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

To: "''james.tamm@dot.gov' (james.tamm@dot.gov)'" <james.tamm@dot.gov>, "'rebecca.yoon@dot.gov'" 

<rebecca.yoon@dot.gov>, Ed Nam/AA/USEPA/US@EPA, Robin Moran/AA/USEPA/US@EPA, 

"'Timothy.Mullins@dot.gov'" <Timothy.Mullins@dot.gov>, William Charmley/AA/USEPA/US@EPA, 

"'Steve.Wood@dot.gov'" <Steve.Wood@dot.gov> 

Date: 08/18/2012 09:24 PM 

Subject: Summary of interagency working comments received on draft final rule under EO 12866 review 

 

Please find attached additional interagency working comments received on draft final rule “Joint Rulemaking to 

Establish Light-Duty Vehicle Greenhouse Gas Emission Standards and Corporate Average Fuel Economy 

Standards” under EO 12866 and EO 13563 review. They are for your consideration and are subject to further 

policy review. 

 

Thanks. 

Summary of interagency working comments received on draft rule under EO 12866 and EO 13563 reviewA.pdf 

Summary of interagency working comments received on draft rule under EO 12866 and EO 13563 review.pdf 
From: William Charmley/AA/USEPA/US 

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

Cc: Ed Nam/AA/USEPA/US@EPA, "''james.tamm@dot.gov' (james.tamm@dot.gov)'" <james.tamm@dot.gov>, 

"'rebecca.yoon@dot.gov'" <rebecca.yoon@dot.gov>, Robin Moran/AA/USEPA/US@EPA, "'Steve.Wood@dot.gov'" 

<Steve.Wood@dot.gov>, "'Timothy.Mullins@dot.gov'" <Timothy.Mullins@dot.gov>, Margo 

Oge/DC/USEPA/US@EPA 

Date: 08/20/2012 03:14 PM 

Subject: Re: Summary of interagency working comments received on draft final rule under EO 12866 review 

Chandana, 

Attached are EPA's responses to the material OMB provided from the interagency review this past Saturday. 

Draft EPA responses to OMB 8.18.2012 requests document 1 of 2.docx 

Draft EPA responses to OMB 8.18.2012 requests document 2 of 2.docx 
Summary of interagency working comments received on draft rule under EO 12866 and EO 

13563 review. They are for your consideration and are subject to further policy review. 

1 

Below is a summary of interagency working comments received during EO 12866 and EO 13563 

review of the draft final rule “Joint Rulemaking to Establish Light-Duty Vehicle Greenhouse Gas 

Emission Standards and Corporate Average Fuel Economy Standards”. They are for your 

consideration and subject to further policy review. 

Commenters provided the following suggested edits and comments on the sales and employment 

section. 

1. Commenters noted that the discussion of the Center for Automotive Research (CAR) 

study on sales might be a little confusing. In this study, commenters noted that CAR 

estimates that additional safety features through 2025 will cost $1500 per vehicle. 

NTHSA states that “NHTSA does not believe that the assumed safety mandates should 

be a part of this analysis without estimating the benefits achieved by the safety 

mandates.” Commenters believe NHTSA should provide more explanation in this 

section. Commenters note that the baseline of the CAR study does not include $1500 for 

assumed safety improvements. Therefore, commenters believe the incremental change in 

sales for each level of fuel economy standard includes an additional $1500 in cost relative 

to the baseline along with the net cost of fuel economy. 

Commenters suggest the following language to be included: 

“The CAR study cannot be compared to other studies as it combines the cost of 

additional safety mandates along with fuel economy improvements. The CAR study 

likely underestimates sales, as it assigns no value to customer’s perceived values of 

additional safety features. In any case, unlike other analyses sales changes shown cannot 

be solely attributed to the rulemaking.” 

2. Interagency commenters provided the following revised section for sales and 

employment for NHTSA. Commenters request agencies to make conforming edits to the 

preamble sections on sales and jobs and EPA’s RIA section on sales and jobs. Because of 

multiple edits, the following includes a simplified clean version of the section for your 

consideration. 

*** 

The Impact of Higher Prices on Sales and Employment 

The effect of this rule on sales of new vehicles depends largely on how potential buyers evaluate 

and respond to its effects on vehicle prices and fuel economy. The rule will make new cars and 

light trucks more expensive, as manufacturers attempt to recover their costs for complying with 

the rule by raising vehicle prices. At the same time, the rule will require manufacturers to 

improve the fuel economy of many of their models, which will lower the operating costs of the 

vehicles. The initial purchase cost of vehicles will increase, but the overall cost that includes 
Summary of interagency working comments received on draft rule under EO 12866 and EO 

13563 review. They are for your consideration and are subject to further policy review. 

2 

operating costs will decrease. The net effect on sales will depend on the extent to which 

consumers are willing to pay for fuel economy and their sensitivity to price changes, which is 

challenging to evaluate. 

The agency anticipates that consumers will place at least some value on improved fuel economy, 

because it reduces the operating cost of the vehicles, and also because, based on recentlypromulgated EPA and DOT regulations, vehicles sold during 2017 through 2025 will display 

labels that more clearly communicate to buyers the fuel savings, economic, and environmental 

benefits of more efficient vehicles. We recognize, of course, that the magnitude of this effect 

cannot be predicted at this time, and that how much consumers value fuel economy is an ongoing 

debate. We also expect that consumers may consider other factors besides direct purchase price 

increases that affect the costs they pay for new vehicles, and have included these factors in the 

analysis. 

There is a broad consensus in the economic literature that the price elasticity of demand for 

automobiles is approximately –1.0,1, 2, 3, 4 meaning that every one percent increase in the price of 

the vehicle would reduce sales by one percent. NHTSA typically assumes that manufacturers 

will be able to pass all of their costs to improve fuel economy on to consumers. Elasticity 

estimates assume no perceived change in the quality of the product. The later discussion of 

consumer welfare, however, suggests that by itself, a net decrease in overall operating costs may 

not necessarily produce a net increase in sales. Many consumers are more affected by upfront 

cost than by overall cost, and thus may not be willing to purchase vehicles with greater fuel 

economy even when it appears to be in their economic interest to do so (assuming consumers’ 

 1

 Kleit, A.N. (1990). “The Effect of Annual Changes in Automobile Fuel Economy Standards,” Journal of 

Regulatory Economics, vol. 2, pp 151-172. Available at http://www.springerlink.com/content/m04787480k056018/ 

(last accessed August 1, 2012) or Docket No. NHTSA-2010-0131 2

Bordley, R. (1994). “An Overlapping Choice Set Model of Automotive Price Elasticities,” Transportation 

Research B, vol 28B, no 6, pp 401-408. Available at http://www.sciencedirect.com/science/article/B6V99-

466M3VD-1/2/3ecfe61bac45f1afb8d9b370330e3f0c (last accessed August 1, 2012) 3

 McCarthy, P.S. (1996). “Market Price and Income Elasticities of New Vehicle Demands,” The Review of 

Economics and Statistics, vol. LXXVII, no. 3, pp. 543-547. Available at 

http://econpapers.repec.org/article/tprrestat/v_3a78_3ay_3a1996_3ai_3a3_3ap_3a543-47.htm (last accessed August 

1, 2012) or Docket No. NHTSA-2010-0131 4

 This elasticity is generally considered to be a short-run elasticity, reflecting the immediate impacts of a 

price change on vehicle sales. For a durable good such as an auto, the elasticity may be smaller in the long run: 

though people may be able to change the timing of their purchase when price changes in the short run, they must 

eventually make the investment. Using a smaller elasticity would reduce the magnitude of the estimates presented 

here for vehicle sales, but it would not change the direction. A short-run elasticity is more valid for initial responses 

to changes in price, but, over time, a long-run elasticity may better reflect behavior; thus, the results presented for 

the initial years of the program may be more appropriate for modeling with the short-run elasticity than the later 

years of the program. A search of the literature has not found studies more recent than the 1970s that specifically 

investigate long-run elasticities. See., e.g., Hymans, Saul H., “Consumer Durable Spending: Explanation and 

Prediction,” Brookings Papers on Economic Activity 1 (1970), which finds a short-run elasticity of auto 

expenditures (not sales) with respect to price of 0.78 to 1.17, and a long-run elasticity of 0.3 to 0.46 (pp. 173-206). 

