the incremental values assigned an d therefore do not require a synergy pair to address. For example, all engine technolog ies take into account incremental synergy factors of preceding engine technologies, a nd all transmission technologies take into account incremental synergy factors of precedi ng transmission technologies. These factors are expressed in the fuel consumption impro vement factors in the input files used by the Volpe model.

For applying incremental synergy factors in separat e path technologies, the Volpe model uses an input table (see the tables in Chapte r 3 of the TSD and in the PRIA) which lists technology pairings and incremental synergy f actors associated with those pairings, most of which are between engine technologies and t ransmission/electrification/hybrid technologies. When a technology is applied to a ve hicle by the Volpe model, all instances of that technology in the incremental syn ergy table which match technologies already applied to the vehicle (either pre-existing or previously applied by the Volpe model) are summed and applied to the fuel consumpti on improvement factor of the technology being applied. Synergies for the strong hybrid technology fuel consumption

reductions are included in the incremental value fo r the specific hybrid technology block since the model applies technologies in the order o f the most effectiveness for least cost and also applies all available electrification and transmission technologies before applying strong hybrid technologies. NHTSA seeks c omment on whether the synergistic effects presented are accurate, and whether there a re other synergies that the agency may

have overlooked.

d. Where C c an Readers F f ind M m ore Detailed Information about NHTSA’s Technology Analysis?

Much more detailed information is provided in Sect ion V of the PRIA, and a discussion of how NHTSA and EPA jointly reviewed an d updated technology assumptions for purposes of this NPRM is available in Chapter 3 of the TSD. Additionally, all of NHTSA’s model input and output files are now public and available

for the reader’s review and consideration. The tec hnology input files can be found in the docket for this NPRM, Docket No. NHTSA-2009-0059, a nd on NHTSA’s website. [ in

the docket and on the website ]

. And finally, because much of NHTSA’s technology analysis for purposes of this NPRM builds on the wo rk that was done for the MY 2011 final rule, we refer readers to that document as we ll for background information concerning how NHTSA’s methodology for technology a pplication analysis has evolved over the past several rulemakings, both in response to comments and as a result of the agency’s growing experience with this type of analy sis. 74

M070(2007), at 29-30. Available at http://tonto.eia.doe.gov/ftproot/modeldoc/m070(200 7).pdf (last accessed Jul. 6, 2009).

74 74 FR 14233-308 (Mar. 30, 2009).DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

78 3. How Dd id NHTSA Dd evelop the Ee conomic Aa ssumption Ii nputs?

NHTSA’s preliminary analysis of alternative CAFE st andards for the model years covered by this proposed rulemaking relies on a range of forecast variables, economic assumptions, and parameter values. This section de scribes the proposed sources of these forecasts, the rationale underlying each assumption , and the agency’s preliminary choices of specific parameter values These proposed econo mic values play a significant role in determining the benefits of alternative CAFE standa rds, as they have for the last several CAFE rulemakings. Under those alternatives where s tandards would be established by reference to their costs and benefits, these econom ic values also affect the levels of the

CAFE standards themselves. Some of these variables have more important effects on the level of CAFE standards and the benefits from requi ring alternative increases in fuel economy than do others.

In reviewing these variables and the agency’s estim ates of their values for purposes of this NPRM, NHTSA reconsidered previous comments it had received and reviewed newly available literature. As a conseque nce, the agency elected to revise some of its economic assumptions and parameter estimates , while retaining others. Some of the most important changes, which are discussed in greater detail below, as well as in Chapter 4 of the joint TSD and in Chapter VIII of t he PRIA, include significant revisions to the markup factors for technology costs; reducin g the rebound effect from 15 to 10 percent; and revising the value of reducing CO 2 emissions based on recent interagency efforts to develop estimates of this value for gove rnment-wide use. For the reader’s reference, Table IV.C.3-1 below summarizes the valu es used to calculate the economic benefits from each alternative. The agency seeks c omment on the economic assumptions presented in the table and discussed below.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

79 Table IV.C.3-1. Economic Values for Benefits Computations (2007$)

Fuel Economy Rebound Effect 10% "Gap" between test and on-road MPG 20% Value of refueling time per ($ per vehicle-hour) $ 24.64
Annual growth in average vehicle use 1.1% Fuel Prices (2012-50 average, $/gallon)
Retail gasoline price $3.77

Pre

- tax gaso line price $3.40 Economic Benefits from Reducing Oil Imports ($/gall on) "Monopsony" Component $ 0.00 Price Shock Component $ 0.17 Military Security Component $ 0.00 Total Economic Costs ($/gallon) $ 0.17 Emission Damage Costs (2020, $/ton or $/metric ton)

Carbon monoxide $ 0 Volatile organic compounds (VOC) $ 1,283 Nitrogen oxides (NOx)

– vehicle use $ 5,116 Nitrogen oxides (NOx)

– fuel production and distribution $ 5,339
Particulate matter (PM 2.5 )

– vehicle use $ 238,432
Particulate matter (PM 2.5 ) – fuel production and distribution $ 292,180
Sulfur dioxide (SO 2 ) $ 30,896
Carbon dioxide (CO 2 ) $ 20

Annual Increase in CO 2 Damage Cost 3% External Costs from Additional Automobile Use ($/v ehiclemile) Congestion $ 0.054

Accidents $ 0.023

Noise $ 0.001

Total External Costs $ 0.078 External Costs from Additional Light Truck Use ($/v ehiclemile) Congestion $0.048

Accidents $0.026

Noise $0.001

Total External Costs $0.075
Discount Rate Applied to Future Benefits 3%

a. Costs of Fuel Economyi I mproving Technologies

We developed detailed estimates of the costs of app lying fuel economy-improving technologies to vehicle models jointly with EPA for use in analyzing the impacts of alternative standards considered in this rulemaking . The estimates were based on those reported by the 2002 NAS Report analyzing costs for increasing fuel economy, but were Formatted ... [50]

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modified for purposes of this analysis as a result of extensive consultations among engineers from NHTSA, EPA, and the Volpe Center. A s part of this process, the agency also developed varying cost estimates for applying certain fuel economy technologies to vehicles of different sizes and body styles. We ma y adjust these cost estimates based on

comments received to this NPRM.

The technology cost estimates used in this analysis are intended to represent manufacturers’ direct costs for high-volume product ion of vehicles with these technologies and sufficient experience with their a pplication so that all remaining cost reductions due to “learning curve” effects have bee n fully realized. However, NHTSA recognizes that manufacturers’ actual costs for emp loying these technologies include additional outlays for accompanying design or engin eering changes to models that use them, development and testing of prototype versions , recalibrating engine operating parameters, and integrating the technology with oth er attributes of the vehicle. Manufacturers’ indirect costs for employing these t echnologies also include expenses for product development and integration, modifying asse mbly processes and training assembly workers to install them, increased expense s for operation and maintaining assembly lines, higher initial warranty costs for n ew technologies, any added expenses for selling and distributing vehicles that use thes e technologies, and manufacturer and dealer profit. In previous CAFE rulemakings and in NHTSA’s safety rulemakings, the agency has accounted for these additional costs by using a Retail Price Equivalent (RPE) multiplier of 1.5. For purposes of this rulemaking , based on recent work by EPA, NHTSA has applied indirect cost multipliers ranging from 1.11 to 1.64 to the estimates of vehicle manufacturers’ direct costs for producing o r acquiring each technology to improve fuel economy. 75 These multipliers vary with the complexity of eac h technology

and the time frame over which costs are estimated. More complex technologies are associated with higher multipliers because of the l arger increases in manufacturers’ indirect costs for developing, producing (or procur ing), and deploying these more complex technologies. The appropriate multipliers decline over time for technologies of all complexity levels, since increased familiarity and experience with their application is

assumed to reduce manufacturers’ indirect costs for employing them. NHTSA seeks comment regarding the new indirect cost multiplier approach to technology costs

estimates. We note additionally that this issue will be addre ssed in the upcoming revised NAS report.

b. Potential Opportunity Costs of Improved Fuel Eco nomy

An important concern is whether achieving the fuel economy improvements required by alternative CAFE standards would requir e manufacturers to compromise the performance, carrying capacity, safety, or comfort of their vehicle models. To the extent that it does so, the resulting sacrifice in the val ue of these attributes to consumers represents an additional cost of achieving the requ ired improvements in fuel economy.

75 NHTSA notes that in addition to the technology cos t analysis employing this “ICM” approach, the PRIA contains a sensitivity analysis using a technology cost multiplier of 1.5.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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While exact dollar values of these attributes to co nsumers are difficult to infer, differences in vehicle purchase prices and buyers’ choices among competing models that

feature different combinations of these characteris tics clearly demonstrate that changing vehicle attributes clearly affect the utility and e conomic value that vehicles provide to potential buyers. 76

NHTSA and EPA have approached this potential proble m by developing cost estimates for fuel economy-improving technologies t hat include any additional manufacturing costs that would be necessary to main tain the originally planned levels of performance, comfort, carrying capacity, and safety of any light-duty vehicle model to which those technologies are applied. In doing so, the agencies followed the precedent established by the 2002 NAS Report, which estimated “constant performance and utility” costs for fuel economy technologies. NHTSA has use d these as the basis for its continuing efforts to refine the technology costs i t uses to analyze manufacturer’s costs for complying with alternative passenger car and li ght truck CAFE standards for MYs 2012-2016. Although the agency has revised its est imates of manufacturers’ costs for some technologies significantly for use in this rul emaking, these revised estimates are still intended to represent costs that would allow manufacturers to maintain the performance, carrying capacity, and utility of vehi cle models while improving their fuel

economy.

Although we believe that our tentative cost estimat es for fuel economy-improving technologies should be generally sufficient to prev ent significant reductions in consumer welfare provided by vehicle models to which manufac turers apply those technologies, it is possible that they do not include adequate allow ance for the necessary efforts by manufacturers to prevent sacrifices in these attrib utes on all vehicle models. If this is the case, the true economic costs of achieving higher f uel economy should include the opportunity costs to vehicle owners of any sacrific es in vehicles’ performance, carrying capacity, and utility and the agency’s estimated te chnology costs would underestimate the true economic costs of improving fuel economy.

Recognizing this possibility, it may be preferable for NHTSA to estimate explicitly the changes in vehicle buyers’ welfare f rom the combination of higher prices for new vehicle models, increases in their fuel eco nomy, and any accompanying changes in vehicle attributes such as performance, passenge r- and cargo-carrying capacity, or other dimensions of utility. The net change in buy er’s welfare that results from the combination of these changes would provide a more a ccurate estimate of the true economic costs for improving fuel economy. The age ncy seeks comment on this or other possible ways to deal with this extremely important issue.

76 See

, e.g. , Kleit A.N., 1990. “The Effect of Annual Changes i n Automobile Fuel Economy Standards.” Journal of Regulatory Economics 2: 151-172; Berry, Steven, James Levinsohn, and Ariel Pakes, 1995. “Automobile Prices in Market Equilibrium,” Economet rica 63(4): 841-940; McCarthy, Patrick S., 1996.

“Market Price and Income Elasticities of New Vehicl e Demands.” Review of Economics and Statistics 78: 543-547; and Goldberg, Pinelopi K., 1998. “The Effe cts of the Corporate Average Fuel Efficiency
Standards in the US,” Journal of Industrial Economi cs 46(1): 1-33.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

82 c. The On- R r oad Fuel Economy “Gap”

Actual fuel economy levels achieved by light-duty v ehicles in on-road driving fall

somewhat short of their levels measured under the l aboratory-like test conditions used by EPA to establish its published fuel economy ratings for different models. In analyzing the fuel savings from alternative CAFE standards, N HTSA has previously adjusted the actual fuel economy performance of each light truck model downward from its rated value to reflect the expected size of this on-road fuel economy “gap.” On December 27, 2006, EPA adopted changes to its regulations on fue l economy labeling, which were intended to bring vehicles’ rated fuel economy leve ls closer to their actual on-road fuel economy levels. 77

In its Final Rule, EPA estimated that actual on-roa d fuel economy for light-duty vehicles averages 20 percent lower than published f uel economy levels. For example, if the overall EPA fuel economy rating of a light truc k is 20 mpg, the on-road fuel economy actually achieved by a typical driver of that vehic le is expected to be 16 mpg (20*.80). NHTSA employed EPA’s revised estimate of this on-ro ad fuel economy gap in its analysis of the fuel savings resulting from alterna tive CAFE standards evaluated in the

MY 2011 final rule.

For purposes of this NPRM, NHTSA conducted addition al analysis of this issue. The agency used data on the number of passenger car s and light trucks of each model year that were registered for use during calendar y ears 2000 through 2006, average fuel economy for passenger cars and light trucks produce d during each model year, and estimates of average miles driven per year by cars and light trucks of different ages. These data were combined to develop estimates of th e average fuel economy that the U.S. passenger car and light truck fleets would have achieved from 2000 through 2006 under

test conditions.

NHTSA compared these estimates to the Federal Highw ay Administration’s (FHWA) published values of actual on-road fuel econ omy for passenger cars and light trucks during each of those years. 78 FHWA’s estimates of actual fuel economy for passenger cars averaged 22 percent lower than NHTSA ’s estimates of its fleet-wide average value under test conditions over this perio d, while FHWA’s estimates for light trucks averaged 17 lower than NHTSA’s estimates of average light truck fuel economy under test conditions. These results appear to con firm that the 20 percent on-road fuel economy discount or gap represents a reasonable est imate for use in evaluating the fuel savings likely to result from alternative CAFE stan dards for MY 2012-2016 vehicles.

d. Fuel Prices and the Value of Saving Fuel

Projected future fuel prices are a critical input i nto the preliminary economic analysis of alternative CAFE standards, because the y determine the value of fuel savings

77 71 FR 77871 (Dec. 27, 2006).

78 Federal Highway Administration, Highway Statistics , 2000 through 2006 editions, Table VM-1; see http://www.fhwa.dot.gov/policy/ohpi/hss/hsspubs.cfm (last accessed July 27, 2009).DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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both to new vehicle buyers and to society. NHTSA r elied on the most recent fuel price projections from the U.S. Energy Information Admini stration’s (EIA) Annual Energy

Outlook (AEO) for this analysis. Specifically, we used th e AEO 2009 (April 2009 release) Reference Case forecasts of inflation-adju sted (constant-dollar) retail gasoline and diesel fuel prices, which represent the EIA’s m ost up-to-date estimate of the most likely course of future prices for petroleum produc ts. 79

While NHTSA relied on the forecasts of fuel prices presented in AEO 2008 High Price Case in the MY 2011 final rule, we noted at t he time that we were relying on that estimate primarily because volatility in the oil ma rket appeared to have overtaken the Reference Case, and that we anticipated that the Re ference Case forecast would be significantly higher in the next AEO. In fact, EIA ’s AEO 2009 Reference Case forecast projects higher

retail fuel prices in most future years than those forecast in the High Price

Case from AEO 2008. NHTSA is thus confident that t he AEO 2009 Reference Case is an appropriate forecast for projected future fuel p rices.

Measured in constant 2007 dollars, the Reference Ca se forecast of retail gasoline prices during calendar year 2020 is $3.62 per gallo n, rising gradually to $3.82 by the year 2030 (these values include federal, state and local taxes). To obtain fuel price forecasts for the years 2031 through 2050, the agency assumes that retail fuel prices will continue to increase after 2030 at the average annual rates projected for 2020-2030 in the AEO

2009 Revised Reference Case. 80 This assumption results in a projected retail pr ice of gasoline that reaches $4.25 in 2007 dollars by the year 2050.

The value of fuel savings resulting from improved f uel economy to buyers of light-duty vehicles is determined by the retail pri ce of fuel, which includes federal, state, and any local taxes imposed on fuel sales. Total t axes on gasoline, including federal, state, and local levies averaged $0.42 per gallon d uring 2006, while those levied on diesel averaged $0.50. Because fuel taxes represent trans fers of resources from fuel buyers to government agencies, however, rather than real reso urces that are consumed in the process of supplying or using fuel, their value mus t be deducted from retail fuel prices to determine the value of fuel savings resulting from more stringent CAFE standards to the U.S. economy as a whole.

NHTSA follows the assumptions used by EIA in AEO 20 09 that state and local gasoline taxes will keep pace with inflation in nom inal terms, and thus remain constant when expressed in constant 2007 dollars. In contra st, EIA assumes that federal gasoline taxes will remain unchanged in nominal terms, and thus decline throughout the forecast

79 Energy Information Administration, Annual Energy O utlook 2009, Revised Updated Reference Case (April 2009), Table 12. Available at http://www.eia.doe.gov/oiaf/servicerpt/stimulus/exc el/aeostimtab_12.xls (last accessed July 26, 2009). EIA’s Updated Reference Case reflects the effects o f the American Reinvestment and Recovery Act of 2009, as well as the most recent revisions to the U .S. and global economic outlook.

80 This projection uses the rate of increase in fuel prices for 2020-2030 rather than that over the comp lete forecast period (2009-2030) because there is extrem e volatility in the forecasts for the years 2009 th rough approximately 2020. Using the average rate of chan ge over the complete 2009-2030 forecast period woul d result in projections of declining fuel prices afte r 2030.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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period when expressed in constant 2007 dollars. Th ese differing assumptions about the likely future behavior of federal and state/local f uel taxes are consistent with recent historical experience, which reflects the fact that federal as well as most state motor fuel taxes are specified on a cents-per-gallon basis, an d typically require legislation to change.

The projected value of total taxes is deducted from each future year’s forecast of retail gasoline and diesel prices reported in AEO 2 009 to determine the economic value of each gallon of fuel saved during that year as a result of improved fuel economy. Subtracting fuel taxes results in a projected value for saving gasoline of $3.22 per gallon during 2020, rising to $3.45 per gallon by the year 2030.

EIA includes “High Price Case” and “Low Price Case” forecasts in each AEO, which reflect uncertainties regarding future levels of oil production and demand. These alternative scenarios project retail gasoline price s that range from a low of $2.02 to a high of $5.04 per gallon during 2020, and from $2.04 to $5.47 per gallon during 2030. In conjunction with our assumption that fuel taxes wil l remain constant in real or inflationadjusted terms over this period, these forecasts im ply pre-tax values of saving fuel ranging from $1.63 to $4.65 per gallon during 2020, and from $1.67 to $5.10 per gallon in 2030. In conducting the preliminary analysis of uncertainty in benefits and costs from alternative CAFE standards required by OMB, NHTSA e valuated the sensitivity of its

benefits estimates to these alternative forecasts o f future fuel prices. The results of this sensitivity analysis can be found in the PRIA.

e. Consumer Valuation of Fuel Economy and Payback P eriod

In estimating the value of fuel economy improvement s that would result from alternative CAFE standards to potential vehicle buy ers, NHTSA assumes, as in the MY 2011 final rule, that buyers value the resulting fu el savings over only part of the expected lifetime of the vehicles they purchase. Specifical ly, we assume that buyers value fuel savings over the first five years of a new vehicle’ s lifetime, and discount the value of these future fuel savings at a 3 percent annual rat e. 81 The five-year figure represents approximately the current average term of consumer loans to finance the purchase of new vehicles. We recognize that the period over which individual buyers finance new vehicle purchases may not correspond exactly to the time ho rizons they apply in valuing fuel savings from higher fuel economy.

The agency deducts the discounted present value of fuel savings over the first five years of a vehicle model’s lifetime from the techno logy costs incurred by its manufacturer to improve that model’s fuel economy to determine the increase in its “effective price” to buyers.. The Volpe model uses these estimates of effective costs for increasing the fuel economy of each vehicle model t o identify the order in which manufacturers would be likely to select models for the application of fuel economy-

81 The five-year figure represents approximately the current average term of consumer loans to finance t he purchase of new vehicles. We recognize that the pe riod over which individual buyers finance new vehic le purchases may not correspond exactly to the time ho rizons they apply in valuing fuel savings from high er fuel economy.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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improving technologies in order to comply with stri cter standards. The average value of the resulting increase in effective cost from each manufacturer’s simulated compliance strategy is also used to estimate the impact of alt ernative standards on its total sales for future model years.

However, it is important to recognize that NHTSA es timates the aggregate value to the U.S. economy of fuel savings resulting from alternative standards – or their

“social” value – over the entire expected lifetimes of vehicles manufactured under t hose standards, rather than over this shorter “payback p eriod” we assume for their buyers. The procedure the agency uses for doing so is discussed in detail in the following section.

f. Vehicle Survival and Use Assumptions

NHTSA’s first step in estimating lifetime fuel cons umption by vehicles produced during a model year is to calculate the number expe cted to remain in service during each year following their production and sale. 82 This is calculated by multiplying the number of vehicles originally produced during a model year by the proportion typically expected to remain in service at their age during each later year, often referred to as a “survival

rate.”

To estimate production volumes of passenger cars an d light trucks for individual manufacturers, NHTSA relied on a baseline market fo recast constructed by EPA staff beginning with MY 2008 CAFE certification data. Af ter constructing a MY 2008 baseline, EPA used projected car and truck volumes for this period from Energy Information Administration’s (EIA’s) 2009 Annual En ergy Outlook (AEO). 83 However, AEO projects sales only at the car and truck level, not at the manufacturer and modelspecific level, which are needed in order to estima te the effects new standards will have

on individual manufacturers. 84 Therefore, EPA purchased data from CSM-Worldwide and used their projections of the number of vehicle s of each type predicted to be sold by

82 Vehicles are defined to be of age 1 during the cal endar year corresponding to the model year in which they are produced; thus for example, model year 200 0 vehicles are considered to be of age 1 during calendar year 2000, age 1 during calendar year 2001 , and to reach their maximum age of 26 years during calendar year 2025. NHTSA considers the maximum lifetime of vehicles to be the age after which less than 2 percent of the vehicles originally produced during a model year remain in service. Applying th ese conventions to vehicle registration data indicates that passenger cars have a maximum age of 26 years, while light trucks have a maximum lifetime of 36 ye ars. See Lu, S., NHTSA, Regulatory Analysis and Evaluation Division, “Vehicle Survivability and Tra vel Mileage Schedules,” DOT HS 809 952, 8-11 (January 2006). Available at http://www-nrd.nhtsa.dot.gov/Pubs/809952.pdf (last accessed July 27, 2009)

. 83 Available at http://www.eia.doe.gov/oiaf/aeo/index .html. NHTSA and EPA made the simplifying assumption that projected sales of cars and light t rucks during each calendar year from 2012 through 2 016 represented the likely production volumes for the c orresponding model year. The agency did not attemp t to establish the exact correspondence between projecte d sales during individual calendar years and produc tion volumes for specific model years.

84 Because AEO 2009’s “car” and “truck” classes did n ot reflect NHTSA’s recent reclassification (in Marc h 2009 for enforcement beginning MY 2011) of many two wheel drive SUVs from the nonpassenger ( i.e.

, light truck) fleet to the passenger car fleet, EPA staff made adjustments to account for such vehicles in the

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manufacturers in 2011-2015. 85 This provided the year-by-year percentages of car s and trucks sold by each manufacturer as well as the per centages of each vehicle segment. Although it was thus necessary to assume the same m anufacturer and segment shares in 2016 as in 2015, 2016 estimates from CSM should be available for the final rule. Using these percentages normalized to the AEO projected v olumes then provided the manufacturer-specific market share and model-specif ic sales for model years 2011-2016.

To estimate the number of passenger cars and light trucks originally produced during model years 2012 through 2016 that will remain in use during each subsequent

year the agency applied age-specific survival rates for cars and light trucks to these adjusted forecasts of passenger car and light truck sales. In 2008, NHTSA updated its previous estimates of car and light truck survival rates using the most current registration data for vehicles produced during recent model year s, in order to ensure that they reflected recent increases in the durability and ex pected life spans of cars and light

trucks. 86

The next step in estimating fuel use is to calculat e the total number of miles that model year 2012-2016 cars and light trucks remainin g in use will be driven each year. To estimate total miles driven, the number projecte d to remain in use during each future year is multiplied by the average number of miles they are expected to be driven at the age they will reach in that year. The agency estim ated annual usage of cars and light trucks of each age using data from the Federal High way Administration’s 2001 National Household Transportation Survey (NHTS). 87 Because these estimates reflect the historically low gasoline prices that prevailed at the time the 2001 NHTS was conducted, however, NHTSA adjusted them to account for the eff ect on vehicle use of subsequent increases in fuel prices. Details of this adjustme nt are provided in Chapter VIII of the PRIA and Chapter of the draft joint TSD.

Increases in average annual use of cars and light t rucks have been an important source of historical growth in the total number of miles they are driven each year. To estimate future growth in their average annual use for purposes of this rulemaking, NHTSA calculated the rate of growth in the adjusted mileage schedules derived from the 2001 NHTS necessary for total car and light truck travel to increase at the rate forecast in

the AEO 2009 Reference Case. 88 This rate was calculated to be consistent with fu ture changes in the overall size and age distributions o f the U.S. passenger car and light truck fleets that result from the agency’s forecasts of t otal car and light truck sales and updated

85 EPA also considered other sources of similar infor mation, such as J.D. Powers, and concluded that CSM was better able to provide forecasts at the requisi te level of detail for most of the model years of i nterest.

86 Lu, S., NHTSA, Regulatory Analysis and Evaluation Division, “Vehicle Survivability and Travel Mileage Schedules,” DOT HS 809 952, 8-11 (January 2 006). Available at http://wwwnrd.nhtsa.dot.gov/Pubs/809952.pdf (last accessed Au gust 9, 2009). These updated survival rates sugges t that the expected lifetimes of recent-model passeng er cars and light trucks are 13.8 and 14.5 years.

87 For a description of the Survey, see http://nhts.ornl.gov/quickStart.shtml (last access ed August 9, 2009).

88 This approach differs from that used in the MY 201 1 final rule, where it was assumed that future grow th in the total number of cars and light trucks in use resulting from projected sales of new vehicles was adequate by itself to account for growth in total v ehicle use, without assuming continuing growth in average vehicle use.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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survival rates. The resulting growth rate in avera ge annual car and light truck use of approximately 1.1 percent per year was applied to t he mileage figures derived from the 2001 NHTS to estimate annual mileage during each ye ar of the expected lifetimes of MY 2012-2016 cars and light trucks. 89

Finally, the agency estimated total fuel consumptio n by passenger cars and light trucks remaining in use each year by dividing the total nu mber of miles surviving vehicles are driven by the fuel economy they are expected to achieve un der each alternative CAFE standard. Each model year’s total lifetime fuel consumption is the sum of fuel use by the cars or light trucks produced during that model year during each year of their life spans. In turn, the savings in a model year’s lifetime fuel use that will result fro m each alternative CAFE standard is the

difference between its lifetime fuel use at the fue l economy level it attains under the Baseline alternative, and its lifetime fuel use at the highe r fuel economy level it is projected to achieve

under that alternative standard. 90

g. Accounting for the Rebound Effect of Higher Fuel Economy

The fuel economy rebound effect refers to the fract ion of fuel savings expected to result from an increase in vehicle fuel economy – p articularly an increase required by the adoption of higher CAFE standards – that is offset by additional vehicle use. The increase in vehicle use occurs because higher fuel economy reduces the fuel cost of driving, typically the largest single component of the monetary cost of operating a vehicle, and vehicle owners respond to this reducti on in operating costs by driving slightly more. By lowering the marginal cost of ve hicle use, improved fuel economy may

lead to an increase in the number of miles vehicles are driven each year and over their lifetimes. Even with their higher fuel economy, th is additional driving consumes some fuel, so the rebound effect reduces the net fuel sa vings that result when new CAFE standards require manufacturers to improve fuel eco nomy.

The magnitude of the rebound effect is an important determinant of the actual fuel savings that are likely to result from adopting str icter CAFE standards

. Research on the magnitude of the rebound effect in light-duty vehic le use dates to the early 1980s, and

89 While the adjustment for future fuel prices reduces average mileage at each age from the values derive d from the 2001 NHTS, the adjustment for expected fut ure growth in average vehicle use increases it. Th e net effect of these two adjustments is to increase expected lifetime mileage by about 18 percent significantly for both passenger cars and about 16 percent for light trucks.

90 To illustrate these calculations, the agency’s adj ustment of the AEO 2009 Revised Reference Case forecast indicates that 9.26 million passenger cars will be produced during 2012, and the agency’s upd ated survival rates show that 83 percent of these vehicl es, or 7.64 million, are projected to remain in ser vice during the year 2022, when they will have reached a n age of 10 years. At that age, passenger achievin g the fuel economy level they are projected to achieve un der the Baseline alternative are driven an average of about 800 miles, so surviving model year 2012 passe nger cars will be driven a total of 82.5 billion m iles (= 7.64 million surviving vehicles x 10,800 miles per vehicle) during 2022. Summing the results of simi lar calculations for each year of their 26-year maximum lifetime, model year 2012 passenger cars will be driven a total of 1,395 billion miles under the Bas eline alternative. Under that alternative, they ar e projected to achieve a test fuel economy level of 3 2.4 mpg, which corresponds to actual on-road fuel economy of 25.9 mpg (= 32.4 mpg x 80 percent). Thu s their lifetime fuel use under the Baseline alternative is projected to be 53.9 billion gallons (= 1,395 billion miles divided by 25.9 miles per g allon).DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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generally concludes that a statistically significan t rebound effect occurs when vehicle fuel efficiency improves. 91 The agency reviewed studies of the rebound effect it had previously relied upon, considered more recently pu blished estimates, and developed new estimates of its magnitude for purposes of this NPR M. 92 Recent studies provide clear

some evidence that the rebound effect has been declining over time, and may is likely to

decline further over the immediate future if incomes rise faster than gasoline prices . This result appears plausible, because the responsivenes s of vehicle use to variation in fuel costs is expected to decline as they account for a smaller proportion of the total monetary cost of driving, which has been the case until very recently. At the same time, rising personal incomes would be expected to reduce the se nsitivity of vehicle use to fuel costs as the time component of driving costs – which is l ikely to be related to income levels – accounts for a larger fraction the total cost of au tomobile travel. NHTSA developed new estimates of the rebound effect by using national d ata on light-duty vehicle travel over the period from 1950 through 2006 to estimate various e conometric models of the relationship between vehicle miles-traveled and fac tors likely to influence it, including household income, fuel prices, vehicle fuel efficie ncy, road supply, the number of vehicles in use, vehicle prices, and other factors. 93 The results of NHTSA’s analysis are consistent with the findings from other recent rese arch: the average long-run rebound effect ranged from 16 percent to 30 percent over th e period from 1950 through 2007, while estimates of the rebound effect in 2007 range from 8 percent to 14 percent. Projected values of the rebound effect for the peri od from 2010 through 2030, which the agency developed using forecasts of personal income , fuel prices, and fuel efficiency from AEO 2009’s Reference Case, range from 4 percen t to 16 percent, depending on the specific model used to generate them.

In light of these results, the agency’s judgment is that the apparent decline over time in the magnitude of the rebound effect justifi es using a value for future analysis that is lower than historical estimates, which average 1 5-25 percent. Because the lifetimes of vehicles affected by the alternative CAFE standards considered in this rulemaking will extend from 2012 until nearly 2050, a value that is significantly lower than historical estimates appears to be appropriate. Thus NHTSA ha s elected to use a 10 percent rebound effect in its analysis of fuel savings and other benefits from higher CAFE

standards for this NPRM.

NHTSA also invites comment on other alternatives f or estimating the rebound effect. As one illustration, variation in the pric e per gallon of gasoline directly affects the per-mile cost of driving, and drivers may respond j ust as they would to a change in the cost of driving resulting from a change in fuel eco nomy, by varying the number of miles

91 Some studies estimate that the long-run rebound ef fect is significantly larger than the immediate response to increased fuel efficiency. Although th eir estimates of the adjustment period required for the rebound effect to reach its long-run magnitude vary , this long-run effect is most appropriate for eval uating the fuel savings and emissions reductions resulting from stricter standards that would apply to future model

years.

92 For details of the agency’s analysis, see Chapter VIII of the PRIA and Chapter 4 of the draft joint T SD accompanying this proposed rule.

93 The agency used several different model specificat ions and estimation procedures to control for the e ffect of fuel prices on fuel efficiency in order to obtai n accurate estimates of the rebound effect. Comment [r8]: Revised at OMB’s request.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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they drive. Because vehicles’ fuel economy is fixe d in the short run, variation in the number of miles driven in response to changes in fu el prices will be reflected in changes in gasoline consumption. Under the assumption that drivers respond similarly to changes in the cost of driving whether they are caused by v ariation in fuel prices or fuel economy, the short-run price elasticity of gasoline – which measures the sensitivity of gasoline consumption to changes in its price per gallon – ma y provide some indication about the magnitude of the rebound effect itself. NHTSA invi tes comment on the extent to which the short-run elasticity of demand for gasoline wit h respect to its price can provide useful

information about the size of the rebound effect. Specifically, we seek comment on whether it would be appropriate to use the price el asticity of demand for gasoline, or other alternative approaches, to guide the choice o f a value for the rebound effect.

Additionally, NHTSA recognizes that as the world pr ice of oil falls in response to lower U.S. demand for oil, there is the potential f or an increase in oil use and, in turn, greenhouse gas emissions outside the U.S. This so called international oil “take back”

effect is difficult to estimate. Given that oil co nsumption patterns vary across countries, there will be different demand responses to a chang e in the world price of crude oil. In addition, many countries around the world subsidize their oil consumption. It is not clear how oil consumption would change due to changes in the market price of oil given the current pattern of demand and subsidies. Further, many countries, especially in the developed countries/regions ( i.e. , the European Union), already have or anticipate implementing policies to limit GHG emissions. Furt her out in the future, it is anticipated that developing countries would take actions to red uce their GHG emissions as well. Any increases in petroleum consumption and GHG emis sions in other nations that occurs in response to a decline in world petroleum prices would be attributed to those nations, and recorded in their respective GHG emissions inve ntories. Thus, including the same increase in emissions as part of the impact of adop ting CAFE standards in the U.S. would risk double-counting of global emissions totals. N HTSA seeks comment on how to

estimate the international “take back” effect and i ts impact on fuel consumption and GHG emissions. See the Energy Security section of the TSD, 4.2.8, for more discussion of the impact of the proposed vehicle rule on oil m arkets.

h. Benefits from Increased Vehicle Use

The increase in vehicle use from the rebound effect provides additional benefits to their owners, who may make more frequent trips or t ravel farther to reach more desirable destinations. This additional travel provides bene fits to drivers and their passengers by improving their access to social and economic oppor tunities away from home. As evidenced by their decisions to make more frequent or longer trips when improved fuel economy reduces their costs for driving, the benefi ts from this additional travel exceed the costs drivers and passengers incur in making mo re frequent or longer trips.

The agency’s analysis estimates the economic benefi ts from increased reboundeffect driving as the sum of fuel costs drivers inc ur plus the consumer surplus they Comment [r9]: Added at OMB’s request

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receive from the additional accessibility it provid es. 94 Because the increased in travel depend on the extent of improvement in fuel economy , the value of benefits it provides differs among model years and alternative CAFE stan dards. Under even those alternatives that would impose the highest standard s, however, the magnitude of these benefits represents a small fraction of total benef its.

i. The Value of Increased Driving Range

Improving vehicles’ fuel economy may also increase their driving range before they require refueling. By reducing the frequency with which drivers typically refuel, and by extending the upper limit of the range they can travel before requiring refueling, improving fuel economy thus provides some additiona l benefits to their owners. 95
NHTSA re-examined this issue for purposes of this r ulemaking, and found no

information in comments or elsewhere that would cau se the agency to revise its previous approach. Since no direct estimates of the value o f extended vehicle range are available, NHTSA calculates directly the reduction in the annu al number of required refueling cycles that results from improved fuel economy, and applies DOT-recommended values of travel time savings to convert the resulting tim e savings to their economic value. 96

As an illustration, a typical small light truck mod el has an average fuel tank size of approximately 20 gallons. Assuming that drivers typically refuel when their tanks are

20 55 percent full ( i.e.

, 11 4 gallons in reserve), increasing this model’s actua l on-road fuel economy from 24 to 25 mpg would extend its driving range from 384 216 miles (= 16 9 gallons x 24 mpg) to 400 225 miles (= 9 16 gallons x 25 mpg). Assuming that it is driven 12,000 miles/year, this reduces the number of times it needs to be refueled each year

from 31 55

. 3 6 (= 12,000 miles per year / 384 216 miles per refueling) to 30 53

. 0 3 (= 12,000 miles per year / 400 225 miles per refueling), or by 2 1 .3 refuelings per year.

Weighted by the nationwide mix of urban and rural driving, personal and business travel in urban and rural areas, and avera ge vehicle occupancy for driving trips, the DOT-recommended values of travel time per vehic le-hour is $24.64 (in 2007 dollars). 97 Assuming that locating a station and filling up re quires five minutes, the

94 The consumer surplus provided by added travel is e stimated as one-half of the product of the decline in fuel cost per mile and the resulting increase in th e annual number of miles driven.

95 If manufacturers respond to improved fuel economy by reducing the size of fuel tanks to maintain a constant driving range, the resulting cost saving w ill presumably be reflected in lower vehicle sales prices.

96 See Department of Transportation, Guidance Memorandum, “The Value of Saving Travel Time: Departmental Guidance for Conducting Economic Evalu ations,” Apr. 9, 1997. http://ostpxweb.dot.gov/policy/Data/VOT97guid.pdf ( last accessed August 9, 2009); update available at http://ostpxweb.dot.gov/policy/Data/VOTrevision1_2- 11-03.pdf (last accessed August 9, 2009).

97 The hourly wage rate during 2008 is estimated to average $25.50 when expressed in 2007 dollars. Personal travel in urban areas (which represents 94 percent of urban travel) is valued at 50 percent o f the hourly wage rate, while business travel (the remain ing 6 percent of urban travel) is valued at 100 per cent of the hourly wage rate. For intercity travel, person al travel (87 percent of total intercity travel) is valued at 70 percent of the wage rate, while business travel (13 percent) is valued at 100 percent of the wage r ate. The resulting values of travel time are $12.67 for urban travel and $17.66 for intercity travel, and m ust be multiplied by vehicle occupancy (1.6) to obtain the estimated values of time per vehicle hour in urban and rural driving. Finally, about 66% of driving occur s in urban areas, while the remaining 34% takes pla ce inDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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annual value of time saved as a result of less freq uent refueling amounts to $ 2 4

. 65 72 (calculated as 5/60 x 2 1 .3 x $24.64). This calculation is repeated for eac h future year that model year 2012-2016 cars and light trucks would re main in service. Like fuel savings and other benefits, the value of this benefit decli nes over a model year’s lifetime, because a smaller number of vehicles originally produced du ring that model year remain in service each year, and those remaining in service a re driven fewer miles.

NHTSA recognizes that many assumptions made in its estimate for the value of increased driving range are subject to uncertainty. Please see Chapter 4 of the TSD and Chapter 8 of NHTSA’s PRIA for more information abou t the uncertainty regarding these assumptions.

j. Added Costs from Congestion, Crashes and Noise

Increased vehicle use associated with the rebound e ffect also contributes to increased traffic congestion, motor vehicle acciden ts, and highway noise. NHTSA relies on estimates of per-mile congestion, accident, and noise costs caused by increased use of automobiles and light trucks developed by the Feder al Highway Administration to

estimate these increased costs. 98 NHTSA employed these estimates previously in its analysis accompanying the MY 2011 final rule, and c ontinues to find them appropriate for this NPRM after reviewing the procedures used b y FHWA to develop them and considering other available estimates of these valu es. The agency multiplies FHWA’s estimates of per-mile costs by the annual increases in automobile and light truck use from the rebound effect to yield the estimated increases in congestion, accident, and noise externality costs during each future year.

k. Petroleum Consumption and Import Externalities

U.S. consumption and imports of petroleum products also impose costs on the domestic economy that are not reflected in the mark et price for crude petroleum, or in the prices paid by consumers of petroleum products such as gasoline. These costs include (1) higher prices for petroleum products resulting from the effect of U.S. oil import demand on the world oil price; (2) the risk of disruptions to the U.S. economy caused by sudden reductions in the supply of imported oil to the U.S .; and (3) expenses for maintaining a U.S. military presence to secure imported oil suppl ies from unstable regions, and for maintaining the strategic petroleum reserve (SPR) t o cushion against resulting price

increases. 99

rural areas, and these percentages are used to calc ulate a weighted average of the value of time in al l driving.

98 These estimates were developed by FHWA for use in its 1997 Federal Highway Cost Allocation Study ;

see http://www.fhwa.dot.gov/policy/hcas/final/index.ht m (last accessed August 9, 2009).

99 See, e.g. , Bohi, Douglas R. and W. David Montgomery (1982). Oil Prices, Energy Security, and Import Policy Washington, DC: Resources for the Future, Jo hns Hopkins University Press; Bohi, D. R., and M. A

. Toman (1993). "Energy and Security: Externalities a nd Policies," Energy Policy 21:1093-1109; and Toman, M. A. (1993). "The Economics of Energy Secur ity: Theory, Evidence, Policy," in A. V. Kneese and J. L. Sweeney, eds. (1993). Handbook of Natural Resource and Energy Economics, Vol. III. Amsterdam: North-Holland, pp. 1167-1218. Comment [r11]: Added in response to interagency commentDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

92 Higher U.S. imports of crude oil or refined petrole um products increase the magnitude of these external economic costs, thus in creasing the true economic cost of supplying transportation fuels above their market p rices. Conversely, lowering U.S. imports of crude petroleum or refined fuels by redu cing domestic fuel consumption can reduce these external costs, and any reduction in t heir total value that results from improved fuel economy represents an economic benefi t of more stringent CAFE standards, in addition to the value of saving fuel itself..

NHTSA has carefully reviewed its assumptions regard ing the appropriate value of these benefits for this proposed rule. In analyzin g benefits from its recent actions to increase light truck CAFE standards for model years 2005-07 and 2008-11, NHTSA relied on a 1997 study by Oak Ridge National Labora tory (ORNL) to estimate the value of reduced economic externalities from petroleum co nsumption and imports. 100 More recently, ORNL updated its estimates of the value o f these externalities, using the analytic framework developed in its original 1997 s tudy in conjunction with recent estimates of the variables and parameters that dete rmine their value. 101 The updated ORNL study was subjected to a detailed peer review by experts selected by EPA, and its estimates of the value of oil import externalities were subsequently revised to reflect their

comments and recommendations. 102

At the request of EPA, ORNL further revised its 200 8 estimates of external costs from U.S. oil imports to reflect recent changes in the outlook for world petroleum prices and continuing changes in the structure and charact eristics of global petroleum supply

and demand.

These most recent revisions increase ORNL’s estimat es of the “monopsony premium” associated with U.S. oil imports, which me asures the reduced value of payments from U.S. oil purchasers to foreign oil su ppliers beyond the savings from reduced purchases of petroleum itself that results when lower U.S. import demand reduces the world price of petroleum.. 103 Consistency with NHTSA’s use of estimates of

the global

benefits from reducing emissions of CO 2 and other greenhouse gases in this analysis, however, requires the use of a global per spective for assessing their net value. From this perspective, reducing these payments simp ly results in a transfer of resources from foreign oil suppliers to U.S. purchasers (or m ore properly, in a savings in the value of resources previously transferred from U.S. purch asers to foreign producers), and

100 Leiby, Paul N., Donald W. Jones, T. Randall Curlee , and Russell Lee, Oil Imports: An Assessment of Benefits and Costs , ORNL-6851, Oak Ridge National Laboratory, Novembe r 1, 1997. Available at http://pzl1.ed.ornl.gov/ORNL6851.pdf (last accessed August 9, 2009).

101 Leiby, Paul N. "Estimating the Energy Security Ben efits of Reduced U.S. Oil Imports," Oak Ridge National Laboratory, ORNL/TM-2007/028, Revised July 23, 2007. Available at http://pzl1.ed.ornl.gov/energysecurity.html (click on link below “Oil Imports Costs and Benefits”) (la st accessed August 9, 2009).

102 Peer Review Report Summary: Estimating the Energy S ecurity Benefits of Reduced U.S. Oil Imports

, ICF, Inc., September 2007.

103 The reduction in payments from U.S. oil purchaser s to domestic petroleum producers is not included a s a benefit, since it represents a transfer that occu rs entirely within the U.S. economy.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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provides no real savings in resources to the global economy. Thus NHTSA’s analysis of the benefits from adopting higher CAFE standards fo r MY 2012-2016 cars and light

trucks excludes the reduced value of monopsony payments by U.S. oi l consumers that might result from lower fuel consumption by these v ehicles.

The literature on the energy security for the last two decades has routinely combined the monopsony and the macroeconomic disrup tion components when calculating the total value of the energy security premium. However, in the context of using a global value for the Social Cost of Carbon (SCC) the question arises: how should the energy security premium be used when some benef its from the proposed rule, such as the benefits of reducing greenhouse gas emissions, are calculated at a global level? Monopsony benefits represent avoided payments by th e U.S. to oil producers in foreign

countries that result from a decrease in the world oil price as the U.S. decreases its consumption of imported oil. Although there is cle arly a benefit to the U.S. when considered from the domestic perspective, the decre ase in price due to decreased demand in the U.S. also represents a loss of income to oil -producing countries. Given the redistributive nature of this effect, do the negati ve effects on other countries “net out” the positive impacts to the U.S.? If this is the case, then, the monopsony portion of the energy security premium should be excluded from the net benefits calculation for the

rule.

As the preceding discussion has indicated, the age ncies omitted the reduction in monopsony payments that occurs when U.S. petroleum consumption and imports are

reduced from their estimates of economic benefits f or the proposed rules. Since the reduction in monopsony payments by U.S. oil consume rs is exactly offset by a decline in income to suppliers of imported oil, this omission ensures consistency of the agencies’ analysis with the inclusion of global benefits from reducing emissions of greenhouse gas emissions. The agencies seek comment on whether, f rom other perspectives, it would be reasonable to include both the global value of redu cing GHG emissions and the reduction in monopsony payments by U.S. consumers of petroleu m products in their estimates of total economic benefits from reducing U.S. fuel con sumption.

ORNL’s most recently revised estimates of the incre ase in the expected costs associated with potential disruptions in U.S. petro leum imports imply that each gallon of imported fuel or petroleum saved reduces the expect ed costs of oil supply disruptions to the U.S. economy by $0.16 per gallon (in 2007$). T he reduction in expected disruption costs represents a real savings in resources, and t hus contributes economic benefits in

addition to the savings in fuel production costs that result f rom increasing fuel economy. NHTSA employs this value in its evaluation of the e conomic benefits from adopting higher CAFE standards for MY 2012-2016 cars and lig ht trucks.

NHTSA’s analysis does not include savings in budget ary outlays to support U.S. military activities among the benefits of higher fu el economy and the resulting fuel Comment [r12]: Added in response to interagency comment.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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savings. 104 NHTSA’s analysis of benefits from alternative CAF E standards for MY 2012-2016 also excludes any cost savings from maint aining a smaller SPR from its estimates of the external benefits of reducing gaso line consumption and petroleum imports. This view concurs with that of the recent ORNL study of economic costs from U.S. oil imports, which concludes that savings in g overnment outlays for these purposes are unlikely to result form reductions in consumpti on of petroleum products and oil imports on the scale of those resulting from higher CAFE standards.

Based on a detailed analysis of differences in fuel consumption, petroleum imports, and imports of refined petroleum products among the Reference Case, High Economic Growth, and Low Economic Growth Scenarios presented in AEO 2009, NHTSA estimates that approximately 50 percent of th e reduction in fuel consumption resulting from adopting higher CAFE standards is li kely to be reflected in reduced U.S. imports of refined fuel, while the remaining 50 per cent would be reduce domestic fuel refining. 105 Of this latter figure, 90 percent is anticipated to reduce U.S. imports of crude petroleum for use as a refinery feedstock, while th e remaining 10 percent is expected to reduce U.S. domestic production of crude petroleum. 106 Thus on balance, each 100 gallons of fuel saved as a consequence of higher CA FE standards is anticipated to reduce total U.S. imports of crude petroleum or refined fu el by 95 gallons. 107

l. Air P p ollutant E e missions

i. Impacts on c C riteria a A ir p P ollutant e E

missions

Criteria air pollutants emitted by vehicles and dur ing fuel production include carbon monoxide (CO), hydrocarbon compounds (usuall y referred to as “volatile organic compounds,” or VOC), nitrogen oxides (NO

x ), fine particulate matter (PM2.5), and sulfur oxides (SO

x ). While reductions in domestic fuel refining and distribution that result from lower fuel consumption will reduce U.S. emissions o f these pollutants, additional vehicle use associated with the rebound effect from higher fuel economy will increase their

emissions. Thus the net effect of stricter CAFE st andards on emissions of each criteria pollutant depends on the relative magnitudes of its reduced emissions in fuel refining and distribution, and increases in its emissions from v ehicle use. Because the relationship between emissions in fuel refining and vehicle use is different for each criteria pollutant, the net effect of fuel savings from the proposed st andards on total emissions of each pollutant is likely to differ.

104 However, the agency conducted a sensitivity analys is of the potential effect of assuming that some reduction military spending would result from fuel savings and reduced petroleum imports in order to investigate its impacts on the standards and fuel s avings.

105 Differences between forecast annual U.S. imports o f crude petroleum and refined products among these three scenarios range from 24-89 percent of differe nces in projected annual gasoline and diesel fuel consumption in the U.S. These differences average 49 percent over the forecast period spanned by AEO

2009.

106 Differences between forecast annual U.S. imports o f crude petroleum among these three scenarios range from 67-97 percent of differences in total U.S. ref ining of crude petroleum, and average 85 percent ov er the forecast period spanned by AEO 2009.

