From: William Charmley/AA/USEPA/US 

To: "Achanta, Chandana L." <Chandana_L._Achanta@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/USEPA/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 and 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 the 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 Annual Energy Outlook 2010 (AEO 2010) for the 

proposal and final rule respectively. 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-related 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 detailed, 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 the 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 forecasts, incorporates the interactions of these 

components through a complex system of sector-specific modules (Appendix A). The frequent 

releases from AEO 2010 are particularly relevant because of the rapidly changing economic and 

regulatory landscape that effects energy production, consumption, and distribution. 

Consequently, each AEO report incorporates significant national scale drivers into each revised 

AEO forecast. As an example, the final 2009 forecast 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 shale 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 the combined CAFE MPG level of U.S. cars and 

light trucks reach 35 miles per gallon by model year 2020. Therefore, EPA and NHTSA were 

concerned that the effects of EISA might be reflected in the baseline 2009 forecasts, which could 

potentially bias the rulemaking analysis. This section discusses the impact of EISA with regard 
to EIA’s forecasts of fuel prices and market share by light-duty vehicle category (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 legislation. 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 confident 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 EISA, 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 consistent difference between the pre- and post-EISA 

forecasts is evident in Table 1. 

Table 1: Sample Motor Gasoline 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 sales, 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 forecasts 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 the March 2009 release of AEO 2009, a sharp increase in the 

share of car sales is evident. While attributing this increase to any specific cause would be 

speculative, Table 2 shows that the shift between AEO 2008 and AEO 2009 (both of which 

include EISA), is greater than the relative car/truck sales shifting 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, legislative and social factors to the AEO forecasts, 

EPA and NHTSA carefully evaluated AEO 2010 before 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 includes a rapid increase in sales of unconventional 

vehicle technologies,3

 such as flex-fuel, hybrid, and diesel vehicles, 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 percent 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 increases 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 economy 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 external factors, but it is difficult to untangle the 

relationship between the proposed standards and the fuel economy forecasts shown here. Given 

the complexity of running NEMS, the relative 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 macroeconomic factors such as the economic recovery on 

the AEO forecasts, the Agencies believed it important to update the forecasts to the newest set of 

data. 

3
Table 4: Annual Energy Outlook 2009-2010 Fuel Economy Comparison1 

 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 36.7

AEO 

2010 

Early 

 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 38.0 

AEO 

2009 

ARRA 

 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)

AEO 

2010-

AEO 

2009 

 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 this memo, the agencies concluded that it is 

reasonable to use the AEO 2010 projection in their 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/servicerpt/stimulus/excel/aeostimtab_7.xls