Available at: 

http://www.brookings.edu/about/projects/bpea/editions/~/media/Projects/BPEA/1970%202/1970b_bpea_hymans_ac

kley_juster.PDF or Docket No. NHTSA-2010-0131 (last accessed August 1, 2012) 
Summary of interagency working comments received on draft rule under EO 12866 and EO 

13563 review. They are for your consideration and are subject to further policy review. 

3 

discount rates are equal to standard social discount rates). For example, consumer valuation of 

fuel economy improvements often depends upon the price of gasoline, which has recently been 

very volatile. However, there is considerable uncertainty in the economics literature about the 

extent to which consumers value fuel savings from increased fuel economy, and there is still 

more uncertainty about possible changes in consumer behavior over time (especially with the 

likelihood of consumer learning), and whether and to what extent this final rule could bring 

about changes in consumer behavior. Thus, more specifically, the effect of this final rule on 

vehicle sales will depend upon whether the overall value that potential buyers place on the 

increased fuel economy is greater or less than the increase in vehicle prices as a result of this 

rule, and how automakers factor that into choosing technologies and price setting for the various 

vehicle models incorporating those technologies. 

How do consumers value fuel economy? 

The first question to evaluate is how consumers value fuel economy, or more accurately, how 

they value fuel savings attributable to increased fuel economy. Two interrelated economic 

concepts bear on how consumers might value fuel savings. The first relates to the length of time 

that consumers consider when valuing fuel savings, or “payback period,” and the second relates 

to the discount rate that consumers apply to future savings. These two concepts are used 

together in our analysis below to determine consumer valuation of future fuel savings. The 

length of time that consumers consider when valuing future fuel savings can significantly affect 

their decision when they compare their estimates of fuel savings with the increased cost of 

purchasing higher fuel economy. There is a significant difference in aggregate fuel savings if 

consumers consider the savings over 1 year, 3 years, 5 years, 10 years, or the lifetime of the 

vehicle as the relevant payback period. The discount rate that consumers use to discount future 

fuel savings to present value can also have a significant impact. If consumers value fuel savings 

over a short period, such as 1 to 2 years, then the discount rate is less important. If consumers 

value fuel savings over a long period, then the discount rate is important. 

The payback period and discount rate are conceptual proxies for consumer decisions that may 

often be made without any corresponding explicit quantitative analysis. For example, some 

buyers choosing among some set of vehicles may know what they have been paying recently for 

fuel, may know what they are likely to pay to buy each of the vehicles considered, and may 

know some of the attributes—including labeled fuel economies—of those vehicles. Such buyers 

may then make a choice without actually trying to estimate how much they would pay to fuel 

each of the vehicles they are considering buying. In other words, for such buyers, the idea of a 

payback period and discount rate may have no explicit meaning. This does not, however, limit 

the utility of these concepts for the agency’s analysis. If, as a group, buyers behave as if they 

value fuel consumption considering a payback period and discount rate, these concepts remain 

useful as a basis for estimating the market response to increases in fuel economy accompanied 

by increases in price. 
Summary of interagency working comments received on draft rule under EO 12866 and EO 

13563 review. They are for your consideration and are subject to further policy review. 

4 

Information regarding the number of years that consumers value fuel savings (or undervalue fuel 

savings) come from several sources. In past analyses NHTSA has used five years as 

representing the average payback period, because this is the average length of time of a financing 

agreement.5

 We conducted a search of the literature for additional estimates of consumer 

valuation of fuel savings, in order to determine whether the 5 year assumption was accurate or 

whether it should be revised. A recent paper by David Greene6

 examined studies from the past 

20 years of consumers’ willingness to pay for fuel economy and found that “the available 

literature does not provide a reasonable consensus,” although the author states that 

“manufacturers have repeatedly stated that consumers will pay, in increased vehicle price, for 

only 2 - 4 years in fuel savings” based on manufacturers’ own market research. The National 

Research Council7

 also used a 3 year payback period as one way to compare consumer valuation 

of benefits to a full lifetime value. A survey conducted for the Department of Energy in 2004,8

which asked 1,000 households how much they would pay for a vehicle that saved them $400 or 

$1,200 per year in fuel costs, found implied payback periods of 1.5 to 2.5 years. In reviewing 

this survey, Greene concluded: “The striking similarity of the implied payback periods from the 

two subsamples would seem to suggest that consumers understand the questions and are giving 

consistent and reliable responses: they require payback in 1.5 to 2.5 years.” However, 

Turrentine and Kurani’s9

 in-depth interviews of 57 households found almost no evidence that 

consumers think about fuel economy in terms of payback periods. When asked such questions, 

some consumers became confused while others offered time periods that were meaningful to 

them for other reasons, such as the length of their car loan or lease. 

The effective discount rate that consumers have used in the past to value future fuel economy 

savings has been studied in many different ways and by many different economists. Greene10

examined and compiled many of these analyses and found: “Implicit consumer discount rates 

were estimated by Greene (1983) based on eight early multinomial logit choice models. ...The 

estimates range from 0 to 73% ... Most fall between 4 and 40%.” Greene added: “The more 

recent studies exhibit as least a wide a range as the earlier studies.” 

 5

 National average financing terms for automobile loans are available from the Board of Governors of the 

Federal Reserve System G.19 “Consumer Finance” release. See http://www.federalreserve.gov/releases/g19/ (last 

accessed August 25, 2011). The average new car loan at an auto finance company in the first quarter of 2011 is for 

62 months at 4.73 %. 

6

 “Why the Market for New Passenger Cars Generally Undervalues Fuel Economy”, David Greene, Oak Ridge 

National Laboratory, 2010, Pg. 17, 

http://www.internationaltransportforum.org/jtrc/DiscussionPapers/DP201006.pdf (last accessed August 8, 2012) 7

 National Research Council (2002), “Effectiveness and Impact of Corporate Average Fuel Economy 

(CAFE) Standards”, National Academies Press, Washington D.C. 8

 Opinion Research Corporation (2004), “CARAVAN” ORC study #7132218, for the National Renewable 

Energy Laboratory Princeton, New Jersey, May 20, 2004. 

9

 Turrentine, T.S. and K.S. Kurani, 2007. “Car Buyers and Fuel Economy,” Energy Policy, vol. 35, 

pp. 1213-1223. 10 “Why the Market for New Passenger Cars Generally Undervalues Fuel Economy”, David Greene, Oak 

Ridge National Laboratory, 2010. 
Summary of interagency working comments received on draft rule under EO 12866 and EO 

13563 review. They are for your consideration and are subject to further policy review. 

5 

This is an extremely broad range. With such uncertainty about how consumers value future fuel 

savings and the discount rates they might use to determine the present value of future fuel 

savings, NHTSA chose for purposes of this analysis to utilize the standard 3 and 7 percent social 

discount rates recommended by OMB guidance to evaluate the costs and benefits of regulation. 

To the extent that some consumers appear to show higher discount rates, the analysis of likely 

sales consequences would be different. 

This review leads us to conclude that consumer valuation of future fuel savings is highly 

uncertain, leading to different potential scenarios of vehicle sales. A negative impact on sales is 

possible, because the final rule will lead to an increase in the initial price of vehicles if 

consumers don’t value the fuels savings or desire very short payback periods. In addition, sales 

decreases are possible if gasoline prices are lower than expected or technology costs are higher 

than expected. In these cases, the standards may require manufacturers to produce cars with 

higher than socially optimal levels of fuel economy. A positive impact is also possible, because 

the final rule will lead to a significant decrease in the lifetime cost of vehicles, and with 

consumer learning over time, this effect may produce an increase in sales. Whether a change in 

sales will result from this final rule, or will result from other factors that affect the way drivers 

consider fuel economy in their purchasing decisions, is subject to uncertainty. 