107 This figure is calculated as 50 gallons + 50 gallo ns*90% = 50 gallons + 45 gallons = 95 gallons.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

95 With the exception of SO 2 , NHTSA calculated annual emissions of each criteri a pollutant resulting from vehicle use by multiplying its estimates of car and light truck use during each year over their expected lifetimes by p er-mile emission rates appropriate to each vehicle type, fuel, model year, and age. Thes e emission rates were developed by U.S. EPA using its Motor Vehicle Emission Simulator (Draft MOVES 2009)

. 108

Emission rates for SO 2 were calculated by NHTSA using average fuel sulfur content estimates supplied by EPA, together with the assump tion that the entire sulfur content of

fuel is emitted in the form of SO 2

. 109 Total SO 2 emissions under each alternative CAFE standard were calculated by applying the resulting emission rates directly to estimated annual gasoline and diesel fuel use by cars and lig ht trucks.

As with other impacts, the changes in emissions of criteria air pollutants resulting from alternative increases in CAFE standa rds for MY 2012-2016 cars and light trucks were calculated from the differenc es between emissions under

each alternative that would increase CAFE standards , and emissions under the

baseline alternative.

NHTSA estimated the reductions in criteria pollutan t emissions from producing and distributing fuel that would occur under altern ative CAFE standards using emission rates obtained by EPA from Argonne National Laborat ories’ Greenhouse Gases and Regulated Emissions in Transportation (GREET) model

. 110 The GREET model provides separate estimates of air pollutant emissions that occur in different phases of fuel production and distribution, including crude oil ex traction, transportation, and storage, fuel refining, and fuel distribution and storage. 111 EPA modified the GREET model to change certain assumptions about emissions during c rude petroleum extraction and transportation, as well as to update its emission r ates to reflect adopted and pending EPA

emission standards. NHTSA converted these emission rates from the mass per fuel energy content basis on which GREET reports them to mass per gallon of fuel supplied using estimates of fuel energy content supplied by GREET.

The resulting emission rates were applied to the ag ency’s estimates of fuel consumption under each alternative CAFE standard to develop estimates of total emissions of each criteria pollutant during fuel pr oduction and distribution. The assumptions about the effects of changes in fuel consumption on domestic and imported

108 The MOVES model assumes that the per-mile rates at which these pollutants are emitted are determined by EPA regulations and the effectiveness of catalyt ic after-treatment of engine exhaust emissions, and are thus unaffected by changes in car and light truck f uel economy.

109 These are 30 and 15 parts per million (ppm, measur ed on a mass basis) for gasoline and diesel respectively, which produces emission rates of 0.1 7 grams of SO 2 per gallon of gasoline and 0.10 grams per gallon of diesel.

110 Argonne National Laboratories, The Greenhouse Gas and Regulated Emissions from Tra nsportation (GREET) Model , Version 1.8, June 2007, available at http://www.transportation.anl.gov/modeling_simulati on/GREET/index.html (last accessed August 9, 2009).

111 Emissions that occur during vehicle refueling at r etail gasoline stations (primarily evaporative emis sions of volatile organic compounds, or VOCs) are already accounted for in the “tailpipe” emission factors u sed to estimate the emissions generated by increased li ght truck use. GREET estimates emissions in each p hase of gasoline production and distribution in mass per unit of gasoline energy content; these factors are then converted to mass per gallon of gasoline using the average energy content of gasoline.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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sources of fuel supply discussed above were then em ployed to calculate the effects of

reductions in fuel use from alternative CAFE standa rds on changes in imports of refined fuel and domestic refining. NHTSA’s analysis assum es that reductions in imports of refined fuel would reduce criteria pollutant emissi ons during fuel storage and distribution only. Reductions in domestic fuel refining using i mported crude oil as a feedstock are assumed to reduce emissions during fuel refining, s torage, and distribution, because each

of these activities would be reduced. Reduced dome stic fuel refining using domesticallyproduced crude oil is assumed to reduce emissions d uring all four phases of fuel production and distribution. 112

Finally, NHTSA calculated the net changes in domestic emissions of each criteria pollutant by summing the increases in emissions pro jected to result from increased vehicle use, and the reductions anticipated to resu lt from lower domestic fuel refining and

distribution. 113 As indicated previously, the effect of adopting h igher CAFE standards on total emissions of each criteria pollutant depends on the relative magnitudes of the resulting reduction in emissions from fuel refining and distribution, and the increase in emissions from additional vehicle use. Although th ese net changes vary significantly among individual criteria pollutants, the agency pr ojects that on balance, adopting higher

CAFE standards would reduce emissions of all criter ia air pollutants except carbon monoxide (CO).

The net changes in domestic emissions of fine parti culates (PM 2.5 ) and its chemical precursors (such as NOx, SOx, and VOCs) ar e converted to economic values using estimates of the reductions in health damage costs per ton of emissions of each pollutant that is avoided, which were developed and recently revised by EPA. These savings represent the estimated reductions in the v alue of damages to human health resulting from lower atmospheric concentrations and population exposure to air pollution that occur when emissions of each pollutant that co ntributes to atmospheric PM 2.5 concentrations are reduced. The value of reduction s in the risk of premature death due to exposure to fine particulate pollution (PM 2.5 ) account for a majority of EPA’s estimated values of reducing criteria pollutant emissions, al though the value of avoiding other health impacts is also included in these estimates. These values do not include a number of unquantified benefits, such as reduction in the welfare and environmental impacts of

PM 2.5 pollution, or reductions in health and welfare imp acts related to other criteria pollutants (ozone, NO 2 , and SO 2 ) and air toxics. EPA estimates different PM-relat ed perton values for reducing emissions from vehicle use than for reductions in emissions of that occur during fuel production and distribution. 114 NHTSA applies these separate values to its estimates of changes in emissions fro m vehicle use and fuel production and

112 In effect, this assumes that the distances crude o il travels to U.S. refineries are approximately the same regardless of whether it travels from domestic oilf ields or import terminals, and that the distances t hat gasoline travels from refineries to retail stations are approximately the same as those from import te rminals to gasoline stations.

113 All emissions from increased vehicle use are assum ed to occur within the U.S., since CAFE standards would apply only to vehicles produced for sale in t he U.S.

114 These reflect differences in the typical geographi c distributions of emissions of each pollutant, the ir

contributions to ambient PM 2.5 concentrations, pollution levels (predominantly th ose of PM 2.5 ), and resulting changes in population exposure.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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distribution to determine the net change in total e conomic damages from emissions of

these pollutants.

EPA projects that the per-ton values for reducing e missions of criteria pollutants from both mobile sources (including motor vehicles) and stationary sources such as fuel refineries and storage facilities will increase ove r time. These projected increases reflect rising income levels, which are assumed to increase affected individuals’ willingness to pay for reduced exposure to health threats from air pollution, as well as future population growth, which increases population exposure to futu re levels of air pollution.

ii. Reductions in CO 2 e E missions

Emissions of carbon dioxide and other greenhouse ga ses (GHGs) occur throughout the process of producing and distributin g transportation fuels, as well as from fuel combustion itself. By reducing the volume of fuel consumed by passenger cars and light trucks, higher CAFE standards will reduce GHG emissions generated by fuel use, as well as throughout the fuel supply cycle. Lowering these emissions is likely to slow the projected pace and reduce the ultimate extent of fu ture changes in the global climate, thus reducing future economic damages that changes in th e global climate are expected to cause. By reducing the probability that climate ch anges with potentially catastrophic economic or environmental impacts will occur, lower ing GHG emissions may also result in economic benefits that exceed the resulting redu ction in the expected future economic costs caused by gradual changes in the earth’s clim atic systems.

Quantifying and monetizing benefits from reducing G HG emissions is thus an important step in estimating the total economic ben efits likely to result from establishing higher CAFE standards. The agency estimated emissi ons of CO 2 from passenger car and light truck use by multiplying the number of gallon s of each type of fuel (gasoline and diesel) they are projected to consume under alterna tive CAFE standards by the quantity

or mass of CO 2 emissions released per gallon of fuel consumed. T his calculation

assumes that the entire carbon content of each fuel is converted to CO 2 emissions during the combustion process. Carbon dioxide emissions a ccount for nearly 95 percent of total

GHG emissions that result from fuel combustion duri ng vehicle use.

iii. Economic v V

alue of r R eductions in CO 2 e E

missions

NHTSA has taken the economic benefits of reducing C O 2 emission into account in this rulemaking, both in developing proposed CAF E standards and in assessing the

economic benefits of each alternative that was cons idered. Since direct estimates of the economic benefits from reducing GHG emissions are g enerally not reported in published literature on the impacts of climate change, these benefits are typically assumed to be the “mirror image” of the estimated incremental costs r esulting from an increase in those emissions. That is, the benefits from reducing emi ssions are usually measured by the savings in estimated economic damages that an equiv alent increase in emissions would

otherwise have caused.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

98 The “social cost of carbon” (SCC) is intended to be a monetary measure of the incremental damage resulting from carbon dioxide (C O 2 ) emissions, including (but not limited to) net agricultural productivity loss, hum an health effects, property damages from sea level rise, and changes in ecosystem servi ces. Any effort to quantify and to monetize the consequences associated with climate c hange will raise serious questions of science, economics, and ethics. But with full regar d for the limits of both quantification and monetization, the SCC can be used to provide an estimate of the social benefits of

reductions in GHG emissions.

For at least four reasons, any particular figure w ill be contestable. First, scientific and economic knowledge about the impacts of climate change continues to grow. With new and better information about relevant questions , including the cost, burdens, and possibility of adaptation, current estimates will i nevitably change over time. Second, some of the likely and potential damages from clima te change—for example, the loss of endangered species—are generally not included in cu rrent SCC estimates. These omissions may turn out to be significant; in the se nse that they may mean that the best current estimates are too low. As noted by the IPC C Fourth Assessment Report, “It is very likely that globally aggregated figures underestimate the damage costs because they cannot include many non-quantifiable impacts.” Thi rd, it is unlikely that the damage estimates account for the directed technological ch ange that will lead to innovations that reduce the costs of responding to climate change—fo r example, it is likely that scientists will develop crops that are better able to withstan d high temperatures. In this respect, the current estimates may overstate the likely damages. Fourth, controversial ethical judgments, including those involving the treatment of future generations, play a role in judgments about the SCC (see in particular the disc ussion of the discount rate, below).

To date, SCC estimates presented in recent regulat ory documents have varied within and among agencies, including DOT, DOE, and EPA. For example, a regulation proposed by DOT in 2008 assumed a value of $7 per t on CO 2 115 (2006$) for 2011 emission reductions (with a range of $0-14 for sens itivity analysis). A regulation finalized by DOE used a range of $0-$20 (2007$). B oth of these ranges were designed to reflect the value of damages to the United States r esulting from carbon emissions, or the “domestic” SCC. In the final MY 2011 CAFE EIS, DOT used both a domestic SCC value of $2/tCO 2 and a global SCC value of $33/tCO 2 (with sensitivity analysis at $80/tCO2), increasing at 2.4 percent per year there after. The final MY 2011 CAFE rule also presented a range from $2 to $80/tCO 2 . EPA’s Advance Notice of Proposed Rulemaking for Greenhouse Gases discussed the benef its of reducing GHG emissions and identified what it described as “very prelimina ry” SCC estimates “subject to revision” that spanned three orders of magnitude. EPA’s global mean values were $68

115 For the purposes of this discussion, we present al l values of the SCC as the cost per ton of CO 2 emissions. Some discussions of the SCC in the lite rature use an alternative presentation of a dollar per ton of Carbon. The standard adjustment factor is 3.67, which means, for example, that a SCC of $10 per to n of

CO 2 would be equivalent to a cost of $36.70 for a ton of carbon emitted.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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and $40/tCO 2 for discount rates of 2 percent and 3 percent resp ectively (in 2006 real dollars for 2007 emissions). 116

The current Administration has worked to develop a transparent methodology for selecting a set of interim SCC estimates to use in regulatory analyses until a more comprehensive characterization of the distribution of SCC is developed. This discussion proposes a set of values for the interim social cos t of carbon. It should be emphasized that the analysis here is preliminary. Today’s proposed joint rulemaking presents SCC

estimates that reflect the Administration’s current understanding of the relevant literature. These interim estimates are being used for the shor t-term while an interagency group develops a more comprehensive characterization of t he distribution of SCC values for future economic and regulatory analyses. The inter im values should not be viewed as a statement about the results of the longer-term proc ess. The Administration will be evaluating and seeking comment in the preamble to t oday’s proposed rule on all of the scientific, economic, and ethical issues before est ablishing final estimates for use in future rulemakings.

The outcomes of the Administration’s process to de velop interim values are judgments in favor of a) global rather than domesti c values, b) an annual growth rate of 3%, and c) interim global SCC estimates for 2007 (i n 2006 dollars) of $55, $33, $19, $10, and $5 per ton of CO 2 . Notably, we have centered our current attention o n a SCC of $19. The proposed figures are based on the following jud gments.

• 1. Global and domestic measures . Because of the distinctive nature of the climate change problem, we present both a global SCC and a fraction of that value that represents impacts that may occur within the border s of the U.S. alone, or a “domestic” SCC, but center our current attention on the global measure. This approach represents a departure from past practices , which relied, for the most part, on domestic measures. As a matter of law, bot h global and domestic values are permissible; the relevant statutory provisions are ambiguous and allow

selection of either measure. 117

It is true that under OMB guidance, analysis from t he domestic perspective is required, while analysis from the international per spective is optional. The domestic decisions of one nation are not typically based on a judgment about the

effects of those decisions on other nations. But th e climate change problem is highly unusual in the sense that it involves (a) a global public good in which (b) the emissions of one nation may inflict significant damages on other nations and (c) the United States is actively engaged in promot ing an international agreement

to reduce worldwide emissions.

116 73 FR 44416 (July 30, 2008). EPA, “Advance Notice of Proposed Rulemaking for Greenhouse Gases Under the Clean Air Act, Technical Support Document on Benefits of Reducing GHG Emissions,” June 2008. www.regulations.gov. Search for ID “EPA-HQ-OA R-2008-0318-0078.

117 It is true that federal statutes are presumed not to have extraterritorial effect, in part to ensure that the laws of the United States respect the interests of foreign sovereigns. But use of a global measure for the SCC does not give extraterritorial effect to federa l law and hence does not intrude on such interests. Formatted: Indent: Left: 0.25", Numbered + Level: 1 + Numbering Style: 1, 2, 3, ... + Start at: 1 + Alignment: Left + Aligned at: 0.38" +

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100 In these circumstances, we believe the global measu re is preferred. Use of a global measure reflects the reality of the problem and is expected to contribute to the continuing efforts of the United States to ensu re that emissions reductions occur in many nations.

Domestic SCC values are also presented. The develo pment of a domestic SCC is greatly complicated by the relatively few region- o r country-specific estimates of the SCC in the literature. One potential domestic estimate comes from the DICE models. In an unpublished paper, Nordhaus (2007) p roduced disaggregated SCC estimates using a regional version of the DICE mode l. He reported a U.S. estimate of $1/tCO2 (2007 value, 2007$), which is r oughly 11 percent of the global value. 118

An alternative source of estimates comes from a rec ent unpublished EPA modeling effort using the FUND model. The resultin g estimates suggest that the ratio of domestic to global benefits varies with ke y parameter assumptions. With a 3 percent discount rate, for example, the U.S. be nefit is about 6 percent of the global benefit for the “central” (mean) FUND result s, while, for the corresponding “high” estimates associated with a hi gher climate sensitivity and lower global economic growth, the U.S. benefit is l ess than 4 percent of the global benefit. With a 2 percent discount rate, the U.S. share is about 2-5 percent of the global estimate.

Based on this available evidence, an interim domest ic SCC value equal to 6 percent of the global damages is proposed. This fi gure is in the middle of the range of available estimates from the literature. It is recognized that the 6 percent figure is approximate and highly speculative and al ternative approaches will be explored before establishing final values for futur e rulemakings.

• 2. Filtering existing analyses . There are numerous SCC estimates in the existing literature, and it is reasonable to make use of tho se estimates in order to produce a figure for current use. A starting point is provid ed by the meta-analysis in Richard Tol, 2008. 119 With that starting point, the Administration prop oses to “filter” existing SCC estimates by using those that(1) are derived from peerreviewed studies; (2) do not weight the monetized d amages to one country more than those in other countries; (3) use a “business as usual” climate scenario; and (4) are based on the most recent published version of each of the three major integrated assessment models (IAMs): FUND, PAGE, an d DICE.

Proposal (1) is based on the view that those studie s that have been subject to peer review are more likely to be reliable than those th at have not been. Proposal (2) is

118 Personal communication (add cite to unpublished 20 07 Nordhaus paper)

119 Richard Tol, The Social Cost of Carbon: Trends, Ou tliers, and Catastrophes, Economics: The OpenAccess, Open-Assessment E-Journal, Vol. 2, 2008-25. http://www.economicsejournal.org/economics/journalarticles/2008-25 (200 8). Formatted: Indent: Left: 0.25", Numbered + Level: 1 + Numbering Style: 1, 2, 3, ... + Start at: 1 + Alignment: Left + Aligned at: 0.38" +

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101 based on a principle of neutrality and simplicity; it does not treat the citizens of one nation (or different citizens within the U.S.) differently on the basis of speculative or controversial considerations. Furth er, it is consistent with the potential compensation tests of Kaldor (1939) and H icks (1940), which use unweighted sums of willingness to pay. Finally, th is is the approach used in rulemakings across a variety of settings and conseq uently keeps U.S. government policy consistent across contexts.

Proposal (3) stems from the judgment that as a gene ral rule, the proper way to assess a policy decision is by comparing the implem entation of the policy against a counterfactual state where the policy is not impl emented. In addition, our expectation is that most policies to be evaluated u sing these interim SCC estimates will constitute small enough changes to t he larger economy to safely assume that the marginal benefits of emissions redu ctions will not change between the baseline and policy scenarios. A depar ture from this approach would be to consider a more dynamic setting in which othe r countries might implement policies to reduce GHG emissions at an unknown futu re date and the U.S. could choose to implement such a policy now or at a futur e date.

Proposal (4) is based on four complementary judgmen ts. First, the FUND, PAGE, and DICE models now stand as the most compreh ensive and reliable efforts to measure the economic damages from climat e change. Second, the latest versions of the three IAMs are likely to reflect th e most recent evidence and learning, and hence they are presumed to be superio r to those that preceded them. Third, any effort to choose among them, or to rejec t one in favor of the others, would be difficult to defend at the present time. In the absence of a clear reason to choose among them, it is reasonable to base the SCC on all of them. Fourth, in light of the uncertainties associated with the SCC, the additional information offered by different models is important.

3. Use a model-weighted average of the estimates a t each discount rate . At this time, a scientifically valid reason to prefer any o f the three major IAMs (FUND, PAGE, and DICE) has not been identified. According ly, to address the concern that certain models not be given unequal weight rel ative to the other models, the estimates are based on an equal weighting of the me ans of the estimates from each of the models. Among estimates that remain after a pplying the filter, we begin by taking the average of all estimates within a model. The estimated SCC is then calculated as the average of the three model-specif ic averages. This approach is used to ensure that models with a greater number of published results do not exert unequal weight on the interim SCC estimates.

4. Apply a 3 percent annual growth rate to the chosen SCC values . SCC is assumed to increase over time, because future emiss ions are expected to produce larger incremental damages as physical and economic systems become more stressed as the magnitude of climate change increas es. Indeed, an implied growth rate in the SCC can be produced by most of the mode ls that estimate economicDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

102 damages caused by increased GHG emissions in future years. But neither the rate itself nor the information necessary to derive its implied value is commonly reported. In light of the limited amount of debate thus far about the appropriate growth rate of the SCC, applying a rate of 3 percen t per year seems appropriate at this stage. This value is consistent with the rang e recommended by IPCC (2007) and close to the latest published estimate (Hope 20 08).

(1) Discount Rates

For estimation of the benefits associated with the mitigation of climate change, one of the most complex issues involves the appropr iate discount rate. OMB’s current guidance offers a detailed discussion of the releva nt issues and calls for discount rates of 3 percent and 7 percent. It also permits a sensitiv ity analysis with low rates (1 – 3 percent) for intergenerational problems: “If your rule will have important intergenerational benefits or costs you might consi der a further sensitivity analysis using a lower but positive discount rate in addition to c alculating net benefits using discount rates of 3 and 7 percent.” 120

The choice of a discount rate, especially over lon g periods of time, raises highly contested and exceedingly difficult questions of sc ience, economics, philosophy, and law.

See

, e.g. , William Nordhaus, The Challenge of Global Warming (2008); Nicholas Stern, The Economics of Climate Change (2007); Discounting and Intergenerational Equity (Paul Portney and John Weyant eds. 1999). It is no t clear that future generations would be willing to trade environmental quality for consu mption at the same rate as the current generations. Under imaginable assumptions, decisio ns based on cost-benefit analysis with high discount rates might harm future generati ons – at least if investments are not made for the benefit of those generations. See Robert Lind, Analysis for Intergenerational Discounting, id. at 173, 176-177. It is also possible that the use of low discount rates for particular projects might itself harm future generations, by ensuring that resources are not used in a way that would gre atly benefit them. In the context of climate change, questions of intergenerational equi ty are especially important.

Reasonable arguments support the use of a 3 percen t discount rate. First, that rate is among the two figures suggested by OMB guidance, and hence it fits with existing national policy. Second, it is standard to base th e discount rate on the compensation that people receive for delaying consumption, and the 3 percent is close to the risk-free rate of return, proxied by the return on long term inflatio n-adjusted U.S. Treasury Bonds, as of this writing. Although these rates are currently c loser to 2.5 percent, the use of 3 percent provides an adjustment for the liquidity premium th at is reflected in these bonds’ returns.

At the same time, others would argue that a 5 perc ent discount rate can be supported. The argument relies on several assumpti ons. First, that rate can also be justified by reference to the level of compensation for delaying consumption, because it fits with market behavior with respect to individuals’ willingness to trade-off

120 See OMB Circular A-4, pp. 35-36, citing Portney a nd Weyant, eds. (1999), Discounting and Intergenerational Equity, Resources for the Future, Washington, DC.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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consumption across periods as measured by the estim ated post-tax average real returns to risky private investments ( e.g. , the S&P 500). In the climate setting, the 5 perc ent discount rate may be preferable to the riskless rat e because it is based on risky investments and the return to projects to mitigate climate change is also risky. In contrast, the 3 percent riskless rate may be a more appropriate discount rate for projects where the return is known with a high degree of con fidence ( e.g. , highway guardrails). In principal, the correct discount rate would reflect the variance in payoff from climate mitigation policy and the correlation between the p ayoffs of the policy and the broader

economy. 121

Second, 5 percent, and not 3 percent, is roughly c onsistent with estimates implied by reasonable inputs to the theoretically derived R amsey equation, which specifies the optimal time path for consumption. That equation s pecifies the optimal discount rate as the sum of two components. The first term (the pro duct of the elasticity of the marginal utility of consumption and the growth rate of consu mption) reflects the fact that consumption in the future is likely to be higher th an consumption today, so diminishing marginal utility implies that the same monetary dam age will cause a smaller reduction of utility in the future. Standard estimates of this term from the economics literature are in the range of 3 percent - 5 percent [cite sources he re]. The second component reflects the possibility that a lower weight should be placed on utility in the future, to account for social impatience or extinction risk, which is spec ified by a pure rate of time preference (PRTP). A common estimate of the PRTP is 2 percent , though some observers believe that a principle of intergenerational equity sugges ts that the PRTP should be close to zero. It follows that discount rate of 5 percent i s near the middle of the range of values that are able to be derived from the Ramsey equatio n.

It is recognized that the arguments above – for us e of market behavior and the Ramsey equation – face objections in the context of climate change, and of course there are alternative approaches. In light of climate cha nge, it is possible that consumption in the future will not be higher than consumption toda y, and if so, the Ramsey equation will suggest a lower figure. However, the historical ev idence is consistent with rising consumption over time.

Some critics note that using observed interest rat es for inter-generational decisions imposes current preferences on future gen erations, which some economists say may not be appropriate. For generational equity, t hey argue that the discount rate should

be below market rates to correct for market distort ions and inefficiencies in intergenerational transfers of wealth (which are pr esumed to compensate future generations for damage), and to treat generations e quitably based on ethical principles ( see Broome 2008). 122

121 Specifically, if the benefits of the policy are hi ghly correlated with the returns from broader econo my, then the market rate should be used to discount the benefits. If the benefits are uncorrelated with t he broader economy the long term government bond rate should be applied. Furthermore, if the benefits ar e negatively correlated with the broader economy a ra te less than that on long term government bonds sho uld be used (Lind, 1982 pp. 89-90).

122 See Arrow, K.J., W.R. Cline, K-G Maler, M. Munasin ghe, R. Squiteri, J.E.Stiglitz, 1996. "Intertemporal equity, discounting and economic eff iciency," in Climate Change 1995: Economic andDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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Additionally, some analyses attempt to deal with u ncertainty with respect to interest rates over time. We explore below how this might be done. 123

(2) Proposed Interim Estimates

The application of the methodology outlined above yields interim estimates of the SCC that are reported in Table IV.C.3-2. These est imates are reported separately using 3 percent and 5 percent discount rates. The cells ar e empty in rows 10 and 11, because these studies did not report estimates of the SCC at a 3 percent discount rate. The modelweighted means are reported in the final or summary row; they are $33 per tCO 2 at a 3 percent discount rate and $5 per tCO 2 with a 5 percent discount rate.

Social Dimensions of Climate Change, Contribution o f Working Group III to the Second Assessment Report of the Intergovernmental Panel on Climate Ch ange. See also Weitzman, M.L., 1999. In Portney P.R. and Weyant J.P. (eds.), Discounting and Interg enerational Equity, resources for the Future, Washington, D.C.

123 Richard Newell and William Pizer, Discounting the distant future: how much do uncertain rates increas e valuations? J. Environ. Econ. Manage. 46 (2003) 52- 71.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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Table IV.C.3-2: Global Social Cost of Carbon (SCC) Estimates ($/tCO2 in 2007

(2006$)), Based on 3% and 5% Discount Rates * Model Study Climate Scenario 3% 5%

1 FUND Anthoff et al. 2009 FUND default 6 -1

2 FUND Anthoff et al. 2009 SRES A1b 1 -1

3 FUND Anthoff et al. 2009 SRES A2 9 -1

4 FUND Link and Tol 2004 No THC 12 3

5 FUND Link and Tol 2004 THC continues 12 2

6 FUND Guo et al. 2006 Constant PRTP 5 -1

7 FUND Guo et al. 2006 Gollier discount 1 14 0

8 FUND Guo et al. 2006 Gollier discount 2 7 -1

FUND Mean 8.25 0

9 PAGE Wahba & Hope 2006 A2

- scen 57 7

10 PAGE Hope 2006 7

11 DICE Nordhaus 2008 8
Summary Model-weighted Mean 33 5

*The sample includes all peer reviewed, non-equity- weighted estimates included in Tol (2008), Nordhaus (2008), Hope (2008), and Anthoff et al. (2009), tha t are based on the most recent published version of FUND, PAGE, or DICE and use business-as-usual clima te scenarios. 124125 All values are based on the best available information from the underlying studies a bout the base year and year dollars, rather than th e Tol (2008) assumption that all estimates included in hi s review are 1995 values in 1995$. All values were updated to 2007 using a 3 percent annual growth rat e in the SCC, and adjusted for inflation using GDP

deflator.

Analyses have been conducted at $33 and $5 as these represent the estimates associated with the 3 percent and 5 percent discoun t rates, respectively. 126 The 3 percent and 5 percent estimates have independent appeal and at this time a clear preference for

124 Most of the estimates in Table 1 rely on climate s cenarios developed by the Intergovernmental Panel o n Climate Change (IPCC). The IPCC published a new se t of scenarios in 2000 for use in the Third Assessment Report (Special Report on Emissions Scen arios - SRES). The SRES scenarios define four narrative storylines: A1, A2, B1 and B2, describin g the relationships between the forces driving greenhouse gas and aerosol emissions and their evol ution during the 21st century for large world regio ns and globally. Each storyline represents different d emographic, social, economic, technological, and environmental developments that diverge in increasi ngly irreversible ways. The storylines are summariz ed in Nakicenovic et al., 2000 (see also http://sedac. ciesin.columbia.edu/ddc/sres/ ). Because the B1 and B2 storylines represent policy cases rather than busin ess-as-usual projections, estimates derived from th ese scenarios to be less appropriate for use in benefit -cost analysis. They are therefore excluded.

125 Guo et al. (2006) report estimates based on two Go llier discounting schemes. The Gollier discounting assumes complex specifications about individual uti lity functions and risk preferences. After various conditions are satisfied, declining social discount rates emerge. Gollier Discounting Scheme 1 employs a certainty-equivalent social rate of time preference (SRTP) derived by assuming the regional growth rat e is equally likely to be 1% above or below the original forecast growth rate. Gollier Discounting Scheme 2 calculates a certainty-equivalent social rate of ti me preference (SRTP) using five possible growth rat es, and applies the new SRTP instead of the original. Hope (2008) conducts Monte Carlo analysis on the PRTP component of the discount rate. The PRTP is modele d as a triangular distribution with a min value of 1%/yr, a most likely value of 2 %/yr, and a max val ue of 3 %/yr.

126 It should be noted that reported discount rates ma y not be consistently derived across models or spec ific applications of models: while the discount rate may be identical, it may reflect different assumptions about the individual components of the Ramsey equation id entified earlier.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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one over the other is not warranted. Thus, we have also included – and centered our current attention on – the average of the estimates associated with these discount rates, which is $19. (Based on the $19 global value, the approximate domestic fraction of these benefits would be $1.14 per ton of CO 2 assuming that domestic benefits are 6 percent of the global benefits.

It is true that there is uncertainty about interest rates over long time horizons. Recognizing that point, Newell and Pizer (2003) hav e made a careful effort to adjust for that uncertainty. The Newell-Pizer approach models discount rate uncertainty as something that evolves over time. 127 This is a relatively recent contribution to the

literature and estimates based on this method are i ncluded with the aim of soliciting

comment.

There are several concerns with using this approac h in this context. First, it would be a departure from current OMB guidance. Se cond, an approach that would average what emerges from discount rates of 3 perce nt and 5 percent reflects uncertainty about the discount rate, but based on a different m odel of uncertainty. The Newell-Pizer approach models discount rate uncertainty as someth ing that evolves over time; in contrast, the preferred approach (outlined above) a ssumes that there is a single discount rate with equal probability of 3 percent and 5 perc ent.

Table IV.C.3-3 reports on the application of the N ewell-Pizer adjustments. The precise numbers depend on the assumptions about the data generating process that governs interest rates. Columns (1a) and (1b) assu me that “random walk” model best describes the data and uses 3 percent and 5 percent discount rates, respectively. Columns (2a) and (2b) repeat this, except that it assumes a “mean-reverting” process. While the empirical evidence does not rule out a mean-reverti ng model, Newell and Pizer find stronger empirical support for the random walk mode l.

127 In contrast, an alternative approach based on Weit zman (2001) would assume that there is a constant discount rate that is uncertain and represented by a probability distribution. The Newell and Pizer, and Weitzman approaches are relatively recent contribut ions and we invite comment on the advantages and disadvantages of each.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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Table IV.C.3-3: Global Social Cost of Carbon (SCC) Estimates ($/tCO2 in 2007 (2006$))*, Using Newell & Pizer (2003) Adjustment for Future D iscount Rate Uncertainty**

Mode l Study Climate Scenario Randomwalk model Meanreverting

model

3% 5% 3% 5% (1a) (1b) (2a) (2b)

1 FUND Anthoff et al. 2009 FUND default 10 0 7 -1

2 FUND Anthoff et al. 2009 SRES A1b 2 0 1 -1

3 FUND Anthoff et al. 2009 SRES A2 15 0 10 -1

4 FUND Link and Tol 2004 No THC 20 6 13 4

5 FUND Link and Tol 2004 THC continues 20 4 13 2

6 FUND Guo et al. 2006 Constant PRTP 9 0 6 -1

7 FUND Guo et al. 2006 Gollier discount 1 14 0 14 0

8 FUND Guo et al. 2006 Gollier discount 2 7

- 1 7

- 1

FUND Mean 12 1 9 0

9

PAGE Wahba & Hope

2006 A2-scen 97 13 63 8

10 PAGE Hope 2006 13 8

11 DICE Nordhaus 2008 15 9

Summary Model-weighted

Mean 55 10 36 6

*The sample includes all peer reviewed, non-equity- weighted estimates included in Tol (2008), Nordhaus (2008), Hope (2008), and Anthoff et al. (2009), tha t are based on the most recent published version of
FUND, PAGE, or DICE and use business-as-usual clima te scenarios. All values are based on the best available information from the underlying studies a bout the base year and year dollars, rather than th e Tol (2008) assumption that all estimates included in hi s review are 1995 values in 1995$. All values were updated to 2007 using a 3 percent annual growth rat e in the SCC, and adjusted for inflation using GDP

deflator. See the Notes to Table 1 for further det ails. **Assumes a starting discount rate of 3 percent or 5 percent. Newell and Pizer (2003) based adjustmen t factors are not applied to estimates from Guo et al . (2006) that use a different approach to account f or discount rate uncertainty (rows 7-8).

Note that the correction factor from Newell and Piz er is based on the DICE model. The proper adjustme nt may differ for other integrated assessment models t hat produce different time schedules of marginal damages. We would expect this difference to be min or.

The resulting estimates of the social cost of carbo n are necessarily greater. When the adjustments from the random walk model are appl ied, the estimates of the social cost of carbon are $10 and $55 per ton of CO 2 , with the 5 percent and 3 percent discount rates, respectively. The application of the mean-revertin g adjustment yields estimates of $6 and $36. Relying on the random walk model, analyse s are also conducted with the value of the SCC set at $10 and $55.

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There are at least four caveats to the approach ou tlined above.

First, the impacts of climate change are expected t o be widespread, diverse, and heterogeneous. In addition, the exact magnitude of these impacts is uncertain, because of the inherent randomness in the Earth’s atmospheric processes, the U.S. and global economies, and the behaviors of current and future populations. Current IAM do not currently individually account for and assign value to all of the important physical and other impacts of climate change that are recognized in the climate change literature. Although it is likely that our capability to quanti fy and monetize impacts will improve with time, it is also likely that even in future ap plications, there are a number of potentially significant benefits categories that wi ll remain unmonetized.

Second, in the opposite direction, it is unlikely t hat the damage estimates adequately account for the directed technological c hange that climate change will cause. In particular, climate change will increase the ret urn on investment to develop technologies that allow individuals to better cope with climate change. For example, it is likely that scientists will develop crops that are better able to withstand high temperatures. In this respect, the current estimat es may overstate the likely damages

Third, there has been considerable recent discussio n of the risk of catastrophic impacts and of how best to account for worst-case s cenarios. Recent research by Weitzman (2009) specifies some conditions under whi ch the possibility of catastrophe

would undermine the use of IAMs and conventional co st-benefit analysis. This research requires further exploration before its generality is known and the optimal way to incorporate it into regulatory reviews is understoo d.

Fourth, it is also worth noting that the SCC estim ates are only relevant for incremental policies relative to the projected base lines, which capture business-as-usual scenarios. To evaluate non-marginal changes, such as might occur if the U.S. acts in tandem with other nations, then it might be necessa ry to go beyond the simple expedient of using the SCC along the BAU path. In particular , it would be correct to calculate the aggregate WTP to move from the BAU scenario to the policy scenario, without imposing the restriction that the marginal benefit remains c onstant over this range.

All of the values derived from this process are exp ressed in 2006 dollars. NHTSA has adjusted them to their equivalent values in 2007 dollars for consistency with other values used in its analysis of benefits from adopting higher CAFE standards for MY 2012-2016 passenger cars and light trucks. The res ulting value upon which we have centered our analysis, which is derived from the fi gures reported in the tables above, is equivalent to $20 per metric ton of CO2 emissions a voided when expressed in 2007$, and the agency has relied on this value in its analysis . NHTSA has also analyzed the sensitivity of its benefit estimates to alternative values of $5, $10, $34, and $56 per metric ton of CO2 emissions avoided, with all figur es again in 2007$. Each of these values applies to emissions during 2007, and are as sumed to grow in real terms by 3 percent annually beginning in 2007. NHTSA seeks co mments on these values and the approach used to derive them.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

109 m. Discounting Future Benefits and Costs

Discounting future fuel savings and other benefits is intended to account for the reduction in their value to society when they are d eferred until some future date, rather than received immediately. The discount rate expre sses the percent decline in the value of these benefits—as viewed from today’s perspectiv e—for each year they are deferred into the future. In evaluating the benefits from a lternative increases in CAFE standards for MY 2012-2016 passenger cars and light trucks, N HTSA has employed a discount rate of 3 percent per year. The agency has also tested the sensitivity of these benefit and cost estimates to the use of a 7 percent discount rate. Although these are the same discount rates analyzed in the MY 2011 final rule, NHTSA has chosen to use 3 percent as the basis for the Reference Case in this proposed rule rather than the 7 percent rate it employed previously, for the reasons discussed below.

The primary reason that NHTSA has selected 3 percen t as the appropriate rate for discounting future benefits from increased CAFE sta ndards is that most or all of vehicle manufacturers’ costs for complying with higher CAFE standards are likely to be reflected in higher sales prices for their new vehicle models . By increasing sales prices for new cars and light trucks, CAFE regulation will thus pr imarily affect vehicle purchases and other private consumption decisions. Both economic theory and OMB guidance on discounting indicate that the future benefits and c osts of regulations that mainly affect private consumption should be discounted at the soc ial rate of time preference. 128

OMB guidance also indicates that savers appear to d iscount future consumption at an average real (that is, adjusted to remove the ef fect of inflation) rate of about 3 percent when they face little risk about its likely level. Since the real rate that savers use to discount future consumption represents a reasonable estimate of the social rate of time preference, NHTSA has employed the 3 percent rate to discount p rojected future benefits and costs resulting from higher CAFE standards for MY 2012-2016 passenger cars and light trucks. 129

Because there is some uncertainty about the extent to which vehicle

manufacturers will be able to recover their costs f or complying with higher CAFE standards by increasing vehicle sales prices, howev er, NHTSA has also tested the sensitivity of these benefit and cost estimates to the use of a higher percent discount rate. OMB guidance indicates that the real economy-wide o pportunity cost of capital is the appropriate discount rate to apply to future benefi ts and costs when the primary effect of a regulation is “...to displace or alter the use of c apital in the private sector,” and estimates that this rate currently averages about 7 percent. 130 Thus the agency has also testing the sensitivity of its benefit and cost est imates for alternative MY 2012-2016 CAFE standards to the use of a 7 percent real disco unt rate. NHTSA seeks comment on

128 Id.

129 Office of Management and Budget, Circular A-4, “Re gulatory Analysis,” September 17, 2003, 33.

Available at

http://www.whitehouse.gov/omb/circulars/a004/a-4.p df (last accessed August 9, 2009).

130 Id.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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whether it should evaluate CAFE standards using a d iscount rate of 3 percent, 7 percent,

or an alternative value.

n. Accounting for Uncertainty in B b enefits and Costs

In analyzing the uncertainty surrounding its estima tes of benefits and costs from alternative CAFE standards, NHTSA has considered al ternative estimates of those assumptions and parameters likely to have the large st effect. These include the projected costs of fuel economy-improving technologies and th eir expected effectiveness in reducing vehicle fuel consumption, forecasts of fut ure fuel prices, the magnitude of the rebound effect, the reduction in external economic costs resulting from lower U.S. oil imports, the value to the U.S. economy of reducing carbon dioxide emissions, and the discount rate applied to future benefits and costs. The range for each of these variables employed in the uncertainty analysis is presented i n the section of this notice discussing

each variable.

The uncertainty analysis was conducted by assuming independent normal probability distributions for each of these variabl es, using the low and high estimates for each variable as the values below which 5 percent a nd 95 percent of observed values are believed to fall. Each trial of the uncertainty an alysis employed a set of values randomly drawn from each of these probability distributions, assuming that the value of each variable is independent of the others. Benefits an d costs of each alternative standard were estimated using each combination of variables. A total of 1,000 trials were used to establish the likely probability distributions of e stimated benefits and costs for each

alternative standard.

o. Where C c an Readers Find M m ore Information About the Economic Assumptions?

Much more detailed information is provided in Chap ter VIII of the PRIA, and a discussion of how NHTSA and EPA jointly reviewed an d updated economic assumptions for purposes of this NPRM is available in Chapter 4 of the TSD. In addition, all of NHTSA’s model input and output files are now public and available for the reader’s review and consideration. The economic input files can be found in the docket for this NPRM, NHTSA-2009-0059, and on NHTSA’s website [ in the docket and on the

website ] . Finally, because much of NHTSA’s economic analys is for purposes of this

NPRM builds on the work that was done for the MY 20 11 final rule, we refer readers to that document as well for background information co ncerning how NHTSA’s assumptions regarding economic inputs for CAFE anal ysis have evolved over the past several rulemakings, both in response to comments a nd as a result of the agency’s growing experience with this type of analysis. 131

4. How Dd oes NHTSA Uu se the Aa ssumptions in its Mm odeling Aa nalysis?

131 74 FR 14308-14358 (Mar. 30, 2009).DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

111 In developing today’s proposed CAFE standards, NHTS A has made significant use of results produced by the CAFE Compliance and Effects Model (commonly referred to as “the CAFE model” or “the Volpe model”), which DOT’s Volpe National Transportation Systems Center developed specificall y to support NHTSA’s CAFE rulemakings. The model, which has been constructed specifically for the purpose of analyzing potential CAFE standards, integrates the following core capabilities: (1) estimating how manufacturers could apply techno logies in response to new fuel economy standards, (2) estimating the costs that would be incurred in applying these technologies, (3) estimating the physical effects resulting from the application of these technologies, such as changes in travel demand, fue l consumption, and emissions of carbon dioxide and criteria pollutants , and (4) estimating the monetized societal benefits of t hese physical effects.

An overview of the model follows below. Separate m odel documentation provides a detailed explanation of the functions th e model performs, the calculations it performs in doing so, and how to install the model, construct inputs to the model, and interpret the model’s outputs. Documentation of th e model, along with model installation files, source code, and sample inputs are available at NHTSA’s web site. The model

documentation is also available in the docket for t oday’s proposed rule, as are inputs for and outputs from analysis of today’s proposed CAFE standards.

a. How Does the Model Operate?

As discussed above, the agency uses the Volpe model to estimate the extent to which manufacturers could attempt to comply with a given CAFE standard by adding technology to fleets that the agency anticipates th ey will produce in future model years.

This exercise constitutes a simulation of manufactu rers’ decisions regarding compliance

with CAFE standards.

This compliance simulation begins with the followin g inputs: (a) the baseline market forecast discussed above in Section IV.C.1, (b) technology-related estimates discussed above in Section IV.C.2, (c) economic inp uts discussed above in Section IV.C.3, and (d) inputs defining the characteristics of potential new CAFE standards. For each manufacturer, the model applies technologies i n a sequence that follows a defined engineering logic (“decision trees” discussed in th e MY 2011 final rule and in the model documentation) and a cost-minimizing strategy in or der identify a set of technologies the manufacturer could apply in response to new CAFE st andards. The model applies technologies to each of the projected individual ve hicles in a manufacturer’s fleet, until one of three things occurs: (1) the manufacturer’s fleet achieves compliance wi th the applicable standard; (2) the manufacturer “exhausts” 132 available technologies; or

132 In a given model year, the model makes additional technologies available to each vehicle model within several constraints, including (a) whether or not t he technology is applicable to the vehicle model’sDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

112 (3) for manufacturers estimated to be willing to pa y civil penalties, the manufacturer reaches the point at which doing so wo uld be more costeffective (from the manufacturer’s perspective) tha n adding further technology. 133

As discussed below, the model has also been modifie d in order to apply additional technology in early model years if doing so will fa cilitate compliance in later model

years.

The model accounts explicitly for each model year, applying most technologies when vehicles are scheduled to be redesigned or fre shened, and carrying forward technologies between model years. The CAFE model a ccounts explicitly for each model year because EPCA requires that NHTSA make a year-b y-year determination of the

a p propriate level of stringency and then set the stan dard at that level, while ensuring ratable increases in average fuel economy. 134

The model also calculates the costs, effects, and b enefits of technologies that it estimates could be added in response to a given CAF E standard. 135 It calculates costs by applying the cost estimation techniques discussed a bove in Section IV.C.2, and by accounting for the number of affected vehicles. It accounts for effects such as changes in vehicle travel, changes in fuel consumption, and ch anges in greenhouse gas and criteria pollutant emissions. It does so by applying the fu el consumption estimation techniques also discussed in Section IV.C.2, and the vehicle s urvival and mileage accumulation forecasts, the rebound effect estimate and the fuel properties and emission factors discussed in Section IV.C.3. Considering changes i n travel demand and fuel

technology class, (b) whether the vehicle is underg oing a redesign or freshening in the given model ye ar, (c) whether engineering aspects of the vehicle make the technology unavailable ( e.g. , secondary axle disconnect cannot be applied to two-wheel drive veh icles), and (d) whether technology application rema ins within “phase in caps” constraining the overall sha re of a manufacturer’s fleet to which the technolog y can be added in a given model year. Once enough techno logy is added to a given manufacturer’s fleet in a given model year that these constraints make furthe r technology application unavailable, technologies are exhausted for that manufacturer in that model year.

133 This possibility was added to the model to account for the fact that under EPCA/EISA, manufacturers must pay fines if they do not achieve compliance wi th applicable CAFE standards. 49 U.S.C. sec. § 32912(b). NHTSA recognizes that some manufacturers will find it more cost-effective to pay fines than to achieve compliance, and believes that to assume the se manufacturers would exhaust available technologi es before paying fines would cause unrealistically hig h estimates of market penetration of expensive technologies such as diesel engines and strong hybr id electric vehicles, as well as correspondingly in flated estimates of both the costs and benefits of any pot ential CAFE standards.

134 49 U.S.C. sec. § 32902(a) states that “A a t least 18 months before the beginning of each mode l year, the Secretary of Transportation shall prescribe by regu lation average fuel economy standards for automobil es manufactured by a manufacturer in that model year

. , and that E e ach standard shall be the maximum feasible average fuel economy level that the Secret ary decides the manufacturers can achieve in that y ear. ” NHTSA has long interpreted this statutory language to require year-by-year assessment of manufacturer capabilities. 49 U.S.C. sec. § 32902(b)(2)(C) also requires that standards increase ratably between MY

2011 and MY 2020.

135 As for all of its other rulemakings, NHTSA is requ ired by Executive Order 12866 and DOT regulations to analyze the costs and benefits of CAFE standards . Executive Order 12866, 58 FR 51735 (Oct. 4, 1993 ); DOT Order 2100.5, “Regulatory Policies and Procedur es,” 1979, available at http://regs.dot.gov/rulemakingrequirements.htm (las t accessed August 21, 2009).DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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consumption, the model estimates the monetized valu e of accompanying benefits to society, as discussed in Section IV.C.3. The model calculates both the undiscounted and

discounted value of benefits that accrue over time in the future.

The Volpe model has other capabilities that facilit ate the development of a CAFE

standard. It can be used to fit a mathematical fun ction forming the basis for an attributebased CAFE standard, following the steps described below. It can also be used to evaluate many ( e.g. , 200 per model year) potential levels of stringenc y sequentially, and identify the stringency at which specific criteria are met. For example, it can identify the stringency at which net benefits to society are max imized, the stringency at which a specified total cost is reached, or the stringency at which a given average required fuel economy level is attained. This allows the agency to compare more easily the impacts in terms of fuel savings, emissions reductions, and co sts and benefits of achieving different levels of stringency according to different criteri a. The model can also be used to perform uncertainty analysis ( i.e. , Monte Carlo simulation), in which input estimates are varied randomly according to specified probability distributions, such that the uncertainty of key measures ( e.g. , fuel consumption, costs, benefits) can be evaluat ed.

b. Has NHTSA C c onsidered Other Models?

Nothing in EPCA requires NHTSA to use the Volpe mod el. In principle, NHTSA could perform all of these tasks through other mean s. For example, in developing the standards proposed today, the agency did not use th e Volpe model’s curve fitting routines, because they could not be modified in tim e to reflect the change in the mathematical function defining the proposed CAFE st andards. The Volpe model may be modified to do so for the final rule, although the agency can also continue to fit the mathematical function outside the model. In genera l, though, these model capabilities have greatly increased the agency’s ability to rapi dly, systematically, and reproducibly conduct key analyses relevant to the formulation an d evaluation of new CAFE standards.

During its previous rulemaking, which led to the fi nal MY 2011 standards promulgated earlier this year, NHTSA received comme nts from the Alliance and CARB encouraging NHTSA to examine the usefulness of othe r models. As discussed in that final rule, NHTSA, having undertaken such considera tion, concluded that the Volpe model is a sound and reliable tool for the developm ent and evaluation of potential CAFE

standards. 136

In reconsidering and reaffirming this conclusion fo r purposes of this NPRM, NHTSA notes that the Volpe model not only has been formally peer-reviewed and tested through three rulemakings, but also has some featur es especially important for the analysis of CAFE standards under EPCA/EISA. Among these are the ability to perform year-by-year analysis, and the ability to account f or engineering differences between specific vehicle models.

