From: William Charmley/AA/USEPA/US

To: "Achanta, Chandana L." <Chandana_L._Achant a@omb.eop.gov>, "Wolverton, Maryann" <Maryann_Wolverton@cea.eop.gov>
Cc: rebecca.yoon@dot.gov, james.tamm@dot.gov, Steve.Wood@dot.gov, Don.Pickrell@dot.gov, Robin Moran/AA/US EPA/US@EPA, Ed Nam/AA/USEPA/US@EPA

Date: 03/25/2010 01:45 PM Subjec

t: Draft DOT-EPA memo regarding the use of AEO2010 early release

Chandana and Ann,

Here is the draft memo on the use of AEO2010 that we mentioned during our meeting.

As we discussed today, we will be adding additional discussion to the rule in several places regarding AEO2010 and uncertainties, and once will be referencing this memo and placing it in
both the EPA and NHTSA docket.

Thanks

Bill

[attachment "Draft EPA and DOT Memo regarding use of AEO 2010.doc" deleted by Tad Wysor/AA/USEPA/US]

# EPA AND DOT DRAFT

Memorandum

To: Docket EPA-HQ-OAR -2009-0472 & Docket NHTSA-2009-0059 Date: March 24, 2010E Subject: Energy Information Administration’s Annual Energy Outlook 2009 and 2010. From: Ari Kahan EPA/OTAQ/ASD a nd Don Pickrell, DOT Volpe Center

The Environmental Protection Agency (EPA ) and National Highway Traffic Safety Administration (NHTSA) used inputs from a variety of sources to analyze the costs, benefits and impacts of their respective components of th e national program to reduce greenhouse gases and improve fuel economy for cars and trucks (RIN 2060–AP58; RIN 2127–AK50). A number of inputs were derived from the U.S. Department of Energy, Energy Information Administration’s Annual Energy Outlook 2009 (AEO 2009) and Annua l Energy Outlook 2010 (AEO 2010) for the proposal and final rule respectivel y. Specifically, the Agencies used forecasts of fuel prices and

vehicle sales from AEO 2009 and AEO 2010 in their analyses.

Why were EIA forecasts used? As stated in the documentation to the rule, i 

### federal government agencies generally use EIA’s projections in their assessments of future energy-relate d policies. EIA provides a comprehensive suite of forecasts on energy related issues, and generally incorporates new and/or significant market developments and government policies in each release. The AEO forecasts are particularly relevant because they are deta iled, widely used, and released on a semi-annual schedule (when the early release is included). During the public comment period, no comments were received that significantly challenged th e agencies’ use of AEO 2009 in the analyses supporting the proposal.

Generally, energy forecasts are driven by an intertwined set of regulatory, economic and legislative forces. The Energy Information Administration’s National Energy Modeling System (NEMS), which is used to produce the AEO forecas ts, incorporates the interactions of these components through a complex system of sector-s pecific modules (Appendix A). The frequent releases from AEO 2010 are particularly relevant because of the rapidly changing economic and regulatory landscape that e ffects energy production, consumption, and distribution. Consequently, each AEO report incorporates signifi cant national scale drivers into each revised AEO forecast. As an example, the final 2009 fo recast incorporated new information pertaining to the American Recovery and Reinvestment Act of 2009, while the 2010 forecast was updated with data as specific as gas sh ale production, and as broad as changes in investment activity (“increased investment costs”). ii



### The Energy Independence and Security Act of 2007 Recent AEO releases have reflected the provisions of the Energy Independence and Security Act of 2007 (EISA), including the requirement that th e combined CAFE MPG level of U.S. cars and light trucks reach 35 miles per gallon by mode l year 2020. Therefore, EPA and NHTSA were

concerned that the effects of EISA might be reflected in the base line 2009 forecasts, which could potentially bias the rulemaking analysis. This s ection discusses the impact of EISA with regard

### to EIA’s forecasts of fuel prices and market shar e by light-duty vehicle cate gory (cars vs. trucks).

Regarding fuel prices, EPA and NHTSA note that EIA issued a revised version of AEO 2008 in June 2008, which modified its previous December 2007 Early Release of AEO 2008 to reflect the effects of then recently-passed EISA legislat ion. The fuel price forecasts reported in EIA’s Revised Release of AEO 2008 differed by less than one cent per gallon over the entire forecast period (2008–2030) from those previously issued as part of its initial release of AEO 2008. Thus, the agencies are reasonably confid ent that the fuel price forecasts presented in AEO 2009, which were used to analyze the value of fuel savings projected to result from the proposed rule, were not unduly affected by the CAFE provisions of EI SA, and therefore the do not cause a baseline problem. An excerpt from this data is presented in Table 1 (below). As can be seen from this table, in some years the post-EISA release of AEO 2008 forecast higher fuel prices, while in others it forecast lower prices. No consiste nt difference between the pre- and post-EISA

forecasts is evident in Table 1.

Table 1: Sample Motor Gaso line Prices presented in AEO 2008 Early Release and Reference Case.