The next question is how much manufacturers think consumers value fuel savings 

attributable to higher fuel economy: 

Although some manufacturers have indicated in public remarks and/or confidential statements to 

NHTSA that their plans to apply fuel-saving technology depend on fuel prices and consumers’ 

willingness to pay for fuel economy improvements, the agency does not have specific and robust 

information regarding how manufacturers view consumers’ valuation of fuel savings. Based on 

our review of the literature and available evidence, it is not at all clear how accurately 

manufacturers are accounting for consumer valuation of fuel economy in making their pricing 

decisions, nor how that accuracy will be affected in the future as manufacturers’ costs to produce 

vehicles rise in response to the final standards. In standard economic theory, if manufacturers 

believe that consumers value the fuel savings at a higher dollar level than the technology costs, 

then manufacturers’ profit motives would lead them to voluntarily add the cost-effective 

technologies to their vehicles in the absence of government mandates in the belief that their sales 

would increase. 

This concept ties into the basic question of whether manufacturers are providing the amount of 

fuel economy that consumers wish to purchase—whether there is matching between consumers’ 

demand for fuel economy and the firms’ supply of fuel economy. It is possible that the lightduty vehicle market is currently operating according to standard theoretical economic principles, 

and manufacturers are providing exactly the amount of fuel economy that consumers wish to 

Comment [A1]: Interagency commenters 

requests clarity on whether it is necessary to include 

the preceding two sentences if this is the 

conclusion? Commenters request clarity on whether 

these can be deleted. 
Summary of interagency working comments received on draft rule under EO 12866 and EO 

13563 review. They are for your consideration and are subject to further policy review. 

6 

purchase, because they perfectly understand consumers’ valuation of fuel economy. On the 

other hand, it is possible that manufacturers are not providing the exact amount of fuel economy 

that consumers wish to purchase (either too much or too little), because they do not have perfect 

information regarding consumers’ valuation of fuel economy. NHTSA does not know which 

scenario is correct today, and cannot predict which scenario will be correct in the future, but we 

evaluate both in the following sections in order to assess the range of potential sales impacts that 

could be attributable to this final rule. 

As discussed above, it is very difficult to determine how consumers will react to fuel economy 

improvements. Consumer consideration of fuel economy appears to evolve based on a variety of 

factors (fuel price, recessions, marketing), and consumers can react to changing factors rapidly, 

sometimes more rapidly than the industry is able to change its product offerings. There have 

been examples of periods when demand for fuel efficient vehicles exceeded the available supply 

of highly efficient vehicles, and other periods where very efficient vehicle models were 

introduced into the market and sales stalled. If manufacturers did not accurately forecast 

consumers demand for fuel efficient vehicles, manufacturers’ investment in vehicle technologies 

would not result in desired payoff. It is important to note that investments in vehicle 

technologies are substantial. Manufacturers may likely to be particularly risk averse with regard 

to future changes in fuel prices, in large part due to the substantial capital investments. If a 

manufacturer invests substantially in fuel efficient technologies expecting higher consumer 

demand than realized, then the manufacturer has incurred the costs of investment but not reaped 

the benefits of those investments. On the other hand, if a manufacturer does not invest in fuel 

efficient technologies, then the manufacturers may lose some market share in the short run if 

demand for fuel economy is higher than expected, but they still retain the option of investing in 

fuel efficient technologies. The predicted level of investment under uncertainty related to 

consumer demand for fuel efficient vehicles and irreversibility of investment for fuel efficient 

technologies would be less than the predicted level of investment under no uncertainty and 

complete irreversibility. 

In addition, there is reason to believe there may be risk aversion on the consider side. The 

simultaneous investment by all companies may also encourage consumer confidence in the new 

technologies. If only one company adopted new technologies, early adopters might gravitate 

toward that company, but early adopters tend to be a relatively small portion of the public. More 

cautious buyers, who are likely to be more numerous, might wait for greater information before 

moving away from well-known technologies. If all companies adopt advanced technologies at 

the same time, though, potential buyers may perceive the new technologies as the new norm 

rather than as a risky innovation. They will then be more willing to move to the new 

technologies. As some commenters have pointed out, simultaneous action required by the rule 

may change buyers’ expectations (their reference points) for fuel economy, and investing in 

more fuel economy may seem less risky than in the absence of the rule. 

Further, the certainty of the regulations reduces the costs of meeting them, because there will be 

a) more economies of scale and more learning curve benefits due to greater cumulative 

production of fuel-efficient technologies and b) more incentive for automakers and suppliers to 
Summary of interagency working comments received on draft rule under EO 12866 and EO 

13563 review. They are for your consideration and are subject to further policy review. 

7 

invest in R&D to create future fuel-efficient technologies.11 We note that this risk aversion by 

itself does not indicate a market failure; it is the fact that the risk aversion leads to 

underprovision of social benefits (eg, reduction in greenhouse gas emissions). 

 

How did NHTSA/EPA attempt to calculate potential impacts of the final rule on vehicle 

sales under the different scenarios discussed above? 

Given the considerable uncertainty associated with consumer valuation of fuel savings and 

manufacturers’ understanding of that valuation, NHTSA sought to assess potential sales impacts 

under two possible basic scenarios: first, one in which the light-duty vehicle market is currently 

operating according to standard theoretical economic principles, and manufacturers are providing 

exactly the amount of fuel economy that consumers wish to purchase, because they perfectly 

understand consumers’ valuation of fuel economy; and second, one in which manufacturers are 

not providing the exact amount of fuel economy that consumers wish to purchase (either too 

much or too little), because they do not have perfect information regarding consumers’ valuation 

of fuel economy. In the first scenario, manufacturers and consumers would behave as though 

they are assuming the same payback period (and/or discount rate) for fuel savings attributable to 

higher fuel economy; in the second, manufacturers and consumers would behave as though they 

are assuming different payback periods (and/or discount rates). 

For years, consumers have been learning about the benefits that accrue to them from owning and 

operating vehicles with greater fuel efficiency. Consumer demand has thus shifted towards such 

vehicles, not only because of higher fuel prices but also because many consumers are learning 

about the value of purchases based not only on initial costs but also on the total cost of owning 

and operating a vehicle over its lifetime.12 This type of learning is expected to continue before 

and during the model years affected by this rule, particularly given the new fuel economy labels 

that clarify potential economic effects and should therefore reinforce that learning. Therefore, 

some increase in the demand for, and production of, more fuel efficient vehicles is incorporated 

in the market driven baseline. 

The time and fuel savings associated with operating more fuel efficient vehicles will be more 

salient to individuals who own them, causing their subsequent purchase decisions to shift closer 

to minimizing the total cost of ownership over the lifetime of the vehicle. Second, this 

 11 The literature reviewed by Popp, Newell, and Jaffe (2010) shows that environmental regulation has 

played an important role in inducing innovation that reduces the cost of achieving environmental goals; Popp 

(2011) provides evidence that consumer pressure alone is rarely sufficient to achieve broad diffusion of 

environmentally-friendly technologies. 12 “High Gas Prices Motivate Drivers to Change Direction.” Consumer Reports, May 2012. Available at 

http://www.consumerreports.org/content/cro/en/cars/fuel-economy-survey-high-gas-prices-impact-drivers.html (last 

accessed August 1, 2012). 

Comment [A2]: Commenters request clarity on 

whether agencies should rely on consumer reports. 

Commenters note that when learning occurs demand 

for fuel economy should increase absent gas prices. 

Commenters note that there have been no empirical 

evidence to date that demonstrates that this 

phenomenon is anything other than responses to 

gasoline prices. Commenters request clarity on 

whether agencies have information to distinguish 

between responses to prices and learning. 
Summary of interagency working comments received on draft rule under EO 12866 and EO 

13563 review. They are for your consideration and are subject to further policy review. 

8 

appreciation may spread across households through word of mouth and other forms of 

communications. Third, as more motorists experience the time and fuel savings associated with 

greater fuel efficiency, the price of used cars will better reflect such efficiency, further reducing 

the cost of owning more efficient vehicles for the buyers of new vehicles (since the resale price 

will increase). 

If these induced learning effects are strong, the rule could potentially increase total vehicle sales 

over time. These increased sales would not occur in the model years first affected by the rule, 

but they could occur once the induced learning takes place. It is not possible to quantify these 

learning effects years in advance and that effect may be speeded or slowed by other factors that 

enter into a consumer’s valuation of fuel efficiency in selecting vehicles. 