136 74 FR 14372 (Mar. 30, 2009).DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

114 EPCA requires that NHTSA set CAFE standards for eac h model year at the level appropriate for that year. 137 Doing so requires the ability to analyze each mode l year and, when developing regulations covering multiple model years, to account for the interdependency of model years in terms of the appr opriate levels of stringency for each one. Also, as part of the evaluation of the econom ic practicability of the standards, as required by EPCA, NHTSA has traditionally assessed the annual costs and benefits of the standards as it is permitted to do so. The first ( 2002) version of DOT’s model treated each model year separately, and did not perform thi s type of explicit accounting. Manufacturers took strong exception to these shortc omings. For example, GM commented in 2002 that “although the table suggests that the proposed standard for MY 2007, considered in isolation, promises benefits ex ceeding costs, that anomalous outcome is merely an artifact of the peculiar Volpe methodo logy, which treats each year independently of any other...” In 2002, GM also crit icized DOT’s analysis for, in some cases, adding a technology in MY 2006 and then repl acing it with another technology in MY 2007. GM (and other manufacturers) argued that this completely failed to represent true manufacturer product-development cycles, and t herefore could not be technologically feasible or economically practicabl e.

In response to these concerns, and related concerns expressed by other manufacturers, DOT modified the CAFE model in order to account for dependencies between model years and to better represent manufac turers’ planning cycles, in a way that still allowed NHTSA to comply with the statuto ry requirement to determine the appropriate level of the standards for each model y ear. This was accomplished by limiting the application of many technologies to mo del years in which vehicle models are scheduled to be redesigned (or, for some technologi es, “freshened”), and by causing the model to “carry forward” applied technologies from one model year to the next.

During the recent rulemaking for MY 2011 passenger cars and light trucks, DOT

further modified the CAFE model to account for cost reductions attributable to “learning effects” related to volume ( i.e. , economies of scale) and the passage of time ( i.e. , timebased learning), both of which evolve on year-by-ye ar basis. These changes were implemented in response to comments by environmenta l groups and other stakeholders.

The Volpe model is also able to account for importa nt engineering differences between specific vehicle models, and to thereby red uce the risk of applying technologies that may be incompatible with or already present on a given vehicle model. Some commenters have previously suggested that manufactu rers are most likely to broadly apply generic technology “packages,” and the Volpe model does tend to form “packages” dynamically, based on vehicle characteristics, rede sign schedules, and schedules for increases in CAFE standards. For example, under th e proposed CAFE standards for passenger cars, the CAFE model estimated that manuf acturers could apply turbocharged SGDI engines mated with dual-clutch AMTs to 1.8 mil lion passenger cars in MY 2016, about 16 percent of the MY 2016 passenger car fleet . Recent modifications to the model, discussed below, to represent multi-year planning, increase the model’s tendency to add

137 49 U.S.C. sec. § 32902(a).DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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relatively cost-effective technologies when vehicle s are estimated to be redesigned, and thereby increase the model’s tendency to form such packages.

On the other hand, some manufacturers have indicate d that especially when faced with significant progressive increases in the strin gency of new CAFE standards, they are likely to also look for narrower opportunities to a pply specific technologies. By progressively applying specific technologies to spe cific vehicle models, the CAFE model also produces such outcomes. For example, under th e proposed CAFE standards for passenger cars, the CAFE model estimated that in MY 2012, some manufacturers could find it advantageous to apply SIDI to some vehicle models without also adding turbochargers.

By following this approach of combining technologie s incrementally and on a model-by-model basis, the CAFE model is able to acc ount for important engineering

differences between vehicle models and avoid unlike ly technology combinations. For example, the model does not apply dual-clutch AMTs (or strong hybrid systems) to vehicle models with 6-speed manual transmissions. Some vehicle buyers prefer a manual transmission; this preference cannot be assumed awa y. The model’s accounting for manual transmissions is also important for vehicles with larger engines: for example, cylinder deactivation cannot be applied to vehicles with manual transmissions, because there is no reliable means of predicting when the d river will change gears. By retaining cylinder deactivation as a specific technology rath er than part of a pre-determined package and by retaining differentiation between ve hicles with different transmissions, DOT’s model is able to target cylinder deactivation only to vehicle models for which it is technologically feasible.

The Volpe model also produces a single vehicle-leve l output file that, for each vehicle model, shows which technologies were presen t at the outset of modeling, which technologies were superseded by other technologies, and which technologies were ultimately present at the conclusion of modeling. For each vehicle, the same file shows resultant changes in vehicle weight, fuel economy, and cost. This provides for efficient identification, analysis, and correction of errors, a task with which the public can now assist the agency, since all inputs and outputs are public.

Such considerations, as well as those related to th e efficiency with which the Volpe model is able to analyze attribute-based CAFE standards and changes in vehicle classification, and to perform higher-level analysi s such as stringency estimation (to meet predetermined criteria), sensitivity analysis, and uncertainty analysis, lead the agency to

conclude that the model remains the best available to the agency for the purposes of analyzing potential new CAFE standards.

c. What Changes H h as DOT Made to the Model?

Prior to being used for analysis supporting today’s proposal, the Volpe model was revised to make some minor improvements, and to add one significant new capability: the ability to simulate manufacturers’ ability to e ngage in “multi-year planning.” Multi-DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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year planning refers to the fact that when redesign ing or freshening vehicles, manufacturers can anticipate future fuel economy or CO 2 standards, and add technologies accounting for these standards. For example, a man ufacturer might choose to overcomply in a given model year when many vehicle mode ls are scheduled for redesign, in order to facilitate compliance in a later model yea r when standards will be more stringent yet few vehicle models are scheduled for redesign. 138 Prior comments have indicated that the Volpe model, by not representing such manufactu rer choices, tended to overestimate compliance costs. However, because of the technica l complexity involved in representing these choices when, as in the Volpe mo del, each model year is accounted for separately and explicitly, the model could not be m odified to add this capability prior to the statutory deadline for the MY 2011 final standa rds.

The model now includes this capability, and NHTSA h as applied it in analyzing the standards proposed today. Consequently, this o ften produces results indicating that manufacturers could over-comply in some model years (with corresponding increases in costs and benefits in those model years) and thereb y “carry forward” technology into later model years in order to reduce compliance cos ts in those later model years. NHTSA believes this better represents how manufacturers w ould actually respond to new CAFE standards, and thereby produces more realistic esti mates of the costs and benefits of such

standards.

The Volpe model has also been modified to accommoda te inputs specifying the amount of CAFE credit to be applied to each manufac turer’s fleet. Although the model is not currently capable of estimating manufacturers’ decisions regarding the generation and use of CAFE credits, and EPCA does not allow NHTSA, in setting CAFE standards, to take into account manufacturers’ potential use of c redits, this additional capability in the Volpe model provides a basis for more accurately es timating costs, effects, and benefits that may actually result from new CAFE standards. Insofar as some manufacturers actually do earn and use CAFE credits, this provide s NHTSA with some ability to examine outcomes more realistically than EPCA allow s for purposes of setting new

CAFE standards.

In comments on recent NHTSA rulemakings, some revie wers have suggested that the Volpe model should be modified to estimate the extent to which new CAFE standards would induce changes in the mix of vehicles in the new vehicle fleet. NHTSA, like EPA, agrees that a “market shift” model, also called a c onsumer vehicle choice model, could provide useful information regarding the possible e ffects of potential new CAFE standards. An earlier experimental version of the Volpe model included a multinomial logit model that estimated changes in sales resulti ng from CAFE-induced increases in new vehicle fuel economy and prices. A fuller desc ription of this attempt can be found in Section V of the PRIA. However, NHTSA has thus far been unable to develop credible coefficients specifying such a model. In addition, as discussed in Section II.H.4, such a model is sensitive to the coefficients used in it, and there is great variation over some key

138 Although a manufacturer may, in addition, generate CAFE credits in early model years for use in later model years (or, less likely, in later years for us e in early years), EPCA does not allow NHTSA, when setting CAFE standards, to account for manufacturer s’ use of CAFE credits.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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values of these coefficients in published studies. NHTSA seeks comment on ways to improve on this earlier work and develop this capab ility effectively. If the agency is able to do so prior to conducting analysis supporting de cisions regarding final CAFE standards, it will attempt to reintegrate this capa bility in the Volpe model and include these effects in its analysis of final standards. If not, NHTSA will continue efforts to develop and make use of this capability in future r ulemakings.

d. Does the Model Set the Standards?

Although NHTSA currently uses the Volpe model as a tool to inform its consideration of potential CAFE standards, the Volp e model does not determine the CAFE standards that NHTSA proposes or promulgates a s final regulations. The results it produces are completely dependent on inputs selecte d by NHTSA, based on the best available information and data available in the age ncy’s estimation at the time standards are set. Although the model has been programmed in previous rulemakings to estimate at what stringency net benefits are maximized, NHTSA h as not done so here and has instead used the Volpe model to estimate stringency levels that produce roughly constant rates of increase in the combined average required fuel economy. In addition to identifying the input assumptions underlying its de cisions, NHTSA provides the rationale and justification for selecting those inputs as des cribed in Sections ? through ? of this notice. Ultimately, NHTSA’s selection of a CAFE st andard is governed and guided by the statutory requirements of EPCA, as amended by E ISA: NHTSA sets the standard at the maximum feasible average fuel economy level tha t it determines is achievable during a particular model year, considering technological feasibility, economic practicability, the

effect of other standards of the Government on fuel economy, and the need of the nation

to conserve energy.

NHTSA considers the results of analyses conducted by the Volpe model and analyses conducted outside of the Volpe model, incl uding analysis of the impacts of carbon dioxide and criteria pollutant emissions, an alysis of technologies that may be available in the long term and whether NHTSA could expedite their entry into the market through these standards, and analysis of the extent to which changes in vehicle prices and fuel economy might affect vehicle production and sa les. Using all of this information— not solely that from the Volpe model—the agency con siders the governing statutory factors, along with environmental issues and other relevant societal issues such as safety, and promulgates the standards based on its best jud gment on how to balance these

factors.

This is why the agency considered eight regulatory alternatives, only one of which reflects the agency’s proposed standards, bas ed on the agency’s determinations and assumptions. Others assess alternative standar ds, some of which exceed the proposed standards and/or the point at which net be nefits are maximized. These comprehensive analyses, which also included scenari os with different economic input assumptions as presented in the FEIS and FRIA, are intended to inform and contribute to the agency’s consideration of the “need of the Unit ed States to conserve energy,” as well as the other statutory factors. 49 U.S.C. sec. § 32902(f). Additionally, the agency’sDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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analysis considers the need of the nation to conser ve energy by accounting for economic externalities of petroleum consumption and monetizi ng the economic costs of

incremental CO 2 emissions in the social cost of carbon. NHTSA use s information from the model when considering what standards to propos e and finalize, but the model does

not determine the standards.

e. How D d oes NHTSA Make the Model Available and Transparent?

Model documentation, which is publicly available in the rulemaking docket and on NHTSA’s web site, explains how the model is inst alled, how the model inputs (all of which are available to the public) 139 and outputs are structured, and how the model is used. The model can be used on any Windows-based p ersonal computer with Microsoft

Office 2003 and the Microsoft .NET framework instal led (the latter available without charge from Microsoft). The executable version of the model and the underlying source

code are also available at NHTSA’s web site. The i nput files used to conduct the core analysis documented in this proposed rule are avail able in the public docket. With the model and these input files, anyone is capable of i ndependently running the model to repeat, evaluate, and/or modify the agency’s analys is.

5. How Dd id NHTSA Develop the Shape of the Target Curves for the Proposed Standards?

In developing the shape of the target curves for t oday’s proposed standards, NHTSA took a new approach, primarily in response to comments received in the MY 2011 rulemaking. NHTSA’s authority under EISA allo ws consideration of any “attribute related to fuel economy” and any “mathematical func tion.” While the attribute, footprint, is the same for these proposed standards as the att ribute used for the MY 2011 standards,

the mathematical function is new.

Both vehicle manufacturers and public interest gro ups expressed concern in the MY 2011 rulemaking process that the constrained log istic function, particularly the function for the passenger car standards, was overl y steep and could lead, on the one hand, to fuel economy targets that were overly stri ngent for small footprint vehicles, and on the other hand, to a greater incentive for manuf acturers to upsize vehicles in order to reduce their compliance obligation (because larger- footprint vehicles have less stringent targets) in ways that could compromise energy and e nvironmental benefits. We tentatively believe that the constrained linear fun ction developed here significantly mitigates steepness concerns, but we seek comment o n whether readers agree, and whether there are any other issues relating to the new approach that NHTSA should consider in developing the curves for the final rul e.

a. Standards are Attribute- B b ased and D d efined by a Mathematical Function

139 We note, however, that files from any supplemental analysis conducted that relied in part on confiden tial manufacturer product plans cannot be made public, a s prohibited under 49 CFR Part 512.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

119 EPCA, as amended by EISA, expressly requires that C AFE standards for passenger cars and light trucks be based on one or more vehicle attributes related to fuel economy, and be expressed in the form of a mathemat ical function. 140 Like the MY 2011 standards, the MY 2012-2016 passenger car and light truck standards are attribute-based and defined by a mathematical function. 141 Also like the MY 2011 standards, the MY 2012-2016 standards are based on the footprint attr ibute. However, unlike the MY 2011 standards, the MY 2012-2016 standards are defined b y a constrained linear rather than a constrained logistic function. The reasons for the se similarities and differences are explained below.

As discussed above in Section II, under attribute-b ased standards, the fleet-wide average fuel economy that a particular manufacturer must achieve in a given model year depends on the mix of vehicles that it produces for sale. Until NHTSA began to set “Reformed” attribute-based standards for light truc ks in MYs 2008-2011, and until EISA gave NHTSA authority to set attribute-based standar ds for passenger cars beginning in MY 2011, NHTSA set “universal” or “flat” industry-w ide average CAFE standards. Attribute-based standards are preferable to univers al industry-wide average standards for several reasons. First, attribute-based standards increase fuel savings and reduce emissions when compared to an equivalent universal industry-wide standard under which each manufacturer is subject to the same numerical requirement. Absent a policy to require all full-line manufacturers to produce and sell essentially the same mix of vehicles, the stringency of the universal industry- wide standards is constrained by the capability of those full-line manufacturers whose p roduct mix includes a relatively high proportion of larger and heavier vehicles. In effe ct, the standards are based on the mix of those manufacturers. As a result, the standards ar e generally set below the capabilities of

full-line and limited-line manufacturers that sell predominantly lighter and smaller

vehicles.

Under an attribute-based system, in contrast, every manufacturer is more likely to be required to continue adding more fuel-saving tec hnology each year because the level of the compliance obligation of each manufacturer i s based on its own particular product mix. Thus, the compliance obligation of a manufact urer with a higher percentage of lighter and smaller vehicles will have a higher com pliance obligation than a manufacturer with a lower percentage of such vehicles. As a res ult, all manufacturers must use technologies to enhance the fuel economy levels of the vehicles they sell. Therefore, fuel savings and CO 2 emissions reductions should be higher under an att ribute-based system than under a comparable industry-wide standard.

140 49 U.S.C. sec. § 32902(a)(3)(A).

141 As discussed in Chapter 2 of the TSD, EPA is also proposing to set attribute-based CO 2 standards that are defined by a mathematical function, given the a dvantages of using attribute-based standards and gi ven the goal of coordinating and harmonizing the CAFE a nd CO 2 standards as expressed by President Obama in his announcement of the new National Program and in the joint NOI.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

120 Second, attribute-based standards minimize the ince ntive for manufacturers to respond to CAFE in ways harmful to safety. 142 Because each vehicle model has its own target (based on the attribute chosen), attribute-b ased standards provide no incentive to build smaller vehicles simply to meet a fleet-wide average. Since smaller vehicles are subject to more stringent fuel economy targets, a m anufacturer’s increasing its proportion of smaller vehicles would simply cause its complian ce obligation to increase.

Third, attribute-based standards provide a more equ itable regulatory framework

for different vehicle manufacturers. 143 A universal industry-wide average standard imposes disproportionate cost burdens and complianc e difficulties on the manufacturers that need to change their product plans and no obli gation on those manufacturers that have no need to change their plans. Attribute-base d standards spread the regulatory cost burden for fuel economy more broadly across all of the vehicle manufacturers within the industry.

And fourth, attribute-based standards respect econo mic conditions and consumer choice, instead of having the government mandate a certain fleet mix. Manufacturers are required to invest in technologies that improve the fuel economy of their fleets, regardless of vehicle mix. Additionally, attribute-based stan dards help to avoid the need to conduct rulemakings to amend standards if economic conditio ns change, causing a shift in the mix of vehicles demanded by the public. NHTSA conducte d three rulemakings during the 1980s to amend passenger car standards for MYs 1986 -1989 in response to unexpected drops in fuel prices and resulting shifts in consum er demand that made the passenger car standard of 27.5 mpg infeasible for several years f ollowing the change in fuel prices.

As discussed above in Section II, for purposes of t he CAFE standards proposed in this NPRM, NHTSA recognizes that the risk, even if small, does exist that low fuel prices in MYs 2012-2016 might lead indirectly to less than currently anticipated fuel savings and emissions reductions. Thus, we seek comment on whether backstop standards, or any other method within the agencies’ statutory aut hority, should and can be implemented for the import and light truck fleets i n order to achieve the fuel savings that attribute-based standards might not absolutely guar antee. Commenters are encouraged, but not required, to review and respond to NHTSA’s discussion of this issue in the MY 2011 final rule as a starting point. 144

b

. , What A a ttribute Does NHTSA Use, and Why?

Consistent with the MY 2011 CAFE standards, NHTSA i s proposing to use footprint as the attribute for the MY 2012-2016 CAF E standards. There are several policy reasons why NHTSA and EPA both believe that footprint is the most appropriate attribute on which to base the standards, as discus sed below.

142 The 2002 NAS Report described at length and quanti fied the potential safety problem with average fuel economy standards that specify a single numerical r equirement for the entire industry. See NAS Report at 5, finding 12.

143 Id . at 4-5, finding 10.

144 74 FR 14409-14412 (Mar. 30, 2009).DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

121 As discussed in the PRIA, in NHTSA’s judgment, from the standpoint of vehicle safety, it is important that the CAFE standards be set in a way that does not encourage manufacturers to respond by selling vehicles that a re in any way less safe. While

NHTSA’s research also indicates that reductions in vehicle mass tend to compromise vehicle safety, footprint-based standards provide a n incentive to use advanced lightweight materials and structures that would be discouraged by weight-based standards, because manufacturers can use them to im prove a vehicle’s fuel economy without their use necessarily resulting in a change in the vehicle’s target level of fuel

economy.

Further, although we recognize that weight is bette r correlated with fuel economy than is footprint, we continue to believe that ther e is less risk of “gaming” (artificial manipulation of the attribute(s) to achieve a more favorable target) by increasing footprint under footprint-based standards than by i ncreasing vehicle mass under weightbased standards—it is relatively easy for a manufac turer to add enough weight to a vehicle to decrease its applicable fuel economy tar get a significant amount, as compared to increasing vehicle footprint. We also agree wit h concerns raised in 2008 by some commenters in the MY 2011 CAFE rulemaking that ther e would be greater potential for gaming under multi-attribute standards, such as sta ndards under which targets would also depend on attributes such as weight, torque, power, towing capability, and/or off-road capability. Standards that incorporate such attrib utes in conjunction with footprint would not only be significantly more complex, but by prov iding degrees of freedom with respect to more easily-adjusted attributes, they would make it less certain that the future fleet would actually achieve the projected average fuel e conomy and CO 2 reduction levels.

However, while NHTSA tentatively concludes that fo otprint is the most appropriate attribute upon which to base the propos ed standards, recognizing strong public interest in this issue, we seek comment on w hether the agency should consider setting standards for the final rule based on anoth er attribute or another combination of attributes. If commenters suggest that the agency should consider another attribute or another combination of attributes, the agency speci fically requests that the commenters address the concerns raised in the paragraphs above regarding the use of other attributes, and explain how standards should be developed using the other attribute(s) in a way that contributes more to fuel savings and CO 2 reductions than the footprint-based standards, without compromising safety.

c. What Mathematical Function D d id NHTSA Use for the RecentlyPromulgated MY 2011 CAFE Standards?

The MY 2011 CAFE standards are defined by a continu ous, constrained logistic function, which takes the form of an S-curve, and i s defined according to the following

formula:DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

122 ( )

( ) 1

1 1 1

1 FOOTPRINT c d

FOOTPRINT c d TARGET

e

a b a e −

− =  

+ −  

+  

Here, TARGET

is the fuel economy target (in mpg) applicable to vehicles of a given footprint ( FOOTPRINT

, in square feet), b and a are the function’s lower and upper asymptotes (also in mpg), e is approximately equal to 2.718, 145 c is the footprint (in square feet) at which the inverse of the fuel econo my target falls halfway between the inverses of the lower and upper asymptotes, and d is a parameter (in square feet) that determines how gradually the fuel economy target tr ansitions from the upper toward the lower asymptote as the footprint increases.

After fitting this mathematical form (separately) to the passenger car and light truck fleets and determining the stringency of the standards ( i.e. , the vertical positions of the curves), NHTSA arrived at the following curves to define the MY 2011 standards:

145 e is the irrational number for which the slope of the function y = number x is equal to 1 when x

is equal to zero. The first 8 digits of e are 2.7182818.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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Figure IV.C.5-2. MY 2011 CAFE Standards for Passen ger Cars and Light Trucks

20 25 30 35 40 45

35 40 45 50 55 60 65 70

Footprint (sf)Target (mpg) Passenger Cars

Light Trucks

d. What Mathematical Function is NHTSA Proposing to Use for New CAFE Standards, and W w hy?

In finalizing the MY 2011 standards, NHTSA noted th at the agency is not required to use a constrained logistic function and indicated that the agency may consider defining future CAFE standards in terms of a differ ent mathematical function. NHTSA has done so in preparation for the proposed CAFE st andards.

In revisiting this question, NHTSA found that the f inal MY 2011 CAFE standard for passenger cars, though less steep than the MY 2 011 standard NHTSA proposed in 2008, continues to concentrate the sloped portion o f the curve (from a compliance perspective, the area in which upsizing results in a slightly lower applicable target) within a relatively narrow footprint range (approximately 47-55 square feet). Further, most passenger car models have footprints smaller than t he curve’s 51.4 square foot inflection point, and many passenger car models have footprint s at which the curve is relatively flat.

For both passenger cars and light trucks, a mathema tical function that has some slope at most footprints where vehicles are produce d is advantageous in terms of fairly balancing regulatory burdens among manufacturers, a nd in terms of providing a Formatted: CenteredDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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disincentive to respond to new standards by downsiz ing vehicles in ways that compromise vehicle safety. For example, a flat sta ndard may be very difficult for a fullline manufacturer to meet, while requiring very lit tle of a manufacturer concentrating on small vehicles, and a flat standard may provide an incentive to manufacturers to downsize certain vehicles, in order to “balance out” other v ehicles subject to the same standard.

As a potential alternative to the constrained logis tic function, NHTSA had, in proposing MY 2011 standards, presented information regarding a constrained linear function. As shown in the 2008 NPRM, a constrained linear function has the potential to avoid creating a localized region (in terms of vehi cle footprint) over which the slope of the function is relatively steep. Although NHTSA d id not receive public comments on this option, the agency indicated that it still bel ieved a linear function constrained by upper (on a gpm basis) and possibly lower limits co uld merit reconsideration in future CAFE rulemakings.

Having re-examined a constrained linear function fo r purposes of the proposed standards, NHTSA tentatively concludes that for bot h passenger cars and light trucks, it remains meaningfully sloped over a wide footprint r ange, thereby providing a welldistributed disincentive to downsize vehicles in wa ys that could compromise highway safety. Further, the constrained linear function p roposed today is not so steeply sloped that it would provide a strong incentive to increas e vehicle size in order to obtain a lower CAFE requirement and higher CO 2 limit, thereby compromising energy and environmental benefits. Therefore, the CAFE standa rds proposed today are defined by

constrained linear functions.

The constrained linear function is defined accordin g to the following formula:

1

1 1

, , TARGET

MIN MAX c FOOTPRINT d a b

=  

 

× +        

Here, TARGET

is the fuel economy target (in mpg) applicable to vehicles of a given footprint ( FOOTPRINT , in square feet), b and a are the function’s lower and upper asymptotes (also in mpg), respectively, c is the slope (in gpm per square foot) of the sloped portion of the function, and d is the intercept (in gpm) of the sloped portion of the function (that is, the value the sloped portion wou ld take if extended to a footprint of 0 square feet. The MIN

and MAX functions take the minimum and maximum, respective ly of the included values; for example, MIN (1,2) = 1, MAX (1,2) = 2, and

MIN [ MAX (1,2),3)]=2. The following chart shows an example of a linear target function,

where a = 0.0241 gpm (41.6 mpg), b = 0.032 gpm (31.2 mpg), c = 0.000531 gpm per square foot, and d

= 0.002292 gpm (436 mpg). Because the function is linear on a gpm basis, not an mpg basis, it is plotted on this basi s.

e. How d D id NHTSA Fit the Coefficients that Determine the Sh ape of the Proposed Curves?DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

125 For purposes of this NPRM, and for EPA’s use in dev eloping new CO 2 emissions standards, the basic curve shapes were developed us ing methods similar to those applied by NHTSA in fitting the curves defining the MY 2011 standards. We began with the market inputs discussed above, but because the base line fleet is technologically heterogeneous, NHTSA used the CAFE model to develop a fleet to which nearly all the technologies discussed in Section [XX] V of the PRIA and Chapter 3 of the joint TSD 146
were applied, by taking the following steps: (1) t reating all manufacturers as unwilling to pay civil penalties rather than applying technology , (2) applying any technology at any time, irrespective of scheduled vehicle redesigns o r freshening, and (3) ignoring “phasein caps” that constrain the overall amount of techn ology that can be applied by the model to a given manufacturer’s fleet. These steps helpe d to increase technological parity among vehicle models, thereby providing a better ba sis (than the baseline fleet) for estimating the statistical relationship between veh icle size and fuel economy.

More information on the process for fitting the pas senger car and light truck

curves for MYs 2012-2016 is available above in Sect ion II.C, and NHTSA refers the reader to that section and to Chapter 2 of the join t TSD. NHTSA seeks comment on this approach to fitting the curves. We note that final decisions on this issue will play an important role in determining the form and stringen cy of the final CAFE and CO 2 standards, the incentives those standards will prov ide ( e.g ., with respect to downsizing small vehicles), and the relative compliance burden faced by each manufacturer.

D. Statutory requirements

1. EPCA, as Amended by EISA a. Standard Setting

NHTSA must establish separate standards for MY 2011 -2020 passenger cars and light trucks, subject to two principal requirements

. 147 First, the standards are subject to a minimum requirement regarding stringency: they mus t be set at levels high enough to ensure that the combined U.S. passenger car and lig ht truck fleet achieves an average fuel economy level of not less than 35 mpg not later tha n MY 2020. 148 Second, as discussed above and at length in the March 2009 final rule es tablishing the MY 2011 CAFE standards, EPCA requires that the agency establish standards for all new passenger cars

146 The agencies excluded diesel engines and strong hy brid vehicle technologies from this exercise (and only this exercise) because the agencies expect tha t manufacturers would not need to rely heavily on t hese technologies in order to comply with the proposed s tandards. NHTSA and EPA did include diesel engines and strong hybrid vehicle technologies in all other portions of their analyses.

147 EISA added the following additional requirements-

- 1. • Standards must be attribute-based and expressed in the form of a mathematical function. 49

U.S.C. sec. § 32902(b)(3)(A).

2. • Standards for MYs 2011-2020 must “increase ratably” in each model year. 49 U.S.C. sec. § 32902(b)(2)(C). NHTSA interprets this requirement, in combination with the requirement to set the standards for each model year at the level determined to be the maximum feasible level for that model year, to mean that the annual increa ses should not be disproportionately large

or small in relation to each other.

148 49 U.S.C. sec. § 32902(b)(2)(A). Formatted: Indent: Left: 0.5", Bulleted + Level: 1 + Aligned at: 0.25" + Tab after: 0.5" + Indent at: 0.5", Tab stops: 0.75", List tab +

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and light trucks at the maximum feasible average fu el economy level that the Secretary

decides the manufacturers can achieve in that model year. 149 The implication of this second requirement is that it calls for exceeding t he minimum requirement if the agency determines that the manufacturers can achieve a hig her level. When determining the level achievable by the manufacturers, EPCA require s that the agency consider the four statutory factors of technological feasibility, eco nomic practicability, the effect of other

motor vehicle standards of the Government on fuel e conomy, and the need of the United States to conserve energy. In addition, the agency has the authority to and traditionally does consider other relevant factors, such as the e ffect of the CAFE standards on motor vehicle safety.

i. Statutory Factors C c onsidered in Determining the Achievable Level of Average Fuel Economy

As none of the four factors is defined in EPCA and each remains interpreted only to a limited degree by case law, NHTSA has consider able latitude in interpreting them. NHTSA interprets the four statutory factors as set forth below.

(1) Technological F

f easibiilty

“Technological feasibility” refers to whether a par ticular technology for improving fuel economy is available or can become a vailable for commercial application in the model year for which a standard is being est ablished. Thus, the agency is not limited in determining the level of new standards t o technology that is already being commercially applied at the time of the rulemaking. It can, instead, set technologyforcing standards, i.e. , ones that make it necessary for manufacturers to engage in research and development in order to bring a new te chnology to market.

(2) Economic p P racticability

“Economic practicability” refers to whether a stand ard is one “within the financial capability of the industry, but not so stringent as to” lead to “adverse economic consequences, such as a significant loss of jobs or the unreasonable elimination of

consumer choice.” 150 In an attempt to ensure the economic practicabili ty, the agency considers a variety of factors, including the annua l rate at which manufacturers can increase the percentage of its fleet that has a par ticular type of fuel saving technology, and cost to consumers. Consumer acceptability is a lso an element of economic practicability.

At the same time, the law does not preclude a CAFE standard that poses considerable challenges to any individual manufactu rer. The Conference Report for EPCA, as enacted in 1975, makes clear, and the case law affirms, “(A) determination of maximum feasible average fuel economy should not be keyed to the single manufacturer which might have the most difficulty achieving a gi ven level of average fuel

149 49 U.S.C. sec. § 32902(a).

150 67 FR 77015, 77021 (Dec. 16, 2002). Formatted: Font: ItalicDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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economy.” 151 Instead, the agency is compelled “to weigh the be nefits to the nation of a higher fuel economy standard against the difficulti es of individual automobile

manufacturers.” Id. The law permits CAFE standards exceeding the proj ected capability of any particular manufacturer as long as the stand ard is economically practicable for the industry as a whole. Thus, while a particular CAFE standard may pose difficulties for one manufacturer, it may also present opportunities for another. The CAFE program is not necessarily intended to maintain the competitiv e positioning of each particular company. Rather, it is intended to enhance fuel ec onomy of the vehicle fleet on American roads, while protecting motor vehicle safe ty and being mindful of the risk of harm to the overall United States economy.

Thus, NHTSA believes that this term must be applied in the context of the competing concerns associated with different levels of standards. Prior to switching to

attribute-based standards in the MY 2008-2011 rulem aking, the agency sought to ensure the economy practicability of standards in part by setting them at or near the capability of the “least capable manufacturer” with a significant share of the market, i.e., typically the manufacturer whose vehicles are, on average, the he aviest and largest. In the first several rulemakings to establish attribute based standards, the agency applied marginal cost benefit analysis. This ensured that the agency’s a pplication of technologies was limited to those that would pay for themselves and thus wou ld have significant appeal to consumers. However, the agency can and has limited its application of technologies to those technologies, with or without the use of such analysis.

(3) The e E

ffect of o O ther M

m otor V v ehicle S s tandards of the Government on

F f uel e E conomy

“The effect of other motor vehicle standards of the Government on fuel economy,” involves an analysis of the effects of co mpliance with emission, 152 safety, noise, or damageability standards on fuel economy c apability and thus on average fuel economy. In previous CAFE rulemakings, the agency has said that pursuant to this provision, it considers the adverse effects of othe r motor vehicle standards on fuel economy. It said so because, from the CAFE program ’s earliest years 153 until present, the effects of such compliance on fuel economy capa bility over the history of the CAFE program have been negative ones. In those instance s in which the effects are negative, NHTSA is called upon to “mak[e] a straightforward a djustment to the fuel economy improvement projections to account for the impacts of other Federal standards, principally those in the areas of emission control, occupant safety, vehicle damageability, and vehicle noise. However, only the unavoidable c onsequences should be accounted for. The automobile manufacturers must be expected to adopt those feasible methods of achieving compliance with other Federal standards w hich minimize any adverse fuel

151 CEI-I , 793 F.2d 1322, 1352 (D.C. Cir. 1986).

152 In the case of emission standards, this includes s tandards adopted by the Federal government and can include standards adopted by the States as well, si nce in certain circumstances the Clean Air Act allo ws States to adopt and enforce State standards differe nt from the Federal ones.

153 42 FR 63184, 63188 (Dec. 15, 1977). See also 42 FR 33534, 33537 (Jun. 30, 1977).DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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economy effects of those standards.” 154 For example, safety standards that have the effect of increasing vehicle weight lower vehicle f uel economy capability and thus decrease the level of average fuel economy that the agency can determine to be feasible.

The “other motor vehicle standards” consideration h as thus in practice functioned in a fashion similar to the provision in EPCA, as o riginally enacted, for adjusting the statutorily-specified CAFE standards for MY 1978-19 80 passengers cars. 155 EPCA did not permit NHTSA to amend those standards based on a finding that the maximum feasible level of average fuel economy for any of t hose three years was greater or less than the standard specified for that year. Instead , it provided that the agency could only reduce the standards and only on one basis: if the agency found that there had been a federal standards fuel economy reduction, i.e. , a reduction in fuel economy due to changes in the Federal vehicle standards, e.g. , emissions and safety, relative to the year of enactment, 1975.

The “other motor vehicle standards” provision is br oader than the federal standards fuel economy reduction provision. Althou gh the effects analyzed to date under the “other motor vehicle standards” provision have been negative, there could be circumstances in which the effects are positive. I n the event that the agency encountered such circumstances, it would be required to conside r those positive effects. For example, if changes in vehicle safety technology led to NHTS A’s amending a safety standard in a way that permits manufacturers to reduce the weight added in complying with that standard, that weight reduction would increase vehi cle fuel economy capability and thus increase the level of average fuel economy that cou ld be determined to be feasible.

In the wake of Massachusetts v. EPA and of EPA’s proposed endangerment finding, granting of a waiver to California for its motor vehicle GHG standards, and its own proposal of GHG standards, the agency is confro nted with the issue of how to treat

those standards under the “other motor vehicle stan dards” provision. To the extent the GHG standards result in increases in fuel economy, they would do so almost exclusively as a result of inducing manufacturers to install th e same types of technologies used by manufacturers in complying with the CAFE standards. The primary exception would involve increases in the efficiency of air conditio ners.

Thus, NHTSA tentatively concludes that the effects of the EPA and California standards are neither positive nor negative because the proposed rule results in consistent standards among all components of the National Prog ram. Comment is requested on whether and in what way the effects of the Californ ia and EPA standards should be

considered under the “other motor vehicle standards ” provision or other provisions of

EPCA in 49 U.S.C. sec. § 32902, consistent with NHTSA’s independent obligat ion under EPCA/EISA to issue CAFE standards? The agency has already considered EPA’s proposal and the harmonization benefits of the Nati onal Program in developing its own proposal.

154 42 FR 33534, 33537 (Jun. 30, 1977).

155 That provision was deleted as obsolete when EPCA w as codified in 1994.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

129 (4) The N

n eed of the United States to C c onserve E e nergy

“The need of the United States to conserve energy” means “the consumer cost, national balance of payments, environmental, and fo reign policy implications of our need for large quantities of petroleum, especially impor ted petroleum.” 156 Environmental implications principally include those associated w ith reductions in emissions of criteria pollutants and CO 2 . A prime example of foreign policy implications a re energy independence and security concerns.

ii. Other Factors Considered by NHTSA

The agency historically has considered the potentia l for adverse safety consequences in setting CAFE standards. This pract ice is recognized approvingly in case law. As the courts have recognized, “NHTSA has alw ays examined the safety consequences of the CAFE standards in its overall c onsideration of relevant factors since its earliest rulemaking under the CAFE program.” Competitive Enterprise Institute v.

NHTSA , 901 F.2d 107, 120 n. 11 (DC Cir. 1990) (“ CEI I ”) (citing 42 Fed. Reg. 33534, 33551 (June 30, 1977)). The courts have consistent ly upheld NHTSA’s implementation

of EPCA in this manner. See, e.g., Competitive Enterprise Institute v. NHTS A , 956 F.2d 321, 322 (D.C. Cir. 1992) (“ CEI II ”) (in determining the maximum feasible fuel econom y standard, “NHTSA has always taken passenger safety into account.”) (citing CEI I , 901 F.2d at 120 n. 11); Competitive Enterprise Institute v. NHTSA , 45 F.3d 481, 482-83 (D.C. Cir. 1995) (“ CEI III

”) (same); Center for Biological Diversity v. NHTSA , 538 F.3d 1172, 1203-04 (9th Cir. 2008) (upholding NHTSA’s analysis of vehicle safety issues associated with weight in connection with the MY 2008-11 light truck CAFE rule). Thus, in evaluating what levels of stringency would result i n maximum feasible standards, NHTSA assesses the potential safety impacts and con siders them in balancing the statutory considerations and to determine the appro priate level of the standards.

Under the universal or “flat” CAFE standards that N HTSA was previously authorized to establish, the primary risk to safety came from the possibility that manufacturers would respond to higher standards by building smaller, less safe vehicles in order to “balance out” the larger, safer vehicle s that the public generally preferred to buy. Under the attribute-based standards being pro posed today, that risk is reduced because building smaller vehicles would tend to rai se a manufacturer’s overall CAFE obligation, rather than only raising its fleet aver age CAFE. However, even if the manufacturers did not engage in any downsizing unde r attribute-based standards, there is still the possibility that manufacturers would rely on downweighting to improve their fuel economy (for a given vehicle at a given footprint t arget) in ways that may reduce safety to a greater or lesser extent. While NHTSA recogni zes that manufacturers may nonetheless choose this option for raising their CA FE levels, in prior rulemakings we have limited the application of downweighting/mater ial substitution in our modeling analysis to vehicles over 5,000 lbs GVWR. 157

156 42 FR 63184, 63188 (1977).

157 S ee 74 FR 14396-14407 (Mar. 30, 2009).DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

130 For purposes of today’s proposed standards, however , NHTSA has revised its modeling analysis to allow some application of down weighting/material substitution for all vehicles, including those under 5,000 lbs GVWR, because we believe that this is more consistent with how manufacturers will actually res pond to the standards. However, as discussed above, NHTSA does not mandate the use of any particular technology by manufacturers in meeting the standards. More infor mation on the new approach to modeling manufacturer use of downweighting/material substitution is available in Chapter 3 of the draft joint TSD and in Section V o f the PRIA; and the estimated safety impacts that may be due to the proposed standards a re described below.

iii. Factors that NHTSA is Prohibited From Considering

EPCA also provides that in determining the level a t which it should set CAFE standards for a particular model year, NHTSA may no t consider the ability of manufacturers to take advantage of several EPCA pro visions that facilitate compliance with the CAFE standards and thereby reduce the cost s of compliance. 158 As discussed further below, manufacturers can earn compliance cr edits by exceeding the CAFE

standards and then use those credits to achieve com pliance in years in which their measured average fuel economy falls below the stand ards. Manufacturers can also increase their CAFE levels through MY 2019 by produ cing alternative fuel vehicles. EPCA provides an incentive for producing these vehi cles by specifying that their fuel economy is to be determined using a special calcula tion procedure that results in those vehicles being assigned a high fuel economy level.

The effect of the prohibitions against considering these flexibilities in setting the

CAFE standards is that the flexibilities remain vol untarily-employed measures. If the agency were instead to assume manufacturer use of t hose flexibilities in setting new standards, that assumption would result in higher s tandards and thus tend to require

manufacturers to use those flexibilities.

iv. Determining the Level of the Standards by Balancing the Factors

NHTSA has broad discretion in balancing the above f actors in determining the appropriate levels of average fuel economy at which to set the CAFE standards for each model year. Congress “specifically delegated the p rocess of setting ... fuel economy

standards with broad

guidelines concerning the factors that the agency must consider.” 159
The breadth of those guidelines, the absence of any statutorily prescribed formula for balancing the factors, the fact that the relative w eight to be given to the various factors may change from rulemaking to rulemaking as the und erlying facts change, and the fact that the factors may often be conflicting with resp ect to whether they militate toward higher or lower standards give NHTSA discretion to decide what weight to give each of the competing policies and concerns and then determ ine how to balance them. The exercise of that discretion is subject to the neces sity of ensuring that NHTSA's balancing

158 49 U.S.C. § 32902(h).

159 Center for Auto Safety v. NHTSA , 793 F.2d 1322, 1341 (C.A.D.C. 1986).DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

131

does not undermine the fundamental purpose of the E PCA: energy conservation 160 , and as long as that balancing reasonably accommodates “ conflicting policies that were committed to the agency's care by the statute.” 161 The balancing of the factors in any given rulemaking is highly dependent on the factual and policy context of that rulemaking. Given the changes over time in facts b earing on assessment of the various factors, such as those relating to the economic con ditions, fuel prices and the state of climate change science, the agency recognizes that what was a reasonable balancing of competing statutory priorities in one rulemaking ma y not be a reasonable balancing of those priorities in another rulemaking. 162 Nevertheless, the agency retains substantial discretion under EPCA to choose among reasonable al ternatives.

EPCA neither requires nor precludes the use of any type of cost-benefit analysis as a tool to help inform the balancing process. Wh ile NHTSA used marginal cost-benefit analysis in the first two rulemakings to establish attribute-based CAFE standards, it was not required to do so and is not required to contin ue to do so. Regardless of what type of analysis is or is not used, considerations relating to costs and benefits remain an important part of CAFE standard setting.

Because the relevant considerations and factors can reasonably be balanced in a variety of ways under EPCA, and because of uncertai nties associated with the many technological and cost inputs, NHTSA considers a wi de variety of alternative sets of standards, each reflecting different balancing of t hose policies and concerns, to aid it in discerning reasonable outcomes. Among the alternat ives providing for an increase in the standards in this rulemaking, the alternatives rang e in stringency from a set of standards that increase, on average, 3 percent annually to a set of standards that increase, on average, 7 percent annually.

2. Administrative Procedure Act

To be upheld under the “arbitrary and capricious” s tandard of judicial review in the APA, an agency rule must be rational, based on consideration of the relevant factors, and within the scope of the authority delegated to the agency by the statute. The agency

must examine the relevant data and articulate a sat isfactory explanation for its action including a “rational connection between the facts found and the choice made.” Burlington Truck Lines, Inc. v. United States , 371 U.S. 156, 168 (1962).

Statutory interpretations included in an agency’s r ule are subjected to the two-step analysis of Chevron, U.S.A., Inc. v. Natural Resources Defense Council , 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984). Under step o ne, where a statute “has directly spoken to the precise question at issue,” id. at 842, 104 S.Ct. 2778, the court and the agency “must give effect to the unambiguously expre ssed intent of Congress,” id. at 843, 104 S.Ct. 2778. If the statute is silent or ambiguo us regarding the specific question, the

160 Center for Biological Diversity v. NHTSA , 538 F.3d 1172, 1195 (9 th Cir. 2008)

161 CAS

. , 1338 (quoting Chevron U.S.A., Inc. v. Natural Resources Defense C ouncil , Inc ., 467 U.S. 837, 845)

162 CBD v. NHTSA , 538 F.3d 1172, 1198 (9 th Cir. 2008)DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

132

court proceeds to step two and asks “whether the ag ency's answer is based on a permissible construction of the statute.” Id.

If an agency’s interpretation differs from the one that it has previously adopted, the agency need not demonstrate that the prior posi tion was wrong or even less desirable. Rather, the agency would need only to demonstrate t hat its new position is consistent with the statute and supported by the record, and a cknowledge that this is a departure from past positions. The Supreme Court emphasized this recently in FCC v. Fox

Television , 129 S.Ct. 1800 (2009). When an agency changes co urse from earlier regulations, “the requirement that an agency provid e reasoned explanation for its action would ordinarily demand that it display awareness t hat it is changing position,” but “need

not demonstrate to a court's satisfaction that the reasons for the new policy are better than the reasons for the old one; it suffices that the n ew policy is permissible under the statute, that there are good reasons for it, and that the ag ency believes it to be better, which the conscious change of course adequately indicates.” 163

3. National Environmental Policy Act

As discussed above, EPCA requires the agency to det ermine what level at which to set the CAFE standards for each model year by co nsidering the four factors of technological feasibility, economic practicability, the effect of other motor vehicle standards of the Government on fuel economy, and th e need of the United States to conserve energy. NEPA directs that environmental c onsiderations be integrated into that process. To accomplish that purpose, NEPA requires an agency to compare the potential environmental impacts of its proposed action to tho se of a reasonable range of

alternatives.

To explore the environmental consequences in depth, NHTSA has prepared a draft environmental impact statement. The purpose of an EIS is to “provide full and fair discussion of significant environmental impacts and [to] inform decisionmakers and the public of the reasonable alternatives which would a void or minimize adverse impacts or enhance the quality of the human environment.” 40 C

. F

. R . § 1502.1.

NEPA is “a procedural statute that mandates a proce ss rather than a particular

result.” Stewart Park & Reserve Coal., Inc. v. Slater , 352 F.3d at 557. The agency's overall EIS-related obligation is to “take a ‘hard look’ at the environmental consequences before taking a major action.” Baltimore Gas & Elec. Co. v. Natural Res. Def. Coun cil,

Inc ., 462 U.S. 87, 97, 103 S.Ct. 2246, 76 L.Ed.2d 437 (1983). Significantly, “[i]f the adverse environmental effects of the proposed actio n are adequately identified and evaluated, the agency is not constrained by NEPA fr om deciding that other values outweigh the environmental costs.” Robertson v. Methow Valley Citizens Council , 490 U.S. 332, 350, 109 S.Ct. 1835, 104 L.Ed.2d 351 (198 9).

The agency must identify the “environmentally prefe rable” alternative, but need not adopt it. “Congress in enacting NEPA . . . did not require agencies to elevate

163 Ibid ., 1181.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

133

environmental concerns over other appropriate consi derations.” Baltimore Gas and Elec. Co. v. Natural Resources Defense Council, Inc ., 462 U.S. 87, 97 (1983). Instead, NEPA requires an agency to develop “ alternatives to the proposed action ” in preparing an EIS.

42 U.S.C. sec. § 4332(2)(C)(iii). The statute does not command the agency to favor an environmentally preferable course of action, only t hat it make its decision to proceed with the action after taking a hard look at environmenta l consequences.

E. What are the Proposed CAFE Standards?

1. Form of the Standards

Each of the CAFE standards that NHTSA is proposing today for passenger cars and light trucks is expressed as a mathematical fun ction that defines a fuel economy target applicable to each vehicle model and, for ea ch fleet, establishes a required CAFE level determined by computing the sales-weighted ha rmonic average of those targets. 164

As discussed above in Section II.C, NHTSA is propos ing to determine fuel economy targets using a constrained linear function defined according to the following

formula:

1

1 1

, , TARGET

MIN MAX c FOOTPRINT d a b

=  

 

× +        

Here, TARGET

is the fuel economy target (in mpg) applicable to vehicles of a given footprint ( FOOTPRINT , in square feet), b and a are the function’s lower and upper asymptotes (also in mpg), respectively, c is the slope (in gpm per square foot) of the sloped portion of the function, and d is the intercept (in gpm) of the sloped portion of the function (that is, the value the sloped portion wou ld take if extended to a footprint of 0 square feet. The MIN

and MAX functions take the minimum and maximum, respective ly

of the included values.

As also discussed in Section II.C, under the propos ed standards (as under the recently-promulgated MY 2011 standards), the CAFE l evel required of any given manufacturer will be determined by calculating the production-weighted harmonic average of the fuel economy targets applicable to e ach vehicle model:

i

i required

i

i i SALES

CAFE SALES

TARGET = 

## ∑

∑

164 Required CAFE levels shown here are estimated required levels based on NHTSA’s current projectio n of manufacturers’ vehicle fleets in MYs 2012-2016. Actual required levels are not determined until the end of each model year, when all of the vehicles produc ed by a manufacturer in that model year are known a nd their compliance obligation can be determined with certainty. The target curves, as defined by the constrained linear function, and as embedded in the function for the sales-weighted harmonic average, are the real “standards” being proposed today. Formatted: Font: Not Bold, UnderlineDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

134 Here, CAFE required

is the required level for a given fleet, SALES i is the number of

units of model i produced for sale in the United States, TARGET i is the fuel economy target applicable to model i (according to the equation shown in Chapter II and based on the footprint of model i ), and the summations in the numerator and denomina tor are both performed over all models in the fleet in question.

The proposed standards are, therefore, specified b y the four coefficients defining fuel economy targets:

a = upper limit (mpg)

b = lower limit (mpg)

c = slope (gpm per square foot)

d = intercept (gpm)

The values of the coefficients are different for th e passenger car standards and the light

truck standards.