Reflects

EISA? 2005 2010 2015 2020 2025 2030

AEO 2008 Early No $2.40 $2.44 $2.23 $2.30 $2.41 $2.49

AEO 2008 Revised Yes $2.40 $2.55 $2.25 $2.36 $2.36 $2.45



### With respect to the composition of new vehicle sale s, an analysis of past AEO reports indicates that the effects of macroeconomic developments are generally more significant than those of policy initiatives such as EISA. Table 2 shows fo recasts of the shares of total light-duty vehicle sales accounted for by passenger cars from five past major AEO releases. AEO 2007 does not include the CAFE component of EISA (nor any other), iii 

### but its forecast differs little from AEO

2008 Revised – which does reflect the effects of EISA – in the relative market share of cars. By contrast, between AEO 2008 and th e March 2009 release of AEO 2009, a sharp increase in the

share of car sales is evident. While attribut ing this increase to any specific cause would be speculative, Table 2 shows th at the shift between AEO 2008 and AEO 2009 (both of which include EISA), is greater than the relative car/truck sales sh ifting between AEO 2007 and AEO 2008 (where only AEO 2008 incorporates EISA).

Table 2: Relative Car Share in 2012-2016

AEO Edition Reflects

EISA? 2012 2013 2014 2015 2016

AEO2007 No 49.9% 49.0% 47.9% 47.4% 47.0%

AEO2008 Revised Yes 50.0% 49.3% 49.1% 48.2% 47.2%

AEO2009 March Yes 55.0% 56.1% 57.4% 58.5% 59.4%

AEO2009 ARRA Yes 52.0% 52.8% 54.1% 55.8% 57.1%

AEO2010 Early Yes 50.8% 52.8% 54.3% 55.4% 56.6%



### 2

### The Transition from AEO 2009 to AEO 2010

Given the importance of updated economic, legislat ive and social factors to the AEO forecasts, EPA and NHTSA carefully evaluated AEO 2010 be fore incorporating it in the final rule. Specifically, EPA and NHTSA were concerned by the following statement in the AEO 2010 Early Release:

“ AEO2010 assumes the adoption of CAFE standards jointly proposed by the EPA and NHTSA for LDVs in model years 2012 through 2016. The proposed fuel economy standards for model year 2016 then modestly increase through the 2020 model year to meet the requirements of EISA2007. CAFE standards beyond 2020 are similar to those used in the updated AEO2009 reference case. To attain the mandated fuel economy levels, the AEO2010 reference case incl udes a rapid increase in sales of unconventional vehicle technologies, 3 such as flex-fuel, hybrid, and diesel vehicl es, as well as slower growth in sales of new light trucks. Sales of hybrid vehicles, including plug-in hybrid electric vehicles (PHEVs), increase from 2.6 percent of new LDV sales in 2008 to 24.6 pe rcent in 2035. PHEV sales grow rapidly as a result of the EIEA2008 tax credits, increasing to about 90, 000 vehicles annually in 2015. In 2035, PHEVs account for 2.6 percent of new LDV sales and 1.7 percent of the total LDV stock.”



### As a result of this comment, the Agencies were concerned that because the AEO 2010 forecast of fuel economy incorporated the increase s in fuel efficiency required by the proposed rule, using it as the baseline for their analyses of the rule’s effects could lead to significant underestimation of fuel savings and other impacts of the final rule. Table 4 compares AEO 2010

and AEO 2009 forecasts of fuel ec onomy for new light-duty vehicles. iv 

### Surprisingly, AEO 2010 actually features lower estimated fuel economy than the AEO 2009 ARRA release, which was used in the proposal. This may be due to extern al factors, but it is di fficult to untangle the relationship between the proposed standards and the fuel economy forecasts shown here. Given the complexity of running NEMS, the relativ e advantage of using a common, widely used forecast, and the uncertain interaction between the regulation and fuel economy forecasts from NEMS, the Agencies did not adjust the AEO 2010 forecast to account for EIA’s comments. Further, given the greater influence of macroec onomic factors such as the economic recovery on the AEO forecasts, the Agencies believed it importan t to update the forecasts to the newest set of

data.

3Table 4: Annual Energy Outlook 2009-2010 Fuel Economy Comparison 1

Estimated Fuel Economy (miles per gallon)

Vehicle Type 2012 2013 2014 2015 2016
New Light-Duty Vehicles 28.6 29.2 29.9 30.8 31.6

New Cars 33.8 34.3 35.0 35.8 36.7AEO2010Early

New Light Trucks 24.7 25.1 25.5 26.2 26.8

New Light-Duty Vehicles 28.7 29.8 30.9 32.0 32.9

New Car 32.9 34.1 35.4 37.0 38.0AEO2009ARRA

New Light Truck 25.2 26.1 26.9 27.4 27.9

New Light-Duty Vehicles (0.1) (0.6) (1.0) (1.3) (1.3)

New Car 1.0 0.2 (0.4) (1.1) (1.3)AEO2010-AEO2009

New Light Truck (0.5) (1.1) (1.4) (1.3) (1.1)

1 AEO 2009 features “Tested” and “On-road” vehicle MPG ratings, while AEO 2010 early features MPG ratings under the categories “CAFE Standard,” “Compliance,” “Tested,” and “On-road.” The comparison shown here is within the “Tested” category, but similar deltas are seen in the “On-road” category.



### On the basis of the analysis discussed in th is memo, the agencies concluded that it is reasonable to use the AEO 2010 projection in th eir analyses supporting the final rule.

4

### Appendix A

5

### 6 References

i TSD Chapter 4

ii AEO 2010 Website. http://www.eia.doe.gov/oiaf/aeo/index.html

iii http://www.eia.doe.gov/oiaf/archive/aeo08/eisa.html

iv 

### AEO Summary Table 7.

Links to the two source tables: http://www.eia.doe.gov/oiaf/ aeo/excel/aeotab_7.xls http://www.eia.doe.gov/oiaf/servicerp t/stimulus/excel/aeostimtab_7.xls