The possibility that the rule will (after a lag for consumer learning) increase sales need not rest 

on the assumption that automobile manufacturers are failing to pursue profitable opportunities to 

supply the vehicles that consumers demand. In the absence of the rule, no individual automobile 

manufacturer would find it profitable to move toward the more efficient vehicles mandated under 

the rule. In particular, no individual company can fully internalize the future boost to demand 

resulting from the rule. If one company were to make more efficient vehicles, counting on 

consumer learning to enhance demand in the future, that company would capture only a fraction 

of the extra sales so generated, because the learning at issue is not specific to any one company's 

fleet. Many of the extra sales would accrue to that company's competitors. 

In the language of economics, consumer learning about the benefits of fuel efficient vehicles 

involves positive externalities (spillovers) from one company to the others.13 These positive 

externalities may lead to benefits for manufacturers as a whole. 

We emphasize that this discussion has been tentative and qualified. Social learning of related 

kinds has been identified in a number of contexts,14 and the agency expects that it will influence 

consumers’ future valuation of fuel economy. 

Thus, while it is difficult to determine how consumers will react to fuel economy improvements 

attributable to the final rule, we believe that it is likely that consumers will learn more about and 

increasingly value fuel economy improvements in the future. If manufacturers assume that 

consumers value fuel economy less than consumers actually value fuel economy, there will be a 

 13 Industry-wide positive spillovers of this type are hardly unique to this situation. In many industries, 

companies form trade associations to promote industry-wide public goods. For example, merchants in a given 

locale may band together to promote tourism in that locale. Antitrust law recognizes that this type of coordination 

can increase output. 14 See Hunt Alcott, Social Norms and Energy Conservation, Journal of Public Economics (March 2011), 

available at http://opower.com/uploads/library/file/1/allcott_2011_jpubec_-

_social_norms_and_energy_conservation.pdf (last accessed August 1, 2012); Christophe Chamley, Rational Herds: 

Economic Models of Social Learning (Cambridge, 2004), available at 

http://bilder.buecher.de/zusatz/21/21995/21995098_lese_1.pdf (last accessed August 1, 2012) 
Summary of interagency working comments received on draft rule under EO 12866 and EO 

13563 review. They are for your consideration and are subject to further policy review. 

9 

demand pull for better fuel economy vehicles into the market, and by virtue of the final standards 

forcing manufacturers to increase better fuel economy product offerings, it is possible that sales 

could increase as a result. 

How did NHTSA/EPA illustrate these scenarios analytically? 

The agency examined a number of cases to illustrate these scenarios. Sales impacts were 

determined for 6 cases that are combinations of manufacturers’ beliefs of how consumers value 

fuel savings and consumers’ valuation of fuel savings. The first two cases assume a flat baseline 

(no voluntary improvement in fuel economy above the MY 2016 standards by manufacturers 

absent new regulations), consistent with the agency’s main analysis in this rulemaking. In these 

first two cases we assume consumers value fuel savings for a 3 year period or a 5 year period 

(the average length of a loan), and we also determine the breakeven point of consumer valuation 

of fuel savings, where there would be no impact on sales, assuming all other factors remain 

constant. As can be seen in Table VII-16 below, with a flat baseline and assuming that 

consumers consider fuel economy benefits over a 3 or 5 year period, benefits exceed costs to the 

point that consumers will purchase more vehicles and sales will increase. NHTSA estimates a 

break-even point of 2.35 years for scenarios with a flat baseline; that is, if consumers value fuel 

savings over an average 2.35 years, neither an increase nor a decrease in sales is expected. 

The next 4 cases assume that manufacturers will, absent new regulations, implement 

technologies in response to their belief that consumers have either a 1 year, 3 year, or 5 year 

payback period, and for 3 of these scenarios where the consumer also values fuel economy over 

the same payback periods assumed by manufacturers. For example, the agency also examined 

the impact on sales and employment under the sensitivity analysis assumption that the baseline 

fleet included the manufacturers voluntarily implementing any technology that had a 1 year or 

less payback period for consumers. In this analysis, the least expensive technologies relative to 

their effects on fuel economy improvement (those that had a consumer payback where fuel 

savings over the first year of use were higher than new vehicle price increases) were assumed to 

be voluntarily implemented by manufacturers, resulting in improved fuel economy in the 

baseline case which would have occurred without adoption of this rule. The same methodology 

was used in the cases where both manufacturers and consumers value fuel savings over either a 3 

year period or a 5 year period. All three of these cases result in reductions in sales, with the 

impact decreasing as the manufacturer’s baseline increases from 1 year to 3 year to 5 years. In a 

final case we assume that manufacturers voluntarily implement any technology that had a 1 year 

or less payback period for consumers, but that consumers value fuel savings over a 3 year period. 

Under that case, the breakeven point for consumers is about 3.1 years – meaning that if 

consumers valued their fuel savings over 3.1 years in this scenario, there would be no impact on 
Summary of interagency working comments received on draft rule under EO 12866 and EO 

13563 review. They are for your consideration and are subject to further policy review. 

10 

sales; in other words if the payback period of the fuel saving technologies was less than 3.1 

years, then the vehicle sales would increase and visa versa. 

For the reader’s reference, Table VII-15 below shows the included combinations of payback 

periods assumed—for these different cases—to represent consumers’ and manufacturers’ 

decisions. The agency considered these different cases to represent an illustrative range of 

possible outcomes under the scenarios described above. 

Table VII-15 

Scenarios Considered for Sales Impact Analysis 

Payback Period

Representing

Manufacturers’

Decisions

Payback Period Representing Buyers’ Decisions

1 Year 3 Years 5 Years

0 Years (Flat)    Included Included

1 Year Included Included   

3 Years    Included

5 Years     Included

For the analysis for each of these cases, NHTSA makes several assumptions. For the fuel 

savings part of the equation, we used for a 5 year payback period as we have used in previous 

analyses. For the fuel savings part of the equation, we assumed as a starting point that the 

average purchaser considers the fuel savings they would receive over a 5 year timeframe. The 

present values of these savings were calculated using a 3 and 7 percent discount rate. We 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 present value. 

The agency believes that consumers may consider several other factors over the 5 year horizon 

when contemplating the purchase of a new vehicle. The agency added some of these factors into 

the calculation to represent how an increase in technology costs might affect consumers’ buying 

considerations. 

First, consumers might consider the sales taxes they have to pay at the time of purchasing the 

vehicle. As these costs are transfer payments, they are not included in the societal cost of the 

program, but they are included as one of the increased costs to the consumer for these standards. 
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13563 review. They are for your consideration and are subject to further policy review. 

11 

We took the most recent auto sales tax by state15 and weighted them by population by state to 

determine a national weighted-average sales tax of 5.46 percent (hereafter rounded to 5.5 percent 

in the discussion). NHTSA sought to weight sales taxes by new vehicle sales by state; however, 

such data were unavailable. NHTSA recognizes that for this purpose, new vehicle sales by state 

is a superior weighting mechanism to Census population; in an effort to approximate new vehicle 

sales by state NHTSA studied the change in new vehicle registrations (using R.L. Polk data) by 

state across recent years and developed a corresponding set of weights. The resulting national 

weighted-average sales tax rate was almost identical to that resulting from the use of Census 

population estimates as weights, just slightly above 5.5 percent. NHTSA opted to utilize Census 

population rather than the registration-based proxy of new vehicle sales as the basis for 

computing this weighted average, as the end results were negligibly different and the analytical 

approach involving new vehicle registrations had not been as thoroughly reviewed. 

Second, we considered insurance costs over the 5 year period. More expensive vehicles will 

require more expensive collision 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 proportion of average new vehicle price. Collision plus comprehensive insurance is the portion 

of insurance costs that depend on vehicle value. A recent study by Quality Planning16 provides 

the average value of collision plus comprehensive insurance for new vehicles, in 2010$, is $521 

($396 of which is collision and $125 of which is comprehensive). The average consumer 

expenditure for a new passenger car in 2011, according to the Bureau of Economic Analysis was 

$24,572 and the average price of a new light truck was $31,721 in $2010.17 Using sales volumes 

from the Bureau, we determined an average passenger car and an average light truck price was 

$27,953 in $2010 dollars18. Average prices and estimated sales volumes are needed because 

price elasticity is an estimate of how a percent increase in price19 affects the percent decrease in 

sales. 