2. Passenger Car Standards for MYs 2012-2016

For passenger cars, NHTSA is proposing CAFE standar ds defined by the following coefficients during MY 2012-2016:

Table IV.E.2-1. Coefficients Defining Proposed MY 2012-2016 Fuel Economy Targets for Passenger Cars

Coefficient 2012 2013 2014 2015 2016

a (mpg) 36.23 37.15 38.08 39.55 41.38

b (mpg) 28.12 28.67 29.22 30.08 31.12

c (gpm/sf) 0.0005308 0.0005308 0.0005308 0.0005308 0.0005308

d (gpm) 0.005842 0.005153 0.004498 0.003520 0.002406

These coefficients result in footprint-dependent ta rget curves shown graphically below. The MY 2011 final standard, which is specif ied by a constrained logistic function rather than a constrained linear function, is shown for comparison. Formatted: Font: 12 pt

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Figure IV.E.2-1. Final MY 2011 and Proposed MY 201 2-2016 Fuel Economy Target Curves for Passenger Cars

20 25 30 35 40 45

35 40 45 50 55 60 65 70

Footprint (sf)Target (mpg)

2011 2016

2015

2014

2013

2012

As discussed, the CAFE levels required of individua l manufacturers will depend on the mix of vehicles they produce for sale in the United States. Based on the market

forecast of future sales that NHTSA has used to exa mine today’s proposed CAFE standards, the agency estimates that the targets sh own above will result in the following average required fuel economy levels for individual manufacturers during MYs 2012- 2016 (an updated estimate of the average required f uel economy level under the final MY 2011 standard is shown for comparison) 165 :

165 In the March 2009 final rule establishing MY 2011 standards for passenger cars and light trucks, NHTSA estimated that the required fuel economy leve ls for passenger cars would average 30.2 mpg under the MY 2011 passenger car standard. Based on the a gency’s current forecast of the MY 2011 passenger c ar market, which anticipates greater numbers of passen ger cars than the forecast used in the MY 2011 fina l rule, NHTSA now estimates that the average required fuel economy level for passenger cars will be 30.5 mpg in MY 2011.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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Table IV.E.2-2. Estimated Average Fuel Economy Req uired under Final MY 2011 and Proposed MY 2012-2016 CAFE Standards for Passen ger Cars

Manufacturer MY 2011 MY 2012 MY 2013 MY 2014 MY 2015 MY 2016

BMW 30.2 33.2 34.0 34.8 36.0 37.5 Chrysler 29.6 33.0 33.7 34.5 35.3 36.8

Daimler 29.4 32.6 33.1 33.8 35.0 36.4

Ford 29.8 33.0 33.7 34.5 35.8 37.3

General Motors 30.3 33.0 33.8 34.6 35.8 37.3

Honda 30.8 33.9 34.7 35.5 36.8 38.4 Hyundai 30.8 33.8 34.6 35.5 36.8 38.3

Kia 30.6 33.6 34.4 35.2 36.5 38.0

Mazda 30.7 34.1 34.8 35.7 37.0 38.6

Mitsubishi 31.0 34.4 35.3 3 6.1 37.4 39.2

Nissan 30.7 33.5 34.2 35.0 36.2 37.8

Porsche 31.2 36.2 37.2 38.1 39.6 41.4

Subaru 31.0 34.8 35.7 36.5 37.9 39.6

Suzuki 31.2 35.9 36.8 37.7 39.2 41.0

Tata 27.8 30.7 31.4 32.1 33.1 34.4 Toyota 30.8 34.1 34.9 35.7 37.0 38.6 Volkswagen 30.8 34.6 35.4 36.2 37.5 39.1 Average 30.5 33.6 34.4 35.2 36.4 38.0

Manufacturer MY 2011 MY 2012 MY 2013 MY 2014 MY 2015 MY 2016

BMW 30.2

33.2

34.0

34.8

36.0

37.5 Chrysler 29.6

33.0

33.7

34.5

35.3

36.8

Daimler 29.4

32.6

33.1

33.8

35.0

36.4

Ford 29.8

33.0

33.7

34.5

35.8

37.3

General Motors 30.3

33.0

33.8

34.6

35.8

37.3

Honda 30.8

33.9

34.7

35.5

36.8

38.4 Hyundai 30.8

33.8

34.6

35.5

36.8

38.3

Kia 30.6

33.6

34.4

35.2

36.5

38.0

Mazda 30.7

34.1

34.8

35.7

37.0

38.6

Mitsubishi 31.0

34.4

35.3

36.1

37.4

39.1

Nissan 30.7

33.5

34.2

35.0

36.2

37.8

Porsche 31.2

36.2

37.2

38.1

39.6

41.4

Subaru 31.0

34.8

35.7

36.5

37.9

39.6

Suzuki 31.2

35.9

36.8

37.7

39.2

41.0

Tata 27.8

30.7

31.4

32.1

33.1

34.4 Toyota 30.8

34.1

34.9

35.7

37.0

38.6 Volkswagen 30.8

34.6

35.4

36.2

37.5

39.1 Average 30.5

33.6

34.4

35.2

36.4

38.0

We note that a manufacturer’s required average fuel economy level for a model year under the proposed standards would be based on its actual production numbers in that model year. Therefore, its official required fuel economy level would not be known Formatted TableDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

137

until the end of that model year. However, because the targets for each vehicle footprint would be established in advance of the model year, a manufacturer should be able to estimate its required level accurately.

3. Minimum Domestic Passenger Car standards

EISA expressly requires each manufacturer to meet a minimum fuel economy standard for domestically manufactured passenger ca rs in addition to meeting the standards set by NHTSA. According to the statute (49 U.S.C. sec. 32902(b)(4 )) T t he

minimum standard “ shall be the greater of (A) 27.5 miles per gallon; or (B) 92 percent of the average fuel economy projected by the Secretary for the combined domestic and nondomestic passenger automobile fleets manufactured f or sale in the United States by all manufacturers in the model year ....” 166

. The agency must publish the projected minimum

standards in the Federal Register when the passenger car standards for the model yea r in question are promulgated.

Based on NHTSA’s current market forecast, the agenc y’s estimates of these minimum standards under the proposed MY 2012-2016 C AFE standards (and, for comparison, the final MY 2011 standard) are summari zed below in Table IV.E.2-1. 167
For eventual compliance calculations, the final cal culated minimum standards will be updated to reflect any changes in the average fuel economy level required under the final

standards.

Table IV.E.3-1. Estimated Minimum Standard for Dom estically Manufactured Passenger Cars under Final MY 2011 and Proposed MY 2012-2016 CAFE

Standards for Passenger Cars

2011 2012 2013 2014 2015 2016

28.0 30.9 31.6 32.4 33.5 34.9

4. Light Truck Standards

For light trucks, NHTSA is proposing CAFE standards defined by the following coefficients during MYs 2012-2016:

166 49 U.S.C. sec. § 32902(b)(4).

167 In the March 2009 final rule establishing MY 2011 standards for passenger cars and light trucks, NHTSA estimated that the minimum required CAFE stan dard for domestically manufactured passenger cars would be 27.8 mpg under the MY 2011 passenger car standard. Based on the agency’s current forecast of the MY 2011 passenger car market, NHTSA now estimates that the minimum required CAFE standard will be 28.0 mpg in MY 2011.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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Table IV.E.4-1. Coefficients Defining Proposed MY 2012-2016 Fuel Economy Targets for Light Trucks

Coefficient 2012 2013 2014 2015 2016

a (mpg) 29.44 30.32 31.30 32.70 34.38

b (mpg) 22.06 22.55 23.09 23.84 24.72

c (gpm/sf) 0.0004546 0.0004546 0.0004546 0.0004546 0.0004546

d (gpm) 0.01533 0.01434 0.01331 0.01194 0.01045

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Figure IV.E.4-1. Final MY 2011 and Proposed MY 201 2-2016 Fuel Economy Targets for Light Trucks

20 25 30 35 40 45

35 40 45 50 55 60 65 70

Footprint (sf)Target (mpg)

2011 2016

2015

2014

2013

2012

Given these targets, the CAFE levels required of in dividual manufacturers will depend on the mix of vehicles they produce for sale in the United States. Based on the market forecast NHTSA has used to examine today’s p roposed CAFE standards, the agency estimates that the targets shown above will result in the following average required fuel economy levels for individual manufac turers during MYs 2012-2016 (an updated estimate of the average required fuel econo my level under the final MY 2011 standard is shown for comparison) 168 :

168 In the March 2009 final rule establishing MY 2011 standards for passenger cars and light trucks, NHTSA estimated that the required fuel economy leve ls for light trucks would average 24.1 mpg under th e MY 2011 light truck standard. Based on the agency’ s current forecast of the MY 2011 light truck marke t, NHTSA now estimates that the required fuel economy levels will average 24.2 mpg in MY 2011. The increase in the estimate reflects a slight decrease in the size of the average light truck.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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Table IV.E.4-2. Estimated Average Fuel Economy Req uired under Final MY 2011 and Proposed MY 2012-2016 CAFE Standards for Light Trucks

Manufacturer MY 2011 MY 2012 MY 2013 MY 2014 MY 2015 MY 2016

BMW 25.7 26.3 27.0 27.7 28.8 30.1 Chrysler 24.2 25.2 25.8 26.4 27.3 28.5

Daimler 24.7 25.4 26.1 26.9 27.9 29.1

Ford 23.3 24.3 24.9 25.3 26.2 27.3

General Motors 22.9 23.6 24.2 24.8 25.6 26.6

Honda 25.6 26.4 27.1 27.9 29.0 30.4 Hyundai 25.9 26.6 27.3 28.1 29.3 30.6

Kia 25.1 25.8 26.4 27.2 28.3 29.6

Mazda 26.3 27.4 28.1 28.8 29.9 31.4

Mitsubishi 26.4 27.4 28. 1 28.9 30.1 31.6

Nissan 24.1 25.0 25.6 26.1 27.0 28.2

Porsche 25.5 26.0 26.7 27.4 28.5 29.8

Subaru 26.5 27.5 28.3 29.2 30.4 31.8

Suzuki 26.3 27.2 27.9 28.7 29.9 31.3

Tata 26.1 26.9 27.6 28.4 29.6 31.0 Toyota 25.2 25.7 26.3 27.1 28.1 29.3 Volkswagen 25.0 25.6 26.2 26.9 27.9 29.2 Average 24.2 25.0 25.6 26.2 27.1 28.3

Manufacturer MY 2011 MY 2012 MY 2013 MY 2014 MY 2015 MY 2016

BMW 25.7

26.3

27.0

27.7

28.8

30.1 Chrysler 24.2

25.2

25.8

26.4

27.3

28.5

Daimler 24.7

25.4

26.1

26.9

27.9

29.1

Ford 23.3

24.3

24.9

25.3

26.2

27.3

General Motors 22.9

23.6

24.2

24.8

25.6

26.6

Honda 25.6

26.4

27.1

27.9

29.0

30.4 Hyundai 25.9

26.6

27.3

28.1

29.3

30.6

Kia 25.1

25.8

26.4

27.2

28.3

29.6

Mazda 26.3

27.4

28.1

28.8

29.9

31.4

Mitsubishi 26.4

27.4

28.1

28.9

30.1

31.6

Nissan 24.1

25.0

25.6

26.1

27.0

28.2

Porsche 25.5

26.0

26.7

27.4

28.5

29.8

Subaru 26.5

27.5

28.3

29.2

30.4

31.8

Suzuki 26.3

27.2

27.9

28.7

29.9

31.3

Tata 26.1

26.9

27.6

28.4

29.6

31.0 Toyota 25.2

25.7

26.3

27.1

28.1

29.3 Volkswagen 25.0

25.6

26.2

26.9

27.9

29.2 Average 24.2

25.0

25.6

26.2

27.1

28.3

As discussed above with respect to the proposed pas senger cars standards, we note that a manufacturer’s required fuel economy le vel for a model year under the proposed standards would be based on its actual pro duction numbers in that model year. Formatted TableDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

141 F. How D d o the Proposed S s tandards Fulfill NHTSA’s Statutory Obligations?

In developing the proposed MY 2012-16 standards, th e agency developed and considered a wide variety of alternatives. NHTSA t ook a new approach to defining alternatives as compared to the most recent prior C AFE rulemaking. In response to comments received in the last round of rulemaking, in our March 2009 notice of intent to prepare an environmental impact statement, the agen cy selected a range of candidate stringencies that increased annually, on average, 3 % to 7%. 169 That same approach has been carried over to this NPRM and to the accompany ing DEIS and PRIA. The majority of the alternatives considered in this rulemaking a re defined as average percentage increases in stringency—3 percent per year, 4 perce nt per year, 5 percent per year, and so on. NHTSA believes that this approach more clearly communicates the level of stringency of each alternative and is more intuitiv e than alternatives defined in terms of different cost-benefit ratios, and still allows us to identify alternatives that represent different ways to balance NHTSA’s statutory require ments under EPCA/EISA.

In the notice of intent, we noted that each of the listed alternatives represents, in part, a different way in which NHTSA could conceiva bly balance conflicting policies and considerations in setting the standards. We were m indful that the agency would need to weigh and balance many factors, such as the technol ogical feasibility, economic practicability, including leadtime considerations f or the introduction of technologies and impacts on the auto industry, the impacts of the st andards on fuel savings and CO 2 emissions, fuel savings by consumers; as well as ot her relevant factors such as safety. For example, the 7% Alternative, the most stringent alternative, weighs energy conservation and climate change considerations more heavily and technological feasibility and economic practicability less heavil y. In contrast, the 3% Alternative, the least stringent alternative, places more weight on technological feasibility and economic practicability. We recognized that the “feasibilit y” of the alternatives also may reflect differences and uncertainties in the way in which k ey economic ( e.g. , the price of fuel and the social cost of carbon) and technological in puts could be assessed and estimated or

valued.

In subsequently developing the NPRM and the associa ted analytical documents, the agency expanded the list of alternatives to pro vide a degree of analytical continuity between the old and new approach to defining altern atives in an effort help the agency and the public understand the similarities and diss imilarities between the two approaches and to make the transition to the new approach. To that end, we included and analyzed two additional alternatives, one that sets standard s at the point where net benefits are maximized, and another that sets standards at the p oint at which total costs are equal to

total benefits. 170 With respect to the first of those alternatives, we note that Executive

169 Notice of intent to prepare an EIS, 74 FR 14857, 1 4859-60, April 1, 2009.

170 The stringency indicated by each of these alternat ives depends on the value of inputs to NHTSA’s analysis. Results presented here for these two alt ernatives are based on NHTSA’s reference case input s, which underlie the central analysis of the proposed standards. In the accompanying PRIA, the agencyDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

142

Order 12866 focuses attention on an approach that m aximizes net benefits. Further, since

NHTSA has thus far set attribute-based CAFE standar ds at the point at which net benefits are maximized, we believed it would be useful and i nformative to consider the potential impacts of that approach as compared to the new app roach for MYs 2012-2016.

After working with EPA in thoroughly reviewing and in some cases reassessing the effectiveness and costs of technologies, most o f which are already being incorporated in at least some vehicles, market forecasts and eco nomic assumptions, we used the Volpe model extensively to assess the technologies that t he manufacturers could apply in order to comply with each of the alternatives. This perm itted us to assess the variety, amount and cost of the technologies that could be needed t o enable the manufacturers to comply

with each of the alternatives. NHTSA estimated how the application of these and other technologies could increase vehicle costs. The fol lowing five figures show industry-wide average incremental ( i.e. , relative to the reference fleet) per-vehicle cost s, for each model year, each fleet, and the combined fleet. Estimate s specific to each manufacturer are shown in the accompanying PRIA.

Figure IV.F.1. Average Incremental Per-Vehicle Cos ts (MY 2012)

- 500 1,000 1,500 2,000 2,500 3,000 3,500

3%/y 4%/y 5%/y 6%/y 7%/y Max NB TC=TBAverage Technology Cost ($/Vehicle) Industry Ave. Cost (PC, 2012)

Industry Ave. Cost (LT, 2012)

Industry Ave. Cost (Comb., 2012)

presents the results of that analysis to explore th e sensitivity of results to changes in key economic inputs. Because of numerous changes in model inputs ( e.g. , discount rate, rebound effect, CO 2 value, technology cost estimates), our analysis often exhausts all av ailable technologies before reaching the point at w hich total costs equal total benefits. In these cases, the stringency that exhausts all available technolo gies is

considered.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

143 Figure IV.F.2. Average Incremental Per-Vehicle Cos ts (MY 2013)

- 500 1,000 1,500 2,000 2,500 3,000 3,500

3%/y 4%/y 5%/y 6%/y 7%/y Max NB TC=TBAverage Technology Cost ($/Vehicle) Industry Ave. Cost (PC, 2013)

Industry Ave. Cost (LT, 2013)

Industry Ave. Cost (Comb., 2013)

Figure IV.F.3. Average Incremental Per-Vehicle Cos ts (MY 2014)

- 500 1,000 1,500 2,000 2,500 3,000 3,500

3%/y 4%/y 5%/y 6%/y 7%/y Max NB TC=TBAverage Technology Cost ($/Vehicle) Industry Ave. Cost (PC, 2014)

Industry Ave. Cost (LT, 2014)

Industry Ave. Cost (Comb., 2014)DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

144 Figure IV.F.4. Average Incremental Per-Vehicle Cos ts (MY 2015)

- 500 1,000 1,500 2,000 2,500 3,000 3,500

3%/y 4%/y 5%/y 6%/y 7%/y Max NB TC=TBAverage Technology Cost ($/Vehicle) Industry Ave. Cost (PC, 2015)

Industry Ave. Cost (LT, 2015)

Industry Ave. Cost (Comb., 2015)

Figure IV.F.5. Average Incremental Per-Vehicle Cos ts (MY 2016)

- 500 1,000 1,500 2,000 2,500 3,000 3,500

3%/y 4%/y 5%/y 6%/y 7%/y Max NB TC=TBAverage Technology Cost ($/Vehicle) Industry Ave. Cost (PC, 2016)

Industry Ave. Cost (LT, 2016)

Industry Ave. Cost (Comb., 2016)DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

145 Corresponding to these per-vehicle cost increases, NHTSA estimated total incremental outlays for additional technology in ea ch model year. The following figure

shows cumulative results for MY 2012-2016 for indus try and Chrysler, Ford, General Motors, Honda, Nissan, and Toyota. This figure foc uses on these manufacturers as they currently (in MY 2008) represent three large U.S.-h eadquartered and three large foreignheadquartered full-line manufacturers.

Figure IV.F.6. Incremental Technology Outlays (MY 2012-2016)

0 5 10 15 20 25 30

3%/y 4%/y 5%/y 6%/y 7%/y Max NB TC=TBManufacturers' Incremental Outlays ($b)

0 20 40 60 80 100 120 140Industry-Wide Incremental Outlays ($b) Chrysler Outlays (2012-2016) Ford Outlays (2012-2016) GM Outlays (2012-2016) Honda Outlays (2012-2016) Nissan Outlays (2012-2016) Toyota Outlays (2012-2016) Industry Outlays (2012-2016)

For each alternative, NHTSA has also estimated all corresponding effects for each model year, including fuel savings, CO 2 reductions, and other effects, as well as the

estimated societal benefits of these effects.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

146

Table IV.F.1. Fuel Savings, CO 2 Reductions, and Technology Costs for Regulatory

Alternatives Regulatory Alternative Fuel Savings (b. gal) CO 2 Reductions

(mmt) Cost

($b) 3% per Year 37 404 29 4% per Year 54 582 46 5% per Year 69 718 74 6% per Year 83 846 103

Maximum Net Benefit 90 923 111 7% per Year 91 934 116

Total Cost = Total Benefit 95 977 122

The accompanying PRIA presents a detailed analysis of these results. Relevant to EPCA’s requirement that NHTSA consider, among other factors, economic practicability and the need of the nation to conserve energy, the following figure compares the incremental technology outlays presented above to t he corresponding cumulative fuel savings.

Figure IV.F.7. Incremental Technology Outlays and Fuel Savings (MY 2012-2016)

0 10 20 30 40 50 60 70 80 90 100 110 120 130

3%/y 4%/y 5%/y 6%/y 7%/y Max NB TC=TBTechnology Outlays ($b)

0 10 20 30 40 50 60 70 80 90 100Fuel Savings (b. gal.) Industry Outlays (2012-2016)

Fuel Savings (b. gal., 2012-2016)

The agency then assessed which alternative would re present a reasonable balancing of the statutory criteria, given the diff iculties confronting the industry and the economy, and the priorities and policy goals of the President. Those priorities and goals include achieving nationally harmonized and coordin ated program for regulating fuel economy and GHG emissions. Formatted: Font: 12 pt

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147 Part of that assessment entailed an evaluation of t he stringencies necessary to

achieve both Federal and State GHG emission reducti on goals, especially those of California and the States that have adopted its GHG emission standard for motor vehicles. Given that EPCA requires attribute-based standards, NHTSA and EPA

determined the level at which an attribute-based GH G emissions standard would need to be set to achieve the goals of California. This wa s done by evaluating a nationwide CAA standard for MY 2016 that would require the levels of technology upgrade, across the country, which California standards would require f or the subset of vehicles sold in

California under the California standards for MY 20 09-2016 (known as “Pavley 1”). In essence, the stringency of the California Pavley 1 program was evaluated, but for a

national standard. For a number of reasons discus sed in section III.D

. , an assessment was developed of an equivalent national new vehicle fleet-wide CO 2 performance standards for model year 2016 which would result in the new vehicle fleet in the State of California having CO 2 performance equal to the performance from the Cali fornia Pavley 1 standards. That level, 250 g/mi, is equivalent t o 35.5 mpg if the GHG standard is met exclusively by fuel economy improvements.

To obtain the counterpart CAFE standard, we then ad justed that level downward to account for differences between the more prescri ptive EPCA and the more flexible CAA. These differences give EPA greater ability un der the CAA to provide compliance

flexibilities that would enable manufacturers to ac hieve compliance with a given level of requirement under the CAA at less cost than with th e same level of requirement under EPCA. Principal among those greater flexibilities are the credits that EPA can provide for improving the efficiency of air conditioners an d reducing the leakage of refrigerants from them. The adjustments result in a figure of 3 4.1 mpg as the appropriate counterpart CAFE standard. This differential gives manufacture rs the opportunity to reach 35.5 mpg under the CAA in ways that would significantly redu ce their costs. Were NHTSA

instead to establish its standard at the same level , manufacturers would need to make substantially greater expenditures on fuel-saving t echnologies to reach 35.5 mpg under

EPCA.

Given the importance to this rulemaking of achievi ng a harmonized National Program, we created a new alternative whose annual percentage increases would achieve 34.1 mpg by MY 2016. That alternative is one which increases on average at 4.3% annually.

This new alternative, like the seven alternative p resented above, represents a unique balancing of the statutory factors and other relevant considerations. We have

added that alternative to the table below.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

148

Table IV.F.2. Fuel Savings, CO 2 Reductions, and Technology Costs for Regulatory

Alternatives

Regulatory Alternative Fuel Savings (b. gal) CO 2

Reductions (mmt) Cost

($b)

3% per Year 37 404 29 4% per Year 54 582 46 Proposed (4.3% per Year) 62 656 60 5% per Year 69 718 74 6% per Year 83 846 103

Maximum Net Benefit 90 923 111 7% per Year 91 934 116

Total Cost = Total Benefit 95 977 122

As noted earlier, NHTSA has used the Volpe model to analyze each of these alternatives based on analytical inputs determined jointly with EPA. For a given regulatory alternative, the Volpe model estimates h ow each manufacturer could apply technology in response to the MY 2012 standard (sep arately for cars and trucks), carries technologies applied in MY 2012 forward to MY 2013, and then estimates how each manufacturer could apply technology in response to the MY 2013 standard. When analyzing MY 2013, the model considers the potentia l to add “extra” technology in MY 2012 in order to carry that technology into MY 2013 , thereby avoiding the use of more expensive technologies in MY 2013. The model conti nues in this fashion through MY 2016, and then performs calculations to estimate th e costs, effects, and benefits of the applied technologies, and to estimate any civil pen alties owed based on projected noncompliance. For each regulatory alternative, th e model calculates incremental costs, effects, and benefits relative to the regulatory ba seline ( i.e. , the no-action alternative),

under which the MY 2011 CAFE standards continue thr ough MY 2016. The model calculates results for each model year, because EPC A requires that NHTSA set its standards for each model year at the “maximum feasi ble average fuel economy level that the Secretary decides the manufacturers can achieve in that model year” considering four statutory factors. Pursuant to EPCA’s directive no tice not to consider statutory credits in establishing CAFE standards, NHTSA did not FFV cred its, credits carried forward and backward, and transferred credit. 171, 172 In addition, the analysis reflects the ability of manufacturers to pay fines in lieu of compliance.

Because it entails year-by-year examination of eigh t regulatory alternatives for, separately, passenger cars and light trucks, NHTSA’ s analysis involves a large amount of information. Detailed results of this analysis are presented separately in the PRIA

171 Separately, NHTSA has conducted analysis that acco unts for EPCA’s provisions regarding FFVs.

172 Because NHTSA’s modeling represents every model ye ar explicitly, accounts for estimates of when vehicle model redesigns will occur, and sets aside these compliance flexibilities, the agency’s modeli ng produces results that differ varyingly from EPA’s f or specific manufacturers, fleets, and model years. Formatted: Font: 12 pt

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149

accompanying today’s notice. The remainder of this section discusses a combination of aggregated and illustrative results of this analysi s.

The following figure compares average fuel economy levels required of manufacturers under the eight regulatory alternativ es in MYs 2012, 2014, and 2016. Required levels for MY 2013 and MY 2015 fall betwee n those for MYs 2012 and 2014 and MYs 2014 and 2016, respectively. Although requ ired levels for these interim years are not presented in the following figure to limit the complexity of the figure, they do appear in the accompanying PRIA. 173

Figure IV.F.8. Average Required Fuel Economy (MYs 2012, 2014, and 2016)

24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44

3%/y 4%/y Proposed 5%/y 6%/y 7%/y Max NB TC=TBAverage Required FE (mpg) PC, 2012

Comb., 2012

LT, 2012

PC, 2014

Comb., 2014

LT, 2014

PC, 2016

Comb., 2016

LT, 2016

As this figure illustrates, the proposed standards involve a “faster start” toward increased stringency than do any of the alternative s that increase steadily ( i.e. , the 3%/y, 4%/y, 5%/y, 6%/y, and 7%/y alternatives). However, by MY 2016, the stringency of the proposed standards reflects an average annual incre ase of 4.3%/y. The proposed

173 Also, the “Max NB” and the “TC = TB” alternatives depend on the inputs to the agencies’ analysis. Th e sensitivity analysis presented in the PRIA document s the response of these alternatives to changes in key economic inputs. For example, the combined average required fuel economy under the “Max NB” alternative is 36.8 mpg under the reference case ec onomic inputs presented here, and ranges from 32.8 mpg to 37.2 mpg under the alternative economic inputs p resented in the PRIA.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

150

standards, therefore, represent an alternative that could be referred to as “4.3% per year with a fast start” or a “front-loaded 4.3% average annual increase.”

In NHTSA’s analysis, these achieved average fuel e conomy levels result from the application of technology rather than changes in th e mix of vehicles produced for sale in the U.S. The accompanying PRIA presents detailed e stimates of additional technology penetration into the NHTSA reference fleet associat ed with each regulatory alternative. The following four charts illustrate the results of this analysis, considering the application of four technologies by six manufacturers and the i ndustry as a whole. Technologies include gasoline direct injection (GDI), engine tur bocharging and downsizing, diesel engines, and strong HEV systems (including CISG sys tems). GDI and turbocharging are among the technologies that play an important role in achieving the fuel economy improvements shown in NHTSA’s analysis, and diesels and strong HEVs represent technologies involving significant challenges for w idespread use through MY 2016. These figures focus on Chrysler, Ford, General Moto rs, Honda, Nissan, and Toyota, as these manufacturers currently (in MY 2008) represen t three large U.S.-headquartered and three large foreign-headquartered full-line manufac turers. For each alternative, the figures show additional application of technology b y MY 2016. The PRIA presents results for all model years, technologies, and manu facturers, and NHTSA has considered these broader results when considering the eight re gulatory alternatives.

Figure IV.F.9. Additional Application of GDI (MY 2 016)

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

3%/y 4%/y Proposed 5%/y 6%/y 7%/y Max NB TC=TBAdditional Application (%) Chrysler Add'l SGDI (2016)

Ford Add'l SGDI (2016) GM Add'l SGDI (2016) Honda Add'l SGDI (2016) Nissan Add'l SGDI (2016) Toyota Add'l SGDI (2016) Industry Add'l SGDI (2016)DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

151

Figure IV.F.10. Additional Application of Engine T urbocharging & Downsizing (MY 2016)

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

3%/y 4%/y Proposed 5%/y 6%/y 7%/y Max NB TC=TBAdditional Application (%) Chrysler Add'l Turbo (2016)

Ford Add'l Turbo (2016) GM Add'l Turbo (2016) Honda Add'l Turbo (2016) Nissan Add'l Turbo (2016) Toyota Add'l Turbo (2016) Industry Add'l Turbo (2016)DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

152 Figure IV.F.11. Additional Application of Diesel E ngines (MY 2016)

0% 5% 10% 15% 20% 25% 30%

3%/y 4%/y Proposed 5%/y 6%/y 7%/y Max NB TC=TBAdditional Application (%) Chrysler Add'l Diesels (2016)

Ford Add'l Diesels (2016) GM Add'l Diesels (2016) Honda Add'l Diesels (2016) Nissan Add'l Diesels (2016) Toyota Add'l Diesels (2016) Industry Add'l Diesels (2016)

Figure IV.F.12. Additional Application of CISG and Strong HEV Systems (MY 2016)

0% 5% 10% 15% 20% 25% 30% 35%

3%/y 4%/y Proposed 5%/y 6%/y 7%/y Max NB TC=TBAdditional Application (%) Chrysler Add'l Strong HEVs (2016)

Ford Add'l Strong HEVs (2016) GM Add'l Strong HEVs (2016) Honda Add'l Strong HEVs (2016) Nissan Add'l Strong HEVs (2016) Toyota Add'l Strong HEVs (2016) Industry Add'l Strong HEVs (2016)

`DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

153 The agency began the process of winnowing the alter natives by determining whether any of the lower stringency alternatives sh ould be eliminated from consideration. To begin with, the agency needs to ensure that its standards are high enough to enable the combined fleet of passenger cars and light trucks t o achieve at least 35 mpg not later than MY 2020, as required by EISA. Achieving that level makes it necessary for the chosen alternative to increase at over 3 percent annually.

NHTSA has concluded that it must reject the 3%/y an d 4%/y alternatives. Given

that CO 2 and fuel savings are very closely correlated, the above chart reveals that the 3%/y and 4%/y alternative would not produce the red uctions in fuel savings and CO 2 emissions that the Nation needs at this time. Pick ing either of those alternatives would unnecessarily result in foregoing substantial benef its, in terms of fuel savings and

reduced CO 2 emissions, which would be achievable at reasonable cost. Further, NHTSA has tentatively concluded that it must reject the 3 %/y and 4%/y alternatives, as neither would lead to the regulatory harmonization that for ms a vital core principle of the National Program that EPA and NHTSA are jointly str iving to implement. In order to achieve a harmonized National Program, an average a nnual increase of 4.3% is

necessary.

In contrast, at the upper end of the range of alter natives, the agency was concerned that the increased benefits offered by th ose alternatives were available only at excessive cost and might not be practicable in all cases within the available leadtime.

NHTSA first considered the environmentally-preferab le alternative. Based on the information provided in the DEIS, the environmental ly-preferable alternative would be that involving stringencies at which total costs mo st nearly equal total benefits. NHTSA notes that NEPA does not require that agencies choo se the environmentally-preferable alternative if doing so would be contrary to the ch oice that the agency would otherwise make under its governing statute. Given the levels of stringency required by the environmentally-preferable alternative and the lack of lead time to achieve such levels between now and MY 2016, NHTSA tentatively conclude s that the environmentallypreferable alternative would not be economically pr acticable or technologically feasible, and thus tentatively concludes that it would result in standards that would be beyond the

level achievable for MYs 2012-2016.

NHTSA determined that it would be inappropriate to propose any of the other more stringent alternatives due to concerns over le ad time and economic practicability. At a time when the entire industry remains in an ec onomically critical state, the agencies believe that it would be unreasonable to propose mo re stringent standards. Even in a case where economic factors were not a consideration, th ere are real-world time constraints

which must be considered due to the short lead time available for the early years of this program, in particular for MYs 2012 and 2013.

As revealed by the figures shown above, the propose d standards already require aggressive application of technologies, and more st ringent standards which would requireDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

154

more widespread use (including more substantial imp lementation of advanced technologies such as stoichiometric gasoline direct injection engines and strong hybrids) raise serious issues of adequacy of lead time, not only to meet the standards but to coordinate such significant changes with manufactur ers’ redesign cycles.

NHTSA does not believe that more stringent standard s would meet EPCA’s requirement that CAFE standards be economically pra cticable. The figures presented above reveal that increasing stringency beyond the proposed standards would entail significant additional application of technology—te chnology that, though perhaps feasible for individual vehicle models, would not b e economically practicable for the industry at the scales involved. Among the more st ringent alternatives, the one closest in stringency to the standards proposed today is the a lternative under which combined CAFE stringency increases at 5% annually. As indic ated above, this alternative would yield fuel savings and CO 2 reductions about 12% and 9% higher, respectively, than the proposed standards. However, compared to the propo sed standards, this alternative would increase outlays for new technologies during MY 2012-2016 by about 24%, or $14b. Average MY 2016 cost increases would, in tur n, rise from $1,076 under the proposed standards to $1,409 when stringency increa ses at 5% annually. This represents a 30% increase in per-vehicle cost for only a 3% in crease in average performance (on a gallon-per-mile basis to which fuel savings are pro portional). The following three tables summarize estimated manufacturer-level average incr emental costs for the 5%/y alternative and the average of the passenger and li ght truck fleets:

Table IV.F.3. Average Incremental Costs ($/vehicle ) under the 5%/y Alternative

CAFE Standards for Passenger Cars

Manufacturer MY 2012 MY 2013 MY 2014 MY 2015 MY 2016

BMW 474 541 667 883 1,190 Chrysler 726 1,464 1,832 1,928 1,913

Daimler 132 209 814 1,094 1,467

Ford 979 1,556 1,572 1,918 2,181

General Motors 94 934 1,242 1,541 1,808

Honda 55 263 408 451 671 Hyundai 518 531 943 1,007 1,152

Kia 180 344 440 612 796

Mazda 603 919 1,294 1,569 1,863

Mitsubishi 1,106 1,141 2,594 2,962 2,913

Nissan 298 587 1,344 1,402 1,517

Porsche 209 240 350 465 581

Subaru 353 454 1,828 2,258 2,201

Suzuki 204 1,453 2,444 2,580 2,624

Tata 202 239 428 632 1,350 Toyota 133 127 194 285 446 Volkswagen 231 550 688 828 1,202 Average 337 664 916 1,079 1,291 Formatted TableDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

155

Manufacturer MY 2012 MY 2013 MY 2014 MY 2015 MY 2016

BMW 474

541

667

883

1,190 Chrysler 726

1,464

1,832

1,928

1,913

Daimler 132

209

814

1,094

1,467

Ford 979

1,556

1,572

1,918

2,181

General Motors 94

934

1,242

1,541

1,808

Honda 55

263

408

451

671 Hyundai 518

531

943

1,007

1,152

Kia 180

344

440

612

796

Mazda 603

919

1,294

1,569

1,863
Mitsubishi 1,106

1,141

2,594

2,962

2,913

Nissan 298

587

1,344

1,402

1,517

Porsche 209

240

350

465

581

Subaru 353

454

1,828

2,258

2,201

Suzuki 204

1,453

2,444

2,580

2,624

Tata 202

239

428

632

1,350
Toyota 133

127

194

285

446
Volkswagen 231

550

688

828

1,202 Total/Average 337

664

916

1,079

1,291

Table IV.F.4. Average Incremental Costs ($/vehicle ) under the 5%/y Alternative

CAFE Standards for Light Trucks

Manufacturer MY 2012 MY 2013 MY 2014 MY 2015 MY 2016

BMW 297 306 403 753 935 Chrysler 113 475 1,058 1,271 1,538

Daimler 172 198 227 459 528

Ford 732 1,201 1,685 2,345 2,380

General Motors

- 786 1,121 1,275 1,457

Honda 646 614 1,139 1,265 1,624 Hyundai 990 1,009 2,106 2,206 2,148

Kia

- 309 713 1,181 1,692

Mazda 434 608 612 722 953

Mitsubishi 11 88 2,102 2,081 2,817

Nissan 793 891 1,419 1,535 1,907

Porsche (17) 55 117 962 1,009

Subaru 1,398 1,370 1,501 1,441 1,486

Suzuki 6 2,169 2,093 2,028 2,155

Tata

- 77 160 242 695 Toyota 113 427 906 1,065 1,291 Volkswagen (11) 55 127 209 286 Average 373 742 1,179 1,449 1,641 Formatted TableDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

156

Manufacturer MY 2012 MY 2013 MY 2014 MY 2015 MY 2016

BMW 297

306

403

753

935 Chrysler 113

475

1,058

1,271

1,538

Daimler 172

198

227

459

528

Ford 732

1,201

1,685

2,345

2,380

General Motors -

786

1,121

1,275

1,457

Honda 646

614

1,139

1,265

1,624 Hyundai 990

1,009

2,106

2,206

2,148

Kia -

309

713

1,181

1,692

Mazda 434

608

612

722

953

Mitsubishi 11

88

2,102

2,081

2,817

Nissan 793

891

1,419

1,535

1,907
Porsche (17)

55

117

962

1,009
Subaru 1,398

1,370

1,501

1,441

1,486

Suzuki 6

2,169

2,093

2,028

2,155

Tata -

77

160

242

695
Toyota 113

427

906

1,065

1,291
Volkswagen (11)

55

127

209

286 Total/Average 373

742

1,179

1,449

1,641DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

157

Table IV.F.5. Average Incremental Costs ($/vehicle ) under the 5%/y Alternative

CAFE Standards

Manufacturer MY 2012 MY 2013 MY 2014 MY 2015 MY 2016

BMW 415 469 590 848 1,123 Chrysler 351 888 1,392 1,632 1,747

Daimler 148 205 591 884 1,167

Ford 872 1,401 1,623 2,110 2,269

General Motors 52 868 1,189 1,426 1,660

Honda 272 386 638 701 955 Hyundai 610 625 1,167 1,228 1,330

Kia 143 337 489 707 942

Mazda 571 862 1,181 1,443 1,732

Mitsubishi 959 975 2,525 2,854 2,902

Nissan 462 683 1,367 1,441 1,627

Porsche 120 172 272 623 717

Subaru 743 787 1,709 1,964 1,942

Suzuki 152 1,637 2,349 2,434 2,504

Tata 71 144 267 420 1,001 Toyota 125 233 440 549 724 Volkswagen 182 460 586 716 1,043 Average 350 692 1,010 1,207 1,409

Manufacturer MY 2012 MY 2013 MY 2014 MY 2015 MY 2016

BMW 415

469

590

848

1,123 Chrysler 351

888

1,392

1,632

1,747

Daimler 148

205

591

884

1,167

Ford 872

1,401

1,623

2,110

2,269

General Motors 52

868

1,189

1,426

1,660

Honda 272

386

638

701

955 Hyundai 610

625

1,167

1,228

1,330

Kia 143

337

489

707

942

Mazda 571

862

1,181

1,443

1,732

Mitsubishi 959

975

2,525

2,854

2,902

Nissan 462

683

1,367

1,441

1,627

Porsche 120

172

272

623

717

Subaru 743

787

1,709

1,964

1,942

Suzuki 152

1,637

2,349

2,434

2,504

Tata 71

144

267

420

1,001 Toyota 125

233

440

549

724
Volkswagen 182

460

586

716

1,043 Total/Average 350

692

1,010

1,207

1,409

These cost increases derive from accelerated applic ation of advanced technologies as stringency increases past the levels in the prop osed standards. For example, under the proposed standards, additional diesel application r ates average 2% for the industry and range from 0% to 7% among Chrysler, Ford, GM, Honda , Nissan, and Toyota. UnderDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

158

standards increasing in combined stringency at 5% a nnually, these rates more than double, averaging 5% for the industry and ranging f rom 2% to 13% for the same six manufacturers. The agency tentatively concludes th at the levels of technology penetration required by the proposed standards are reasonable. Increasing the standards beyond those levels would lead to rapidly increasin g dependence on advanced technologies with higher costs, particularly in the early years of the rulemaking time frame, according to the agency’s analysis, and pote ntially pose too great an economic burden given the state of the industry.

In contrast, through analysis of the illustrative r esults shown above, as well as the more complete and detailed results presented in the accompanying PRIA, NHTSA has concluded that the proposed standards are technolog ically feasible and economically practicable. The proposed standards will require m anufacturers to apply considerable additional technology. Although NHTSA cannot predi ct how manufacturers will respond to the proposed standards, the agency’s analysis in dicates that the standards could lead to significantly greater use of advanced engine and tr ansmission technologies. As shown above, the agency’s analysis shows considerable inc reases in the application of SGDI systems and engine turbocharging and downsizing. T hough not presented above, the agency’s analysis also shows similarly large increa ses in the use of dual-clutch automated manual transmissions (AMTs). However, the agency’s analysis does not suggest that the additional application of these technologies in res ponse to the proposed standards would extend beyond levels achievable by the industry. T hese technologies are likely to be applied to at least some extent even in the absence of new CAFE standards. In addition, the agency’s analysis indicates that most manufactu rers would rely only to a limited extent on the most expensive and advanced technolog ies, including diesel engines and strong HEVs.

As shown above, NHTSA estimates that the proposed s tandards could lead to average incremental costs ranging from $291 per veh icle (for light trucks in MY 2011) to $1,085 per vehicle (for passenger cars in MY 2016), increasing steadily from $421 per vehicle in for all light vehicles in MY 2011 $1,076 for all light vehicle in MY 2016. NHTSA estimates that these costs would vary conside rably among manufacturers, but would rarely exceed $2,000 per vehicle. The follow ing three tables summarize estimated manufacturer-level average incremental costs for th e proposed standards and the average of the passenger and light truck fleets:

Table IV.F.6. Average Incremental Costs ($/vehicle ) under Proposed Passenger Car

CAFE StandardsDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

159

Manufacturer MY 2012 MY 2013 MY 2014 MY 2015 MY 2016

BMW 524

552

634

828

1,124 Chrysler 775

1,304

1,473

1,583

1,582

Daimler 182

215

781

1,039

1,401

Ford 1,746

1,719

1,735

1,880

2,078

General Motors 143

990

1,189

1,387

1,553

Honda 31

122

205

287

494 Hyundai 418

452

643

726

868

Kia 319

359

387

473

647

Mazda 658

735

965

991

1,263
Mitsubishi 1,156

1,076

1,715

2,076

2,035

Nissan 653

712

1,155

1,153

1,275

Porsche 270

256

306

399

498

Subaru 408

465

1,493

1,877

1,838

Suzuki 259

1,001

1,445

1,494

1,675

Tata 246

244

395

577

1,284 Toyota 133

127

155

257

267
Volkswagen 286

561

650

767

1,125 Total/Average 498

674

820

930

1,085

Manufacturer MY 2012 MY 2013 MY 2014 MY 2015 MY 2016

BMW 524 552 634 828 1,124 Chrysler 775 1,304 1,473 1,583 1,582

Daimler 182 215 781 1,039 1,401

Ford 1,746 1,719 1,735 1,880 2,078

General Motors 143 990 1,189 1,387 1,553

Honda 31 122 205 287 494 Hyundai 418 452 643 726 868

Kia 319 359 387 473 647

Mazda 658 735 965 991 1,26

Mitsubishi 1,156 1,076 1,715 2,076 2,035

Nissan 653 712 1,155 1,153 1,275

Porsche 270 256 306 399 498

Subaru 408 465 1,493 1,877 1,838

Suzuki 259 1,001 1,445 1,494 1,675

Tata 246 244 395 577 1,284 Toyota 133 127 155 257 267 Volkswagen 286 561 650 767 1,125 Average 498 674 820 930 1,085DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

160

Table IV.F.7. Average Incremental Costs ($/vehicle ) under Proposed Light Truck

CAFE Standards

Manufacturer MY 2012 MY 2013 MY 2014 MY 2015 MY 2016

BMW 325 327 380 708 884 Chrysler 152 399 749 892 1,188

Daimler 322 289 316 420 478

Ford 471 629 693 1,323 1,365

General Motors 33 533 752 792 962

Honda 390 380 616 749 1,006 Hyundai 774 744 1,301 1,322 1,292

Kia 228 373 547 843 1,218

Mazda 340 608 610 679 776

Mitsubishi 55 94 1,546 1,732 2,123

Nissan 541 608 903 1,022 1,312

Porsche 28 46 84 913 954

Subaru 1,203 1,140 1,213 1,197 1,184

Suzuki 50 1,451 1,404 1,358 1,373

Tata 44 83 127 193 635 Toyota 172 309 665 764 877 Volkswagen 28 61 99 160 231 Average 291 485 701 911 1,058

Manufacturer MY 2012 MY 2013 MY 2014 MY 2015 MY 2016

BMW 325

327

380

708

884 Chrysler 152

399

749

892

1,188

Daimler 322

289

316

420

478

Ford 471

629

693

1,323

1,365

General Motors 33

533

752

792

962

Honda 390

380

616

749

1,006 Hyundai 774

744

1,301

1,322

1,292

Kia 228

373

547

843

1,218

Mazda 340

608

610

679

776

Mitsubishi 55

94

1,546

1,732

2,123

Nissan 541

608

903

1,022

1,312

Porsche 28

46

84

913

954
Subaru 1,203

1,140

1,213

1,197

1,184

Suzuki 50

1,451

1,404

1,358

1,373

Tata 44

83

127

193

635
Toyota 172

309

665

764

877
Volkswagen 28

61

99

160

231 Total/Average 291

485

701

911

1,058

Table IV.F.8. Average Incremental Costs ($/vehicle ) under Proposed CAFE

Standards

Manufacturer MY 2012 MY 2013 MY 2014 MY 2015 MY 2016

BMW 457 483 560 796 1,061DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

161

Chrysler 393 777 1,061 1,271 1,408

Daimler 236 243 604 834 1,106

Ford 1,195 1,242 1,262 1,629 1,762

General Motors 94 785 997 1,131 1,304

Honda 162 212 335 429 647 Hyundai 488 509 769 835 944

Kia 300 362 416 535 740

Mazda 598 712 907 944 1,193

Mitsubishi 1,007 921 1,692 2,033 2,045

Nissan 616 679 1,078 1,115 1,286

Porsche 174 179 231 562 643

Subaru 705 711 1,392 1,632 1,602

Suzuki 204 1,117 1,434 1,458 1,598

Tata 115 150 234 368 938 Toyota 147 191 331 429 468 Volkswagen 233 470 550 657 970 Average 421 605 777 924 1 ,076

Manufacturer MY 2012 MY 2013 MY 2014 MY 2015 MY 2016

BMW 457

483

560

796

1,061 Chrysler 393

777

1,061

1,271

1,408

Daimler 236

243

604

834

1,106

Ford 1,195

1,242

1,262

1,629

1,762

General Motors 94

785

997

1,131

1,304

Honda 162

212

335

429

647 Hyundai 488

509

769

835

944

Kia 300

362

416

535

740

Mazda 598

712

907

944

1,193
Mitsubishi 1,007

921

1,692

2,033

2,045

Nissan 616

679

1,078

1,115

1,286

Porsche 174

179

231

562

643

Subaru 705

711

1,392

1,632

1,602

Suzuki 204

1,117

1,434

1,458

1,598

Tata 115

150

234

368

938 Toyota 147

191

331

429

468
Volkswagen 233

470

550

657

970 Total/Average 421

605

777

924

1,076

In summary, NHTSA has considered eight regulatory a lternatives, including the proposed standards, examining technologies that cou ld be applied in response to each alternative, as well as corresponding costs, effect s, and benefits. The agency has concluded that alternatives less stringent than the proposed standards would not produce the fuel savings and CO 2 reductions necessary at this time to achieve eithe r the overarching purpose of EPCA, i.e. , energy conservation, or an important part of the regulatory harmonization underpinning the National Program. Conversely, the agency has concluded that more stringent standards would i nvolve levels of additionalDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

162

technology and cost that, considering the fragile s tate of the automotive industry, would not be economically practicable. Therefore, having considered these eight regulatory alternatives, and the statutorily-relevant factors of technological feasibility, economic practicability, the effect of other motor vehicle s tandards of the Government on fuel economy, and the need of the United States to conse rve energy, along with other relevant factors such as the safety impacts of the proposed standards, 174 NHTSA tentatively concludes that the proposed standards represent a r easonable balancing of all of these concerns, and are the maximum feasible average fuel economy levels that the

manufacturers can achieve in MYs 2012-2016.

G. Impacts of the Proposed CAFE Standards

1. How Would These Proposed Standards Improve Fuel Economy and

Reduce GHG Emissions for MY 2012-2016 Vehicles?