 15 See http://www.factorywarrantylist.com/car-tax-by-state.html (last accessed August 1, 2012). Note that 

county, city, and other municipality-specific taxes were excluded from NHTSA’s weighted average, as the variation 

in locality taxes within states, lack of accessible documentation of locality rates, and difficulty in obtaining reliable 

sets of weights to apply to locality taxes complicates the ability to perform this analysis. Localities with relatively 

high automobile sales taxes may have relatively fewer auto dealerships, as consumers would likely endeavor to 

purchase vehicles in areas with lower locality taxes. 16 “During Recession, American Drivers Assumed More Risk to Reduce Auto Insurance Costs,” Quality 

Planning, March 2011. See https://www.qualityplanning.com/media/4312/110329%20tough%20times_f2.pdf (last 

accessed August 1, 2012). 17 U.S. Department of Commerce, Bureau of Economic Analysis, Table 7.2.5S. Auto and Truck Unit Sales, 

Production, Inventories, Expenditures, and Price, Available at 

http://www.bea.gov/itable/ (last accessed August 1, 2012) 18 http://www.bls.gov/cpi/cpid11av.pdf, Table 1A. Consumer Price Index for All Urban Consumers (CPI-U): U.S. 

city average, by expenditure category and commodity and service group, for new vehicles. (Last accessed August 1, 

2012) 19 When estimating the sales impact, the price of the vehicle was increased from these MY 2011 prices 

based on the costs of estimated safety and MY 2011-2016 fuel economy rules. See the cumulative impact section 

for an estimate of those costs. For passenger cars $871 was added to the average price of a MY 2011 passenger car 
Summary of interagency working comments received on draft rule under EO 12866 and EO 

13563 review. They are for your consideration and are subject to further policy review. 

12 

Dividing the cost to insure a new vehicle by the average price of a new vehicle gives the 

proportion of comprehensive plus collision insurance as 1.86 percent of the price of a vehicle. 

As vehicles’ values decline with vehicle age, comprehensive and collision insurance premiums 

likewise decline. Data on the change in insurance premiums as a function of vehicle age are 

scarce; however, NHTSA utilized data from the aforementioned Quality Planning study that cite 

the cost to insure the average vehicle on the road today (average age 10.8 years)20 to enable a 

linear interpolation of the change in insurance premiums during the first 11 years of a typical 

vehicle’s life. Using this interpolation, as a percentage of the base vehicle price of $27,953, the 

cost of collision and comprehensive insurance in each of the first five years of a vehicle’s life is 

1.86 percent, 1.82 percent, 1.75 percent, 1.64 percent, and 1.50 percent, respectively, or 8.57 

percent in aggregate. Discounting that stream of insurance costs back to present value indicates 

that the present value of the component of insurance costs that vary with vehicle price is equal to 

8.0 percent of the vehicle’s price at a 3 percent discount rate. 

Third, we considered that 70 percent of new vehicle purchasers take out loans to finance their 

purchase.21 Using proprietary forecasts available from Global Insight, NHTSA developed an 

average of 48-month22 bank and auto finance company loan rates for years 2017 through 2025, 

which – when deflated by Global Insight’s corresponding forecasts of the CPI – is 5.16 percent.23 

In the construction of this estimate, NHTSA assumed an equal distribution of bank and auto 

finance company loans – an assumption necessitated by the lack of data on the distribution of the 

volume of loans between the differing types of creditors. NHTSA opted to adjust future loan 

rates using the CPI rather than the GDP deflator as this analysis is intended to facilitate further 

analysis from the perspective of the consumer, for which the CPI is the preferred deflation factor. 

At these terms the average person taking a loan will pay 13.7 percent more (undiscounted) for 

their vehicle over the 5 years than a consumer paying cash for the vehicle at the time of 

purchase. Discounting future loan payments at a 3 percent discount rate, a consumer financing a 

vehicle purchase pays 5.43 percent more as opposed to an all cash purchase. Taking into account 

 to make the total baseline price for MY 2017 $25,443 ($24,572 + $871), for light trucks $1,090 was added to the 

average price of a MY 2011 light truck to make the total baseline price for MY 2017 $32,811 ($31,721 + $1,090). 

All of these values are in 2010 dollars. 20 See 

https://www.polk.com/company/news/average_age_of_vehicles_reaches_record_high_according_to_polk (last 

accessed August 1, 2012). 21 Bird, Colin. “Should I Pay Cash, Lease or Finance My New Car?” 

http://www.cars.com/go/advice/Story.jsp?section=fin&story=should-i-pay-cash&subject=loan-quickstart&referer=advice&aff=sacbee, July 12, 2011, citing CNW Marketing Research. (Last accessed August 1, 2012) 22 No projections were available for rates of loan terms of 60 months. NHTSA compared the historical 

difference of 48-month and 60-month loan rates and determined the 48-month rate to be a suitable proxy for the 60-

month rate. 23 Global Insight data are available on a fee basis at http://www.ihs.com/products/global-insight/countryanalysis/us-economic-forecasts.aspx. NHTSA analysis of future auto loan rates is based on Global Insight data 

available as of March, 2012. 
Summary of interagency working comments received on draft rule under EO 12866 and EO 

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13 

that only 70 percent of vehicle purchases are financed, the average consumer would pay 3.80 

(=0.70 * 5.43 percent) percent more than the retail price of a vehicle. 

Fourth, we considered the residual value (or resale value) of the vehicle after 5 years and 

expressed this as a percentage of the new vehicle price. If the price of the vehicle increases due 

to fuel economy technologies, the resale value of the vehicle will go up proportionately. The 

average resale price of a vehicle after 5 years is about 35 percent24 of the original purchase 

price. Discounting the residual value back 5 years using a 3 percent discount rate (=35 percent * 

.8755) gives an effective residual value of 30.64 percent. Note that added CAFE technology 

could also result in more expensive or more frequent repairs. However, we do not have data to 

verify the extent to which this would be a factor during the first 5 years of vehicle life. 

We add these four factors together. At a 3 percent discount rate, the consumer considers that he 

could get 30.64 percent back upon resale in 5 years, but will pay 5.5 percent more for taxes, 8.0 

percent more in insurance, and 5.1 percent more for loans, resulting in an 12.0 percent return on 

the increase in price for fuel economy technology (=30.6 percent - 5.5 percent - 8.0 percent - 5.1 

percent). Thus, the increase in price per vehicle would be multiplied by 0.88 (=1 - 0.12) before 

subtracting the fuel savings to determine the overall net consumer valuation of the increase of 

costs on this purchase decision. This process results in estimates of the payback period for MY 

2025 vehicles of 2 years for light trucks and 4 years for passenger cars at a 3 percent discount 

rate. 

For ease of presentation, we combine the impact on passenger car and light truck sales for the 

Preferred Alternative only for the combined 9 year period of 2017-2025, and we compare the 

sales impact for both the MY 2010 baseline and for the MY 2008 baseline at the 3 percent and 7 

percent discount rates. There is not a significant difference in sales impacts depending upon the 

baseline considered (2010 versus 2008) and the discount rate impact is predictable, with sales 

increasing to a lesser extent under a 7 percent discount rate than in the case of a 3 percent 

discount rate, since benefits are valued lower with a higher discount rate. 