As discussed above, the CAFE level required under an attribute-based standard depends on the mix of vehicles produced for sale in the U.S. Based on the market forecast that NHTSA and EPA have used to develop an d analyze new CAFE and CO 2 emissions standards, NHTSA estimates that the new C AFE standards will require CAFE levels to increase by an average of 4.3 percent ann ually through MY 2016, reaching a combined average fuel economy requirement of 34.1 m pg in that model year:

Table IV.G.1-1. Average Required Fuel Economy (mpg )

under Proposed Standards

2012 2013 2014 2015 2016 Passenger Cars 33.6 34.4 35.2 36.4 38.0 Light Trucks 25.0 25.6 26.2 27.1 28.3

Combined 29.8 30.6 31.4 32.6 34.1

201 2 20 13 2 014 2 015 201 6
Passenger C ars 33 .6 34 .4

3 5.2

36.4

38 .0 Light Truck s 25 .0 25 .6

2 6.2

27.1

28 .3

Co mbined 29 .8 30 .6

3 1.4

32.6

34 .1

NHTSA estimates that average achieved fuel economy levels will correspondingly increase through MY 2016, but that manufacturers will, on average, undercomply 175 in some model years and overcomply 176 in others, reaching a combined average fuel economy of 33.7 mpg in MY 2016: 177

174 See Section IV.G.6 below.

175 In NHTSA’s analysis, “undercompliance” is mitigate d either through use of FFV credits, use of existin g or “banked” credits, or through fine payment. Beca use NHTSA cannot consider availability of credits i n setting standards, the estimated achieved CAFE leve ls presented here do not account for their use. In contrast, because NHTSA is not prohibited from cons idering fine payment, the estimated achieved CAFE levels presented here include the assumption that B MW, Daimler ( i.e. , Mercedes), Porsche, and, Tata ( i.e.

, Jaguar and Rover) will only apply technology up to the point that it would be less expensive to pay ci vil penalties. Formatted Table

Formatted TableDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

163 Table IV.G.1-2. Average Achieved Fuel Economy (mpg )

under Proposed Standards

2012 2013 2014 2015 2016 Passenger Cars 32.9 34.2 35.2 36.5 37.6 Light Trucks 24.9 25.7 26.5 27.4 28.1

Combined 29.3 30.5 31.5 32.7 33.7

201 2 20 13 2 014 2 015 201 6
Passenger C ars 32 .9 34 .2

3 5.2

36.5

37 .6 Light Truck s 24 .9 25 .7

2 6.5

27.4

28 .1

Co mbined 29 .3 30 .5

3 1.5

32.7

33 .7

NHTSA estimates that these fuel economy increases will lead to fuel savings totaling 61.6 billion gallons during the useful liv es of vehicles sold in MYs 2012-2016:

Table IV.G.1-3. Fuel Saved (billion gallons) under Proposed Standards

2012 2013 2014 2015 2016 Total Passenger Cars 2.5 5.3 7.5 9.4 11.4 36.0 Light Trucks 1.8 3.7 5.4 6.8 7.8 25.6

Combined 4.3 9.1 12.9 16.1 19.2 61.6

201 2 20 13 2 014 2 015 201 6 T otal
Passenger C ars 2 .5

5 .3

7.5

9.4

11 .4

3 6.0 Light Truck s 1 .8

3 .7

5.4

6.8

7 .8

2 5.6

Co mbined 4 .3

9 .1

1 2.9

16.1

19 .2

6 1.6

The agency also estimates that these new CAFE stan dards will lead to corresponding reductions of CO 2 emissions totaling 656 million metric tons (mmt) d uring

the useful lives of vehicles sold in MYs 2012-2016:

Table IV.G.1-4. Avoided Carbon Dioxide Emissions ( mmt)

under Proposed Standards

2012 2013 2014 2015 2016 Total Passenger Cars 25 56 79 99 121 381 Light Trucks 19 40 58 73 85 275

Combined 44 96 137 173 206 656

176 In NHTSA’s analysis, “overcompliance” occurs throu gh multi-year planning: manufacturers apply some “extra” technology in early model years ( e.g. , MY 2014) in order to carry that technology forwar d and thereby facilitate compliance in later model ye ars ( e.g. , MY 2016)

177 Consistent with EPCA, NHTSA has not accounted for manufacturers’ ability to earn CAFE credits for selling FFVs, carry credits forward and back betwee n model years, and transfer credits between the passenger car and light truck fleets. Formatted Table

Formatted Table

Formatted Table

Formatted TableDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

164 201 2 20 13 2 014 2 015 201 6 T otal
Passenger C ars 2 5

56

79

9 9

1 21

381 Light Truck s 1 9

40

58

7 3

85

275

Co mbined 4 4

96

137

17 3

2 06

656

2. How Would These Proposed Standards Improve Fleet -wide Fuel Economy and Reduce GHG Emissions Beyond MY 2016?

Under the assumption that CAFE standards at least as stringent as those proposed for MY 2016 would be established for subsequent mod el years, the effects of the proposed standards on fuel consumption and GHG emis sions will continue to increase for many years. This will occur because over time, a g rowing fraction of the U.S. light-duty vehicle fleet will be comprised of cars and light t rucks that meet the MY 2016 standard. The impact of the proposed standards on fuel use an d GHG emissions will continue to grow through approximately 2050, when virtually all cars and light trucks in service will

have met the MY 2016 standard.

As Table IV.G.2-1 shows, NHTSA estimates that the f uel economy increases resulting from the proposed standards will lead to reductions in total fuel consumption by cars and light trucks of 9 billion gallons during 2 020, increasing to 30 billion gallons by 2050. Over the period from 2012–when the proposed standards would begin to take effect–through 2050, cumulative fuel savings would total 693 billion gallons, as Table

IV.G.2-1 also indicates.

Table IV.G.2-1. Reduction in Fleet-Wide Fuel Use ( billion gallons)

under Proposed Standards

Calendar Year 2020 2030 2040 2050 Total, 2012-

2050 Passenger Cars 5 12 16 19 431 Light Trucks 4 7 9 11 262

Combined 9 1 9 25 30 693



### Calendar Year 2020 2030 2040 2050 Total, 2012-

2050
Passenger Cars 5 12 16 19 431
Light Trucks 4 7 9 11 262

Total 9 19 25 30 693

As a consequence of these reductions in fleet-wide fuel consumption, the agency also estimates that the proposed CAFE standards for MYs 2012-2016 will lead to corresponding reductions in CO 2 emissions from the U.S. light-duty vehicle fleet. Specifically, NHTSA estimates that total CO 2 emissions associated with passenger car and light truck use in the U.S. use will decline by 111 million metric tons (mmt) during 2020 as a consequence of the proposed standards, as Table IV.G.2-2reports. The tableDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

165

also shows that the this reduction is estimated to grow to 355 million metric tons by the year 2050, and will total 8,247 million metric tons over the period from 2012, when the proposed standards would take effect, through 2050.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

166

Table IV.G.2-2. Reduction in Fleet-Wide Carbon Dio xide Emissions (mmt) From Passenger Car and Light Truck Use under Propos ed Standards

Calendar Year 2020 2030 2040 2050 Total, 2012-

2050 Passenger Cars 64 144 186 222 5,117 Light Trucks 47 87 110 132 3,130

Combined 111 231 295 355 8,247



### Calendar Year 2020 2030 2040 2050 Total, 2012-

2050
Passenger Cars 64 144 186 222 5,117
Light Trucks 47 87 110 132 3,130

Total 111 231 295 355 8,247

These reductions in fleet-wide CO 2 emissions, together with corresponding reductions in other GHG emissions from fuel product ion and use, would lead to small but significant reductions in projected changes in the future global climate. These changes

are summarized in Table IV.G.2-3 below.

Table IV.G.2-3. Effects of Reductions in Fleet-Wid e Carbon Dioxide Emissions

(mmt) On Projected Changes in Global Climate

Measure Units Date Projected Change in Measure

No

Action With Proposed

Standards Difference

Atmospheric CO 2 Concentration ppm 2100 783.0 780.3 -2.7

Increase in Global Mean Surface Temperature o C 2100 3.136 3.126 -0.010

Sea Level Rise cm 2100 38.00 37.91

- 0.09 Global Mean Precipitation % change

from 1980- 1999 avg. 2090 4.59% 4.57% -0.02%

No Action with Proposed

Standards Difference

Atmospheric CO 2 Concentration ppm 2100 783.0 780.3 -2.7

Increase in Global Mean Surface
Temperature ° C 2100 3.136 3.126 -0.010

Sea Level Rise cm 2100 38.00 37.91 -0.09

Global Mean Precipitation % change

from 1980-
1999 avg. 2090 4.59% 4.57% -0.02% Measure Units Date Projected Change in Measure:DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

167 3. How Would These Proposed standards Impact Non-GH G emissions and

Their Associated Effects?

Under the assumption that CAFE standards at least a s stringent as those proposed for MY 2016 would be established for subsequent mod el years, the effects of the proposed standards on air quality and its associate d health effects will continue to be felt

over the foreseeable future. This will occur becau se over time a growing fraction of the U.S. light-duty vehicle fleet will be comprised of cars and light trucks that meet the MY 2016 standard, and this growth will continue until approximately 2050.

Increases in the fuel economy of light-duty vehicle s required by the proposed CAFE standards will cause a slight increase in the number of miles they are driven, through the fuel economy “rebound effect.” In turn , this increase in vehicle use will lead to increases in emissions of criteria air pollutant s and some airborne toxics, since these are products of the number of miles vehicles are dr iven.

At the same time, however, the projected reductions in fuel production and use reported in Table IV.G.2-1 above will lead to corre sponding reductions in emissions of these pollutants that occur during fuel production and distribution (“upstream” emissions). For most of these pollutants, the redu ction in upstream emissions resulting from lower fuel production and distribution will ou tweigh the increase in emissions from vehicle use, resulting in a net decline in their to tal emissions.

Tables IV.G.3-1a and 3-1b report estimated reductio ns in emissions of selected criteria air pollutants (or their chemical precurso rs) and airborne toxics expected to result from the proposed standards during calendar year 20 30. By that date, the majority of light-duty vehicles in use will have met the propos ed MY 2016 CAFE standards, so these reductions provide a useful index of the long-term impact of the proposed standards on air pollution and its consequences for human health

.

Table IV.G.3-1a. Projected Changes in Emissions of Criteria Air Pollutants from Car and Light Truck Use (calendar year 2030; tons)

Vehicle Class Source of

Emissions Criteria Air Pollutant

Nitrogen

Oxides (NOx) Particulate

Matter (PM2.5) Sulfur

Oxides (SOx) Volatile

Organic Compounds (VOC)

Passenger Cars Vehicle use 1,791 630

- 2,375 2,157

Fuel production

and distribution -19,022 -2,539 -11,363 -75,031

All sources

- 17,231

- 1,909

- 13,738

- 72,874

Light Trucks Vehicle use 1,137 257

- 1,401 1,094

Fuel production

and distribution -11,677 -1,569 -7,031 -43,667DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

168 All sources -10,540 -1,312 -8,432 -42,573

Total Vehicle use 2,928 887

- 3,776 3,251

Fuel production

and distribution -30,699 -4,108 -18,394 -118,698

All sources -27,771 -3,221 -22,170 -115,447

Nitrogen

Oxides
(NOx) Particulate

Matter
(PM2.5) Sulfur

Oxides
(SOx) Volatile

Organic
Compounds
(VOC)

Vehicle use 1,791 630 -2,375 2,157
Fuel production

and distribution -19,022 -2,539 -11,363 -75,031

All sources -17,231 -1,909 -13,738 -72,874

Vehicle use 1,137 257 -1,401 1,094

Fuel production

and distribution -11,677 -1,569 -7,031 -43,667

All sources -10,540 -1,312 -8,432 -42,573

Vehicle use 2,928 887 -3,776 3,251

Fuel production

and distribution -30,699 -4,108 -18,394 -118,698

All sources -27,771 -3,221 -22,170 -115,447 Vehicle Class Source of

Emisisons Criteria Air Pollutant

Passenger Cars

Light Trucks

TotalDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

169

Table IV.F.3-1b. Projected Changes in Emissions of Airborne Toxics from Car and Light Truck Use (calendar year 2030; tons)

Vehicle Class Source of

Emissions Toxic Air Pollutant

Benzene 1,3-

Butadiene Formaldehyde

Passenger Cars Vehicle use 67 19 72

Fuel production

and distribution -158 -1 -54

All sources

- 91 18 18

Light Trucks Vehicle use 45 9 32

Fuel production

and distribution -93 -1 -33

All sources

- 48 8

- 1

Total Vehicle use 112 28 104

Fuel production

and distribution -251 -2 -87

All sources

- 139 26 17



### Benzene 1,3-

Butadiene Formaldehyde

Vehicle use 67 19 72

Fuel production

and distribution -158 -1 -54

All sources -91 18 18

Vehicle use 45 9 32

Fuel production

and distribution -93 -1 -33

All sources -48 8 -1

Vehicle use 112 28 104

Fuel production

and distribution -251 -2 -87

All sources -139 26 17 Source of

Emisisons Toxic Air Pollutant

Passenger Cars

Light Trucks

Total Vehicle Class

Note: positive values indicate increases in emissio ns; negative values indicate reductions.

In turn, the reductions in emissions reported in Ta bles IV.G.3-1a and 3-1b are projected to result in significant declines in the health effects that result from populationDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

170

exposure to these pollutants. Table IV.G.3-2 repor ts the estimated reductions in selected

PM 2.5 -related human health impacts that are expected to result from reduced population exposure to unhealthful atmospheric concentrations of PM 2.5 . The estimates reported in

Table IV.G.3-2 are derived from PM 2.5 -related dollar-per-ton estimates that include only quantifiable reductions in health impacts likely to result from reduced population exposure to particular matter (PM). They do not in clude all health impacts related to reduced exposure to PM, nor do they include any red uctions in health impacts resulting from lower population exposure to other criteria ai r pollutants (particularly ozone) and air toxics. NHTSA and EPA are using PM-related benefit s-per-ton values as an interim approach to estimating the PM-related benefits of t he proposal. To model the ozone and PM air quality benefit sof the final rule, the anal ysis will utilize ambient concentration data derived from full-scale photochemical air qual ity modeling.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

171

Table IV.G.3-2. Projected Reductions in Health Impa cts of Exposure to Criteria Air

Pollutants from Proposed Standards (calendar year 2 030)

Health Impact Measure Projected

Reduction (2030) Mortality (ages 30 and older) premature deaths per year 217 to 55 4

Chronic Bronchitis cases per year 142 Emergency Room Visits for Asthma number per year 198

Work Loss workdays per year 25,522

M ortality (ages 30 and o lder) prematu re d eaths p er y ear 5 45 to 1,394
Chro nic Bronchitis cases per year 359

Em ergency Ro om Visits fo r Asthm a num ber per year 495
W ork L oss workdays per year 64,4 83

H ealt h Im pact M easure P ro jected
Reduction (2 030)

4. What are the Estimated Costs and Benefits of The se Proposed

Standards?

NHTSA estimates that the proposed standards could entail significant additional technology beyond the levels reflected in the basel ine market forecast used by NHTSA. This additional technology will lead to increases i n costs to manufacturers and vehicle buyers, as well as fuel savings to vehicle buyers. The following three tables summarize the extent to which the agency estimates technologi es could be added to the passenger car, light truck, and overall fleets in each model year in response to the proposed standards. Percentages reflect the technology’s ad ditional application in the market, and are negative in cases where one technology is super seded ( i.e. , displaced) by another. For example, the agency estimates that many automatic t ransmissions used in light trucks could be displaced by dual clutch transmissions. Formatted TableDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

172 Table IV.G.4-1. Addition of Technologies to Passen ger Car Fleet

under Proposed Standards

Technology MY 2012 MY 2013 MY 2014 MY 2015 MY 2016

Low Friction Lubricants 21% 20% 21% 37% 36% Engine Friction Reduction 10% 21% 24% 29% 40% VVT - Coupled Cam Phasing (CCP) on SOHC 1% 1% 1% 4% 9%
Discrete Variable Valve Lift (DVVL) on SOHC 0% 1% 2% 2% 2% Cylinder Deactivation on SOHC 0% 0% 0% 0% 1%
VVT - Intake Cam Phasing (ICP) 0% 0% 0% 0% 0% VVT - Dual Cam Phasing (DCP) 13% 19% 26% 28% 29%
Discrete Variable Valve Lift (DVVL) on DOHC 13% 18% 21 % 23% 29%
Continuously Variable Valve Lift (CVVL) 0% 0% 0% 0% 0% Cylinder Deactivation on DOHC 0% 0% 0% 0% 0% Cylinder Deactivation on OHV 0% 1% 1% 1% 1%
VVT - Coupled Cam Phasing (CCP) on OHV 0% 1% 1% 1% 1%
Discrete Variable Valve Lift (DVVL) on OHV 0% 2% 2% 3% 4 %

Conversion to DOHC with DCP 0% 0% 0% 0% 0% Stoichiometric Gasoline Direct Injection (GDI) 14% 22 % 26% 30% 36%

Combustion Restart 0% 0% 2% 5% 9%
Turbocharging and Downsizing 10% 15% 16% 17% 20%
Exhaust Gas Recirculation (EGR) Boost 0% 7% 9% 10% 15%
Conversion to Diesel following TRBDS 1% 2% 2% 2% 2% Conversion to Diesel following CBRST 0% 0% 0% 0% 1% 6-Speed Manual/Improved Internals 0% 0% 0% 0% 0%
Improved Auto. Trans. Controls/Externals 2% 8% 12% 10% 1 1% Continuously Variable Transmission 0% 0% 0% 0% 0% 6/7/8-Speed Auto. Trans with Improved Internals 0% 0% 1% 1% 2%

Dual Clutch or Automated Manual Transmission 14% 24% 3 1% 41% 47% Electric Power Steering 8% 24% 34% 42% 55%
Improved Accessories 14% 26% 31% 38% 50% 12V Micro-Hybrid 0% 0% 0% 0% 0% Belt mounted Integrated Starter Generator 8% 18% 27% 30 % 33%
Crank mounted Integrated Starter Generator 3% 3% 3% 3% 3 % Power Split Hybrid 1% 2% 2% 2% 2%
2-Mode Hybrid 0% 0% 0% 0% 0% Plug-in Hybrid 0% 0% 0% 0% 0%
Material Substitution (1.5%) 18% 29% 32% 40% 62%
Material Substitution (5% to 10%) 0% 0% 14% 21% 32%
Material Substitution (NA) 0% 0% 0% 0% 0% Low Rolling Resistance Tires 5% 26% 38% 45% 50%
Low Drag Brakes 2% 4% 5% 5% 9% Secondary Axle Disconnect - Unibody 0% 0% 0% 0% 0%
Secondary Axle Disconnect - Ladder Frame 1% 2% 2% 2% 3% Aero Drag Reduction 8% 21% 32% 37% 45%DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

173 Table IV.G.4-2. Addition of Technologies to Light Truck Fleet

under Proposed Standards

Technology MY 2012 MY 2013 MY 2014 MY 2015 MY 2016

Low Friction Lubricants 19% 19% 19% 20% 21% Engine Friction Reduction 2% 4% 12% 21% 21% VVT - Coupled Cam Phasing (CCP) on SOHC 0% 0% 6% 8% 8%
Discrete Variable Valve Lift (DVVL) on SOHC 1% 1% 3% 12 % 12% Cylinder Deactivation on SOHC 0% 1% 1% 3% 6%
VVT - Intake Cam Phasing (ICP) 0% 0% 0% 0% 0% VVT - Dual Cam Phasing (DCP) 2% 3% 7% 8% 10%
Discrete Variable Valve Lift (DVVL) on DOHC 12% 17% 21 % 22% 27%
Continuously Variable Valve Lift (CVVL) 0% 0% 0% 0% 0% Cylinder Deactivation on DOHC -2% -2% -2% 1% 1% Cylinder Deactivation on OHV 1% 6% 8% 7% 12%
VVT - Coupled Cam Phasing (CCP) on OHV 0% 1% 2% 4% 17%
Discrete Variable Valve Lift (DVVL) on OHV 0% 14% 17% 1 9% 19%

Conversion to DOHC with DCP 0% 0% 0% 0% 0% Stoichiometric Gasoline Direct Injection (GDI) 17% 34 % 41% 43% 47%

Combustion Restart 0% 0% 1% 6% 11%
Turbocharging and Downsizing 5% 8% 8% 8% 9%
Exhaust Gas Recirculation (EGR) Boost 0% 3% 3% 3% 6%
Conversion to Diesel following TRBDS 0% 0% 0% 0% 0% Conversion to Diesel following CBRST 1% 1% 1% 1% 1% 6-Speed Manual/Improved Internals 0% 0% 0% 0% 0%
Improved Auto. Trans. Controls/Externals -1% -10% -14% -30% -40% Continuously Variable Transmission 0% 0% 0% 0% 0% 6/7/8-Speed Auto. Trans with Improved Internals -3% - 4% -4% -4% -3%

Dual Clutch or Automated Manual Transmission 19% 39% 5 4% 71% 80% Electric Power Steering 9% 31% 39% 45% 50%
Improved Accessories 6% 13% 20% 27% 32% 12V Micro-Hybrid 0% 0% 0% 0% 0% Belt mounted Integrated Starter Generator 8% 11% 20% 22 % 24%
Crank mounted Integrated Starter Generator 0% 0% 0% 0% 0 % Power Split Hybrid 0% 0% 0% 0% 0%
2-Mode Hybrid 0% 0% 0% 0% 0% Plug-in Hybrid 0% 0% 0% 0% 0%
Material Substitution (1.5%) 14% 15% 20% 31% 52%
Material Substitution (5% to 10%) 0% 0% 9% 22% 29%
Material Substitution (NA) 0% 0% 0% 0% 0% Low Rolling Resistance Tires 15% 20% 22% 24% 24%
Low Drag Brakes 12% 15% 23% 30% 51% Secondary Axle Disconnect - Unibody 0% 0% 0% 0% 0%
Secondary Axle Disconnect - Ladder Frame 8% 8% 12% 18% 1 9% Aero Drag Reduction 10% 11% 16% 13% 16%DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

174 Table IV.G.4-3. Addition of Technologies to Overal l Fleet

under Proposed Standards

Technology MY 2012 MY 2013 MY 2014 MY 2015 MY 2016

Low Friction Lubricants 20% 19% 20% 31% 31% Engine Friction Reduction 7% 15% 20% 26% 33% VVT - Coupled Cam Phasing (CCP) on SOHC 1% 1% 3% 5% 9%
Discrete Variable Valve Lift (DVVL) on SOHC 1% 1% 2% 6% 6% Cylinder Deactivation on SOHC 0% 0% 1% 1% 3%
VVT - Intake Cam Phasing (ICP) 0% 0% 0% 0% 0% VVT - Dual Cam Phasing (DCP) 9% 13% 19% 21% 23%
Discrete Variable Valve Lift (DVVL) on DOHC 12% 17% 21 % 22% 28%
Continuously Variable Valve Lift (CVVL) 0% 0% 0% 0% 0% Cylinder Deactivation on DOHC -1% -1% -1% 0% 0% Cylinder Deactivation on OHV 0% 3% 3% 3% 4%
VVT - Coupled Cam Phasing (CCP) on OHV 0% 1% 2% 2% 7%
Discrete Variable Valve Lift (DVVL) on OHV 0% 7% 8% 9% 9 %

Conversion to DOHC with DCP 0% 0% 0% 0% 0% Stoichiometric Gasoline Direct Injection (GDI) 15% 27 % 32% 34% 40%

Combustion Restart 0% 0% 2% 6% 10%
Turbocharging and Downsizing 8% 12% 13% 14% 16%
Exhaust Gas Recirculation (EGR) Boost 0% 5% 7% 8% 12%
Conversion to Diesel following TRBDS 1% 1% 1% 1% 1% Conversion to Diesel following CBRST 0% 0% 0% 1% 1% 6-Speed Manual/Improved Internals 0% 0% 0% 0% 0%
Improved Auto. Trans. Controls/Externals 1% 1% 3% -4% -6 % Continuously Variable Transmission 0% 0% 0% 0% 0% 6/7/8-Speed Auto. Trans with Improved Internals -1% - 1% -1% -1% 0%

Dual Clutch or Automated Manual Transmission 16% 29% 3 9% 52% 58% Electric Power Steering 9% 27% 36% 43% 53%
Improved Accessories 11% 21% 27% 34% 44% 12V Micro-Hybrid 0% 0% 0% 0% 0% Belt mounted Integrated Starter Generator 8% 16% 25% 27 % 30%
Crank mounted Integrated Starter Generator 2% 2% 2% 2% 2 % Power Split Hybrid 1% 1% 1% 1% 1%
2-Mode Hybrid 0% 0% 0% 0% 0% Plug-in Hybrid 0% 0% 0% 0% 0%
Material Substitution (1.5%) 17% 24% 28% 37% 59%
Material Substitution (5% to 10%) 0% 0% 12% 21% 31%
Material Substitution (NA) 0% 0% 0% 0% 0% Low Rolling Resistance Tires 8% 23% 32% 38% 41%
Low Drag Brakes 5% 8% 11% 14% 23% Secondary Axle Disconnect - Unibody 0% 0% 0% 0% 0%
Secondary Axle Disconnect - Ladder Frame 4% 4% 5% 7% 8% Aero Drag Reduction 8% 17% 26% 29% 36%DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

175

In order to pay for this additional technology (an d, for some manufacturers, civil penalties), NHTSA estimates that average passenger car and light truck prices will, relative to levels resulting from compliance with b aseline (MY 2011) standards, increase by $591-$1,127 and $283-$1,020, respectively, durin g MYs 2011-2016. The following tables summarize the agency’s estimates of average price increases for each manufacturer’s passenger car, light truck, and over all fleets (with corresponding averages for the industry):

Table IV.G.4-4. Average Passenger Car Incremental Price Increases ($)

under Proposed Standards

Manufacturer MY 2012 MY 2013 MY 2014 MY 2015 MY 2016

BMW 524 552 634 828 1,124 Chrysler 775 1,304 1,473 1,583 1,582

Daimler 182 215 781 1,039 1,401

Ford 1,746 1,719 1,735 1,880 2,078

General Motors 143 990 1,189 1,387 1,553

Honda 31 122 205 287 494 Hyundai 418 452 643 726 868

Kia 319 359 387 473 647

Mazda 658 735 965 991 1,263

Mitsubishi 1,156 1,076 1,715 2,076 2,035

Nissan 653 712 1,155 1,153 1,275

Porsche 270 256 306 399 498

Subaru 408 465 1,493 1,877 1,838

Suzuki 259 1,001 1,445 1,494 1,675

Tata 246 244 395 577 1,284 Toyota 133 127 155 257 267 Volkswagen 286 561 650 767 1,125 Total/Average 498 674 820 930 1,085DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

176 Manufacturer MY 2012 MY 2013 MY 2014 MY 2015 MY 2016

BMW 524 552

634

828

1,124 Chrysler 775 1,304

1,473

1,583

1,582

Daimler 182 215

781

1,039

1,401

Ford 1,746 1,719

1,735

1,880

2,078

General Motors 143 990

1,189

1,387

1,553

Honda 31 122

205

287

494 Hyundai 418 452

643

726

868

Kia 319 359

387

473

647

Mazda 658 735

965

991

1,263

Mitsubishi 1,156 1,076

1,715

2,076

2,035

Nissan 653 712

1,155

1,153

1,275

Porsche 270 256

306

399

498

Subaru 408 465

1,493

1,877

1,838

Suzuki 259 1,001

1,445

1,494

1,675

Tata 246 244

395

577

1,284
Toyota 133 127

155

257

267
Volkswagen 286 561

650

767

1,125 Total/Average 498 674

820

930

1,085DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

177 Table IV.G.4-5. Average Light Truck Incremental Pr ice Increases ($)

under Proposed Standards

Manufacturer MY 2012 MY 2013 MY 2014 MY 2015 MY 2016

BMW 325 327 380 708 884 Chrysler 152 399 749 892 1,188

Daimler 322 289 316 420 478

Ford 471 629 693 1,323 1,365

General Motors 33 533 752 792 962

Honda 390 380 616 749 1,00 6 Hyundai 774 744 1,301 1,322 1,292

Kia 228 373 547 843 1,218

Mazda 340 608 610 679 776

Mitsubishi 55 94 1,546 1,732 2,123

Nissan 541 608 903 1,022 1,312

Porsche 28 46 84 913 954

Subaru 1,203 1,140 1,213 1,197 1,184

Suzuki 50 1,451 1,404 1,358 1,373

Tata 44 83 127 193 635 Toyota 172 309 665 764 877 Volkswagen 28 61 99 160 231 Total/Average 291 485 701 911 1,058

Manufacturer MY 2012 MY 2013 MY 2014 MY 2015 MY 2016

BMW 325 327

380

708

884 Chrysler 152 399

749

892

1,188

Daimler 322 289

316

420

478

Ford 471 629

693

1,323

1,365

General Motors 33 533

752

792

962

Honda 390 380

616

749

1,006 Hyundai 774 744

1,301

1,322

1,292

Kia 228 373

547

843

1,218

Mazda 340 608

610

679

776

Mitsubishi 55 94

1,546

1,732

2,123

Nissan 541 608

903

1,022

1,312

Porsche 28 46

84

913

954

Subaru 1,203 1,140

1,213

1,197

1,184

Suzuki 50 1,451

1,404

1,358

1,373

Tata 44 83

127

193

635
Toyota 172 309

665

764

877
Volkswagen 28 61

99

160

231 Total/Average 291 485

701

911

1,058

Table IV.G.4-6. Average Incremental Price Increase s ($) By Manufacturer under Proposed Standards

Manufacturer MY 2012 MY 2013 MY 2014 MY 2015 MY 2016

BMW 457 483 560 796 1,061 Chrysler 393 777 1,061 1,271 1,408

Daimler 236 243 604 834 1,106

Ford 1,195 1,242 1,262 1,629 1,762DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

178

General Motors 94 785 997 1,131 1,304

Honda 162 212 335 429 647 Hyundai 488 509 769 835 944

Kia 300 36 2 416 535 740

Mazda 598 712 907 944 1,193

Mitsubishi 1,007 921 1,692 2,033 2,045

Nissan 616 679 1,078 1,115 1,286

Porsche 174 179 231 562 643

Subaru 705 711 1,392 1,632 1,602

Suzuki 204 1,117 1,434 1,458 1,598

Tata 115 150 234 368 938 Toyota 147 191 331 429 468 Volkswagen 233 470 550 657 970 Total/Average 421 605 777 924 1,076

Manufacturer MY 2012 MY 2013 MY 2014 MY 2015 MY 2016

BMW 457 483

560

796

1,061 Chrysler 393 777

1,061

1,271

1,408

Daimler 236 243

604

834

1,106

Ford 1,195 1,242

1,262

1,629

1,762

General Motors 94 785

997

1,131

1,304

Honda 162 212

335

429

647 Hyundai 488 509

769

835

944

Kia 300 362

416

535

740

Mazda 598 712

907

944

1,193

Mitsubishi 1,007 921

1,692

2,033

2,045

Nissan 616 679

1,078

1,115

1,286

Porsche 174 179

231

562

643

Subaru 705 711

1,392

1,632

1,602

Suzuki 204 1,117

1,434

1,458

1,598

Tata 115 150

234

368

938
Toyota 147 191

331

429

468
Volkswagen 233 470

550

657

970 Total/Average 421 605

777

924

1,076

Based on the agencies’ estimates of manufacturers’ future sales volumes, these price increases will lead to a total of $60.2 billi on in incremental outlays during MYs 2012-2016 for additional technology attributable to the proposed standards:

Table IV.G.4-7. Incremental Technology Outlays ($b )

under Proposed Standards

201 2 20 13 2 014 2 015 201 6 T otal
Passenger C ars 4 .1

6 .5

8.4

9.9

11 .8

4 0.8 Light Truck s 1 .5

2 .8

4.0

5.2

5 .9

1 9.4

Co mbined 5 .7

9 .3

1 2.5

15.1

17 .6

6 0.2

2012 2013 2014 2015 2016 Total Passenger Cars 4.1 6.5 8.4 9.9 11.8 40.8 Light Trucks 1.5 2.8 4.0 5.2 5.9 19.4

Combined 5.7 9.3 12.5 15.1 17.6 60.2 Formatted: CenteredDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

179 NHTSA notes that these estimates of the economic co sts for meeting higher CAFE standards omit certain potentially important c ategories of costs, and may also reflect underestimation (or possibly overestimation ) of some costs that are included. For example, although the agency’s analysis attempts to hold vehicle performance, capacity, and utility constant in estimating the costs of app lying fuel-saving technologies to vehicles, the analysis imputes no cost to any actua l reductions in vehicle performance, capacity, and utility that may result from manufact urers’ efforts to comply with the proposed CAFE standards. Although these costs are difficult to estimate accurately, they nonetheless represent a potentially significant cat egory of omitted costs. Similarly, the agency’s estimates of costs for meeting higher CAFE standards does not estimate the economic value of potential increases in motor vehi cle fatalities and injuries that could result from reductions in the size or weight of veh icles. While NHTSA reports worstcase estimates of these increases in fatalities and injuries, no estimate of their economic value is included in the agency’s estimates of the net benefits resulting from the proposed standards due to ongoing discussion regarding these potential impacts.

Finally, it is possible that the agency may have un derestimated or overestimated manufacturers’ direct costs for applying some fuel economy technologies, or the

increases in manufacturer’s indirect costs associat ed with higher vehicle manufacturing costs. In either case, the technology outlays repo rted here will not correctly represent the costs of meeting higher CAFE standards. Similarly, NHTSA’s estimates of increased costs of congestion, accidents, and noise associate d with added vehicle use are drawn from a 1997 study, and the correct magnitude of the se values may have changed since they were developed. 178 If this is the case, the costs of increased vehic le use associated with the fuel economy rebound effect will differ fr om the agency’s estimates in this analysis. Thus, like the agency’s estimates of eco nomic benefits, estimates of total compliance costs reported here may underestimate or overestimate the true economic costs of the proposed standards.

NHTSA notes that these estimates of the economic co sts for meeting higher CAFE standards omit certain potentially important c ategories of costs, and may also reflect significant underestimation of some costs t hat are included. For example, the agency’s estimates of costs for meeting higher CAFE standards does not estimate the economic value of potential increases in motor vehi cle fatalities and injuries that could result from reductions in the size or weight of veh icles. While NHTSA report s provisional estimates of these increases in fatalit ies and injuries, no estimate of their economic value is included in the agency’s estimate s of the costs of meeting higher CAFE standards. Similarly, NHTSA’s estimates of in creased costs of congestion, accidents, and noise associated with added vehicle use are drawn from a 1997 study, and the correct magnitude of these values may have incr eased since they were developed. If this is the case, the costs of increased vehicle us e associated with the fuel ec onomy rebound effect will have been underestimated. Thus like the agency’s estimates of economic benefits reported previously, estimates of total compliance costs reported here are likely to underestimate the true economic costs of the proposed standards.

178 The agency seeks comment above on appropriate valu es for these costs. Comment [r13]: Added in response to interagency comment.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

180

However, offsetting these costs, the achieved incr eases in fuel economy will also produce significant benefits to society. NHTSA est imates that, in present value terms (at a discount rate of 3 percent), these benefits will total $201.7 billion over the useful lives of light vehicles sold during MYs 2012-2016:

Table IV.G.4-8. Present Value of Benefits ($billio n)

under Proposed Standards

201 2 20 13 2 014 2 015 201 6 T otal
Passenger C ars 7 .6

17 .0

2 4.4

31.2

38 .7

11 9.1 Light Truck s 5 .5

11 .6

1 7.3

22.2

26 .0

8 2.6

Co mbined 13 .1

28 .7

4 1.8

53.4

64 .7

20 1.7

2012 2013 2014 2015 2016 Total Passenger Cars 7.6 17.0 24.4 31.2 38.7 119.1 Light Trucks 5.5 11.6 17.3 22.2 26 .0 82.6

Combined 13.1 28.7 41.8 53.4 64.7 201.7

NHTSA attributes most of these benefits to reducti ons in fuel consumption, valuing fuel at future pretax prices in EIA’s refer ence case forecast from AEO 2009. The

total benefits shown in the above table also includ e other benefits and disbenefits, examples of which include the social values of redu ctions in CO 2 and criteria pollutant emissions, the value of additional travel (induced by the rebound effect), and the social cost of additional congestion, accidents, and noise attributable to that additional travel.

The P RIA accompanying today’s proposed rule presents a d etailed analysis of specific benefits of the proposed rule.

For both the passenger car and light truck fleets, NHTSA estimates that the benefits of today’s proposed standards will exceed the corresponding costs in every model year. Over the useful lives of the affected (MY 2012-2016) vehicles, the agency estimates that the benefits of the proposed standar ds will exceed the costs of the proposed standards by $141.5 billion:

Table IV.G.4-9. Present Value of Net Benefits ($bi llion)

under Proposed Standards

2012 2013 2014 2015 2016 Total Passenger Cars 3.5 10.5 16.0 21.3 26.9 78.3 Light Trucks 3.9 8.9 13.3 17.0 20.1 63.2

Combined 7.4 19.4 29.3 38.3 47.1 141.5

201 2 20 13 2 014 2 015 201 6 T otal
Passenger C ars 3 .5

10 .5

1 6.0

21.3

26 .9

7 8.3 Light Truck s 3 .9

8 .9

1 3.3

17.0

20 .1

6 3.2

Co mbined 7 .4

19 .4

2 9.3

38.3

47 .1

14 1.5

NHTSA’s estimates of economic benefits from establi shing higher CAFE are also subject to considerable uncertainty. Most importan t, the agency’s estimates of the fuelDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

181

savings likely to result from adopting higher CAFE standards depend critically on the accuracy of the estimated fuel economy levels that will be achieved under both the baseline scenario, which assumes that manufacturers will continue to comply with the MY 2011 CAFE standards, and under alternative incre ases in the standards that apply to MY 2012-16 passenger cars and light trucks. Specif ically, if the agency has underestimated the fuel economy levels that manufac turers will achieve under the baseline scenario, its estimates of fuel savings an d the resulting economic benefits will be too large. As another example, the agency’s estima te of benefits from reducing the threat of economic damages from disruptions in the supply of imported petroleum to the U.S. applies to calendar year 2015. If the magnitude of this estimate would be expected to grow after 2015 in response to increases in U.S. pe troleum imports, growth in the level of U.S. economic activity, or increases in the likelih ood of disruptions in the supply of imported petroleum, the agency may have underestima ted the benefits from the reduction in petroleum imports expected to result from adopti ng higher CAFE standards.

Similar to our estimates for costs However , it is also possible likely that NHTSA’s estimates of economic benefits from establishing hi gher CAFE standards underestimate the true economic benefits of the fuel savings thos e standards would produce. This is partly because the agency has been unable to develo p monetized estimates of the economic value of certain potentially significant c ategories of benefits from reducing fuel consumption. Specifically, the agency’s estimate o f the economic value of reduced damages to human health resulting from lower exposu re to criteria air pollutants includes only the effects of reducing population exposure to PM 2.5 emissions. Although this is likely to be the most significant component of heal th benefits from reduced emissions of criteria air pollutants, it excludes the value of r educed damages to human health and other impacts resulting from lower emissions and reduced populati on exposure to other criteria air pollutants, including ozone and nitrous oxide ( N 2 O), as well as airborne toxics. The agency’s analysis excludes these benefits because n o reliable estimates of the health impacts of criteria pollutants other than PM 2.5 or of the health impacts of airborne toxics were available to use in developing estimates of th ese benefits.

In addition, the agency’s estimate of the value of reduced climate-related economic damages from lower emissions of GHGs exclu des many sources of potential benefits from reducing the pace and extent of globa l climate change. These include reductions in the risk of catastrophic changes in t he global climate, lower costs for necessary adaptations to changes in climate, reduce d water supply within specific global sub-regions, reductions in damages caused by severe storms, lower population exposure to harmful air pollution levels, reductions in ecos ystem impacts and risks to natural resources of global significance, and reduced threa ts from widespread social or political unrest. Including monetized estimates of benefits from reducing the extent of climate change and these associated impacts would increase the agency’s estimates of benefits from adopting higher CAFE standards.

Finally, th e value of some economic benefits that have been monetized in NHTSA’s analysis may have been underestimated. For example, the agency’s estimate of benefits from reducing the threat of economic da mages from disruptions in the supply Comment [r14]: Added in response to interagency commentDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

182

of imported petroleum t o the U.S. applies to calendar year 2015. If the m agnitude of this estimate would be expected to grow after 2015 in re sponse to increases in U.S. petroleum imports, growth in the level of U.S. economic activ ity, or increases in the likelihood of disruptio ns in the supply of imported petroleum, the agency may have underestimated the benefits from the reduction in petroleum imports ex pected to result from adopting higher

CAFE standards.

The benefits, costs, and net benefits shown above a re all based on a discount rate of 3 percent. As documented in the accompanying D P RIA, the agency examined the sensitivity of results to changes in many economic inputs. With an alternative discount rate of 7 percent, incremental technology outlays w ere virtually identical to those estimated at a 3 percent discount rate: 179

Table IV.G.4-10. Incremental Technology Outlays ($ b) under Proposed Standards (using 7 percent Discount Rate)

2012 2013 2014 2015 2016 Total Passenger Cars 4.1 6.5 8.4 9.9 11.8 40.8 Light Trucks 1.5 2.8 4.0 5.2 5.9 19.4

Combined 5.7 9.3 12.5 15.1 17.6 60.2

2012 2013 2014 2015 2016 Total Passenger Cars 4.1

6.5

8.4

9.9

11.8

40.8 Light T rucks 1.5

2.8

4.0

5.2

5.9

19.4

Combined 5.7

9.3

12.5

15.1

17.6

60.2

However, the present value of the benefits accrued over the lifetime of the vehicles covered by the proposal is about 20 percen t smaller when discounted at a 7 percent annual rate than when discounted at a 3 per cent annual rate:

Table IV.G.4-11. Present Value of Benefits ($billi on) under Proposed Standards (using 7 percent Discount Rate)

2012 2013 2014 2015 2016 Total Passenger Cars 6.0 13.6 19.5 25.0 31.1 95.3 Light Trucks 4.3 9.1 13.5 17.4 20.4 64.6

Combined 10.3 22.6 33.1 42.4 51.5 159.8

2012 2013 2014 2015 2016 Total Passenger Cars 6.0

13.6

19.5

25.0

31.1

95.3 Light T rucks 4.3

9.1

13.5

17.4

20.4

64.6

Combined 10.3

22.6

33.1

42.4

51.5

159.8

As a result, net benefits are 38 percent lower whe n total benefits are discounted at a 7 percent annual rate:

179 Because some economic inputs change the effective cost of some technologies, and NHTSA assumes some manufacturers will be willing to pay civil pen alties based on economic considerations, this outco me is not assured.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

183DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

184 Table IV.G.4-12. Present Value of Net Benefits ($b illion) under Proposed Standards (using 7 percent Discount Rate)

2012 2013 2014 2015 2016 Total Passenger Cars 1.9 7.0 11.1 15.1 19.3 54.5 Light Trucks 2.7 6.3 9.5 12.2 14.5 45.2

Combined 4.6 13.3 20.6 27.3 33.8 99.7

2012 2013 2014 2015 2016 Total Passenger Cars 1.9

7.0

11.1

15.1

19.3

54.5 Light T rucks 2.7

6.3

9.5

12.2

14.5

45.2

Combined 4.6

13.3

20.6

27.3

33.8

99.7

The following tables also present itemized costs an d benefits for the combined fleet for each year of the proposed standards and f or all the years combined, at 3 and 7 percent discount rates, respectively. Numbers in p arentheses represent negative values.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

185

Table IV.G.4-13. Itemized Cost and Benefit Estimat es for the Combined Vehicle Fleet, 3% Discount Rate

MY 2012 MY 2013 MY 2014 MY 2015 MY 2016 Total

Costs Technology

Costs $5,695 $9,295 $12,454 $15,080 $17,633 $60,157

Benefits

Lifetime Fuel Expenditures $10,197 $22,396 $32,715 $41,880 $50,823 $158,012

Consumer Surplus from

Additional Driving $751 $1,643 $2,389 $3,029 $3,639 $11,451

Refueling Time

Value $776 $1,551 $2,198 $2,749 $3,277 $10,550

Petroleum

Market

Externalities $559 $1,194 $1,700 $2,129 $2,538 $8,121

Congestion Costs ($460) ($934) ($1,332) ($1,657) ($1,991) ($6,376)

Noise Costs ($7) ($14) ($21) ($26) ($31) ($99)

Crash Costs ($217) ($437) ($625) ($776) ($930) ($2,985)

CO2 $1,028 $2,287 $3,382 $4,376 $5,372 $16,446

CO $0 $0 $0 $0 $0 $0

VOC $41 $80 $108 $131 $156 $518

NOX $82 $132 $155 $174 $200 $744

PM $220 $438 $621 $771 $904 $2,956

SOX $161 $345 $490 $613 $731 $2,341

Total $13,132 $28,680 $41,781 $53,394 $64,687 $201,676

Net Benefits $7,044 $18,759 $27,090 $34,710 $41,386 $128,992

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Table IV.G.4-14. Itemized Cost and Benefit Estimat es for the Combined Vehicle Fleet, 7% Discount Rate

MY 2012 MY 2013 MY 2014 MY 2015 MY 2016 Total

Costs Technology Costs $5,695 $9,295 $12,4 54 $15,080 $17,633 $60,157

Benefits

Lifetime Fuel Expenditures $7,991 $17,671 $25,900 $33,264 $40,478 $125,305

Consumer Surplus from

Additional Driving $590 $1,301 $1,896 $2,412 $2,904 $9,102

Refueling Time

Value $624 $1,249 $1,770 $2,215 $2,642 $8,500

Petroleum Market

Externalities $448 $960 $1,367 $1,712 $2,043 $6,531

Congestion Costs ($371) ($753) ($1,074) ($1,335) ($1,606) ($5,138)

Noise Costs ($6) ($12) ($16) ($21) ($24) ($80)

Crash Costs ($173) ($352) ($503) ($626) ($749) ($2,403)

CO2 $797 $1,781 $2,634 $3,410 $4,189 $12,813

CO $0 $0 $0 $0 $0 $0

VOC $33 $65 $87 $106 $125 $416

NOX $60 $99 $120 $135 $156 $570

PM $170 $344 $492 $613 $721 $2,339

SOX $129 $278 $394 $493 $588 $1,882

Total $10,292 $22,631 $33,066 $42,380 $51,468 $159,837

Net Benefits $4,281 $12,832 $18,818 $24,414 $29,293 $89,638

The above benefit and cost estimates did not reflec t the availability and use of flexibility mechanisms, such as compliance credits and credit trading, because EPCA prohibits NHTSA from considering the effects of tho se mechanisms in setting CAFE standards. However, the agency noted that, in real ity, manufacturers were likely to rely to some extent on flexibility mechanisms provided b y EPCA and would thereby reduce the cost of complying with the proposed standards t o a meaningful extent.

As discussed in the PRIA, NHTSA has performed an an alysis to estimate the costs and benefits if EPCA’s provisions regarding F FVs are accounted for. The agency considered also attempting to account for other EPC A flexibility mechanisms, in particular credit transfers between the passenger a nd nonpassenger fleets, but has concluded that, at least within a context in which each model year is represented Formatted TableDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

187

explicitly, technologies carry forward between mode l years, and multiyear planning effects are represented, there is no basis to relia bly estimate how manufacturers might use these mechanisms. Accounting for the FFV provision s indicates that achieved fuel economies would be 0.6-1.1 mpg lower than when thes e provisions are not considered (for comparison see Table IV.G.1-2 above):

Table IV.G.4-1 5 3 . Average Achieved Fuel Economy (mpg) under Proposed Standards (with FFV Credits)

2012 2013 2014 2015 2016 Passenger Cars 32.5 33.4 34.3 35.3 36.5 Light Trucks 24.1 24.6 25.3 26.3 27.0

Combined 28.7 29.6 30.4 31.6 32.7



### 2012 2013 2014 2015 2016 Passenger Cars 32.5

33.4

34.3

35.3

36.5 Light T rucks 24.1

24.6

25.3

26.3

27.0

Combined 28.7

29.6

30.4

31.6

32.7

As a result, NHTSA estimates that, when FFV credit s are taken into account, fuel savings will total 58.8 billion gallons—about 4.5 p ercent less than the 61.6 billion gallons

estimated when these credits are not considered: Formatted Table

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188 Table IV.G.4-1 6 4 . Fuel Saved (billion gallons) under Proposed Standards (with FFV Credits)

2012 2013 2014 2015 2016 Total Passenger Cars 2.5 5.0 6.9 8.6 10.9 33.9 Light Trucks 2.0 3.3 5.0 6.8 7.9 24.9

Combined 4.5 8.2 11.8 15.4 18.8 58.8

2012 2013 2014 2015 2016 Total Passenger Cars 2.5

5.0

6.9

8.6

10.9

33.9 Light T rucks 2.0

3.3

5.0

6.8

7.9

24.9

Combined 4.5

8.2

11.8

15.4

18.8

58.8

The agency similarly estimates CO 2 emissions reductions would total 639 million metric tons (mmt), about 2.6 percent less than the 656 mmt estimated when these credits

are not considered: 180

Table IV.G.4-1 7 5 . Avoided Carbon Dioxide Emissions (mmt) under Proposed Standards (with FFV Credits)

2012 2013 2014 2015 2016 Total Passenger Cars 27 54 75 93 118 368 Light Trucks 22 36 54 74 86 272

Combined 49 90 129 167 204 639

2012 2013 2014 2015 2016 Total Passenger Cars 27

54

75

93

118

368 Light T rucks 22

36

54

74

86

272

Combined 49

90

129

167

204

639

This analysis further indicates significant reduct ions in outlays for additional technology when FFV provisions are taken into accou nt—about $45b, or about 25 percent less than the $60b estimated when excluding these provisions:

Table IV.G.4-1 8 6 . Incremental Technology Outlays ($b) under Proposed Standards (with FFV Credits)

2012 2013 2014 2015 2016 Total Passenger Cars 2.5 4.4 6.1 7.4 9.3 29.6 Light Trucks 1.3 2.0 3.1 4.3 5.0 15.6

Combined 3.7 6.3 9.2 11.7 14.2 45.2

2012 2013 2014 2015 2016 Total Passenger Cars 2.5

4.4

6.1

7.4

9.3

29.6 Light T rucks 1.3

2.0

3.1

4.3

5.0

15.6

Combined 3.7

6.3

9.2

11.7

14.2

45.2

180 Differences in the application of diesel engines l ead to differences in the incremental percentage changes in fuel consumption and carbon dioxide emis sions.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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Because NHTSA’s analysis indicated that FFV provis ions would not significantly reduce fuel savings, the agency’s estimate of disco unted benefits when including these provisions, $192.5b, is only about 4.5 percent lowe r than the $201.7b shown above for the analysis that excluded these provisions:DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

190 Table IV.G.4-1 9 7 . Present Value of Benefits ($billion) under Proposed Standards (with FFV Credits)

2012 2013 2014 2015 2016 Total Passenger Cars 7.8 15.9 22.5 28.6 37.1 111.9 Light Trucks 6.1 10.2 15.9 22.1 26.3 80.5

Combined 13.9 26.1 38.4 50.7 63.3 192.5

2012 2013 2014 2015 2016 Total Passenger Cars 7.8

15.9

22.5

28.6

37.1

111.9 Light T rucks 6.1

10.2

15.9

22.1

26.3

80.5

Combined 13.9

26.1

38.4

50.7

63.3

192.5

However, although the agency estimates lower disco unted benefits when FFV provisions are taken into account, the agency estim ates that these provisions slightly increase net benefits (by about 4 percent, from $14 1.5b to $147.2b) because costs decrease by more than discounted benefits:

Table IV.G.4- 20 18 . Present Value of Net Benefits ($billion) under Proposed Standards (with FFV Credits)

2012 2013 2014 2015 2016 Total Passenger Cars 5.3 11.5 16.4 21.2 27.8 82.3 Light Trucks 4.8 8.2 12.8 17.8 21.3 64.9

Combined 10.2 19.7 29.2 39.0 49.1 147.2

2012 2013 2014 2015 2016 Total Passenger Cars 5.3

11.5

16.4

21.2

27.8

82.3 Light T rucks 4.8

8.2

12.8

17.8

21.3

64.9

Combined 10.2

19.7

29.2

39.0

49.1

147.2

The agency has performed several sensitivity analys es to examine important assumptions. We examine sensitivity with respect t o the following five economic

parameters:

1) The price of gasoline: The Reference Case uses the AEO 2009 reference case estimate for the price of gasoline. In this sensit ivity analysis we examine the effect of using the AEO high or low forecast estima tes instead.

2) The discount rate: The Reference Case uses a disco unt rate of 3 percent to discount future benefits. In the sensitivity analy sis, we equally examine the effect of using a 7 percent discount rate instead.

3) The rebound effect: The Reference Case uses a rebo und effect of 10 percent to project increased miles traveled as the cost per mi le driven decreases. In the sensitivity analysis, we examine the effect of usin g a 5 percent or 15 percent

rebound effect instead. Comment [r15]: Section added in response to interagency comment.

Formatted: Bullets and Numbering

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191

4) The values of CO 2 benefits and monopsony: The Reference Case uses $ 20 per ton to quantify the benefits of reducing CO 2 emissions and $0.178 per gallon to quantify the benefits of reducing fuel consumption. In the sensitivity analysis, we examine the effect of using values of $5, $10, $34, or $56 per ton instead to value

CO 2 benefits. These values can be translated into cent s per gallon by multiplying by 0.0089, 181 giving the following values:

($5 per ton CO 2 ) x 0.0089 = $0.0445 per gallon ($10 per ton CO 2 ) x 0.0089 = $0.089 per gallon ($20 per ton CO 2 ) x 0.0089 = $0.178 per gallon ($34 per ton CO 2 ) x 0.0089 = $0.3026 per gallon ($56 per ton CO 2 ) x 0.0089 = $0.4984 per gallon

The $5 per ton value reflects the domestic impacts of CO 2 emissions and so we use a nonzero monopsony cost, namely $0.30 cents pe r gallon, when valuing CO 2 emissions at $5 per ton. The higher per-ton values of CO 2 emissions reflect the global impacts of CO 2 emissions and we so use $0 per gallon for monopson y in

these cases.

5) Military security: The Reference Case uses $0 per g allon to quantify the military security benefits of reducing fuel consumption. In the sensitivity analysis, we examine the impact of using a value of 5 cents per gallon instead.

Varying each of the above 5 parameters in isolation results in 10 economic scenarios, not including the Reference case. These are listed in Table IV.G.4-21 below, together with

two additional scenarios that use values for these parameters that produce the lowest and highest valued benefits.

181 The molecular weight of Carbon (C) is 12, the molec ular weight of Oxygen (O) is 16, thus the molecular weight of

CO 2 is 44. One ton of C = 44/12 tons CO 2 = 3.67 tons CO 2 . 1 gallon of gas weighs 2,819 grams, of that 2,43 3 grams are carbon. $1.00 CO 2 = $3.67 C and $3.67/ton * ton/1000kg * kg/1000g * 2433g/gallon = (3.67 * 2433) / 1000 * 1000 = $0.0089/gallon Formatted: Bullets and Numbering

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192 Table IV.G.4-21. Sensitivity Analyses Evaluated in NHTSA’s PRIA

Name Fuel

Price Discount

Rate Rebound

Effect SCC Monopsony

Effect Military

Security

Reference Reference 3% 10% $20 0¢/gal 0¢/gal
High Fuel Price High 3% 10% $20 0¢/gal 0¢/gal

Low Fuel Price Low 3% 10% $20 0¢/gal 0¢/gal

7% Discount Rate Reference 7% 10% $20 0¢/gal 0¢/gal

5% Rebound Effect Reference 3% 5% $20 0¢/gal 0¢/gal

15% Rebound Effect Reference 3% 15% $20 0¢/gal 0¢/gal
$56/ton CO2 Value Reference 3% 10% $56 0¢/gal 0¢/gal
$34/ton CO2 Reference 3% 10% $34 0¢/gal 0¢/gal

$10/ton CO2 Reference 3% 10% $10 0¢/gal 0¢/gal
$5/ton CO2 Reference 3% 10% $5 30¢/gal 0¢/gal 5¢/gal Military Security

Value Reference 3% 10% $20 0¢/gal 5¢/gal

Lowest Discounted

Benefits Low 7% 15% $5 0¢/gal 0¢/gal Highest Discounted

Benefits High 3% 5% $56 0¢/gal 5¢/gal

The basic results of the sensitivity analyses were as follows:

1) The various economic assumptions have similar effec ts on the passenger car and light truck standards. 2) Varying the economic assumptions has virtually no i mpact on achieved fuel

economy. 3) The economic parameter with the greatest impact is fuel price. Changing the fuel price forecast to AEO’s High or Low forecasts impac ts benefits by about +/- 37 percent. However, the impact of fuel price on othe r quantities, such as cost, is much smaller, resulting in increases or decreases o f 3-8 percent. 4) Economic parameters other than fuel price and the r ebound effect had no effect on per-vehicle cost, total cost, fuel savings, or CO 2 reductions. Their impacts on benefits were 6 percent or less, with the exception of the 7 percent discount rate, which decreased benefits by 20 percent, and the $56 /ton CO 2 value, which raised benefits by 14 percent. 5) Changing all economic parameters simultaneously (am ong the considered values) changes benefits by at most about 60 percent. Howe ver impacts to other quantities, such as cost, are much smaller, resulti ng in increases or decreases of 6 percent or less. 6) Impacts other than those discussed in 1) through 5) were small (5 percent or less).

For more detailed information regarding NHTSA’s sen sitivity analyses for this NPRM, please see Chapter X of NHTSA’s PRIA. Formatted: Bullets and Numbering

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193 5. How Would These Proposed Standards Impact Vehicl e Sales?

Higher fuel economy standards are expected to inc rease the price of passenger cars and light trucks, because manufacturers will h ave to add technology to vehicles to increase their fuel economy, the cost for which the y will likely pass on in some fashion to consumers. NHTSA examined the potential impact of higher vehicle prices on sales on an industry-wide basis for passenger cars and light trucks separately. We note that the analysis conducted for this rule does not have the precision to examine effects on

individual manufacturers or different vehicle class es.

There is a broad consensus in the economic literatu re that the price elasticity for demand for automobiles is approximately –1.0. 182 Thus, every one percent increase in the price of the vehicle would reduce sales by one percent. Elasticity estimates assume no perceived change in the quality of the product. However, in this case, vehicle price increases result from adding technologies that impr ove fuel economy. If consumers did not value improved fuel economy at all, and conside red nothing but the increase in price in their purchase decisions, then the estimated imp act on sales from price elasticity could be applied directly. However, NHTSA believes that consumers do value improved fuel economy, because it reduces the operating cost of t he vehicles. NHTSA also believes

that consumers consider other factors that affect t heir costs and have included these in the analysis.

The main question, however, is how much of the ret ail price needed to cover the technology investments to meet higher fuel economy standards will manufacturers be able to pass on to consumers. The ability of manuf acturers to pass the compliance costs on to consumers depends upon how consumers value th e fuel economy improvements. 183
Consumer valuation of fuel economy improvements oft en depends upon the price of gasoline, which has recently been very volatile. T he estimates reported below as part of NHTSA’s analysis on sales impacts assume that manuf acturers will be able to pass all of their costs to improve fuel economy on to consumers . To the extent that NHTSA has accurately predicted the price of gasoline and cons umers reactions, and manufacturers can pass on all of the costs to consumers, then the sales and employment impact analyses are reasonable. On the other hand, if manufacturer s only increase retail prices to the extent that consumers value these fuel economy impr ovements ( i.e. , to the extent that they value fuel savings), then there would be no im pact on sales, although manufacturers’ profit levels would fall. Sales losses are predict ed to occur only if consumers fail to value fuel economy improvements at least as much as they pay in higher vehicle prices. Likewise, if fuel prices rise beyond levels used in this analysis, consumer valuation of

182 Kleit, A.N. (1990). “The Effect of Annual Changes in Automobile Fuel Economy Standards,” Journal of Regulatory Economics , vol. 2, pp 151-172; Bordley, R. (1994). “An Over lapping Choice Set Model of Automotive Price Elasticities,” Transportation Research B , vol 28B, no 6, pp 401-408; McCarthy , P.S. (1996). “Market Price and Income Elasticities of N ew Vehicle Demands,” The Review of Economics and

Statistics , vol. LXXVII, no. 3, pp. 543-547.

183 Gron, Ann and Swenson, Deborah, 2000, “Cost Pass-Th rough in the U.S. Automobile Market,” The Review of Economics and Statistics , 82: 316-324.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

194

improved fuel economy could increase to match or ex ceed their initial investment, resulting in no impact or even an increase in sales levels.

To estimate the average value consumers place on f uel savings at the time of purchase, NHTSA assumes that the average purchaser considers the fuel savings they would receive over a 5 year time frame. NHTSA chos e 5 years because this is the average length of time of a financing agreement. 184 The present values of these savings were calculated using a 3 percent discount rate. N HTSA used a fuel price forecast that included taxes, because this is what consumers must pay. Fuel savings were calculated over the first 5 years and discounted back to a pre sent value.

NHTSA believes that consumers may consider several other factors over the 5 year horizon when contemplating the purchase of a n ew vehicle. NHTSA added these factors into the calculation to represent how an in crease in technology costs might affect consumers’ buying considerations.

First, consumers might consider the sales taxes th ey have to pay at the time of purchasing the vehicle. NHTSA took sales taxes in 2007 by state and weighted them by population by state to determine a national weighte d-average sales tax of 5.5 percent.

Second, NHTSA considered insurance costs over the 5 year period. More expensive vehicles will require more expensive coll ision and comprehensive ( e.g. , theft)

car insurance. The increase in insurance costs is estimated from the average value of collision plus comprehensive insurance as a proport ion of average new vehicle price. Collision plus comprehensive insurance is the porti on of insurance costs that depend on

vehicle value. The Insurance Information Institute provides the average value of collision plus comprehensive insurance in 2006 as $ 448. 185 This is compared to an average price for light vehicles of $24,033 for 200 6. 186 Average prices and estimated sales volumes are needed because price elasticity i s an estimate of how a percent increase in price affects the percent decrease in sales.

Dividing the insurance cost by the average price of a new vehicle gives the proportion of comprehensive plus collision insuranc e as 1.86 percent of the price of a vehicle. If we assume that this premium is proport ional to the new vehicle price, it represents about 1.86 percent of the new vehicle pr ice and insurance is paid each year for the five year period we are considering for payback . Discounting that stream of insurance costs back to present value indicates tha t the present value of the component of insurance costs that vary with vehicle price is equ al to 8.5 percent of the vehicle’s price at a 3 percent discount rate.

184 National average financing terms for automobile loa ns are available from the Board of Governors of the Federal Reserve System G.19 “Consumer Finance” rele ase. See http://www.federalreserve.gov/releases/g19/ (last a ccessed August 9, 2009).

185 Insurance Information Institute, 2008, “Average Exp enditures for Auto Insurance By State, 2005-2006.”

Available at

http://www.iii.org/media/facts/statsbyissue/auto/ (last accessed August 9, 2009).

186 $29,678/$26,201 = 1.1327 * $22,651 = $25,657 avera ge price for light trucks. In 2006, passenger cars were 54 percent of the on-road fleet and light truc ks were 46 percent of the on-road fleet, resulting in an average light vehicle price for 2006 of $24,033.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

195

Third, NHTSA considered that 70 percent of new veh icle purchasers take out loans to finance their purchase. The average new v ehicle loan is for 5 years at a 6 percent

rate. 187 At these terms, the average person taking a loan will pay 16 percent more for their vehicle over the 5 years than a consumer payi ng cash for the vehicle at the time of purchase. 188 Discounting the additional 3.2 percent (16 percen t / 5 years) per year over the 5 years using a 3 percent mid-year discount rat e 189 results in a discounted present value of 14.87 percent higher for those taking a lo an. Multiplying that by the 70 percent

of consumers who take out a loan means that the ave rage consumer would pay 10.2 percent more than the retail price for loans the co nsumer discounted at a 3 percent

discount rate.

Fourth, NHTSA considered the residual value (or re sale value) of the vehicle after 5 years and expressed this as a percentage of the n ew vehicle price. In other words, if the price of the vehicle increases due to fuel economy technologies, the resale value of the vehicle will go up proportionately. The average re sale price of a vehicle after 5 years is about 35 percent of the original purchase price. 190 Discounting the residual value back 5 years using a 3 percent discount rate (35 percent * .8755) gives an effective residual value at new of 30.6 percent.

NHTSA then adds these four factors together. At a 3 percent discount rate, the consumer considers she could get 30.6 percent back upon resale in 5 years, but will pay 5.5 percent more for taxes, 8.5 percent more in ins urance, and 10.2 percent more for loans, results in a 6.48 percent return on the incr ease in price for fuel economy technology. Thus, the increase in price per vehicl e is multiplied by 0.9352 (1 – 0.0648) before subtracting the fuel savings to determine th e overall net consumer valuation of the increase of costs on her purchase decision.

The following table shows the estimated impact on s ales for passenger cars and light trucks combined for the proposed alternative. For all model years except MY 2012, NHTSA anticipates an increase in sales, based on co nsumers valuing the improvement in fuel economy more than the increase in price.

Table IV.G.5-1. Potential Impact on Sales, Passeng er Cars and Light Trucks

Combined

MY 2012 MY 2013 MY 2014 MY 2015 MY 2016
-58,058 52,719 178,470 342,628 454,520

187 New car loan rates in 2007 averaged about 7.8 perce nt at commercial banks and 4.5 percent at auto finance companies, so their average is close to 7 p ercent.

188 Based on www.bankrate.com auto loan calculator for a 5 year loan at 6 percent.

189 For a 3 percent discount rate, the summation of 3.2 percent x 0.9853 in year one, 3.2 x 0.9566 in year two, 3.2 x 0.9288 in year three, 3.2 x 0.9017 in ye ar 4, and 3.2 x 0.8755 in year five.

190 Consumer Reports, August 2008, “What That Car Reall y Costs to Own.” Available at http://www.consumerreports.org/cro/cars/pricing/wha t-that-car-really-costs-to-own-4-08/overview/whatthat-car-really-costs-to-own-ov.htm (last accessed August 9, 2009).DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

196 6. What are the Estimated Safety Impacts of These P roposed Standards?

As discussed above, in evaluating the appropriate l evels at which to establish new CAFE standards, NHTSA must assess any potential saf ety trade-offs. The question of the effect of changes in vehicle weight on safety i n the context of fuel economy is a complex question that poses serious analytic challe nges and has been a contentious issue for many years. This contentiousness arises, at le ast in part, from the difficulty of isolating vehicle weight from other confounding fac tors ( e.g. , driver factors, such as age and gender, other vehicle factors, such as engine s ize and wheelbase, and environmental factors, such as rural/urban). In addition, at lea st in the past several vehicle factors have been closely related, such as vehicle mass, wheelba se, track width, and structural integrity. The issue has been addressed in the lit erature for more than two decades. For the reader’s reference, much more information about safety in the CAFE context is

available in the MY 2011 final rule 191 and in Section IX of the PRIA.

In general, it is unclear to what extent the higher fatality risk of smaller and lighter vehicles is associated with their reduced m ass as compared to their reduced physical dimensions. That is because, historically , the safest vehicles have been heavy and large, while the vehicles with the highest fata l-crash rates have been light and small, both because the crash rate is higher for small/lig ht vehicles and because the fatality rate is higher for small/light vehicle crashes. 192 Intuitively, a reduction in mass while maintaining physical dimensions is likely to be les s harmful than a reduction in both mass and physical dimensions. Setting CAFE standards ba sed on vehicle footprint size helps to minimize the incentive to reduce a vehicle’s phy sical dimensions, since the corresponding fuel economy target is higher for sma ller-footprint vehicles.

However, footprint-based CAFE standards do not disc ourage manufacturers from reducing mass while maintaining size in order to im prove fuel economy. Neither the CAFE standards nor our analysis of the feasibility of fuel economy improvements mandates mass reduction or any other specific techn ology application. In addition, considering NHTSA’s analysis of the observed relati onship between vehicle mass and the prevalence of fatalities, NHTSA has, except for veh icles with baseline curb weight over 5,000 pounds, excluded weight reduction from its an alysis of potential CAFE standards in past rulemakings. The agency followed this anal ytical approach in order to ensure that its consideration of new standards was not dependen t on weight reduction that could potentially compromise highway safety, recognizing, though, that the structure of CAFE standards does not prohibit manufacturers from maki ng such responses to new CAFE standards. The agency implemented this approach by setting the Volpe model to apply this exclusion when estimating how manufacturers co uld apply technology in response to

new CAFE standards.

191 74 FR 14396-14407 (Mar. 30, 2009).

192 Kahane, Charles J., Ph.D., “Vehicle Weight, Fatali ty Risk and Crash Compatibility of Model Year 1991- 99 Passenger Cars and Light Trucks,” DOT HS 809 662 , October 2003, Executive Summary. Available at http://www.nhtsa.dot.gov/cars/rules/regrev/evaluate /809662.html (last accessed August 12, 2009).DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

197 In its rulemakings on MY 2008-2011 light truck CAFE standards and MY 2011 car and light truck CAFE standards, NHTSA received comments suggesting that NHTSA expand the applicability of weight reduction techno logies in its modeling to vehicles under 5,000 pounds, because, according to the comme nters, weight reduction can be accompanied by proper vehicle design to assure vehi cle safety is not compromised. In the final rules in those rulemakings, the agency sa id that there may be great possibilities in the use of material substitution and other proce sses to reduce weight without reducing vehicle safety. The agency further noted that this should be explored as more and more data becomes available. After reviewing its assum ptions and methodologies per the President’s January 26 memorandum and working with EPA in this rulemaking, NHTSA revised its approach to include weight reduction of up to 5-10 percent of baseline curb weight, depending on vehicle type. Recently-submit ted manufacturer product plans as well as public statements from a number of the manu facturers suggest some of them expect that by MY 2016, they will be able to reduce the weight of some specific vehicle models by similar levels. However, NHTSA does not believe that, except where already planned, such significant weight reductions can be achieved in MY 2012 or MY 2013 because there is not enough lead time for the neces sary design, engineering, and tooling. NHTSA estimates that weight reductions of 1.5 perce nt can be achieved during redesigns occurring prior to MY 2014, and that weight reducti ons of 5-10 percent can be achieved in redesigns occurring in MY 2014 or later. For pu rposes of analyzing CAFE standards, NHTSA has further assumed that weight reductions wo uld be limited to 5 percent for small vehicles ( e.g. , subcompact passenger cars), and that reductions o f 10 percent would only be applied to the larger vehicle types ( e.g. , large light trucks).

NHTSA’s modeling approach is similar to EPA’s in te rms of maximum available weight reduction for any vehicle model, sensitive t o highway safety in terms of when and to which vehicle types significant weight reduction can be achieved safely, and supported by information in some manufacturers’ product plans . Some manufacturers have indicated that, in later model years, they plan to reduce significantly the weight of some specific vehicle models, and that they plan to do s o without reducing vehicle size. NHTSA’s analysis results in similar degrees of weig ht reduction, applied more widely to some manufacturers. NHTSA notes, though, that some manufacturers are also planning considerable changes in product mix, and some of th ese changes could mean reduced average size along with reduced average weight. In NHTSA’s (and EPA’s) analysis, such changes in product mix are not counted, becaus e they are either in the baseline market forecast, or are not estimated.

As stated above, neither the CAFE standards nor our analysis mandates mass reduction, or mandates that mass reduction occur in any specific manner. However, mass reduction is one of the technology applications ava ilable to the manufacturers and a degree of mass reduction is used by the Volpe model in determining the capabilities of manufacturers and in predicting both cost and fuel consumption impacts of improved CAFE standards. In this section, we briefly summar ize our analysis of the potential impacts of these mass reductions on vehicle safety.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

198 NHTSA’s quantified analysis is based on the 2003 Ka hane study, 193 which estimates the effect of 100-pound reductions in MYs 1991-1999 heavy light trucks and vans (LTVs), light LTVs, heavy passenger cars, and light passenger cars. The study compares the fatality rates of LTVs and cars to qua ntify differences between vehicle types, given drivers of the same age/gender, etc. In this analysis, the effect of “weight

reduction” is not limited to the effect of mass per se , but includes all the factors, such as length, width, structural strength, and size of the occupant compartment, that were naturally or historically confounded with mass in M Ys 1991-1999 vehicles. The rationale is that adding length, width, or strength to a vehicle will also make it heavier.

The agency utilized the relationships between weigh t and safety from Kahane (2003), expressed as percentage increases in fatali ties per 100-pound weight reduction, and examined the weight impacts assumed in this CAF E analysis. However, there are several identifiable safety trends that are already in place or expected to occur in the

foreseeable future that are not accounted for in th e study. For example, two important new safety standards that have already been issued and will be phasing in during the rulemaking time frame. Federal Motor Vehicle Safet y Standard No. 126 (49 CFR § 571.126) will require electronic stability control in all new vehicles by MY 2012, and the upgrade to Federal Motor Vehicle Safety Standard No . 214 (Side Impact Protection, 49

CFR § 571.214) will likely result in all new vehicles bei ng equipped with head-curtain air bags by MY 2014. 194 Additionally, we anticipate continued improvement s in driver (and passenger) behavior, such as higher safety belt use rates. All of these will tend to reduce the absolute number of fatalities resulting from we ight reductions. Table IV.G.6-4 below shows the overall change in calculated fatalities b y calendar year, after adjusting for the impacts of ESC, Side Impact Protection, and other F ederal safety standards and behavioral changes projected through this time peri od. Thus, while the percentage increases in Kahane (2003) was applied, the reduced base has resulted in smaller absolute increases than those that were predicted in the 200 3 report.

The agency examined the impacts of identifiable saf ety trends over the lifetime of the vehicles produced in each model year. An estim ate of these impacts was contained in a previous agency report. 195 The impacts were estimated on a year-by-year basi s, but could be examined in a combined fashion. The agenc y assumed that the safety trends will result in a reduction in the target population of fatalities from which the weight impacts are derived. Using this method, we found a 12.6 percent reduction in fatality

levels between 2007 and 2020. The estimates derive d from applying Kahane’s

193 Id.

194 We note that the Volpe model currently does not ac count for the weight of safety standards that will be added compared to the MY 2008 baseline, nor does it account for the societal cost of reductions in wei ght. However, both of these items will be added to the m odel for the final rule; doing so will raise the we ight of every vehicle by roughly 17 pounds in MY 2016 (slig htly less in earlier years), which will likely requ ire manufacturers to add slightly more technology to re ach the final standards than they were estimated to need to reach the proposed standards. However, NHTSA do es not expect the impact of these roughly 17 pounds per vehicle to have a significant impact on the saf ety analysis.

195 Blincoe, L. and Shankar, U, “The Impact of Safety Standards and Behavioral Trends on Motor Vehicle Fatality Rates,” DOT HS 810 777, January 2007. See Table 4 comparing 2020 to 2007 (37,906/43,363 = 12.6% reduction (1-.126 = .874)DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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percentages to a baseline of 2007 fatalities were t hus multiplied by 0.874 to account for changes that the agency believes will take place in passenger car and light truck safety

between the 2007 baseline on-road fleet used for th is particular analysis and year 2020.

We note that because these new analyses are based on the method shown in Kahane (2003), which predicts the safety effect of 100-pound mass reductions in MY 1991-1999 light trucks and vans (LTVs) and passenge r cars, the new analyses need to be understood in the context of that study. Specifica lly, the numbers in the new analyses represent an upper bound (or worst case) estimate—t hat is, the estimate would only apply if all weight reductions come from reducing both we ight and footprint. Kahane’s conclusions are based upon a cross-sectional analys is of the actual on-road safety experience of 1991-1999 vehicles. For those vehicl es, heavier usually also meant largerfootprint. Hence, the numbers in the new analyses predict the safety consequences that would occur in the unlikely event that weight reduc tion for MYs 2012-2016 is accomplished entirely by making the vehicles smalle r—that is, again, reducing mass and reducing footprint.

Exclusive reliance on downsizing for the model year s covered by this rulemaking is unlikely for the following reasons. The flat CA FE standards in effect when those MY1991-1999 vehicles were produced had no penalty f or such a strategy for improving fuel economy. In contrast, as discussed above, the current attribute-based CAFE standards do not encourage vehicle downsizing by re ducing footprint. This structural change to the CAFE program means that the CAFE stan dards now favor the use of weight reduction strategies that do not involve sim ply making the vehicle smaller. These other strategies include downsizing the engine and adding turbocharging, as well as

materials substitution.

Given this structural change to the CAFE program, it is likely that a significant portion of the weight reduction in the MY 2012-2016 vehicles will be accomplished by strategies that have a lesser safety impact than th e prevalent 1990s strategy of simply making the vehicles smaller, although NHTSA is unab le to predict how large a portion. For example, a manufacturer could conceivably add l ength, width, or strength to a vehicle by replacing existing materials with light, high-st rength components.

To the extent that future weight reductions could b e achieved by substituting light, high-strength materials for existing materia ls—without any accompanying reduction in the footprint size or structural stren gth of the vehicle—then NHTSA believes that the fatality increases associated with the wei ght reductions anticipated by the model as a result of the proposed standards could be sign ificantly smaller than those in the worst-case scenario. However, NHTSA does not curre ntly have information (on-road data) to calibrate and predict how much smaller tho se increases would be for any given mixture of material substitution and downsizing, si nce the data on the safety effects of

mass reduction alone is not available due to the lo w numbers of vehicles in the current on-road fleet that have utilized this technology ex tensively. Further, to the extent that weight reductions were accomplished through use of light, high-strength materials, there would be significant additional costs that would ne ed to be determined and accounted for.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

200 Nevertheless, even though NHTSA cannot quantify the se safety effects, we can project that they would be significantly less than those that would result from simple downsizing. However, we are also convinced that th e safety effects are larger than zero for the following reasons:

• We have seen that lighter vehicles are driven in a manner that results in a higher

involvement rate in fatal crashes – even after cont rolling for the driver’s age, gender, urbanization, and region of the country. T his appears to be a drivervehicle interface issue. Importantly, in our respo nse in the MY 2011 final rule to the DRI analyses, we were unable to attribute this effect to any obvious “size” parameter such as track width or wheelbase. In non -rollover crashes, weight continued to be the most important parameter, even when track width and wheelbase were included as independent variables. Until we understand the phenomenon better, we should assume that weight red uction is likely to be associated with higher fatal-crash rates, no matter how the weight reduction is

achieved.

• The following effects of mass per se (laws of physics) will persist whether mass is reduced by material substitution, downsizing, or an y other method:

1. o The increased weight disadvantage in collisions wit h vehicles not covered by the regulation, such as medium-sized trucks (GVW R somewhat larger than 10,000 pounds).

2. o In collisions with partially movable objects such a s not-so-large trees.

3. o When center of gravity and track width are held con stant, lighter vehicles are easier to roll over. Thus, unless weight is re moved in a way that sufficiently lowers the center of gravity and/or un less track width is sufficiently widened, removing weight from vehicles will make them

easier to roll over.

• Our attribute-based standards have the excellent fe ature that they can avoid encouraging reductions in footprint. However, weig ht can be removed by downsizing, rather than material substitution, even while maintaining footprint :

4. o By reducing the overhang in front of the front whee ls and behind the rear wheels. These are protective structures whose remo val would increase risk to occupants by reducing vehicle crush space.

5. o By thinning or removing structures within the vehic le.

Table IV.G.6-1 below shows the results of NHTSA’s s afety analysis separately for each model year. Additionally, the societal im pacts of increasing fatalities can be monetized using DOT’s estimated comprehensive cost per life of $6.1 million. This consists of a value of a statistical life of $5.8 m illion plus external economic costs Formatted: Outline numbered + Level: 2 + Numbering Style: Bullet + Aligned at: 0.75" +
Tab after: 1" + Indent at: 1"

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associated with fatalities such as medical care, in surance administration costs and legal

costs. 196 Typically, NHTSA would also estimate the impact o n injuries and add that to the societal costs of fatalities, but in this case NHTSA does not have a model estimating the impact of weight on injuries. However, based o n past studies, fatalities account for roughly 44 percent of total comprehensive costs due to injury. 197 If weight impacts nonfatal injuries roughly proportional to its impact o n fatalities, then total costs would be roughly 2.3 times those noted in Table IV.G.6-2. T he potential societal costs for just

fatalities are shown in Table IV.G.6-2.

Looking at the results on a calendar year basis, we also note that the safety impacts of the Kahane analysis based weight reducti on have a slow onset. Passenger cars typically have a 10-25 year lifetime, and light tru cks somewhat longer. Thus, some of the fatalities for MY 2016 light trucks will not occur until after 2050. Moreover, the weight reductions are small in the early model years 2012 and 2013. The vehicles with reduced weight will only be a small proportion of the entir e on-road fleet in the initial calendar years of these proposed CAFE standards. The influe nce of these factors is illustrated in

Table IV.G.6-3 below.

The slow onset of the safety impact of weight reduc tion will provide time to monitor the situation, to quantify those impacts mo re precisely, and to make changes as necessary in future rulemakings. If lighter vehicl es are introduced into the fleet, NHTSA would continue to monitor how any weight reductions are accomplished. After there is a sufficient number of vehicles that have used weight reduction techniques other than downsizing, and they have been on road long enough to generate sufficient data, NHTSA would update the 2003 Kahane study. NHTSA would al so conduct tests of the performance of the new vehicles compared to that of the older designs of the vehicles. If the safety effects of any weight reduction are subs tantial, NHTSA would take corrective actions. However, we note that the slow onset and the time necessary to gain sufficient on-road experience to generate the data needed for the updated study are important considerations, because they mean that NHTSA cannot act before the MY 2012-2016 vehicles have been produced.

Additionally, there will be significant fuel-saving benefits from these proposed standards, up to 61.6 billion gallons during the li fetime of MYs 2012-2016 vehicles. There will also be significant reductions in CO 2 emissions, up to 656 million metric tons during that same time period.

Improved fuel economy will also result in a decreas e in harmful criteria pollutants, which will decrease premature deaths du e to a number of diseases related to environmental pollution. The literature strongly s upports the causal relationship between health and exposure to criteria pollutants. Howeve r, as with vehicle safety impacts, there

196 Blincoe et al, The Economic Impact of Motor Vehicl e Crashes 2000, May 2002, DOT HS 809 446. Data from this report were updated for inflation an d combined with the current DOT guidance on value o f a statistical life to estimate the comprehensive valu e of a statistical life.

197 Based on data in Blincoe et al updated for inflati on and reflecting the Department’s current VSL of $ 5.8

million.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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is much uncertainty regarding the exact level of he alth impacts that might be achieved with this rule. A detailed discussion of these imp acts is included in NHTSA’s DEIS,

which documents a selection of health outcomes from improved air quality. 198 NHTSA approximated some PM 2.5 -related health benefits using screening-level esti mates in the form of cases per ton of criteria emissions reduced

. 199 Due to analytical limitations, the estimated values do not include comparable benefits related to reductions in other criteria pollutants (such as ozone, NO 2 or SO 2 ) or toxic air pollutants, nor do they monetize all of the potential health and welfare effects associated with PM 2.5 or the other criteria pollutants.

As illustrative examples, the number of PM 2.5 -related premature deaths prevented in calendar year 2016 due to reduced PM 2.5 as a result of the MY 2012-2016 standards is estimated to range from XX-XX; while in 2030, we es timate up to XX-XX premature deaths prevented. However, by 2030, most, but not all of the on-road fleet will already meet the CAFE requirements established for MY 2016, so some further growth in these impacts is possible. Other PM 2.5 -related health impacts estimated to occur during t his period include XX fewer cases of chronic bronchitis and XX fewer emergency room visits for asthma by 2030. These benefits will par tially offset any negative safety impacts that may occur from vehicle mass reduction associat ed with higher CAFE standards. Thus, there are potentially both positive and negat ive impacts that could result from this rulemaking, and the overall impact on health and sa fety is uncertain. We have not attempted to quantify other beneficial health impac ts that are expected to result from the proposed standards, including the results of a decr ease in the rate of global warming, and increased energy security resulting from a lesser d ependence on oil imported volatile regions of the world, but they, too, could be signi ficant.

In summary, the agency recognizes the balancing inh erent in achieving higher levels of fuel economy through reduction of vehicle weight. We emphasize that these safety-related fatality estimates represent an uppe r bound of the potential effects of this rulemaking, and that actual fatalities will be less than these estimates, possibly significantly less, based on the qualitative discus sion above of the various factors that could reduce the estimates. At the same time, howe ver, the agency cannot specify a lower-bound estimate. It is possible that the impa ct could be fairly small, but the agency is unable to specify a lower-bound at this time due to a lack of studies that address the safety risk associated with weight reduction that i s not also accompanied by size

reduction

. Additionally, the estimates presented here do not include estimates for injuries. Nevertheless, we believe that the balanc ing is reasonable.

198 Chapter 7 of EPA’s DRIA also contains information on the health impacts of reducing criteria pollutants.

199 Ideally, the human health benefits would be estima ted based on changes in ambient PM 2.5 concentrations and population exposure, as determined by full-scal e air quality and exposure modeling. Such detailed modeling was not possible within the timeframe for this proposal, but for the final rule, a national-s cale air quality modeling analysis will be performed to anal yze the impacts of the standards on PM 2.5 , ozone, and

selected air toxics. Formatted: Subscript

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203 The tables below contain NHTSA’s estimates of the s afety impacts of the proposed standards, the costs associated with those impacts, and the overall change in impacts given other anticipated mitigating effects during the next several years. Again, we emphasize that the safety impacts presented belo w represent an upper bound, and that NHTSA believes that the fatality increases associat ed with the anticipated weight reductions could be significantly smaller than thos e shown, because manufacturers are unlikely to respond to this rulemaking by decreasin g footprint or reducing the structural integrity of the vehicle. Additionally, the safety impacts of the rule may and even be offset, given due to the following factors :

 Manufacturers are unlikely to respond to this rulem aking by decreasing footprint or reducing the structural integrity of t he vehicle ;

 T t he GHG-reducing benefits expected for the proposed standards , and ;

 T t he benefits due to reduced fatalities and health im pacts related to improved air quality as a result of the proposed standards

. ; and

• The slow onset of the estimated safety impacts, whi ch , if detected early enough, may give NHTSA time to respond and mitigate longer

- term effe cts.

In addition, we note that the implementation of new Federal Motor Vehicle Safety Standards, combined with behavioral changes (e.g., further increases in safety belt use), will produce important reductions in the number of deaths and injuries that would otherwise occur in the vehicles subject to this rul emaking over their lifetime.

NHTSA seeks comments on its analysis of the safety impacts of the proposed

standards.

To aid the agency in refining its analysis for the final rule, NHTSA requests that each vehicle manufacturer provide, for inclusion in the record of this rulemaking, detailed information concerning the extent to which and mann er in which it plans to reduce the weight of each of its models for the period covered by this rulemaking, and the cost of each method used. Include in those plans whether t here will be any size reduction, whether through reducing the size of an existing mo del, mix shifting or other means. Please also submit the analysis, including engineer ing or computer simulation analysis, performed to assess the possible safety impacts of such planned weight reduction. In addition, please submit the results of any vehicle or component tests that would aid in assessing those impacts.

Table IV.G.6-1. Comparison of the Calculated Worst Case Weight Safety Impacts of the Pending Proposed Standards over the Lifetime of the Vehicles Produced in

each Model Year (Increase in Fatalities compared to the Calendar Ye ar 2007 Fatality Level)

Baseline MY 2011 standards continued for lifetime of vehicles

MY 2012 MY 2013 MY 2014 MY 2015 MY 2016 Passenger cars 13 15 18 18 19 Light trucks 13 15 17 17 18

Combined 26 30 35 35 37 Formatted: Bullets and NumberingDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

204 Proposed standards

MY 2012 MY 2013 MY 2014 MY 2015 MY 2016 Passenger cars 42 64 165 242 379 Light trucks 18 20 64 106 150

Combined 60 84 229 348 530

Difference between proposed standards and baseline continued

MY 2012 MY 2013 MY 2014 MY 2015 MY 2016 Passenger cars 29 49 147 224 360 Light trucks 5 5 47 89 132

Combined 34 54 194 313 493

Note – all estimates in this table are worst-case. Actual values could be significantly less.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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Table IV.G.6-2. Calculated Worst Case Weight Safet y Impacts on Societal Costs for the Proposed Standards over the Lifetime of the Veh icles Produced in each Model

Year ($ millions)

MY

2012 MY

2013 MY

2014 MY

2015 MY

2016 Total

Passenger cars 177 299 897 1,366 2,916 4,935 Light trucks 31 31 287 543 805 1,696

Combined 207 329 1,183 1,909 3,001 6,637

Note – all estimates in this table are worst-case. Actual values could be significantly less.

Table IV.G.6-3. Estimated Worst Case Impact of Wei ght Safety on

Calculated Fatalities by Calendar Year (Additional fatalities by model year and calendar y ear)

MY

2012 MY

2013 MY

2014 MY

2015 MY

2016 MY

2017 MY

2018 MY

2019 MY

2020 Totals

2012 3 3

2013 3 5 8

2014 3 5 19 27

2015 3 5 19 30 57

2016 3 5 18 29 47 102

2017 3 5 17 28 46 47 146

2018 3 5 16 27 44 46 47 187

2019 3 4 16 26 42 44 46 47 226

2020 2 4 15 24 40 42 44 46 47 264

Note – all estimates in this table are worst-case. Actual values could be significantly less.

Table IV.G.6

- 4

. Overall Change in Calculated Fatalities by Calendar Year

Calendar

year totals Estimated

Worst Case CAFE weight safety impacts* Safety and

behavioral impacts Net change in

fatalities

2012 3

- 647

- 644

2013 9

- 1,278

- 1,269

2014 28

- 1,899

- 1,871

2015 57

- 2,495

- 2,438

2016 102

- 3,041

- 2,939

2017 146

- 3,521

- 3,375

2018 187

- 3,961

- 3,774

2019 226

- 4,359

- 4,133

2020 264

- 4,717

- 4,453DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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* Note

– weight safety impact estimates in this table are worst

- case . A ctual values could be significantly less.

7. What Other Impacts (Quantitative and Unquantifia ble) will These Proposed Standards Have?

In addition to the quantified benefits and costs of fuel economy standards, the standards we are proposing will have other impacts that we have not quantified in monetary terms. The decision on whether or not to quantify a particular impact depends

on several considerations:

• Does the impact exist, and can the magnitude of the impact reasonably be attributed to the outcome of this rulemaking?

• Would quantification help NHTSA and the public eval uate standards that may be set in rulemaking?

• Is the impact readily quantifiable in monetary term s? Do we know how to quantify a particular impact?

• If quantified, would the monetary impact likely be material?

• Can a quantification be derived with a sufficiently narrow range of uncertainty so

that the estimate is useful?

NHTSA expects that this rulemaking will have a numb er of genuine, material impacts that have not been quantified due to one or more of the considerations listed above. In some cases, further research may yield estimates for future rulemakings.

Technology Forcing

The proposed rule will improve the fuel economy of the U.S. new vehicle fleet, but it will also increase the cost (and presumably, the price) of new passenger cars and light trucks built during MYs 2012-2016. We antic ipate that the cost, scope, and duration of this rule, as well as the steadily risi ng standards it requires, will cause automakers and suppliers to devote increased attent ion to methods of improving vehicle fuel economy.

This increased attention will stimulate additional research and engineering, and we anticipate that, over time, innovative approache s to reducing the fuel consumption of light duty vehicles will emerge. These innovative approaches may reduce the cost of the proposed rule in its later years, and also increase the set of feasible technologies in future

years.

We have attempted to estimate the effect of learni ng on known technologies within the period of the proposed rulemaking. We h ave not attempted to estimate the extent to which not-yet-invented technologies will appear, either within the time period of the current rulemaking or that might be availabl e after MY 2016.

Effects on Vehicle Maintenance, Operation, and Insu rance CostsDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

2 07 Any action that increases the cost of new vehicles will subsequently make such vehicles more costly to maintain, repair, and insur e. In general, this effect can be expected to be a positive linear function of vehicl e costs. The proposed rulemaking, however, raises vehicle costs by only a few percent at most, and hence the change in maintenance and operation costs, distributed over t he expected life of regulated vehicles and discounted back to the present, is probably de minimus in terms of the full analysis.

One of the common consequences of using more compl ex or innovative technologies is a decline in vehicle reliability an d an increase in maintenance costs, borne, in part, by the manufacturer (through warran ty costs, which are included in the indirect costs of production) and, in part by the v ehicle owner. NHTSA believes that this effect is difficult to quantify, but likely to be d e minimus as well.

Effects on Vehicle Miles Traveled (VMT)

While NHTSA has estimated the impact of the reboun d effect on VMT, we have not estimated how a change in vehicle sales could i mpact VMT. Since the value of the fuel savings to consumers outweighs the technology costs, new vehicle sales are predicted to increase. A change in vehicle sales w ill have complicated and a hard-toquantify effect on vehicle miles traveled given the rebound effect, the trade-in of older vehicles, etc. In general, overall VMT should not be significantly affected.

Effect on Composition of Passenger Car and Light Tr uck Sales

In addition, manufacturers, to the extent that they pass on costs to customers, may
distribute these costs across their motor vehicle f leets in ways that affect the composition of sales by model. To the extent that changes in t he composition of sales occur, this could affect fuel savings to some degree. However, NHTSA’s view is that the scope for compositional effects is relatively small, since th e total effect of the regulation itself will be to increase costs by only a few percent. Compos itional effects might be important with respect to compliance costs for individual man ufacturers, but are unlikely to be

material for the rule as a whole.

NHTSA is continuing to study methods of estimating compositional effects and may be able to develop methods for use in future rulemakings.

Effects on the Used Vehicle Market

In general, changes in prices or other characterist ics of the new vehicles market will also have consequences for the used vehicle ma rket. Specifically, any action that raises prices for new vehicles will also tend to in crease prices of used vehicles, and in turn cause owners of existing vehicles to keep them in service for slightly longer. In the case of the proposed rule, however, the agency esti mates that the value of fuel savings

over the lifetimes of the new vehicles will exceed the increase in their prices, prompting an increase in sales of new vehicles during most mo del years that the rule affects. As aDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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consequence, prices for used vehicles are also like ly to decline, leading to slight increases

in the rate at which used vehicles are retired from service (“scrapped”) and replaced with new models. In turn, this will accentuate the effe cts of the proposed standards on fuel consumption and GHG emissions; at the same time, to tal criteria pollutant emissions from the entire vehicle fleet may also decrease, as newer, lower-polluting vehicles replace used vehicles.

NHTSA believes these secondary effects of the prop osed standards are de minimus, because the primary effect on new vehicle prices is likely to be small, and consequently the impact on used vehicle markets wou ld be similarly modest. In general, any change in the new vehicle market wi ll also have consequences for the used vehicle market. In general, any action th at raises the price of new vehicles will tend to raise the price of used vehicles, and to pe rsuade owners of existing vehicles to keep them on the road a bit longer. However, because the fuel savings in new vehicles exceeds the increased cost, consumers may substitut e new vehicles for used vehicles. In this situation, fuel consumption and greenhouse gas emissions are expected to decrease; criteria pollutant emissions from exi sting vehicles may also decrease as fewer used

vehicles continue to be used.

NHTSA believes these secondary effects of the new v ehicle standard are de minimus because the primary effect on new vehicle p rices is small, and that consequently the impact on used vehicle markets would be even smaller.

Impacts of Changing Fuel Composition on Costs, Bene fits, and Emissions

EPAct, as amended by EISA, creates a Renewable Fuel s Standard that sets targets for greatly increased usage of renewable fuels over the next decade. The law requires

fixed volumes of renewable fuels to be used—volumes that are not linked to actual usage of transportation fuels.

Ethanol and biodiesel (in the required volumes) ma y increase the cost of gasoline and diesel depending on crude oil prices and tax su bsidies. The extra cost of renewable fuels will be borne through a cross-subsidy: the p rice of every gallon of gasoline will rise sufficiently to pay for the extra cost of renewable fuels. The proposed CAFE rule, by reducing total fuel consumption, would tend to incr ease any necessary cross-subsidy per gallon of fuel, and hence raise the market price of transportation fuels, while there would be no change in the volume or cost of renewable fue ls used.

Some of these effects are indirectly incorporated in NHTSA’s analysis of the proposed CAFE rule because they are directly incorp orated in EIA’s projections of future gasoline and diesel prices in the Annual Energy Outlook , which incorporates in its

baseline both a Renewable Fuel Standard and an incr easing CAFE standard.

The net effect of incorporating an RFS then might b e to slightly reduce the benefits of the rule because affected vehicles migh t be driven slightly less, and because they emit slightly fewer greenhouse gas emissions p er gallon. In addition there might be Comment [r16]: Changes made in response to interagency comment.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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deadweight losses from the induced reduction in VMT . All of these effects are difficult to estimate, because of uncertainty in future crude oil prices, uncertainty in future tax policy, and uncertainty about how petroleum markete rs will actually comply with the RFS, but they are likely to be small, because the c umulative deviation from baseline fuel consumption induced by the proposed rule will itsel f be small.

Macroeconomic Impacts of this Rule

The proposed rule will have a number of consequence s that may have short-run and longer-run macroeconomic effects. It is import ant to recognize, however, that these

effects do not represent benefits in addition to those resulting d irectly from reduced fuel consumption and emissions. Instead, they represent the economic effects that occur as these direct impacts filter through the interconnec ted markets comprising the U.S.

economy.

• Increasing the cost and quality (in the form of bet ter fuel economy) of new light duty vehicles will have ripple effects through the rest of the economy. Depending on the assumptions made, the rule could generate ve ry small increases or declines in output.

• Reducing consumption of imported petroleum should i nduce an increase in longrun output.

• Decreasing the world price of oil should induce an increase in long-run output.

NHTSA has not studied the macroeconomic effects of the proposal, however a discussion of the economy-wide impacts of this rule conducted by EPA is included in Section III.H.5. Although economy-wide models do not captur e all of the potential impacts of this rule ( e.g. , improvements in product quality), these models ca n provide valuable insights on how this proposal would impact the U.S. economy in ways that extend beyond the transportation sector.

Military Expenditures

This analysis contains quantified estimates for the social cost of petroleum imports based on monopsony effects and the risk of oil market disruption. We have not included estimates of the cost of military expendit ures associated with petroleum imports.

H. Vehicle Classification

Vehicle classification, for purposes of the CAFE p rogram, refers to whether NHTSA considers a vehicle to be a passenger automob ile or a light truck, and thus subject to either the passenger automobile or the l ight truck standards. As NHTSA explained in the MY 2011 rulemaking, EPCA categoriz es some light 4-wheeled vehicles as passenger automobiles (cars) and the balance as non-passenger automobiles (light trucks). EPCA defines P p assenger automobiles are defined in EPCA as “ any automobile (other than an automobile capable of off-highway op eration) which the Secretary [ i.e.

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more than 10 individuals. ” EPCA sec. § 501(2), 89 Stat. 901. NHTSA created regulatory definitions for passenger automobiles and light tru cks, found at 49 CFR Part 523, to guide the agency and manufacturers in classifying v ehicles.

Under EPCA, there are two general groups of automob iles that qualify as nonpassenger automobiles or light trucks: (1) those d efined by NHTSA in its regulations as other than passenger automobiles due to their havin g design features that indicate they were not manufactured “primarily” for transporting up to ten individuals; and (2) those expressly excluded from the passenger category by s tatute due to their capability for offhighway operation, regardless of whether they might have been manufactured primarily for passenger transportation. NHTSA’s classificati on rule directly tracks those two broad groups of non-passenger automobiles in subsections (a) and (b), respectively, of 49 CFR § 523.5.