 

 24 Consumer Reports, August 2008, “What That Car Really Costs to Own,” Available at 

http://www.consumerreports.org/cro/cars/pricing/what-that-car-really-costs-to-own-4-08/overview/what-that-carreally-costs-to-own-ov.htm (last accessed August 1, 2012). 
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14 

Table VII-16 

Potential Sales Impact for Passenger Cars and Light Trucks 

Vehicles in Thousands 

2008 Baseline 

Years Fuel Valued 

by Manufacturers 

Years Fuel 

Valued by 

Consumers 

MYs 2017-2025 Sales 

Impact (3% discount 

rate) (000’s) 

MYs 2017-2025 Sales 

Impact (7% discount 

rate) (000’s) 

0 Flat 3 yr. 911 757 

0 Flat 5 yr. 3,784 3,232 

1 yr. 1 yr. -2,696 -2,322 

1 yr. 3 yr. -360 -445 

3 yr. 3 yr. -530 -542 

5 yr. 5 yr. -3 -36 

2010 Baseline 

0 Flat 3 yr. 988 867 

0 Flat 5 yr. 3,804 3,261 

1 yr. 1 yr. -2,405 -2,611 

1 yr. 3 yr. -50 -130 

3 yr. 3 yr. -309 -314 

5 yr. 5 yr. 124 94 

What have commenters and other sources said in terms of potential sales impacts 

attributable to the final rule? 

A recent study on the effects on sales, attributed to regulatory programs, including the fuel 

economy program was undertaken by the Center for Automotive Research (CAR)25. CAR 

examined the impacts of alternative fuel economy increases of 3%, 4%, 5%, and 6% per year on 

the general outlook for the U.S. motor vehicle market, the likely increase in costs for fuel 

economy (based on the NAS report, which estimates higher costs than NHTSA’s current 

estimates) and required safety features, the technologies used and how they would affect the 

market, production, and automotive manufacturing employment in the year 2025. The required 

safety mandates were assumed to cost $1,500 per vehicle in 2025, but CAR did not evaluate the 

value of those safety mandates to consumers. NHTSA does not believe that the assumed safety 

mandates should be a part of this analysis without estimating consumers’ valuation of those 

safety mandates. 

 25 “The U.S. Automotive Market and Industry in 2025,” Center for Automotive Research, June 2011, 

available at http://www.cargroup.org/assets/files/ami.pdf (last accessed August 1, 2012). 
Summary of interagency working comments received on draft rule under EO 12866 and EO 

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15 

There are many factors that go into the CAR analysis of sales. CAR assumes a 22.0 mpg 

baseline, two gasoline price scenarios of $3.50 and $6.00 per gallon, VMT schedules by age, and 

a rebound rate of 10 percent (although it appears that the CAR report assumes a rebound effect 

even for the baseline and thus negates the impact of the rebound effect). Fuel savings are 

assumed to be valued by consumers over a 5 year period at a 10 percent discount rate. The 

impact on sales varies by scenario, the estimates of the cost of technology, the price of gasoline, 

etc. At $3.50 per gallon, the net change in consumer savings (costs minus the fuel savings 

valued by consumers) is a net cost to consumers of $359 for the 3% scenario, a net cost of 

$1,644 for the 4% scenario, a net cost of $2,858 for the 5% scenario, and a net consumer cost of 

$6,525 for the 6% scenario. At $6.00 per gallon, the net change in consumer savings (costs 

minus the fuel savings valued by consumers) is a net savings to consumers of $2,107 for the 3% 

scenario, a net savings of $1,131 for the 4% scenario, a net savings of $258 for the 5% scenario, 

and a net consumer cost of $3,051 for the 6% scenario. Thus, the price of gasoline can be a 

significant factor in affecting how consumers view whether they are getting value for their 

expenditures on technology. 

 

Table 14 on page 42 of the CAR report presents the results of their estimates of the 4 alternative 

mpg scenarios and the 2 prices of gasoline on light vehicle sales and automotive employment. 

The table below shows these estimates. The baseline for the CAR report is 17.9 million sales 

and 877,075 employees. The price of gasoline at $6.00 per gallon, rather than $3.50 per gallon 

results in about 2.1 million additional sales per year and 100,000 more employees in year 2025. 

 
Summary of interagency working comments received on draft rule under EO 12866 and EO 

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16 

CAR report estimates of sales and employment impacts 

Impacts in 2025 

Gasoline at $3.50 

CAFE 

requirement of a 

3% increase in 

mpg per year 

CAFE 

requirement of a 

4% increase in 

mpg per year 

 CAFE 

requirement of a 

5% increase in 

mpg per year 

CAFE 

requirement of a 

6% increase in 

mpg per year 

Sales (millions) 16.4 15.5 14.7 12.5 

Employment 803,548 757,700 717,626 612,567 

Gasoline at $6.00 

 

Sales 18.5 17.6 16.9 14.5 

Employment 903,135 861,739 826,950 711,538 

Figure 13 on page 44 of the CAR report shows a graph of historical automotive labor 

productivity, indicating that there has been a long term 0.4 percent productivity growth rate from 

1960-2008, to indicate that there will be 12.26 vehicles produced in the U.S. per worker in 2025 

(which is higher than NHTSA’s estimate – see below). In addition, the CAR report discusses the 

jobs multiplier. For every one automotive manufacturing job, they estimate the economic 

contribution to the U.S. economy of 7.96 jobs26 stating “In 2010, about 1 million direct U.S. jobs 

were located at an auto and auto parts manufacturers; these jobs generated an additional 1.966 

million supplier jobs, largely in non-manufacturing sectors of the economy. The combined total 

of 2.966 jobs generated a further spin-off of 3.466 million jobs that depend on the consumer 

spending of direct and supplier employees, for a total jobs contribution from U.S. auto 

manufacturing of 6.432 million jobs in 2010. The figure actually rises to 7.96 million when 

direct jobs located at new vehicle dealerships (connected to the sale and service of new vehicles) 

are considered.” 

CAR uses econometric estimates of the sensitivity of new vehicle purchases to prices and 

consumer incomes and forecasts of income growth through 2025 to translate these estimated 

changes in net vehicle prices to estimates of changes in sales of MY 2025 vehicles; higher net 

prices – which occur when increases in vehicle prices exceeds the value of fuel savings – reduce 

vehicle sales, while lower net prices increase new vehicle sales in 2025. We do not have access 

to the statistical models that CAR develops to estimate the effects of price and income changes 

on vehicle sales. CAR’s analysis assumes continued increases in labor productivity over time 

and then translates the estimated impacts of higher CAFE standards on net vehicle prices into 

estimated impacts on sales and employment in the automobile production and related industries. 

The agency disagrees with the cost estimates in the CAR report for new technologies, the 

addition of safety mandates into the costs, and various other assumptions. 

 26 Kim Hill, Debbie Menk, and Adam Cooper, “Contribution of the Automotive Industry to the Economies 

of All Fifty States and the United States,” The Center for Automotive Research, Ann Arbor MI, April 2010. 
Summary of interagency working comments received on draft rule under EO 12866 and EO 

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17 

 

Many commenters stated that they expected vehicle sales to increase as a result of the final rule, 

and cited an analysis conducted by Ceres and Citigroup Global Markets Inc.27 that examined the 

impact on automotive sales in 2020, with a baseline assumption of an industry fuel economy 

standard of 42 mpg, a $4.00 price of gasoline, a 12.2 percent discount rate and an assumption 

that buyers value 48% of fuel savings over seven years in purchasing vehicles. The main finding 

on sales was that light vehicle sales were predicted to increase by 6% from 16.3 million to 17.3 

million in 2020. That analysis has subsequently been revised to predict a 4% increase from 15.8 

million to 16.4 million.28 Elasticity is not provided in the report but it states that they use a 

complex model of price elasticity and cross elasticities developed by GM. A fuel price risk 

factor29 was utilized. Little rationale was provided for the baseline assumptions, but sensitivity 

analyses were examined around the price of fuel ($2, $4, and $7 per gallon), the discount rate 

(5.2%, 12.2%, 17.2%), purchasers consider fuel savings over (3, 7, or 15 years), fuel price risk 

factor of (30%, 70%, or 140%), and VMT of (10,000, 15,000, and 20,000 in the first year and 

declining thereafter). 

The UAW, along with NRDC and the National Wildlife Foundation, also submitted reports 

indicating their assessment that the additional technology content needed to meet higher fuel 

economy standards would lead to considerable sales and employment growth. For example, the 

2010 UAW/NRDC/Center for American Progress study, “Driving Growth,” concluded that if 75 

percent of the additional content needed for the vehicle fleet to reach an average 40 mpg by 2020 

was produced in the U.S., as many as 150,000 jobs would be created.30 Similarly, the 2011 

UAW/NRDC/NWF study, “Supplying Ingenuity,” found that 504 facilities across 43 states 

employing over 500,000 people are devoted to researching, developing, or producing clean-car 

technologies, and that 67 percent of these jobs are related to advanced conventional technologies 

such as better engines and transmissions and components like electric power steering and highstrength steel.31

 27 “U.S. Autos, CAFE and GHG Emissions”, March 2011, Citi Ceres, UMTRI, Baum and Associates, 

Meszler Engineering Services, and the Natural Resources Defense Council, available at 

http://www.ceres.org/resources/reports/fuel-economy-focus (last accessed August 1, 2012) 28 “U.S. Autos & Auto Parts, Fuel Economy Focus: Industry Perspectives on 2020,” April 2012, Citi Ceres, 

UMTRI, Baum and Associates, Meszler Engineering Services, an d the Natural Resources Defense Council, 

available at http://www.ceres.org/resources/reports/fuel-economy-focus-industry-perspectives-on-2020/ (last 

accessed August 14, 2012.) 29 Fuel price risk factor measures the rate at which consumers are willing to trade reductions in fuel costs 

for increases in purchase price. For example, a fuel price risk factor of 1.0 would indicate the consumers would be 

willing to pay $1 for an improvement in fuel economy that resulted in reducing by $1 the present value of the 

savings in fuel costs. 30 UAW/NRDC/Center for American Progress, “Driving Growth: How Clean Cars and Climate Policy Can 

Create Jobs,” March 2010. 31 UAW/NRDC/NWF, “Supplying Ingenuity: U.S. Suppliers of Clean, Fuel-Efficient Vehicle 

Technologies,” August 2011. 
Summary of interagency working comments received on draft rule under EO 12866 and EO 

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18 

Based on all of the above, what does NHTSA/EPA believe the likely impact on vehicle sales 

attributable to this final rule will be?

While NHTSA conducted and considered a variety of vehicle sales “cases” as presented above, 

we do not believe that we can state with certainty that any given case is “correct” for the 

rulemaking timeframe. Given that this final rule affects multiple years, many years in the future, 

and that during that time there will be a dynamic situation occurring with dramatically changing 

fuel economy levels and technology being added to vehicles, we anticipate that consumers’ 

consideration of fuel economy will evolve over time. NHTSA believes that there is much 

uncertainty in how much consumers’ consideration of fuel economy will change as a result of 

this final rule alone, as compared to other rules such as the MYs 2012-2016 CAFE and GHG 

emissions rules and the Fuel Economy Labeling rule, or manufacturers’ marketing efforts. We 

anticipate that manufacturers will be tracking consumers’ behavior and marketing their products 

to affect consumer behavior, as they always have. We have made several simplifying 

assumptions in order to estimate the potential impact on sales, but as discussed above, there are 

uncertainties in how this final rule will affect sales and employment. We note, as is likely evident 

in the table above, that the impact on sales in this analysis is heavily impacted by the difference 

between manufacturers’ beliefs of how consumers value fuel savings and consumers’ valuation 

of fuel savings. 

This uncertainty, however, supports our conclusion in Section IV.F of the preamble that higher 

standards than the ones finalized in this rulemaking may not be economically practicable. The 

agency has tried to grapple with potential sales impacts as an important aspect of economic 

practicability, but reaching no definitive conclusion, believes that a conservative approach will 

be most likely to help us avoid setting standards that are beyond what would be economically 

practicable, and thus beyond the maximum feasible levels. NHTSA will monitor sales trends 

going forward, and anticipates that the intervening years between this final rule and the future 

rulemaking to develop and establish final standards for MYs 2022-2025 will provide significant 

additional insight into the questions of how consumers value fuel savings associated with 

increased fuel economy, how manufacturers believe consumers value that fuel savings, and 

corresponding effects on vehicle sales attributable to CAFE standards. 

As discussed elsewhere in the preamble and FRIA, the literature provides mixed evidence that 

consumers consistently value future fuel savings consistent with shorter payback periods and/or 

higher discount rate than the full lifetime value of fuel savings over the useful life of vehicles 

discounted as the social discount rates. That also provides an explanation for one of the potential 

reasons that manufacturers do not voluntarily provide all of the fuel saving technologies that are 

cost-effective and available, on a societal basis considered over the lifetime of the vehicle. In the 

past, consumers have not been willing to pay the additional price for such fuel economy 

improvements. One question is whether consumers will place a greater value on fuel savings as 

a result of this rule, and only as a result of this rule. In the past, large spikes in gasoline prices 

and consistently high gasoline prices have spurred consumers to consider fuel economy more 
Summary of interagency working comments received on draft rule under EO 12866 and EO 

13563 review. They are for your consideration and are subject to further policy review. 

19 

prevalent in their purchasing decisions. The agency believes that the new and improved fuel 

economy labels and the large increase in fuel economy required as a result of the MY 2012-2016 

fuel economy standards, may all have an impact on consumer valuation of fuel savings. 

However, these effects are not due to this rule. This final rule with its very large increase in 

average fuel economy, as well as manufacturers marketing these increased fuel economy levels, 

should also have a significant effect on consumers’ realization that fuel economy is changing 

rapidly and significantly. As a result, we believe consumers will pay more attention to fuel 

savings as a result of this final rule assuming that fuel prices do not decrease significantly, but 

there is uncertainty whether all sales impacts will be the result of this final rule alone. 

It is possible that consumers will not demand increased fuel economy even when such increases 

would reduce overall costs for them. Some vehicle owners may also react to persistently higher 

vehicle costs by owning fewer vehicles, and keeping existing vehicles in service for somewhat 

longer. For these consumers, the possibility exists that there may be permanent sales losses, 

compared with a situation in which vehicle prices are lower. 

There is a wide variety in the number of miles that owners drive per year. Some drivers only 

drive 5,000 miles per year and others drive 25,000 miles or more. Rationally those that drive 

many miles have more incentive to buy vehicles with high fuel economy levels. 

In summary, there are a variety of types of consumers that are in different financial situations 

and drive different mileages per year. Since consumers are different and use different reasoning 

in purchasing vehicles, and we do not yet have an account of the distribution of their preferences 

or how that may change over time as a result of this rulemaking, the answer is quite ambiguous. 

Some may be induced by better fuel economy to purchase vehicles more often to keep up with 

technology, some may purchase no new vehicles because of the increase in vehicle price, and 

some may purchase fewer vehicles and hold onto their vehicles longer. There is great 

uncertainty about how consumers value fuel economy, and for this reason, the impact of this fuel 

economy proposal on sales is uncertain. 

Some commenters appear to agree with this conclusion, as evidenced above in the above 

discussion of comments from Ceres and the UAW. Others, including NADA, expressed concern 

that sales may fall. 

How does NHTSA/EPA plan to address this issue in the future? 

NHTSA is currently sponsoring work to develop a vehicle choice model for potential use in the 

agency’s future rulemaking analyses—this work may help to better estimate the market’s 

effective valuation of future fuel economy improvements. This rule did not rely on a vehicle 

choice model. With an integrated market share model, the CAFE model would estimate how the 

sales volumes of individual vehicle models would change in response to changes in fuel 

economy levels and prices throughout the light vehicle market, possibly taking into account 
Summary of interagency working comments received on draft rule under EO 12866 and EO 

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20 

interactions with the used vehicle market. Having done so, the model would replace the sales 

estimates in the original market forecast with those reflecting these model-estimated shifts, 

repeating the entire modeling cycle until converging on a stable solution. We sought comment 

on the potential for this approach to help the agency estimate sales effects. Several commenters 

wanted the agency to either have the vehicle choice model go through a full peer review (the 

Alliance)32 or to be provided for public comment and review (NRDC) before being used. There 

was wide disparity in the comments on the concept of using a vehicle choice model to estimate 

the impacts on sales. The Alliance supported the use of a vehicle choice model. The American 

Fuel and Petrochemical Manufacturers33 stated that it was concerned that the analysis is not 

based on a model that considered consumer choices and the impacts on different industries and 

individual that would be affected. The Natural Resources Defense Council (NRDC)34 and Union 

of Concerned Scientists (UCS)35 did not support the use of a consumer choice model and stated 

that the agencies should not rely on a highly uncertain and idealized consumer choice model. 