For the purpose of this NPRM for the MYs 2012-2016 standards, EPA agreed to use NHTSA’s regulatory definitions for determining which vehicles would be subject to

which CO 2 standards.

In the MY 2011 rulemaking, NHTSA took a fresh look at the regulatory definitions in light of several factors and develop ments: its desire to ensure clarity in how vehicles are classified, the passage of EISA, a nd the Ninth Circuit’s decision in CBD

v. NHTSA

. 200 NHTSA explained the origin of the current definit ions of passenger automobiles and light trucks by tracing them back t hrough the history of the CAFE program, and did not propose to change the definiti ons themselves at that time, because the agency concluded that the definitions were larg ely consistent with Congress’ intent in separating passenger automobiles and light trucks, but also in part because the agency tentatively concluded that doing so would not lead to increased fuel savings. However, the agency tightened the definitions in § 523.5 to ensure that only vehicles that actually have 4WD will be classified as off-highway vehicles by reason of having 4WD (to prevent 2WD SUVs that also come in a 4WD “version” from qualifying automatically as “off-road capable” simply by reason of the existenc e of the 4WD version). It also took this action to ensure that manufacturers may only u se the “greater cargo-carrying capacity” criterion of 523.5(a)(4) for cargo van-ty pe vehicles, rather than for SUVs with removable second-row seats unless they truly have g reater cargo-carrying than passengercarrying capacity “as sold” to the first retail pur chaser. NHTSA concluded that these changes increased clarity, were consistent with EPC A and EISA, and responded to the Ninth Circuit’s decision with regard to vehicle cla ssification.

However, manufacturers currently have an incentive to classify vehicles as light trucks because, generally speaking, the fuel econom y target for light trucks with a given footprint is less stringent than the target for pas senger cars with the same footprint. This

is due to the fact that the curves are based on act ual fuel economy capabilities of the vehicles to which they apply. Because of character istics like 4WD, towing and hauling capacity, and heavy weight, the vehicles in the cur rent light truck fleet are generally less capable of achieving higher fuel economy levels as compared to the vehicles in the

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passenger car fleet. 2WD SUVs are the vehicles tha t could be most readily redesigned so that they can be “moved” from the passenger car to the light truck fleet. A manufacturer could do this by adding a third row of seats, for e xample, or boosting GVWR over 6,000 lbs for a 2WD SUV that already meets the ground cle arance requirements for “off-road capability.” A change like this may only be possib le during a vehicle redesign, but since vehicles are redesigned, on average, every 5 years, at least some manufacturers may make such changes before or during the model years covered by this rulemaking.

In looking forward to model years beyond 2011 and c onsidering how CAFE should operate in the context of the National Progr am and previously-received comments as requested by President Obama, NHTSA seeks commen t on the following potential changes to NHTSA’s vehicle classification system. We request comment also on whether, if any of the changes were to be adopted, they should be applied to any of the model years covered by this rulemaking or whether, due to lead time concerns, they should apply only to MY 2017 and thereafter.

(1) Reclassifying minivans and other “3-row” light truc ks as passenger cars ( i.e.

, removing 49 CFR § 523.5(a)(5)) :

NHTSA has received repeated comments over the cours e of the last several rulemakings from environmental and consumer groups regarding the classification of minivans as light trucks instead of as passenger ca rs. Commenters have argued that because minivans generally have three rows of seats , are built on unibody chassis, and are used primarily for transporting passengers, they sh ould be classified as passenger cars. NHTSA did not accept these arguments in the MY 2011 final rule, due to concerns that moving minivans to the passenger car fleet would lo wer the fuel economy targets for those passenger cars having essentially the same fo otprint as the minivans, and thus lower the overall fuel average fuel economy level that th e manufacturers would need to meet. However, due to the new methodology for setting sta ndards, the as-yet-unknown fueleconomy capabilities of future minivans and 3-row 2 WD SUVs, and the unknown state of the vehicle market (particularly for MYs 2017 an d beyond), NHTSA can no longer say with certainty that moving these vehicles could neg atively affect potential stringency levels for either passenger cars or light trucks.

Although such a change would not be made applicable during the MY 2012-2016 time frame, we seek comment on why NHTSA should or should not consider, as part of this rulemaking, reclassifying minivans (and other current light trucks that qualify as such because they have three rows of designated seating positions as standard equipment) for

MYs 2017 and after.

(2) Classifying “like” vehicles together :

Many commenters objected in the rulemaking for the MY 2011 standards to NHTSA’s regulatory separation of “like” vehicles. Industry commenters argued that it was technologically inappropriate for NHTSA to plac e 4WD and 2WD versions of the Formatted: Indent: Left: 0"DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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same SUV in separate classes. They argued that the vehicles are the same, except for their drivetrain features, thus giving them similar fuel economy improvement potential. They further argued that all SUVs should be classif ied as light trucks. Environmental and consumer group commenters, on the other hand, a rgued that 4WD SUVs and 2WD SUVs that are “off-highway capable” by virtue of a GVWR above 6,000 pounds should be classified as passenger cars, since they are pri marily used to transport passengers. In the MY 2011 rulemaking, NHTSA rejected both of thes e sets of arguments. NHTSA concluded that 2WD SUVs that were neither “off-high way capable” nor possessed “truck-like” functional characteristics were approp riately classified as passenger cars. At the same time, NHTSA also concluded that because Co ngress explicitly designated vehicles with GVWRs over 6,000 pounds as “off-highw ay capable” (if they meet the ground clearance requirements established by the ag ency), NHTSA did not have authority to move these vehicles to the passenger c ar fleet.

With regard to the first argument, that “like” veh icles should be classified similarly ( i.e. , that 2WD SUVs should be classified as light truck s because, besides their drivetrain, they are “like” the 4WD version that qu alifies as a light truck), NHTSA

continues to believe that 2WD SUVs that do not meet any part of the existing regulatory definition for light trucks should be classified as passenger cars. However, NHTSA recognizes the additional point raised by industry commenters in the MY 2011 rulemaking that manufacturers may respond to this t ighter classification by ceasing to build 2WD versions of SUVs, which could reduce fuel savings. In response to that point, NHTSA stated in the MY 2011 final rule that it expe cts that manufacturer decisions about whether to continue building 2WD SUVs will be drive n in much greater measure by consumer demand than by NHTSA’s regulatory definiti ons. If it appears, in the course of the next several model years, that manufacturers ar e indeed responding to the CAFE regulatory definitions in a way that reduces overal l fuel savings from expected levels, it may be appropriate for NHTSA to review this questio n again. NHTSA seeks comment on how the agency might go about reviewing this que stion as more information about

manufacturer behavior is accumulated.

With regard to the second argument, that NHTSA sho uld move vehicles that qualify as “off-highway capable” from the light tru ck to the passenger car fleet because they are primarily used to transport passengers, NH TSA reiterates that EPCA is clear that certain vehicles are non-passenger automobiles ( i.e. , light trucks) because of their offhighway capabilities, regardless of how they may be used day-to-day.

However, NHTSA could explore additional approaches, although not all could be pursued on current law. Possible alternative legal regimes might include: a) classifying vehicles as passenger cars or light trucks based on use alone (rather than characteristics); b) removing the regulatory distinction altogether a nd setting standards for the entire fleet of vehicles instead of for separate passenger car a nd light truck fleets; or c) dividing the fleet into multiple categories more consistent with current vehicle fleets ( i.e. , sedans, minivans, SUVs, pickup trucks, etc.). NHTSA seeks comment on whether and why it should pursue any of these courses of action.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

213 I. Compliance and Enforcement

1. Overview

NHTSA’s CAFE enforcement program and the complianc e flexibilities available to manufacturers are largely established by statute – unlike the CAA, EPCA and EISA are very prescriptive and leave the agency limited authority to increase the flexibilities available to manufacturers. This was intentional, however. Congress balanced the energy saving purposes of the statute against the b enefits of the various flexibilities and incentives it provided and placed precise limits on those flexibilities and incentives. For example, while the Department sought authority for unlimited transfer of credits between a manufacturer’s car and light truck fleets, Congre ss limited the extent to which a manufacturer could raise its average fuel economy f or one of its classes of vehicles through credit transfer in lieu of adding more fuel saving technologies. It did not want these provisions to slow progress toward achieving greater energy conservation or other policy goals. In keeping with EPCA’s focus on ener gy conservation, NHTSA has done its best, for example, in crafting the credit trans fer and trading regulations authorized by EISA, to ensure that total fuel savings are preserv ed when manufacturers exercise their compliance flexibilities.

The following sections explain how NHTSA determine s whether manufacturers are in compliance with the CAFE standards for each model year, and how manufacturers may address potential non-compliance situations thr ough the use of compliance flexibilities or fine payment.

2. How Dd oes NHTSA Determine Compliance? a. Manufacturer Submission of Data and CAFE Testing by EPA

NHTSA begins to determine CAFE compliance by consi dering pre- and midmodel year reports submitted by manufacturers pursu ant to 49 CFR Part 537, Automotive Fuel Economy Reports. 201 The reports for the current model year are submit ted to NHTSA every December and July. As of the time of t his NPRM, NHTSA has received mid-model year reports from manufacturers for MY 20 09, and anticipates receiving premodel year reports for MY 2010 at the end of this y ear. Although the reports are used for NHTSA’s reference only, they help the agency, and t he manufacturers who prepare them, anticipate potential compliance issues as early as possible, and help manufacturers plan compliance strategies. Currently, NHTSA receives t hese reports in paper form. In order to facilitate submission by manufacturers and consi stent with the President’s electronic government initiatives, NHTSA proposes to amend Par t 537 to allow for electronic submission of the pre- and mid-model year CAFE repo rts.

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214 NHTSA makes its ultimate determination of manufactu rers’ CAFE compliance upon receiving EPA’s official certified and reporte d CAFE data. The EPA certified data is based on vehicle testing and on final model year data submitted by manufacturers to EPA pursuant to 40 CFR § 600.512, Model Year Report, no later than 90 days after the end of the calendar year. Pursuant to 49 U.S.C. sec. § 32904(e), EPA is responsible for calculating automobile manufacturers’ CAFE values s o that NHTSA can determine compliance with the CAFE standards. In measuring t he fuel economy of passenger cars, EPA is required by EPCA 202 to use the EPA test procedures in place as of 1975 (or procedures that give comparable results), which are the city and highway tests of today, with adjustments for procedural changes that have o ccurred since 1975. EPA uses similar procedures for light trucks, although, as n oted above, EPCA does not require it to do so. One notable shortcoming of the 1975 test pr ocedure is that it does not include a provision for air conditioner usage during the test cycle. As discussed extensively in

Section [XX—in EPA’s section] of the preamble, air conditioner usage increases t he load on a vehicle’s engine, reducing fuel efficienc y and increasing CO 2 emissions. Since the air conditioner is not turned on during testing , equipping a vehicle model with a relatively inefficient air conditioner will not adv ersely affect that model’s measured fuel economy, while quipping a vehicle model with a rela tively efficient air conditioner will not raise that model’s measured fuel economy. The fuel economy test procedures for light trucks could be amended through rulemaking to provide for air conditioner operation during testing and to take other steps fo r improving the accuracy and representativeness of fuel economy measurements. C omment is sought in section I.D.2 regarding implementing such amendments beginning in MY 2017 and also on the more immediate interim step of providing credits under 4 9 U

. S

. C

. sec. § 32904(c) for light trucks equipped with relatively efficient air condi tioners for MYs 2012-2016. Modernizing the passenger car test procedures as we ll would not be possible under EPCA as currently written.

b. NHTSA Then Analyzes EPA- C c ertified CAFE Values for Compliance

Determining CAFE compliance is fairly straightforw ard. After testing, EPA verifies the data submitted by manufacturers and is sues final CAFE reports to manufacturers and to NHTSA between April and Octobe r of each year (for the previous model year). NHTSA then identifies the manufacture rs’ compliance categories (fleets) that do not meet the applicable CAFE fleet standard s.

To determine if manufacturers have earned credits t hat would offset those shortfalls, NHTSA calculates a cumulative credit st atus for each of a manufacturer’s vehicle compliance categories according to 49 U.S.C

. sec. § 32903. If a manufacturer’s compliance category exceeds the applicable fuel eco nomy standard, NHTSA adds credits to the account for that compliance category. If a manufacturer’s vehicles in a particular compliance category fall below the standard fuel ec onomy value, NHTSA will provide

written notification to the manufacturer that it ha s not met a particular fleet standard. The manufacturer will be required to confirm the shortf all and must either: submit a plan indicating it will allocate existing credits, and/o r for MY 2011 and later, how it will earn,

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transfer and/or acquire credits; or pay the appropr iate civil penalty. The manufacturer must submit a plan or payment within 60 days of rec eiving agency notification. The amount of credits are determined by multiplying the number of tenths of a mpg by which a manufacturer exceeds, or falls short of, a standa rd for a particular category of automobiles by the total volume of automobiles of t hat category manufactured by the manufacturer for a given model year. Credits used to offset shortfalls are subject to the three and five year limitations as described in 49 U.S.C. sec. § 32903(a). Transferred credits are subject to the limitations specified by 49 U.S.C. sec. § 32903(g)(3). The value of each credit, when used for compliance, received via trade or transfer is adjusted, using the adjustment factor described in 49 CFR Part 536. 4, pursuant to 49 U.S.C. sec. § 32903(f)(1). Credit allocation plans received from the manufacturer will be reviewed and approved by NHTSA. NHTSA will approve a credit all ocation plan unless it finds the proposed credits are unavailable or that it is unli kely that the plan will result in the manufacturer earning sufficient credits to offset t he subject credit shortfall. If a plan is approved, NHTSA will revise the respective manufact urer’s credit account accordingly. If a plan is rejected, NHTSA will notify the respec tive manufacturer and request a revised plan or payment of the appropriate fine.

In the event that a manufacturer does not comply wi th a CAFE standard, even after the consideration of credits, EPCA provides f or the assessing of civil penalties. The Act specifies a precise formula for determining the amount of civil penalties for such a noncompliance. The penalty, as adjusted for inflat ion by law, is $5.50 for each tenth of a mpg that a manufacturer’s average fuel economy fall s short of the standard for a given model year multiplied by the total volume of those vehicles in the affected fleet ( i.e., import or domestic passenger car, or light truck), manufactured for that model year. The amount of the penalty may not be reduced except und er the unusual or extreme circumstances specified in the statute. All penalt ies are paid to the U.S. Treasury and not

to NHTSA itself.

Unlike the National Traffic and Motor Vehicle Safe ty Act, EPCA does not provide for recall and remedy in the event of a non compliance. The presence of recall and remedy provisions 203 in the Safety Act and their absence in EPCA is bel ieved to arise from the difference in the application of the safet y standards and CAFE standards. A safety standard applies to individual vehicles; tha t is, each vehicle must possess the requisite equipment or feature which must provide t he requisite type and level of performance. If a vehicle does not, it is noncompl iant. Typically, a vehicle does not entirely lack an item or equipment or feature. Ins tead, the equipment or features fails to perform adequately. Recalling the vehicle to repai r or replace the noncompliant equipment or feature can usually be readily accompl ished.

In contrast, a CAFE standard applies to a manufactu rer’s entire fleet for a model year. It does not require that a particular indivi dual vehicle be equipped with any particular equipment or feature or meet a particula r level of fuel economy. It does require that the manufacturer’s fleet, as a whole, comply. Further, although under the attributebased approach to setting CAFE standards fuel econo my targets are established for

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individual vehicles based on their footprints, the vehicles are not required to comply with those targets on a model-by-model or vehicle-by-veh icle basis. However, as a practical matter, if a manufacturer chooses to design some ve hicles so they fall below their target levels of fuel economy, it will need to design othe r vehicles so they exceed their targets if the manufacturer’s overall fleet average is to meet the applicable standard.

Thus, under EPCA, there is no such thing as a nonco mpliant vehicle, only a noncompliant fleet. No particular vehicle in a non compliant fleet is any more, or less, noncompliant than any other vehicle in the fleet.

After enforcement letters are sent, NHTSA continues to monitor receipt of credit allocation plans or civil penalty payments that are due within 60 days from the date of receipt of the letter by the vehicle manufacturer, and takes further action if the manufacturer is delinquent in responding.

3. What Cc ompliance Flexibilities Aa re Available uU nder the CAFE Program and Hh ow Dd o Manufacturers Uu se Tt hem?

There are three basic flexibilities permitted by E PCA/EISA that manufacturers can use to achieve compliance with CAFE standards b eyond applying fuel economyimproving technologies: (1) building dual- and alt ernative-fueled vehicles; (2) banking, trading, and transferring credits earned for exceed ing fuel economy standards; and (3) paying fines. We note again that while these flexi bility mechanisms will reduce compliance costs to some degree for most manufactur ers, 49 U.S.C. sec. § 32902(h) expressly prohibits NHTSA from considering the avai lability of credits (either for building dual- or alternative-fueled vehicles or fr om accumulated transfers or trades) in determining the level of the standards. Thus, NHTS A may not raise CAFE standards because manufacturers have enough credits to meet h igher standards. This is an important difference from EPA’s authority under the CAA, which does not contain such a restriction, and which allows EPA to set higher sta ndards as a result.

a. Dual- and Alternative- F f ueled Vehicles

As discussed at length in prior rulemakings, EPCA e ncourages manufacturers to build alternative-fueled and dual- (or flexible-) f ueled vehicles by providing special fuel economy calculations for “dedicated” (that is, 100 percent) alternative fueled vehicles and “dual-fueled” (that is, capable of running on e ither the alternative fuel or gasoline) vehicles. The fuel economy of a dedicated alternat ive fuel vehicle is determined by dividing its fuel economy in equivalent miles per g allon of gasoline or diesel fuel by

0.15. 204 Thus, a 15 mpg dedicated alternative fuel vehicle would be rated as 100 mpg. For dual-fueled vehicles, the rating is the average of the fuel economy on gasoline or diesel and the fuel economy on the alternative fuel vehicle divided by 0.15. 205

204 49 U.S.C. § sec. 32905(a).

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For example, this calculation procedure turns a du al-fueled vehicle that averages 25 mpg on gasoline or diesel into a 40 mpg vehicle for CAFE purposes. This assumes that (1) the vehicle operates on gasoline or diesel 50 percent of the time and on alternative fuel 50 percent of the time; (2) fuel e conomy while operating on alternative fuel is 15 mpg (15/.15 = 100 mpg); and (3) fuel eco nomy while operating on gas or diesel is 25 mpg. Thus:

CAFE FE = 1/{0.5/(mpg gas) + 0.5/(mpg alt fuel )} = 1/{0.5/25 + 0.5/100) = 40 mpg

In the case of natural gas, the calculation is per formed in a similar manner. The fuel economy is the weighted average while operatin g on natural gas and operating on gas or diesel. The statute specifies that 100 cubi c feet (ft 3 ) of natural gas is equivalent to 0.823 gallons of gasoline. The gallon equivalency o f natural gas is equal to 0.15 (as for other alternative fuels). 206 Thus, if a vehicle averages 25 miles per 100 ft 3 of natural gas,

then:

CAFE FE = (25/100) * (100/.823)*(1/0.15) = 20 3 mpg

Congress extended the incentive in EISA for dual-fu eled automobiles through MY 2019, but provided for its phase out between MYs 2015 and 2019. 207 The maximum fuel economy increase which may be attributed to th e incentive is thus as follows:

Model Year mpg

increase

MYs 1993

- 2014........... 1.2

MY 2015................... 1.0

MY 2016................... 0.8

MY 2017................... 0.6

MY 2018................... 0.4

MY 2019................... 0.2

After MY 2019............ 0

49 CFR Part 538 implements the statutory alternati ve-fueled and dual-fueled automobile manufacturing incentive. NHTSA is propo sing to update Part 538 as part of this NPRM to reflect the EISA changes, but to the e xtent that 49 U.S.C. sec. § 32906(a)

differs from the current version of 49 CFR § 538.9, the statute supersedes the regulation, and regulated parties may rely on the text of the s tatute.

A major difference between EPA’s statutory authori ty and NHTSA’s statutory authority is that the CAA contains no specific pres criptions with regard to credits for dual- and alternative-fueled vehicles comparable to those found in EPCA/EISA. As an exercise of that authority, and as discussed in Sec tion [XX] , EPA is offering similar

206 49 U.S.C. sec. § 32905(c).

207 49 U.S.C. sec. § 32906(a). NHTSA notes that the incentive for dedi cated alternative-fuel automobiles, automobiles that run exclusively on an alternative fuel, at 49 U.S.C. sec. § 32905(a), was not phased-out by

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credits for dual- and alternative-fueled vehicles t hrough MY 2015 for compliance with its

CO 2 standards, but for MY 2016 and beyond EPA will est ablish CO 2 emission levels for

alternative fuel vehicles based on measurement of a ctual CO 2 emissions during testing, plus a manufacturer demonstration that the vehicles are actually being run on the alternative fuel. NHTSA has no such authority unde r EPCA/EISA to require that vehicles manufactured for the purpose of obtaining the credit actually be run on the alternative fuel, but requests comment on whether i t should seek legislative changes to revise its authority to address this issue.

b. Credit Trading and Transfer

In the MY 2011 final rule, NHTSA established Part 5 36 for credit trading and transfer. Part 536 implements the provisions in EI SA authorizing NHTSA to establish by regulation a credit trading program and directing i t to establish by regulation a credit transfer program. 208 Since its enactment, EPCA has permitted manufactu rers to earn credits for exceeding the standards and to carry th ose credits backward or forward. EISA extended the “carry-forward” period from three to five model years, and left the “carryback” period at three model years. Under Part 536, credit holders (including, but not limited to, manufacturers) will have credit account s with NHTSA, and will be able to hold credits, use them to achieve compliance with C AFE standards, transfer them between compliance categories, or trade them. A cr edit may also be cancelled before its expiry date, if the credit holder so chooses. Trad ed and transferred credits are subject to an “adjustment factor” to ensure total oil savings are preserved, as required by EISA. EISA also prohibits credits earned before MY 2011 f rom being transferred, so NHTSA has developed several regulatory restrictions on tr ading and transferring to facilitate Congress’ intent in this regard. EISA also establi shes a “cap” for the maximum increase in any compliance category attributable to transfer red credits: for MYs 2011-2013, transferred credits can only be used to increase a manufacturer’s CAFE level in a given compliance category by 1.0 mpg; for MYs 2014-2017, by 1.5 mpg; and for MYs 2018 and beyond, by 2.0 mpg.

NHTSA recognizes that some manufacturers may have t o rely on credit transferring for compliance in MYs 2012-2017. 209 As a way to improve the transferring flexibility mechanism for manufacturers, NHTSA inte rprets EISA not to prohibit the banking of transferred credits for use in later mod el years. Thus, NHTSA believes that the language of EISA may be read to allow manufactu rers to transfer credits from one fleet that has an excess number of credits, within the limits specified, to another fleet that may also have excess credits instead of transferrin g only to a fleet that has a credit

208 Congress required that DOT establish a credit “tr ansferring” regulation, to allow individual

manufacturers to move credits from one of their fle ets to another ( e.g. , using a credit earned for exceeding the light truck standard for compliance with the do mestic passenger car standard). Congress allowed D OT to establish a credit “trading” regulation, so that credits may be bought and sold between manufacture rs and other parties.

209 In contrast, manufacturers stated in comments in N HTSA’s MY 2011 rulemaking that they did not anticipate a robust market for credit trading, due to competitive concerns. NHTSA does not yet know

whether those concerns will continue to deter manuf acturers from exercising the trading flexibility du ring

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shortfall. This would mean that a manufacturer cou ld transfer a certain number of credits each year and bank them, and then the credits could be carried forward or back “without

limit” later if and when a shortfall ever occurred in that same fleet. NHTSA bases this interpretation on 49 U.S.C. sec. § 32903(g)(2), which states that transferred credits “are available to be used in the same model years that t he manufacturer could have applied such credits under subsections (a), (b), (d), and ( e), as well as for the model year in which

the manufacturer earned such credits.” The EISA li mitation applies only to the application of such credits for compliance in parti cular model years, and not their transfer

per se . If transferred credits have the same lifespan an d may be used in carry-back and carry-forward plans, it seems reasonable that they should be allowed to be stored in any fleet, rather than only in the fleet in which they were earned. Of course, manufacturers could not transfer and bank credits for purposes of achieving the minimum standard for domestically-manufactured passenger cars, as prohib ited by 49 U.S.C. sec. § 32903(g)(4). Transferred and banked credits would additionally s till be subject to the adjustment factor when actually used, which would help to ensure that total oil savings are preserved while still offering greater flexibility to manufacturers . This interpretation of EISA also helps NHTSA, to some extent, to harmonize better with EPA ’s CO 2 program, which allows unlimited banking and transfer of credits. NHTSA s eeks comment on this interpretation

of EISA.

c. Payment of Fines

If a manufacturer’s average miles per gallon for a given compliance category (domestic passenger car, imported passenger car, li ght truck) falls below the applicable standard, and the manufacturer cannot make up the d ifference by using credits earned or acquired , the manufacturer is subject to penalties. The pe nalty, as mentioned, is $5.50 for each tenth of a mpg that a manufacturer’s avera ge fuel economy falls short of the standard for a given model year, multiplied by the total volume of those vehicles in the affected fleet, manufactured for that model year. NHTSA has collected $772,850,459.00 to date in CAFE penalties, the largest ever being p aid by DaimlerChrysler for its MY 2006 import passenger car fleet, $30,257,920.00. F or their MY 2007 fleets, five manufacturers paid CAFE fines for not meeting an ap plicable standard—Ferrari, Maserati, Mercedes-Benz, Porsche, and Volkswagen—fo r a total of $37,385,941.00

NHTSA recognizes that some manufacturers may use th e option to pay fines as a CAFE compliance flexibility—presumably, when paying fines is deemed more costeffective than applying additional fuel economy-imp roving technology, or when adding fuel economy-improving technology would fundamental ly change the characteristics of the vehicle in ways that the manufacturer believes its target consumers would not accept. NHTSA has no authority under EPCA/EISA to prevent m anufacturers from turning to fine-payment if they choose to do so. This is anot her important difference from EPA’s authority under the CAA, which allows EPA to revoke a manufacturer’s certificate of compliance that permits it to sell vehicles if EPA determines that the manufacturer is in non-compliance, and does not permit manufacturers t o pay fines in lieu of compliance with applicable standards.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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NHTSA has grappled repeatedly with the issue of wh ether fines are motivational for manufacturers, and whether raising fines would increase manufacturers’ compliance with the standards. EPCA authorizes increasing the civil penalty very slightly up to $10.00, exclusive of inflationary adjustments, if N HTSA decides that the increase in the penalty “

— (i) W w ill result in, or substantially further, substantia l energy conservation for automobiles in the model years in which the increas ed penalty may be imposed; and (ii) W w ill not have a substantial deleterious impact on th e economy of the United States, a State, or a region of a State. ” 49 U.S.C. sec. 32912(c). 210

To support a decision that increasing the penalty w ould result in “substantial energy conservation” without having “a substantial deleterious impact on the economy,” NHTSA would likely need to provide some reasonably certain quantitative estimates of the fuel that would be saved, and the impact on the economy, if the penalty were raised. Comments received on this issue in the past have no t explained in clear quantitative terms what the benefits and drawbacks to raising the pena lty might be. Additionally, it may be that the range of possible increase that the statut e provides, i.e. , up to $10 per tenth of a mpg, is insufficient to result in substantial energ y conservation, although changing this would require an amendment to the statute by Congre ss. While NHTSA continues to seek to gain information on this issue to inform a future rulemaking decision, we request that commenters wishing to address this issue pleas e provide, as specifically as possible, estimates of how raising or not raising the penalty amount will or will not substantially raise energy conservation and impact the economy.

4. Other CAFE Enforcement Issues—Variations in Foo tprint

NHTSA has a standardized test procedure for determi ning vehicle footprint, 211
which is defined by regulation as follows:

Footprint is defined as the product of track width (measured in inches, calculated as the average of front and rear track widths, and rounded to the nearest tenth of an inch) times wheelbase (measured in inches and ro unded to the nearest tenth of an inch), divided by 144 and then rounded to the ne arest tenth of a square foot. 212

“Track width,” in turn, is defined as “the lateral distance between the centerlines of the base tires at ground, including the camber angle.” 213 “Wheelbase” is defined as “the longitudinal distance between front and rear wheel centerlines.” 214

NHTSA began requiring manufacturers to submit this information as part of their pre-model year reports in MY 2008 for light trucks, and will require manufacturers to

210 49 U.S.C. sec. § 32912(c).

211 NHTSA TP-537-01, March 30, 2009. Available at http://www.nhtsa.gov/portal/site/nhtsa/menuitem.b16 6d5602714f9a73baf3210dba046a0/, scroll down to “537” (last accessed July 18, 2009).

212 49 CFR § 523.2.

213 Id.

214 Id.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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submit this information for passenger cars as well beginning in MY 2011. Manufacturers have submitted the required information for their l ight trucks, but NHTSA has identified several issues with regard to footprint measurement , that could affect how required fuel economy levels are calculated for a manufacturer. The paragraphs that follow explain NHTSA’s views regarding these issues, and solicit p ublic input on what NHTSA should

do to address them in the future.

a. Variations in Track Width

By definition, wheelbase measurement should be very consistent from one vehicle to another of the same model. Track width, in cont rast, may vary in two respects: wheel offset, 215 and camber. Most current vehicles have wheels wit h positive offset, with technical specifications for offset typically expre ssed in millimeters. Additionally, for most vehicles, the camber angle of each of a vehicl e’s wheels is specified as a range, i.e.

, front axle, left and right within minus 0.9 to plus 0.3 degree and rear axle, left and right within minus 0.9 to plus 0.1 degree. Given the sma ll variations in offset and camber angle dimensions, the potential effects of componen ts (wheels) and vehicle specifications (camber) within existing designs on vehicle footpri nts are considered insignificant.

However, NHTSA recognizes that manufacturers may c hange the specifications of and the equipment on vehicles, even those that a re not redesigned or refreshed, during a model year and from year to year. There may be o pportunity for manufacturers to change specifications for wheel offset and camber t o increase a vehicle’s track width and footprint, and thus decrease their required fuel ec onomy level. NHTSA believes that this is likely easiest on vehicles that already have suf ficient space to accommodate changes without accompanying changes to the body profile an d/or suspension component

locations.

There may be drawbacks to such a decision, however. Changing from positive offset wheels to wheels with zero or negative offse t will move tires and wheels outward toward the fenders. Increasing the negative upper limit of camber will tilt the top of the tire and wheel inward and move the bottom outward, placing the upper portion of the rotating tires and wheels in closer proximity to su spension components. In addition, higher negative camber can adversely affect tire li fe and the on-road fuel economy of the vehicle. Furthermore, it is likely that most vehic le designs have already used the available space in wheel areas since, by doing so, the vehicle’s handling performance is improved. Therefore, it seems unlikely that manufa cturers will make significant changes

to wheel offset and camber.

b. How Manufacturers D d esignate “ B b ase Tires” and Wheels

215 Offset of a wheel is the distance from its hub mou nting surface to the centerline of the wheel, i.e.

, measured laterally inboard or outboard. Zero offset – the hub mounting surface is even wit h the centerline of the wheel Positive offset – the hub mounting surface is outbo ard of the centerline of the wheel (toward street side) Negative offset – the hub mounting surface is inboa rd of the centerline of the wheel (away from street side)DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

222 According to the definition of “track width” in 49 CFR § 523.2, manufacturers must determine track width when the vehicle is equi pped with “base tires.” Section § 523.2 defines “base tire,” in turn, as “the tire sp ecified as standard equipment by a manufacturer on each configuration of a model type. ” NHTSA did not define “standard equipment.”

In their pre-model year reports required by 49 CFR Part 537, manufacturers have the option of either (A) reporting a base tire for each model type, or (B) reporting a base tire for each vehicle configuration within a model type, which represents an additional level of specificity. If different vehicle configu rations have different footprint values, then reporting the number of vehicles for each foot print will improve the accuracy of the required fuel economy level for the fleet, since th e pre-model year report data is part of

what manufacturers use to determine their CAFE obli gations.

For example, assume a manufacturer’s pre-model year report listed five vehicle configurations that comprise one model type. If th e manufacturer provides only one vehicle configuration’s front and rear track widths , wheelbase, footprint and base tire size to represent the model type, and the other vehicle configurations all have a different tire size specified as standard equipment, the footprint value represented by the manufacturer may not capture the full spectrum of footprint valu es for that model type. Similarly, the base tires of a model type may be mounted on two or more wheels with different offset dimensions for different vehicle configurations. O f course, if the footprint value for all vehicle configurations is essentially the same, the re would be no need to report by vehicle configuration. However, if footprints are differen t—larger or smaller—reporting for each group with similar footprints or for each vehicle c onfiguration would produce a more

accurate result.

c. Vehicle “Design” Values Reported by Manufacture rs

NHTSA understands that the track widths and wheelba se values and the calculated footprint calculated values, as provided in pre-model year reports, are based on vehicle designs. This can lead to inaccurate calcu lations of required fuel economy level. For example, if the values reported by manufacturer s are within an expected range of values, but are skewed to the higher end of the ran ges, the required fuel economy level for the fleet will be artificially lower, an inaccu rate attribute based value. Likewise, it

would be inaccurate for manufacturers to submit val ues on the lower end of the ranges,

but would decrease the likelihood that measured val ues would be less than the values reported and reduce the likelihood of an agency inq uiry. Since not every vehicle is identical, it is also probable that variations betw een vehicles exist that can affect track width, wheelbase and footprint. As with other self -certifications, each manufacturer must decide how it will report, by model type, vehicle c onfiguration, or a combination, and whether the reported values have sufficient margin to account for variations.

To address this, the agency will be monitoring the track widths, wheelbases and footprints reported by manufacturers, and anticipat es measuring vehicles to determine ifDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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the reported and measured values are consistent. W e will look for year-to-year changes in the reported values. We can compare MY 2008 lig ht truck information and MY 2010 passenger car information to the information report ed in subsequent model years. Moreover, under 49 CFR § 537.8, manufacturers may make separate reports to e xplain why changes have occurred or they may be contacted by the agency to explain them.

d. How Manufacturers r R eport this Information in t T heir Pre- M m odel Year Reports

49 CFR § 537.7(c) requires that manufacturers’ pre-model yea r reports include “model type and configuration fuel economy and tech nical information.” The fuel economy of a “model type” is, for many manufacturer s, comprised of a number of vehicle configurations. 49 CFR § 537.4 states that “model type” and “vehicle configuration” are defined in 40 CFR Part 600. Und er that Part, “model type” includes engine, transmission, and drive configuration (2WD, 4WD, or all-wheel drive), while “vehicle configuration” includes those parameters p lus test weight. Model type is important for calculating fuel economy in the new a ttribute-based system—the required fuel economy level for each of a manufacturer’s fle ets is calculated using the number of vehicles within each model type and the applicable fuel economy target for each model

type.

In MY 2008 and 2009 pre-model year reports for lig ht trucks, manufacturers have expressed information in different ways. Some manu facturers that have many vehicle configurations within a model type have included in formation for each vehicle configuration’s track width, wheelbase and footprin t. Other manufacturers reported vehicle configuration information per § 537.7(c)(4) , but provided only model type track width, wheelbase and footprint information for subs ections § 537.7(c)(4)(xvi)(B)(3), (4) and (5). NHTSA believes that these manufacturers m ay have reported the information this way because the track widths, wheelbase and fo otprint are essentially the same for each vehicle configuration within each model type. A third group of manufacturers submitted model type information only, presumably b ecause each model type contains only one vehicle configuration.

NHTSA does not believe that this variation in repo rting methodology presents an inherent problem, as long as manufacturers follow t he specifications in Part 537 for reporting format, and as long as pre-model year rep orts provide information that is accurate and represents each vehicle configuration within a model type. The report may, but need not, be similar to what manufacturers subm it to EPA as their end-of-model year report. However, NHTSA seeks comment on any potent ial benefits or drawbacks to requiring a more standardized reporting methodology . If commenters recommend increasing standardization, NHTSA requests that the y provide specific examples of what information should be required and how NHTSA should require it to be provided.

J. Other n N ear- t T erm r R ulemakings m M andated by EISADRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

224 1. Commercial Medium- and Heavy- Dd uty On- Hh ighway Vehicles and

Work Trucks

EISA added a new provision to 49 U.S.C. sec. § 32902 requiring DOT, in consultation with DOE and EPA, to examine the fuel efficiency of commercial mediumand heavy-duty on-highway vehicles 216 and work trucks 217 and determine the appropriate test procedures and methodologies for measuring the ir fuel efficiency, as well as the appropriate metric for measuring and expressing the ir fuel efficiency performance and the range of factors that affect their fuel efficie ncy. Work on developing these standards is on-going.

2. Consumer Ii nformation

EISA also added a new provision to 49 U.S.C. sec. § 32908 requiring DOT, in consultation with DOE and EPA, to develop and imple ment by rule a program to require

manufacturers

— (A) to label new automobiles sold in the United States with : 1)

-- (i) information reflecting an automobile’s performance on the basis of criteria that
[ EPA ] shall develop, not later than 18 months after the date of the enactment of [ EISA ]

, to reflect fuel economy and greenhouse gas and othe r emissions over the useful life of the

automobile ; and 2) ; (ii) a rating system that would make it easy for consume rs to compare the fuel economy and greenhouse gas and other emissions of a utomobiles at the point of purchase, including a designation of automobiles

— (I) with the lowest greenhouse gas emissions over the u seful life of the vehicles;

and (II) with the highest fuel economy ;

. DOT must also develop and implement by rule a progr am to require

manufacturers to and

(B) to include in the owner’s manual for vehicles capable of operating on

alternative fuels information that describes that c apability and the benefits of using alternative fuels, including the renewable nature a nd environmental benefits of using

alternative fuels.

EISA further requires DOT, in consultation with DO E and EPA, to

• “ develop and implement by rule a consumer education program to improve consumer understanding of automobile performance de scribed [by the label to be developed] and to inform consumers of the benefits of using alternative fuel in

automobiles and the location of stations with alter native fuel capacity; ”

216 Defined as “ an on-highway vehicle with a gross vehicle weight r ating of 10,000 pounds or more. ”

217 Defined as “ a vehicle that is both

— (A) is rated at between 8,500 and 10,000 pounds gross vehi cle weight; and also (B) is not a medium-duty passenger vehicle (as defined in 40 CFR 86.1803-01, as in effect on the

date of EISA’s enactment. ” Formatted: Indent: Left: 0"

Formatted: Indent: Left: 0"

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• “ establish a consumer education campaign on the fuel savings that would be recognized from the purchase of vehicles equipped w ith thermal management technologies, including energy efficient air condit ioning systems and glass; ” and

• “ by rule require a label to be attached to the fuel compartment of vehicles capable of operating on alternative fuels, with the form of alternative fuel stated on the

label. ”



49 U.S.C. sec. § 32908(g)(2) and (3). DOT has 42 months from the da te of EISA’s enactment (by the end of 2011) to issue final rules under this subsection. Work on developing these standards is also on-going.

Additionally, in preparation for this rulemaking, N HTSA will consider appropriate metrics for presenting fuel economy-rel ated information on labels. Based on the non-linear relationship between mpg and fuel co sts as well as emissions, inclusion of the “gallons per 100 miles” metric on fuel economy labels may be appropriate going forward, although the mpg information is currently required by law. A cost/distance metric may also be useful, as could a CO 2 e grams per mile metric to facilitate comparisons between conventional vehicles and alter native fuel vehicles and to incorporate information about air conditioning-rela ted emissions. NHTSA seeks comment on these options.

K. Public Participation

How do I prepare and submit comments? Your comments must be written and in English. To e nsure that your comments are correctly filed in the Docket, please include t he docket number of this document in your comments. You r comments must not be more than 15 pages long. 218 We established this limit to encourage you to write yo ur primary comments in a concise fashion. However, you may attach necessary additio nal documents to your comments. There is no limit on the length of the attachments.

Please submit your comments by any of the following methods:

• Federal eRulemaking Portal : Go to http://www.regulations.gov. Follow the on line instructions for submitting comments.

• Mail : Docket Management Facility, M

- 30, U.S. Department of Transportation, West Building, Ground Floor, Rm. W12

- 140, 1200 New Jersey Avenue, SE, Washington, DC 20590.

• Hand delivery or courier : West Building Ground Floor, Rm. W12

- 140, 1200 New Jersey Avenue, SE, between the hours of 9 a.m and 5 p.m. Eastern Tim e, Monday through Friday, except Federal holidays.

218 See 49 CFR § 553.21. Formatted: Indent: Left: 0.25"

Formatted: Bullets and Numbering

Formatted: Subscript

Comment [r17]: Added in response to interagency comment.

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• Fax : (202) 493

- 2251. If you are submitting comments electronically as a PDF (Adobe) file, we ask that the documents submitted be scanned using the Optica l Character Recognition (OCR) process, thus allowin g the agency and other commenters to search and cop y certain portions of your submissions. 219

Please note that pursuant to the Data Quality Act, in order for substantive data to be relied upon and used by the agency, it must meet the information quality st andards set forth in the OMB and DOT Data Quality Act guideline s. Accordingly, we encourage you to consult the guidelines in preparing your comment s. OMB’s guidelines may be accessed at http://www.whitehouse.gov/omb/fedreg/re producible.html. DOT’s guide lines may be accessed at http://www.dot.gov/dataqua lity.htm.

How can I be sure that my comments were received? If you submit your comments by mail and wish Docket Management to notify you upon its receipt of your comments, enclose a self

- addressed, sta mped postcard in the envelope containing your comments. Upon receiving your comments, Docket Management will return the postcard by mail.

How do I submit confidential business information ( CBI)? If you wish to submit any information under a claim of con fidentiality, you should submit three copies of your complete submission, in cluding the information you claim to be confidential business information, to the Chief Counsel, NHTSA, at the address given

above under FOR FURTHER INFORMATION CONTACT . When you send a comment containing information claimed to be confid ential business information, you should include a cover letter setting forth the inf ormation specified in our confidential business information regulation. 220

In addition, you should submit a copy f rom which you have deleted the claimed confidential business information to the Docket by one of the methods set forth above.

Will the agency consider late comments?

We will consider all comments received before the c lose of business on the

comment closi ng date indicated above under DATES . To the extent possible, we will

also consider comments received after that date. I f interested persons believe that any new information the agency places in the docket aff ects their comments, they may submit

comments after the closing date concerning how the agency sh ould consider that information for the final rule. However, the agenc y’s ability to consider late comments in this rulemaking will be limited given the time fram e of this rulemaking.

If a comment is rec eived too late for us to consider in developing a f inal rule (assuming that one is issued), we will consider tha t comment as an informal suggestion for future rulemaking action.

219 Optical character recognition (OCR) is the process of converting an image of text, such as a scanned paper document or electronic fax file, into compute r-editable text.

220 See 49 CFR Part 512.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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How can I read the comments submitted by other peop le? You may read the mate rials placed in the docket for this document ( e.g. , the comments submitted in response to this document by other interested persons) at any time by going to http://www.regulations.gov. Follo w the online instructions for accessing the dockets. You may als o read the materials at the Docket Management Facility by going to the street address given above . The Docket Management Facility is open between 9 a.m. and 5 p.m. Eastern Time, Monday through Friday, except Federal holidays.

Will there be a public heari ng? [To be filled in later]

L K . Regulatory Notices and Analyses 1. Executive Order 12866 and DOT Regulatory Policie s and

Procedures

Executive Order 12866, “Regulatory Planning and Re view” (58 FR 51735, Oct. 4, 1993), provides for making determinations whether a regulatory action is “significant” and therefore subject to OMB review and to the requ irements of the Executive Order. The Order defines a “significant regulatory action” as one that is likely to result in a rule that may: (1) Have an annual effect on the economy of $100 m illion or more or adversely affect in a material way the economy, a sector of t he economy, productivity, competition, jobs, the environment, public health or safety, or State, local or Tribal governments or communities; (2) Create a serious inconsistency or otherwise in terfere with an action taken or planned by another agency; (3) Materially alter the budgetary impact of entit lements, grants, user fees, or loan programs or the rights and obligations of recipient s thereof; or (4) Raise novel legal or policy issues arising out of legal mandates, the President’s priorities, or the principles set forth in the Exec utive Order.

The rulemaking proposed in this NPRM will be econo mically significant if adopted. Accordingly, OMB reviewed it under Execut ive Order 12866. The rule, if adopted, would also be significant within the meani ng of the Department of Transportation’s Regulatory Policies and Procedures

.

The benefits and costs of this proposal are descri bed above. Because the proposed rule would, if adopted, be economically si gnificant under both the Department of Transportation’s procedures and OMB guidelines, the agency has prepared a Preliminary Regulatory Impact Analysis (PRIA) and p laced it in the docket and on the agency’s website. Further, pursuant to OMB Circula r A-4, we have prepared a formal probabilistic uncertainty analysis for this proposa l. The circular requires such an analysis for complex rules where there are large, multiple u ncertainties whose analysis raisesDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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technical challenges or where effects cascade and w here the impacts of the rule exceed $1 billion. This proposal meets these criteria on all counts.

2. National Environmental Policy Act

NHTSA has initiated the Environmental Impact State ment (EIS) process under the National Environmental Policy Act (NEPA), 42 U. S.C. sec. §§ 4321-4347, and implementing regulations issued by the Council on E nvironmental Quality (CEQ), 40 CFR part 1500, and NHTSA, 49 CFR part 520. On Apri l 1, 2009, NHTSA published a notice of intent to prepare an EIS for this rulemak ing and requested scoping comments. (74 FR 14857) The notice invites Federal, State, a nd local agencies, Indian tribes, and the public to participate in the scoping process an d to help identify the environmental

issues and reasonable alternatives to be examined i n the EIS. The scoping notice also provides information about the proposed standards, the alternatives NHTSA expects to consider in its NEPA analysis, and the scoping proc ess.

Concurrently with this NPRM, NHTSA is releasing a Draft Environmental Impact Statement (DEIS). NHTSA prepared the DEIS to analy ze and disclose the potential environmental impacts of the proposed MY 2012-2016 CAFE standards for the total fleet of passenger cars and light trucks and reasonable a lternative standards for the NHTSA CAFE Program pursuant to the Council on Environment al Quality (CEQ) regulations implementing NEPA, DOT Order 5610.1C, and NHTSA reg ulations. 221 The DEIS compares the potential environmental impacts of alt ernative mile per gallon (mpg) levels that will be considered by NHTSA for the final rule . It also analyzes direct, indirect, and cumulative impacts and analyzes impacts in proporti on to their significance.

The DEIS also describes potential environmental imp acts to a variety of resources. Resources that may be affected by the p roposed action and alternatives include water resources, biological resources, land use and development, safety, hazardous materials and regulated wastes, noise, so cioeconomics, and environmental justice. These resource areas were assessed qualit atively in the DEIS.

Throughout the DEIS, NHTSA has relied extensively o n findings of the United Nations Intergovernmental Panel on Climate Change ( IPCC), the U.S. Climate Change Science Program (CCSP), and EPA. Our discussion re lies heavily on the most recent, thoroughly peer-reviewed, and credible assessments of global and U.S. climate change: the IPCC Fourth Assessment Report ( Climate Change 2007 ), EPA’s proposed Endangerment and Cause or Contribute Findings for G reenhouse Gases under Section 202(a) of the Clean Air Act and the accompanying Te chnical Support Document (TSD), and CCSP and National Science and Technology Counci l reports that include the Scientific Assessment of the Effects of Global Chan ge on the United States and Synthesis

and Assessment Products. The DEIS cites these sou rces and the studies they review frequently.

221 NEPA is codified at 42 U.S.C. sec. §§ 4321-4347. CEQ NEPA implementing regulations are codified at 40 Code of Federal Regulations (CFR) Parts 1500-150 8. NHTSA NEPA implementing regulations are

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229 Because of the link between the transportation sect or and GHG emissions, NHTSA recognizes the need to consider the possible impacts on climate and global climate change in the analysis of the effects of th ese fuel economy standards. NHTSA also recognizes the difficulties and uncertainties involved in such an impact analysis. Accordingly, consistent with CEQ regulations on add ressing incomplete or unavailable information in environmental impact analyses, NHTSA has reviewed existing credible scientific evidence that is relevant to this analys is and summarized it in the DEIS. NHTSA has also employed and summarized the results of research models generally accepted in the scientific community.

Although the alternatives have the potential to dec rease GHG emissions substantially, they do not prevent climate change, but only result in reductions in the anticipated increases in CO 2 concentrations, temperature, precipitation, and se a level. They would also, to a small degree, delay the point at which certain temperature increases and other physical effects stemming from increased GHG emissions would occur. As discussed below, NHTSA presumes that these reductio ns in climate effects will be reflected in reduced impacts on affected resources.

NHTSA consulted with various federal agencies in th e development of the DEIS, including EPA, Bureau of Land Management, Centers f or Disease Control and Prevention, Minerals Management Service, National P ark Service, U.S. Army Corps of Engineers, U.S. Forest Service, and Advisory Counci l on Historic Preservation. NHTSA is also exploring its obligations under Section 7 o f the Endangered Species Act with the

U.S. Fish and Wildlife Service and the National Oce anic and Atmospheric

Administration Fisheries Service.

The main direct and indirect effects resulting from the different alternatives analyzed in the DEIS are as follows:

Fuel consumption : For passenger cars, fuel consumption under the N o Action Alternative is 171 billion gallons in 2060. Fuel c onsumption ranges from 156.1 billion gallons under Alternative 2 (3-Percent Alternative) to 133.7 billion gallons under Alternative 9 (TCTB). Fuel consumption is 149.3 bi llion gallons under the Preferred Alternative. For light trucks, fuel consumption un der the No Action Alternative is 105.4 billion gallons in 2060. Fuel consumption ranges f rom 97.1 billion gallons under Alternative 2 (3-Percent Alternative) to 83.8 billi on gallons under Alternative 9 (TCTB). Fuel consumption is 92.2 billion gallons under the Preferred Alternative (Alternative 4).

Air quality : Emissions of criteria pollutants change very lit tle between the No Action Alternative and Alternatives 2 through 4. I n the case of particulate matter (PM 2.5 ), sulfur oxides (SO

x ), nitrogen oxides (NO

x ), and volatile organic compounds (VOCs), the No Action Alternative results in the highest emissi ons, and emissions generally decline as fuel economy standards increase across alternatives . There are some increases from Alternative 6 through Alternative 9, but emissions remain below the levels under the No

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through 4 are slightly higher than under the No Act ion Alternative. Emissions of CO decline as fuel economy standards increase across A lternatives 5 through 9.

The trend for toxic air pollutant emissions across the alternatives is mixed. Emissions of nearly all toxic air pollutants are hi ghest under the No Action Alternative, except for those of acrolein, which increases with each successive alternative and are highest under Alternative 9. The acrolein emission s are an upper-bound estimate and actual emissions might be less. Emissions of aceta ldehyde, benzene, and DPM in 2030

decrease with successive alternatives from Alternat ive 1 to Alternative 9. Emissions of 1,3-butadiene increase slightly from Alternative 3 (4-Percent Alternative) to Alternative 4 (Preferred), and emissions of formaldehyde increase slightly from Alternative 8 (7- Percent Alternative) to Alternative 9 (TCTB) in 203 0.

The reductions in emissions are expected to lead to reductions in adverse health

effects. There would be reductions in adverse heal th effects nationwide under Alternatives 2 (3-Percent Alternative) through 9 (T CTB) compared to the No Action Alternative. These reductions primarily reflect th e projected PM 2.5 reductions, and secondarily the reductions in SO 2 . The economic value of health impacts would vary proportionally with changes in health outcomes.

Climate : The DEIS uses a climate model to estimate the ch anges in CO 2 concentrations, global mean surface temperature, an d changes in sea level for each alternative CAFE standard. NHTSA used the publicly available modeling software,

Model for Assessment of Greenhouse Gas-induced Clim ate Change (MAGICC) version 5.3.v2 to estimate changes in key direct and indire ct effects. The application of

MAGICC version 5.3.v2 uses the emissions estimates for CO 2 , CH 4 , N 2 O, CO, NO

x , SO 2 , and VOCs from the Volpe model. A sensitivity analy sis was completed to examine the relationship among selected CAFE alternatives and l ikely climate sensitivities, and the

associated direct and indirect effects for each com bination. These relationships can be

used to infer the effect of emissions associated wi th the regulatory alternatives on direct

and indirect climate effects.

For the analysis using MAGICC, NHTSA has assumed th at global emissions consistent with the No Action Alternative (Alternat ive 1) follow the trajectory provided by the Representative Concentration Pathway (RCP) 4 .5 MiniCAM (Mini Climate Assessment Model) reference scenario. 222 The SAP 2.1 global emissions scenarios were created as part of CCSP’s effort to develop a set o f long-term (2000 to 2100) global emissions scenarios that incorporate an update of e conomic and technology data and utilize improved scenario development tools compare d to the IPCC Special Report on

Emissions Scenarios (SRES) developed more than a decade ago.

222 The reference scenario for global emissions assume s the absence of significant global GHG control policies. It is based on the Climate Change Scienc e Program’s (CCSP) Synthesis and Assessment Product (SAP) 2.1 MiniCAM reference scenario, and has been revised by the Joint Global Change Research Institute to update emission estimates of non-CO 2 gases.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

231 The results rely primarily on the RCP 4.5 MiniCAM r eference scenario to represent an emissions scenario, that is, future gl obal emissions assuming no additional climate policy. Each alternative was simulated by calculating the difference in annual

GHG emissions in relation to the No Action Alternat ive and subtracting this change from the RCP 4.5 MiniCAM reference scenario to generate modified global-scale emissions scenarios, which each show the effect of the variou s regulatory alternatives on the global emissions path.

To estimate changes in global precipitation, this E IS uses increases in global mean surface temperature combined with a scaling ap proach and coefficients from the IPCC Fourth Assessment Report.

For all of the climate change analysis, the approac hes focus on marginal changes in emissions that affect climate. Thus, the approa ches result in a reasonable characterization of climate change for a given set of emissions reductions, regardless of the underlying details associated with those emissi ons reductions. The climate sensitivity analysis provides a basis for determining climate r esponses to varying climate sensitivities under the No Action Alternative (Alte rnative 1) and the Preferred Alternative (Alternative 4). Some responses of the climate sys tem are believed to be non-linear; by using a range of emissions cases and climate sensit ivities, the effects of the alternatives in

relation to different scenarios and sensitivities c an be estimated.

GHG emissions : Although GHG emissions from new passenger cars a nd light trucks will continue to rise over 2012 through 2100 (absent other reduction efforts), the

effect of the alternatives is to slow this increase by varying amounts. Emissions for the period range from 196,341 million metric tons of CO 2 (MMTCO 2 ) for the TCTB Alternative (Alternative 9) to 244,821 MMTCO 2 for the No Action Alternative (Alternative 1). Compared to the No Action Alterna tive, projections of emissions reductions over the period 2012 to 2100 due to the MY 2012-2016 CAFE standards range from 19,169 to 48,480 MMTCO 2 . Compared to cumulative global emissions of 5,293,896 MMTCO 2 over this period (projected by the RCP 4.5 MiniCAM reference scenario), this rulemaking is expected to reduce gl obal CO 2 emissions by about 0.4 to 0.9

percent.

To get a sense of the relative impact of these redu ctions, it can be helpful to consider the relative importance of emissions from passenger cars and light trucks as a whole and to compare them against emissions project ions from the transportation sector. As mentioned earlier, U.S. passenger cars and light trucks currently account for significant CO 2 emissions in the United States. With the action a lternatives reducing U.S. passenger car and light truck CO 2 emissions by 7.8 to 19.8 percent, the CAFE alternatives would have a noticeable impact on tota l U.S. CO 2 emissions. Compared to

total U.S. CO 2 emissions in 2100 projected by the MiniCAM referen ce scenario of 7,886

MMTCO 2 , the action alternatives would reduce annual U.S. CO 2 emissions by 3.5 to 8.9 percent in 2100.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

232 CO 2 concentration, global mean surface temperature, se a-level rise, and precipitation : Estimated CO 2 concentrations for 2100 range from 778.4 ppm under the most stringent alternative (TCTB) to 783.0 ppm unde r the No Action Alternative. For 2030 and 2050, the range is even smaller. Because CO 2 concentration is the key driver of other climate effects (which in turn act as drivers on resource impacts), this leads to small

differences in these effects. For the No Action al ternative, the temperature increase from 1990 is 0.92 °C for 2030, 1.56 °C for 2050, and 3.1 4 °C for 2100. The differences among alternatives are small. For 2100, the reduct ion in temperature increase, in relation to the No Action Alternative, ranges from 0.007 °C to 0.018 °C. Given that all the action alternatives reduce temperature increases slightly in relation to the No Action Alternative, they also slightly reduce predicted increases in pr ecipitation.

In summary, the impacts of the proposed action and alternatives on global mean surface temperature, precipitation, or sea-level ri se are small in absolute terms. This is because the action alternatives have a small propor tional change in the emissions trajectories in the RCP 4.5 MiniCAM reference scena rio. 223 This is due primarily to the global and multi-sectoral nature of the climate cha nge issues.

Under CEQ regulations, NHTSA must also analyze cumu lative impacts, defined as “the impact on the environment which results fro m the incremental impact of the action when added to other past, present, and reaso nably foreseeable future actions regardless of what agency or person undertakes such other actions.” 40 CFR § 1508.7. Following is a description of the cumulative effect s of the proposed action and alternatives on energy, air quality, and climate.

The methodology for evaluating cumulative effects i ncludes the reasonably foreseeable future actions of projected average ann ual passenger-car and light-truck mpg estimates from 2016 through 2030 that differ from m pg estimates reflected in the analysis of the direct and indirect impacts of MY 2012 throu gh MY 2016 fuel economy requirements under each of the action alternatives, assuming no further increases in average new passenger-car or light-truck mpg after 2016. The evaluation of cumulative effects projects ongoing gains in average new passe nger-car and light-truck mpg

consistent with further increases in CAFE standards to an EISA-mandated minimum level of 35 mpg combined for passenger car and ligh t trucks by the year 2020, along with AEO April 2009 (updated) Reference Case projections of annual percentage gains of 0.51 percent in passenger-car mpg and 0.86 percent in li ght-truck mpg through 2030. 224 AEO

223 These conclusions are not meant to be interpreted as expressing NHTSA’s views that impacts on global mean surface temperature, precipitation, or sea-lev el rise are not areas of concern for policymakers. Under NEPA, the agency is obligated to discuss “ the environmental impact[s] of the proposed action. ” 42 U.S.C.

sec. § 4332(2)(C)(i) (emphasis added). This analysis ful fills NHTSA’s obligations in this regard.

224 NHTSA considers these AEO projected mpg increases to be reasonably foreseeable future action under NEPA because the AEO projections reflect future con sumer and industry actions that result in ongoing m pg gains through 2030. The AEO projections of fuel ec onomy gains beyond the EISA requirement of combined achieved 35 mpg by 2020 result from a futu re forecasted increase in consumer demand for fuel economy resulting from projected fuel price increas es. Since the AEO forecasts do not extend beyond t he year 2030, the mpg estimates for MY 2030 through MY 2060 remain constant.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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Reference Case projections are regarded as the offi cial U.S. government energy projections by both the public and private sector.

The assumption that all action alternatives reach t he EISA 35 mpg target by 2020, with mpg growth at the AEO forecast rate from 2020 to 2030, results in estimated cumulative impacts for Alternatives 2, 3, and 4 tha t are substantially equivalent, with any minor variation in cumulative impacts across these Alternatives due to the specific modeling assumptions used to ensure that each Alter native achieves at least 35 mpg by 2020. Therefore, the cumulative impacts analysis a dds substantively to the analysis of direct and indirect impacts when comparing cumulati ve impacts between Alternatives 4 through 9, but not when comparing cumulative impact s between Alternatives 2 through 4. Another important difference in the methodology for evaluating cumulative effects is that the No Action Alternative (Alternative 1) also refl ects the AEO Reference Case projected annual percentage gains of 0.51 percent in car mpg and 0.86 percent in light truck mpg for the period 2016 through 2030, whereas the direc t and indirect impacts analysis assumed no increases in average new passenger-car o r light-truck mpg after 2016 under any alternative, including the No Action Alternativ e. NHTSA also considered other reasonably foreseeable actions that would affect gr eenhouse gas emissions, such as regional, national, and international initiatives a nd programs to reduce GHG emissions.

Fuel consumption : The nine alternatives examined in the DEIS will result in different future levels of fuel use, total energy, and petroleum consumption, which will in turn have an impact on emissions of GHG and criteri a air pollutants. For passenger cars, by 2060, fuel consumption reaches 160.4 billion gal lons under the No Action Alternative (Alternative 1). Consumption falls across the alte rnatives, from 139.4 billion gallons under the Preferred Alternative (Alternative 4) to 125.7 billion gallons under the TCTB Alternative (Alternative 9) representing a fuel sav ings of 21.0 to 34.7 billion gallons in 2060, as compared to fuel consumption projected und er the No Action Alternative. For light trucks, fuel consumption by 2060 reaches 94.8 billion gallons under the No Action Alternative (Alternative 1). Consumption declines across the alternatives, from 83.3 billion gallons under the 3-Percent Alternative (Al ternative 2) to 75.7 billion gallons under the TCTB Alternative (Alternative 9). This r epresents a fuel savings of 11.5 to 19.1 billion gallons in 2060, as compared to fuel c onsumption projected under the No

Action Alternative.

Air quality : In the case of PM 2.5 , SO

x , NO

x , and VOCs, the No Action Alternative results in the highest emissions, and e missions generally decline as fuel economy standards increase across alternatives. Ex ceptions to this declining trend are

NO

x under the Preferred Alternative (Alternative 4); P M 2.5 under Alternatives 3 and 4, and Alternatives 8 and 9; SO

x under Alternatives 3 (4-Percent Alternative) and 4 (Preferred Alternative); and VOCs under Alternative 4. Despite these individual increases, emissions of PM 2.5 , SO

x , NO

x , and VOCs remain below the levels under the No Action Alternative (Alternative 1). In the case of CO, emissions under Alternatives 2 through 4 are slightly higher than under the No Act ion Alternative. Emissions of CO decline as fuel economy standards increase across A lternatives 5 through 9.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

234 As with criteria pollutants, emissions of most toxi c air pollutants would decrease from one alternative to the next more stringent alt ernative. The exceptions are acetaldehyde emissions, which would increase under Alternative 4; acrolein emissions, which increase under each of the alternatives; benz ene emissions, which would increase under Alternative 4; 1,3-butadiene, which would inc rease under Alternatives 2 and 4; diesel particulate matter (DPM), which would increa se under Alternatives 3 and 4; and formaldehyde, which would increase under Alternativ es 3, 5, 6, 8, and 9. The changes in toxic air pollutant emissions, whether positive or negative, generally would be small

relative to Alternative 1 emissions levels. 225 The exceptions are acetaldehyde emissions, which would decrease by more than 10 percent under Alternative 9; acrolein emissions,

which would increase across successive alternatives (as noted above, the acrolein emissions are an upper-bound estimate and actual em issions might be less); benzene emissions, which would decrease by more than 10 per cent under Alternatives 8 and 9; and DPM emissions, which would decrease by more tha n 10 percent under all action

alternatives.

Cumulative emissions generally would be less than n oncumulative emissions for the same combination of pollutant, year, and altern ative because of differing changes in VMT and fuel consumption under the cumulative case compared to the noncumulative case. The exceptions are acrolein for all alternat ives except Alternative 9, and 1,3- butadiene for all alternatives except Alternative 2 (3-Percent Alternative).

The reductions in emissions are expected to lead to reductions in cumulative

adverse health effects. There would be reductions in adverse health effects nationwide under Alternatives 2 (3-Percent Alternative) throug h 9 (TCTB) compared to the No

Action Alternative. Reductions in adverse health e ffects decrease from Alternative 2 (3- Percent Alternative) through Alternative 4 (Preferr ed Alternative), and then increase under Alternatives 5 (5-Percent Alternative through Alternative 9 (TCTB). These reductions primarily reflect the projected PM 2.5 reductions, and secondarily the

reductions in SO 2 . The economic value of health impacts would vary proportionally with changes in health outcomes.

Climate change : As with the analysis of the direct and indirect effects of the proposed action and alternatives on climate change, for the cumulative impacts analysis

this EIS uses MAGICC version 5.3.v2 to estimate the changes in CO 2 concentrations, global mean surface temperature, and changes in sea level for each alternative CAFE standard. To estimate changes in global precipitat ion, NHTSA uses increases in global mean surface temperature combined with a scaling ap proach and coefficients from the IPCC Fourth Assessment Report. A sensitivity analy sis was completed to examine the relationship among the alternatives and likely clim ate sensitivities, and the associated

direct and indirect effects for each combination. These relationships can be used to infer

225 These conclusions are not meant to be interpreted as expressing NHTSA’s views that impacts on air quality is not an area of concern for policymakers. Under NEPA, the agency is obligated to discuss “ the environmental impact[s] of the proposed action. ” 42 U.S.C. sec. § 4332(2)(C)(i) (emphasis added). This analysis fulfills NHTSA’s obligations in this regar d.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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the effect of emissions associated with the regulat ory alternatives on direct and indirect

climate effects.

One of the key categories of inputs to MAGICC is a time series of global GHG emissions. In assessing the cumulative effects on c limate, NHTSA used the CCSP SAP 2.1 MiniCAM Level 3 scenario to represent a Referen ce Case global emission scenario, that is, future global emissions assuming significa nt global actions to address climate change. This Reference Case global emission scenar io serves as a baseline against which

the climate benefits of the various alternatives ca n be measured.

The Reference Case global emissions scenario used i n the cumulative impacts analysis (and described in Chapter 4 of this EIS) d iffers from the global emissions scenario used for the climate change modeling prese nted in Chapter 3. In Chapter 4, the Reference Case global emission scenario reflects re asonably foreseeable actions in global climate change policy; in Chapter 3, the global emi ssions scenario used for the analysis assumes that there are no significant global contro ls. Given that the climate system is non-linear, the choice of a global emissions scenar io could produce different estimates of the benefits of the proposed action and alternative s, if the emission reductions of the

alternatives were held constant.

The SAP 2.1 MiniCAM Level 3 scenario assumes a mode rate level of global GHG reductions, resulting in a global atmospheric C O 2 concentration of roughly 650 parts per million by volume (ppmv) as of 2100. The following regional, national, and international initiatives and programs are reasonab ly foreseeable actions to reduce GHG emissions: Regional Greenhouse Gas Initiative (RGGI ); Western Climate Initiative (WCI); Midwestern Greenhouse Gas Reduction Accord; EPA’s Proposed GHG Emissions Standards; H.R. 2454: American Clean Ene rgy and Security Act (“WaxmanMarkey Bill”); Renewable Fuel Standard (RFS2); Pro gram Activities of DOE’s Office of Fossil Energy; Program Activities of DOE’s Office of Nuclear Energy; United Nation’s Framework Convention on Climate Change (UNFCCC) – T he Kyoto Protocol and upcoming Conference of the Parties (COP) 15 in Cope nhagen, Denmark; G8 Declaration – Summit 2009; and the Asia Pacific Partnership on Clean Development and Climate. 226
The SAP 2.1 MiniCAM Level 3 scenario provides a glo bal context for emissions of a full suite of GHGs and ozone precursors for a Reference Case harmonious with implementation of the above policies and initiative s. Each of the action alternatives was simulated by calculating the difference in annual G HG emissions in relation to the No Action Alternative, and subtracting this change in the MiniCAM Level 3 scenario to generate modified global-scale emissions scenarios, which each show the effect of the various regulatory alternatives on the global emiss ions path.

226 The regional, national, and international initiati ves and programs discussed above are those which NHTSA has tentatively concluded are reasonably fore seeable past, current, or future actions to reduce GHG emissions. Although some of the actions, polic ies, or programs listed are not associated with pre cise GHG reduction commitments, collectively they illust rate a current and continuing trend of U.S. and glo bal awareness, emphasis, and efforts towards significan t GHG reductions. Together they imply that future commitments for reductions are probable and, theref ore, reasonably foreseeable under NEPA.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

236 NHTSA used the MiniCAM Level 3 scenario as the prim ary global emissions scenario for evaluating climate effects, and used t he MiniCAM Level 2 scenario and the

RCP 4.5 MiniCAM reference emissions scenario to eva luate the sensitivity of the results to alternative emission scenarios. The sensitivity analysis provides a basis for determining climate responses to varying levels of climate sensitivities and global emissions and under the No Action Alternative (Alte rnative 1) and the Preferred Alternative (Alternative 4). Some responses of the climate system are believed to be non-linear; by using a range of emissions cases and climate sensitivities, it is possible to

estimate the effects of the alternatives in relatio n to different reference cases.

Cumulative GHG emissions : Projections of GHG emissions reductions over the 2012 to 2100 period due to the MY 2012-2016 CAFE st andards and other reasonably foreseeable future actions ranged from 27,164 to 44 ,626 MMTCO 2 . Compared to global emissions of 3,919,462 MMTCO 2 over this period (projected by the SAP 2.1 MiniCAM Level 3 scenario), the incremental impact of this r ulemaking is expected to reduce global

CO 2 emissions by about 0.7 to 1.1 percent from their p rojected levels under the No

Action Alternative.

CO 2 concentration, global mean surface temperature, se a-level rise, and precipitation : For the mid-range results of MAGICC model simula tions for the No Action Alternative and the eight action alternative s in terms of CO 2 concentrations and increase in global mean surface temperature in 2030 , 2050, and 2100, the impact on the growth in CO 2 concentrations and temperature is just a fraction of the total growth in CO 2 concentrations and global mean surface temperature. However, the relative impact of the action alternatives is illustrated by the reduction in growth of both CO 2 concentrations and temperature in the TCTB Alternative (Alternativ e 9).

There is a fairly narrow band of estimated CO 2 concentrations as of 2100, from 653.5 ppm for the TCTB Alternative (Alternative 9) to 657.5 ppm for the No Action Alternative (Alternative 1). For 2030 and 2050, th e range is even smaller. Because CO 2 concentrations are the key driver of all other clim ate effects, this leads to small

differences in these effects.

The MAGICC simulations of mean global surface air t emperature increases are also shown in Table S-18. For all alternatives, th e cumulative global mean surface temperature increase is about 0.80 °C to 0.81 °C as of 2030; 1.32 to 1.33 °C as of 2050;

and 2.59 to 2.61 °C as of 2100. 227 The differences among alternatives are small. Fo r 2100, the reduction in temperature increase for the action alternatives in relation to the

No Action Alternative is about 0.01 to 0.02 °C.

The impact on sea-level rise in 2100 ranges from 32 .84 centimeters under the No Action Alternative (Alternative 1) to 32.68 centime ters under the TCTB Alternative (Alternative 9), for a maximum reduction of 0.16 ce ntimeter by 2100 from the action

alternatives.

227 Because the actual increase in global mean surface temperature lags the commitment to warming, the impact on global mean surface temperature increase is less than the long-term commitment to warming.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

237 Given that the action alternatives would reduce tem perature increases slightly in relation to the No Action Alternative (Alternative 1), they also would reduce predicted increases in precipitation slightly. In summary, th e impacts of the proposed action and alternatives and other reasonably foreseeable futur e actions on global mean surface temperature, sea-level rise, and precipitation are relatively small in the context of the expected changes associated with the emissions traj ectories in the SRES scenarios. 228
This is due primarily to the global and multi-secto ral nature of the climate problem.

NHTSA examined the sensitivity of climate effects o n key assumptions used in the analysis. The two variables for which assumpti ons were varied were climate sensitivity and global emissions.

Climate sensitivities used included 2.0, 3.0, and 4 .5 °C for a doubling of CO 2 concentrations in the atmosphere. Global emissions scenarios used included the SAP 2.1 MiniCAM Level 3 (650 ppm as of 2100), the SAP 2.1 M iniCAM Level 2 (550 ppm as of 2100), and RCP 4.5 MiniCAM reference scenario (783 ppm as of 2100). The sensitivity analysis is based on the results provided for two a lternatives – the No Action Alternative (Alternative 1) and the Preferred Alternative (Alte rnative 4). The sensitivity analysis was conducted only for two alternatives, as this was de emed sufficient to assess the effect of

various climate sensitivities on the results.

The results of these simulations illustrate the unc ertainty due to factors influencing future global emissions of GHGs (factor s other than the CAFE rulemaking).

The use of different climate sensitivities 229 (the equilibrium warming that occurs at a doubling of CO 2 from pre-industrial levels) can affect not only wa rming but also indirectly affect sea-level rise and CO 2 concentration. The use of alternative global

emissions scenarios can influence the results in se veral ways. Emissions reductions can lead to larger reductions in the CO 2 concentrations in later years because more anthropogenic emissions can be expected to stay in the atmosphere.

NHTSA’s analysis indicates that the sensitivity of the simulated CO 2 emissions in 2030, 2050, and 2100 to assumptions of global emiss ions and climate sensitivity is low; stated simply, CO 2 emissions do not change much with changes in globa l emissions and climate sensitivity. For 2030 and 2050, the choice of global emissions scenario has little impact on the results. By 2100, the Preferred Alte rnative (Alternative 4) has the greatest

228 These conclusions are not meant to be interpreted as expressing NHTSA’s views that impacts on global mean surface temperature, precipitation, or sea-lev el rise are not areas of concern for policymakers. Under NEPA, the agency is obligated to discuss “ the environmental impact[s] of the proposed action. ” 42 U.S.C.

sec. § 4332(2)(C)(i) (emphasis added). This analysis ful fills NHTSA’s obligations in this regard.

229 Equilibrium climate sensitivity (or climate sensit ivity) is the projected responsiveness of Earth’s g lobal climate system to forcing from GHG drivers, and is often expressed in terms of changes to global surfa ce temperature resulting from a doubling of CO 2 in relation to pre-industrial atmospheric concentr ations. According to IPCC, using a likely emissions scenari o that results in a doubling of the concentration o f atmospheric CO 2 , there is a 66- to 90-percent probability of an in crease in surface warming of 2.5 to 4.0 °C by the end of the century (relative to 1990 average global temperatures), with 3 °C as the single most likely surface temperature increase.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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impact in the global emissions scenario with the hi ghest CO 2 emissions (MiniCAM Reference) and the least impact in the scenario wit h the lowest CO 2 emissions (MiniCAM Level 2). The total range of the impact o f the Preferred Alternative on CO 2 concentrations in 2100 is from 2.2 to 2.6 ppm. The Reference Case using the MiniCAM Level 3 scenario and a 3.0 °C climate sensitivity h as an impact of 2.4 ppm.

The sensitivity of the simulated global mean surfac e temperatures for 2030 is also low due primarily to the slow rate at which the glo bal mean surface temperature increases in response to increases in radiative forcing. The relatively slow response in the climate system explains the observation that even by 2100, when CO 2 concentrations more than double in comparison to pre-industrial levels, the temperature increase is below the equilibrium sensitivity levels, i.e., the climate s ystem has not had enough time to equilibrate to the new CO 2 concentrations. Nonetheless, as of 2100 there is a larger range in temperatures across the different values of clim ate sensitivity: the reduction in global mean surface temperature from the No Action Alterna tive to the Preferred Alternative ranges from 0.008 °C for the 2.0 °C climate sensiti vity to 0.012 °C for the 4.5 °C climate sensitivity, for the MiniCAM Level 3 emissions scen ario.

The impact on global mean surface temperature due t o assumptions concerning global emissions of GHGs is also important. The sc enario with the higher global emissions of GHGs ( viz. , the MiniCAM Reference) has a slightly lower reduc tion in global mean surface temperature, and the scenario w ith lower global emissions ( viz. , the MiniCAM Level 2) has a slightly higher reduction. This is in large part due to the nonlinear and near-logarithmic relationship between ra diative forcing and CO 2 concentrations. At high emissions levels, CO 2 concentrations are higher and, as a result, a fixed reduction in emissions yields a lower reduc tion in radiative forcing and global mean surface temperature.

The sensitivity of the simulated sea-level rise to changes in climate sensitivity and global GHG emissions mirrors that of global tempera ture. Scenarios with lower climate

sensitivities have lower increases in sea-level ris e. The greater the climate sensitivity, the greater the decrement in sea-level rise for the Pre ferred Alternative as compared to the

No Action Alternative.

Resource impacts of climate change : The effects of the alternatives on climate –

CO 2 concentrations, temperature, precipitation, and se a-level rise – can translate into impacts on key resources including terrestrial and freshwater ecosystems; marine, coastal systems, and low-lying areas; food, fiber, and fore st products; industries, settlements, and society; and human health. Although the alternativ es have the potential to substantially decrease GHG emissions, they would not alone preven t climate change from occurring. The magnitude of the changes in climate effects tha t the alternatives would produce – two to five parts per million of CO 2 , a few hundredths of a degree Celsius difference i n temperature, a small percentage change in the rate of precipitation increase, and 1 or 2

millimeters of sea-level rise – are too small to ad dress quantitatively in terms of their impacts on resources. Given the enormous resource values at stake, these distinctions could be important – very small percentages of huge numbers can still yield substantialDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

239

results – but they are too small for current quanti tative techniques to resolve. Consequently, the discussion of resource impacts do es not distinguish among the CAFE alternatives; rather, it provides a qualitative rev iew of the benefits of reducing GHG emissions and the magnitude of the risks involved i n climate change. 230

NHTSA examined the impacts resulting from global cl imate change due to all global emissions on the U.S. and global scale. Imp acts to freshwater resources could include changes in precipitation patterns, decreasi ng aquifer recharge in some locations, changes in snowpack and timing of snowmelt, salt-wa ter intrusion from sea-level changes, changes in weather patterns resulting in f looding or drought in certain regions, increased water temperature, and numerous other cha nges to freshwater systems that disrupt human use and natural aquatic habitats. Im pacts to terrestrial ecosystems could include shifts in species range and migration patte rns, potential extinctions of sensitive species unable to adapt to changing conditions, inc reases in the occurrence of forest fires and pest infestation, and changes in habitat produc tivity because of increased atmospheric

CO 2 . Impacts to coastal ecosystems, primarily from pr edicted sea-level rise, could

include the loss of coastal areas due to submersion and erosion, additional impacts from severe weather and storm surges, and increased sali nization of estuaries and freshwater aquifers. Impacts to land use and several key econ omic sectors could include flooding and severe-weather impacts to coastal, floodplain, and island settlements; extreme heat and cold waves; increases in drought in some locati ons; and weather- or sea-level related disruptions of the service, agricultural, and trans portation sectors. Impacts to human health could include increased mortality and morbid ity due to excessive heat, increases in respiratory conditions due to poor air quality, inc reases in water and food-borne diseases, changes to the seasonal patterns of vector-borne di seases, and increases in malnutrition.

Non-climate cumulative impacts of CO 2 emissions : In addition to its role as a GHG in the atmosphere, CO 2 is transferred from the atmosphere to water, plant s, and soil. In water, CO 2 combines with water molecules to form carbonic acid . When CO 2 dissolves in seawater, a series of well-known chemi cal reactions begin that increase the concentration of hydrogen ions and make seawater mo re acidic, which has adverse

effects on corals and some other marine life.

Increased concentrations of CO 2 in the atmosphere can also stimulate plant growth to some degree, a phenomenon known as the CO 2 fertilization effect. This effect could have positive ramifications for agricultural productivity and forest growth. The available evidence indicates that different plants respond in different ways to enhanced

CO 2 concentrations.

230 See 42 U.S.C. sec. § 4332 (requiring federal agencies to “identify and develop methods and procedures ... which will insure that presently unquantified env ironmental amenities and values may be given appropriate consideration”); 40 CFR § 1502.23 (requiring an EIS to discuss the relationsh ip between a costbenefit analysis and any analyses of unquantified e nvironmental impacts, values, and amenities); CEQ, Considering Cumulative Effects Under the National E nvironmental Policy Act

(1984), available at http://ceq.hss.doe.gov/nepa/ccenepa/ccenepa.htm (re cognizing that agencies are sometimes “limited to qualitative evaluations of effects because cause-an d-effect relationships are poorly understood” or ca nnot be quantified).DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

240 As with the climate effects of CO 2 , the changes in non-climate impacts associated with the alternatives are difficult to assess quant itatively. Whether the distinction in

concentrations is substantial across alternatives i s not clear because the damage functions and potential existence of thresholds for CO 2 concentration are not known. However,

what is clear is that a reduction in the rate of in crease in atmospheric CO 2 , which all the action alternatives would provide to some extent, w ould reduce the ocean acidification

effect and the CO 2 fertilization effect.

For much more information on NHTSA’s NEPA analysis , please see the DEIS.

3. Regulatory Flexibility Act

Pursuant to the Regulatory Flexibility Act (5 U.S. C. sec. § 601 et seq. , as amended by the Small Business Regulatory Enforcement Fairne ss Act (SBREFA) of 1996), whenever an agency is required to publish a notice of rulemaking for any proposed or final rule, it must prepare and make available for public comment a regulatory flexibility analysis that describes the effect of the rule on s mall entities (i.e. , small businesses, small organizations, and small governmental jurisdictions ). The Small Business Administration’s regulations at 13 CFR part 121 def ine a small business, in part, as a business entity “which operates primarily within th e United States.” 13 CFR § 121.105(a). No regulatory flexibility analysis is required if the head of an agency certifies the rule will not have a significant econ omic impact on a substantial number of

small entities.

I certify that the proposed rule would not have a significant economic impact on a

substantial number of small entities. The followin g is NHTSA’s statement providing the factual basis for the certification (5 U.S.C. sec. § 605(b)).

If adopted, the proposal would directly affect twen ty-one large single stage motor

vehicle manufacturers. 231 The proposal would also affect two small domestic single stage motor vehicle manufacturers, Saleen and Tesla. 232 According to the Small Business Administration’s small business size standards (see 13 CFR § 121.201), a single stage automobile or light truck manufacturer (NAICS code 336111, Automobile Manufacturing; 336112, Light Truck and Utility Vehi cle Manufacturing) must have 1,000 or fewer employees to qualify as a small busi ness. Both Saleen and Tesla have less than 1,000 employees and make less than 1,000 vehic les per year. We believe that the rulemaking would not have a significant economic im pact on these small vehicle manufacturers because under Part 525, passenger car manufacturers making less than 10,000 vehicles per year can petition NHTSA to have alternative standards set for those manufacturers. Tesla produces only electric vehicl es with fuel economy values far beyond those proposed today, so we would not expect them to need to petition for relief. Saleen modifies a very small number of vehicles pro duced by one of the 21 large single-

231 BMW, Daimler (Mercedes), Chrysler, Ferrari, Ford, Subaru, General Motors, Honda, Hyundai, Kia,
Lotus, Maserati, Mazda, Mitsubishi, Nissan, Porsche , Subaru, Suzuki, Tata, Toyota, and Volkswagen.

232 The Regulatory Flexibility Act only requires analy sis of small domestic manufacturers. There are two passenger car manufacturers that we know of, Saleen and Tesla, and no light truck manufacturers.DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

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stage manufacturers, and currently does not meet th e 27.5 mpg passenger car standard, nor is it anticipated to be able to meet the standa rds proposed today. However, Saleen already petitions the agency for relief. If the st andard is raised, it has no meaningful impact on Saleen, because it must still go through the same process to petition for relief. Given that there already is a mechanism for handlin g small businesses, which is the purpose of the Regulatory Flexibility Act, a regula tory flexibility analysis was not prepared.

4. Executive Order 13132 (Federalism)

Executive Order 13132 requires NHTSA to develop an accountable process to ensure “meaningful and timely input by State and lo cal officials in the development of regulatory policies that have federalism implicatio ns.” The Order defines the term “Policies that have federalism implications” to inc lude regulations that have

“substantial direct effects on the States, on the relationship b etween the national government

and the States, or on the distribution of power and respons ibilities among the various

levels of government.” Under the Order, NHTSA may not issue a regulation that has

federalism implications, that imposes substantial direct compl iance costs, and that is not required by statute, unless the Federal government provides the funds necessary to pay the

direct compliance costs incurred by State and local govern ments, or NHTSA consults

with State and local officials early in the process of develop ing the proposed regulation.

NHTSA solicits comment on this proposed action from State and local officials. In his January 26 memorandum, the President request ed NHTSA to “consider whether any provisions regarding preemption are consistent with the EISA, the Supreme Court's

decision in Massachusetts v. EPA and other relevant provisions of law and the policies underlying them.” NHTSA is deferring consideration of the preemption issue. The agency believes that it is unnecessary to address t he issue further at this time because of

the consistent and coordinated federal standards th at would apply nationally under the proposed National Program.

5. Executive Order 12988 (Civil Justice Reform) Formatted: Don't adjust space between Latin and Asian text, Don't adjust space between

Asian text and numbersDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

242

Pursuant to Executive Order 12988, “Civil Justice Reform,” 233 NHTSA has considered whether this rulemaking would have any r etroactive effect. This proposed rule does not have any retroactive effect.

6. Unfunded Mandates Reform Act

Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) requires Federal agencies to prepare a written assessment of the costs, benefits, and other effects of a proposed or final rule that includes a Federal mandate likely to result in the expenditure by State, local, or tribal governments, in the aggregate, or by the private sector, of more than $100 million in any one year ( adjusted for inflation with base year of 1995). Adjusting this amount by the implicit gross domestic product price deflator for 2006 results in $126 million (116.043/92.106 = 1.26 ). Before promulgating a rule for which a written statement is needed, section 205 of UMRA generally requires NHTSA to identify and consider a reasonable number of regula tory alternatives and adopt the least costly, most cost-effective, or least burdensome al ternative that achieves the objectives of the rule. The provisions of section 205 do not app ly when they are inconsistent with applicable law. Moreover, section 205 allows NHTSA to adopt an alternative other than the least costly, most cost-effective, or least bur densome alternative if the agency publishes with the final rule an explanation why th at alternative was not adopted.

This proposed rule will not result in the expendit ure by State, local, or tribal governments, in the aggregate, of more than $126 mi llion annually, but it will result in the expenditure of that magnitude by vehicle manufa cturers and/or their suppliers. In promulgating this proposal, NHTSA considered a vari ety of alternative average fuel economy standards lower and higher than those propo sed. NHTSA is statutorily required

to set standards at the maximum feasible level achi evable by manufacturers based on its consideration and balancing of relevant factors and has tentatively concluded that the proposed fuel economy standards are the maximum fea sible standards for the passenger car and light truck fleets for MYs 2012-2016 in lig ht of the statutory considerations.

7. Paperwork Reduction Act

Under the procedures established by the Paperwork R eduction Act of 1995, a person is not required to respond to a collection o f information by a Federal agency unless the collection displays a valid OMB control number. This section describes a request for clearance for a collection of informati on associated with product plan information to assist the agency in developing fina l corporate average fuel economy standards for MY 2012 through 2016 passenger cars a nd light trucks. The establishment of those standards is required by the Energy Policy and Conservation Act, as amended by the Energy Independence and Security Act (EISA) of 2007, P.L. 110-140. In compliance with the PRA, this notice requests comment on the I nformation Collection Request (ICR)

abstracted below. The ICR describes the nature of the information collection and its expected burden. This is a request for an extensio n of an existing collection.

233 61 FR 4729 (Feb. 7, 1996).DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

243 Agency: National Highway Traffic Safety Administration (NH TSA).

Title: 49 CFR Parts 531 and 533 Passenger Car Average Fu el Economy Standards -- Model Years 2008-2020; Light Truck Ave rage Fuel Economy Standards – Model Years 2008-2020; Production Plan Data

Type of Request: Extension of existing collection.

OMB Clearance Number: 2127-0655.

Form Number: This collection of information will not use any s tandard forms.

Summary of the Collection of Information

In this collection of information, NHTSA is request ing any updates to previously-submitted future product plans from vehi cle manufacturers, as well as production data through the recent past, including data about engines and transmissions for model year (MY) 2008 through MY 2020 passenger cars and light trucks and the assumptions underlying those plans. If manufacture rs have not previously submitted product plan information to NHTSA and wish to do so , NHTSA also requests such

information from them.

NHTSA requests information for MYs 2008-2020 to sup plement other information used by NHTSA in developing a realistic forecast of the MY 2012-2016 vehicle market, and in evaluating what technologies may feasibly be applied by manufacturers to achieve compliance with the MY 201 2-2016 standards. Information regarding earlier model years may help the agency t o better account for cumulative

effects such as volume-and time-based reductions in costs, and also may help to reveal product mix and technology application trends durin g model years for which the agency is currently receiving actual corporate average fue l economy (CAFE) compliance data. Information regarding later model years may help th e agency gain a better understanding of how manufacturers’ plans through MY 2016 relate to their longer-term expectations regarding Energy Independence and Security Act requ irements, market trends, and prospects for more advanced technologies.

NHTSA will also consider information from model yea rs before and after MYs 2012-2016 when reviewing manufacturers’ planned sch edules for redesigning and freshening their products, in order to examine how manufacturers anticipate tying technology introduction to product design schedules and to consider how the agency should account for those schedules in its analysis for the final rule. In addition, the agency is requesting information regarding manufact urers’ estimates of the future vehicle population, and fuel economy improvements and incre mental costs attributed to this

notice.

Description of the Need for the Information and Use of the Information Formatted: Indent: First line: 0.5", No bullets or numberingDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

244 NHTSA needs the information described above to aid in assessing what CAFE standards should be established for MY 2012 through 2016 passenger cars and light

trucks.

Description of the Likely Respondents (Including Es timated Number, and Proposed Frequency of Response to the Collection of Informat ion) It is estimated that this collection affects approx imately 22 motor vehicle manufacturers. The information that is the subject of this collection of information is collected whenever NHTSA publishes a notice of prop osed rulemaking for the purpose of setting CAFE standards.

Estimate of the Total Annual Reporting and Recordke eping Burden Resulting from

the Collection of Information It is estimated that this collection affects approx imately 22 vehicle manufacturers. One major manufacturer (General Motors) estimated t heir burden to be approximately 4,300 hours. The burden to other manufacturers was estimated using sales weights relative to General Motor’s total sales ( e.g. , if a manufacturer produces 50 percent as many vehicles as General Motors, their burden is es timated to be 4,300 * 0.5 = 2150 hours). Therefore the burden to each manufacturer d epends on the number of vehicles that manufacturer produces. The total estimated bur den is 16,000 hours annually. Formatted: Indent: Left: 0"DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

245 Number of Affected Vehicle Manufacturers................ 22 Annual Labor Hours for Each Manufacturer to Prepare and Submit Required Information............................ Variable

Total Annual Information Collection Burden............... 16,000 Hours

The monetized cost associated with this information collection is determined by multiplying the total labor hours by an appropriate labor rate. For this information collection, we believe vehicle manufacturers will u se mechanical engineers to prepare and submit the data. Therefore, we are applying a labor rate of $36.02 per hour which is the median national wage for mechanical engineers. 234 Thus, the estimated monetized annual cost is 16,000 hours x $36.02 per hour = $57 6,320.

Comments are specifically sought on the following i ssues:

• Whether the collection of information is necessary for the proper performance of the functions of the Department, including whether the information will have practical utility.

• Whether the Department’s estimate for the burden of the information collection is

accurate.

• Ways to minimize the burden of the collection of in formation on respondents, including the use of automated collection technique s or other forms of information technology.

Please send comments to the docket number cited in the heading of this notice. PRA comments are due within 60 days following publi cation of this document in the

FEDERAL REGISTER . The agency recognizes that the amendment to the existing collection of information may be subject to revisio n in response to public comments and

the OMB review.

For further information on this proposal to extend the collection of information, please contact Ken Katz, Fuel Economy Division, Off ice of International Policy, Fuel Economy, and Consumer Programs, National Highway Tr affic Safety Administration, 1200 New Jersey Avenue, SE, Washington, DC 20590. You may also contact him by phone at (202) 366-0846 or by fax at (202) 493-2290

. [Does anything in the re g text trigger this? Confirm.]

8. Regulation Identifier Number

234 The national median hourly rate for mechanical eng ineers, May 2008, according to the Bureau of Labor Statistics, is $36.02. See http://www.bls.gov/oes/2008/may/oes_nat.htm#b17-00 00 (last accessed August 26, 2009). Formatted: Bullets and NumberingDRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

246

The Department of Transportation assigns a regulat ion identifier number (RIN) to each regulatory action listed in the Unified Agenda of Federal Regulations. The Regulatory Information Service Center publishes the Unified Agenda in April and October of each year. You may use the RIN containe d in the heading at the beginning of this document to find this action in the Unified Ag enda.

9. Executive Order 13045

Executive Order 13045 235 applies to any rule that: (1) Is determined to be economically significant as defined under E.O. 1286 6, and (2) concerns an environmental, health, or safety risk that NHTSA ha s reason to believe may have a disproportionate effect on children. If the regula tory action meets both criteria, we must evaluate the environmental health or safety effects of the proposed rule on children, and explain why the proposed regulation is preferable t o other potentially effective and reasonably foreseeable alternatives considered by u s.

Chapter 4 of NHTSA’s DEIS notes that breathing PM c an cause respiratory ailments, heart attack, and arrhythmias (Dockery et al. 1993, Samet et al. 2000, Pope et
al. 1995, 2002, 2004, Pope and Dockery 2006, Dominici et al. 2006, Laden et al. 2006,

all in Ebi et al. 2008). Populations at greatest risk could include children, the elderly, and those with heart and lung disease, diabetes (Ebi et al. 2008), and high blood pressure (Künzli et al. 2005, in Ebi et al. 2008). Chronic exposure to PM could decrease life span by 1 to 3 years (Pope 2000, in American Lung Associ ation 2008). Increasing PM concentrations are expected to have a measurable ad verse impact on human health (Confalonieri et al. 2007).

Additionally, the DEIS notes that substantial morbi dity and childhood mortality

has been linked to water- and food-borne diseases. Climate change is projected to alter temperature and the hydrologic cycle through change s in precipitation, evaporation, transpiration, and water storage. These changes, i n turn, potentially affect water-borne and food-borne diseases, such as salmonellosis, cam pylobacter, leptospirosis, and pathogenic species of vibrio. They also have a dir ect impact on surface water availability and water quality. It has been estimated that more than 1 billion people in 2002 did not have access to adequate clean water (McMichael et al. 2003, in Epstein et al. 2006). Increased temperatures, greater evaporation, and he avy rain events have been associated with adverse impacts on drinking water through incr eased waterborne diseases, algal blooms, and toxins (Chorus and Bartram 1999, Levin et al. 2002, Johnson and Murphy 2004, all in Epstein et al. 2006). A seasonal signature has been associated w ith waterborne disease outbreaks (EPA 2009b). In the U nited States, 68 percent of all

waterborne diseases between 1948 and 1994 were obse rved after heavy rainfall events (Curriero et al. 2001a, in Epstein et al. 2006).

Climate change could further impact a pathogen by d irectly affecting its life cycle (Ebi et al. 2008). The global increase in the frequency, inte nsity, and duration of red tides could be linked to local impacts already asso ciated with climate change (Harvell et

235 62 FR 19885 (Apr. 23, 1997).DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

247

al. 1999, in Epstein et al. 2006); toxins associated with red tide directly af fect the nervous system (Epstein et al. 2006).

Many people do not report or seek medical attention for their ailments of waterborne or food-borne diseases; hence, the number of actual cases with these diseases is greater than clinical records demonstrate (Mead et al . 1999, in Ebi et al. 2008). Many of the gastrointestinal diseases associated with water -borne and food-borne diseases can be self-limiting; however, vulnerable populations incl ude young children, those with a compromised immune system, and the elderly.

Thus, as detailed in the DEIS, NHTSA has evaluated the environmental health and safety effects of the proposed rule on children . The DEIS also explains why the proposed regulation is preferable to other potentia lly effective and reasonably foreseeable alternatives considered by the agency.

10. National Technology Transfer and Advancement A ct

Section 12(d) of the National Technology Transfer and Advancement Act (NTTAA) requires NHTA to evaluate and use existing voluntary consensus standards in its regulatory activities unless doing so would be inconsistent with applicable law ( e.g. , the statutory provisions regarding NHTSA’s vehicle safety authority) or otherwise impractical.

Voluntary consensus standards are technical standa rds developed or adopted by voluntary consensus standards bodies. Technical st andards are defined by the NTTAA as “performance-base or design-specific technical spec ification and related management systems practices.” They pertain to “products and processes, such as size, strength, or technical performance of a product, process or mate rial.”

Examples of organizations generally regarded as vo luntary consensus standards bodies include the American Society for Testing and Materials (ASTM), the Society of Automotive Engineers (SAE), and the American Nation al Standards Institute (ANSI). If NHTSA does not use available and potentially applic able voluntary consensus standards, we are required by the Act to provide Congress, thr ough OMB, an explanation of the reasons for not using such standards.

There are currently no voluntary consensus standar ds relevant to today’s proposed

CAFE standards.

11. Executive Order 13211DRAFT – DELIBERATIVE – PRIVILEGED AND CONFIDENTIAL

248

Executive Order 13211 236 applies to any rule that: (1) Is determined to be economically significant as defined under E.O. 1286 6, and is likely to have a significant adverse effect on the supply, distribution, or use of energy; or (2) that is designated by the Administrator of the Office of Information and Regu latory Affairs as a significant energy action. If the regulatory action meets either crit erion, we must evaluate the adverse energy effects of the proposed rule and explain why the proposed regulation is preferable to other potentially effective and reasonably feasi ble alternatives considered by us.

The proposed rule seeks to establish passenger car and light truck fuel economy standards that will reduce the consumption of petro leum and will not have any adverse energy effects. Accordingly, this proposed rulemak ing action is not designated as a significant energy action.

12. Department of Energy Review

In accordance with 49 U.S.C. sec. § 32902(j)(1), we submitted this proposed rule to the Department of Energy for review. That Depar tment did not make any comments

that we have not addressed. [Confirm before publishing]

13. Plain Language

Executive Order 12866 requires each agency to writ e all rules in plain language. Application of the principles of plain language inc ludes consideration of the following questions:

• Have we organized the material to suit the public’s needs?

• Are the requirements in the rule clearly stated?

• Does the rule contain technical language or jargon that isn’t clear?

• Would a different format (grouping and order of sec tions, use of headings, paragraphing) make the rule easier to understand?

• Would more (but shorter) sections be better?

• Could we improve clarity by adding tables, lists, o r diagrams?

• What else could we do to make the rule easier to un derstand? If you have any responses to these questions, plea se include them in your comments on this proposal.

14. Privacy Act

Anyone is able to search the electronic form of al l comments received into any of our dockets by the name of the individual submittin g the comment (or signing the comment, if submitted on behalf of an organization, business, labor union, etc.). You may review DOT’s complete Privacy Act statement in the Federal Register (65 FR 19477-78, April 11, 2000) or you may visit http://w ww.dot.gov/privacy.html.

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