NRDC stated that a consumer choice model could only rely on stated or revealed preferences 

based on existing vehicles in the market place and such a model is inappropriate for standards 

that drive the use of new technology. 

In response, NHTSA agrees that further work on the vehicle choice model is necessary, and is 

continuing to develop it. Section IV.C.4 of the preamble discusses the current progress with the 

choice model and next steps, and we refer the reader there for more information. 

Potential Impact on Employment in the Automotive Industry in the Short Run 

There are three potential areas of employment in the automotive industry that fuel economy 

standards could affect.36 We briefly outline those areas here. 

1. The first is the hiring of additional engineers by automobile companies and their 

suppliers to do research and development and testing on new technologies to determine 

their capabilities, durability, platform introduction, etc. The agency anticipates that there 

may be some level of additional job creation due to the added research and development, 

overall program management, and subsequent sales efforts required to market vehicles 

that have been redesigned for significant improvements in fuel economy, especially for 

revolutionary technologies such as hybrid and electric vehicles. In this respect, the final 

rule will likely have a positive effect on employment. At the same time, the levels of 

added employment are uncertain. In addition, it is not clear how much of this effort will 

 32 See Docket NHTSA 2010-0131-0262. 

33 See EPA Docket EPA-HQ-OAR-2010-0799-9485. 

34 See EPA Docket EPA-HQ-OAR-2010-0799-0284. 

35 Id. 36 For a general analysis of the potentially complex employment effects of regulation, see Morgenstern, 

Richard D., William A. Pizer, and Jhih-Shyang Shih. “Jobs Versus the Environment: An Industry-Level 

Perspective.” Journal of Environmental Economics and Management 43 (2002): 412-436 (Docket EPA-HQ-OAR2010-0799). 
Summary of interagency working comments received on draft rule under EO 12866 and EO 

13563 review. They are for your consideration and are subject to further policy review. 

21 

be accomplished by added employment and how much by diverting existing employees 

to focus on CAFE instead of other company priorities such as improved acceleration 

performance, styling, marketing, new vehicle concepts, etc. 

2. The second area is the impact that new technologies would have on production 

employment, both at suppliers and at auto assemblers.. Added parts, like turbochargers, 

or complexity of assembly could have a positive impact on employment. The use of 

more exotic steels, aluminum, or other materials to save weight could affect the number 

of welds or attachment methods It is uncertain to what extent new CAFE technologies 

would require added steps in the assembly process that would necessitate new hiring, but 

generally when content is added, the number of employees in the supplier industry and on 

the assembly line goes up. 

3. The third area is the potential impact that sales gains or losses could have on production 

employment. This area is potentially much more sensitive to change than the first two 

areas discussed above, although for reasons discussed above its estimation is highly 

uncertain. An increase in sales, produced for example by consumer attention to overall 

costs and learning over time, would have a positive effect on employment. A decrease in 

sales, produced by increases in initial costs, would have a negative effect. 

We received a number of comments (from the Defour Group and some private individuals) 

asserting that there will be decreases in employment as a result of the costs of the rule, and a 

number of comments (from the United Auto Workers, environmental organizations, sustainable 

business groups, some private individuals, and others) asserting increases in employment, based 

on the development of advanced technologies and the reduction in net costs due to fuel savings. 

An assessment by the Defour Group predicts a loss of 155,000 jobs in manufacturing and supply, 

plus another 50,000 in distribution.37 A study by Ceres predicts job gains of 43,000 in the auto 

industry and 484,000 economy-wide.38 Some comments cite a study by the Natural Resources 

Defense Council, National Wildlife Federation, and United Auto Workers that 150,000 auto 

workers already are working to supply clean, fuel-efficient technologies.39 The differences in 

results for quantitative employment impacts are mainly due to difference in the price impacts. 

Estimates of decreases in employment commonly come from studies that use cost estimates 

higher than those estimated by the agencies, and sometimes lower benefits estimates, resulting in 

 37 Walton, Thomas F., and Dean Drake, Defour Group LLC (February 13, 2012). “Comments on the 

Notice of Proposed Rulemaking and Preliminary Regulatory Impact Analysis for MY 2017 to 2025 Fuel Economy 

Standards.” Docket EPA-HQ-OAR-2010-0799-9319. 38 Management Information Services, Inc. (July 2011). “More Jobs per Gallon: How Strong Fuel 

Economy/GHG Standards Will Fuel American Jobs.” Boston, MA: Ceres. Docket EPA-HQ-OAR-2010-0799-

0709. 39 Natural Resources Defense Council, National Wildlife Federation, and United Auto Workers (August 

2011). “Supplying Ingenuity: U.S. Suppliers of Clean, Fuel-Efficient Vehicle Technologies,” available at 

http://www.nrdc.org/transportation/autosuppliers/files/SupplierMappingReport.pdf (last accessed August 1, 2012). 

(Docket EPA-HQ-OAR-2010-0799) 
Summary of interagency working comments received on draft rule under EO 12866 and EO 

13563 review. They are for your consideration and are subject to further policy review. 

22 

reductions in vehicle sales. For instance, some comments from individuals cite the National 

Automobile Dealers Association and Center for Automotive Research for cost estimates of 

$5,000 to $6,000 per vehicle, much higher than those estimated by the agencies. Those studies 

commonly look at the employment associated with vehicle sales, but not the employment 

associated with producing the technologies needed to comply with the standards, or changes in 

labor intensity of production. Analyses that find increases in employment commonly start with 

increased vehicle sales as a result of the rule. Many of these analyses also note that even without 

increased unit sales, employment is likely to rise due to the additional technology content of the 

vehicles sold40. In both cases, “multiplier” effects, which extend employment impacts beyond the 

auto sector to impacts on suppliers, other sectors, and expenditure changes by workers, lead to 

large estimates, either positive or negative, of the employment effects of the rule. We received 

the suggestion to include in our analysis an alternative scenario where there is less than full 

employment; the implication of less than full employment is that multiplier effects are more 

likely. While we examined all of these different employment estimates, we decided to continue 

using our methodology from previous analyses, with some updates to our method of calculating 

the impacts. 

In order to obtain an estimate of potential job increases per unit sales increase, we examined 

recent U.S. employment (original equipment manufacturers and suppliers) and U.S. production. 

Total employment in 2000 reached a peak in the Motor Vehicle and Parts Manufacturing sector 

of the economy averaging 1,313,500 workers (NAICS codes of 3361, 2, 3). Then there was a 

steady decline to 1,096,900 in 2006 and more rapid decreases in 2008, and 2009. Employment in 

2009 averaged 664,000, employment in 2010 averaged 675,000 and employment in the first six 

months of 2011 has averaged 699,000. Table VII-16 shows how many vehicles are produced by 

the average worker in the industry. Averaging the information shown for the even years of 

2000-2010, the average U.S. domestic employee produces 11.3 vehicles (the same number as in 

2008 and 2010). Thus, assuming that a projected sales gain or loss divided by 11.3 would be one 

method of estimating the potential employment gain or loss in any one year. This provides a 

measurement in job years. This method underestimates the number of jobs per vehicle sold 

under the rule, because it does not take into account the additional employment associated with 

the additional fuel-saving technologies. 

We also examined the employment impact for production and non-supervisory workers from the 

Bureau of Labor Statistics to see if there was a more direct link between their employment level 

and production than the white collar workers. There is a closer link between light vehicle 

production in the U.S. and the number of production and non-supervisory workers (for example, 

from 2002 to 2010, production fell by 44 percent; the number of production and non-supervisory 

workers in the industry fell by 44 percent and the number of white collar workers fell by 31 

 40 UAW/NRDC/Center for American Progress, “Driving Growth: How Clean Cars and Climate Policy Can 

Create Jobs,” March 2010, p.11 
Summary of interagency working comments received on draft rule under EO 12866 and EO 

13563 review. They are for your consideration and are subject to further policy review. 

23 

percent). However, in some years (2004 and 2006) the white-collar jobs had a higher percentage 

loss than the blue-collar jobs. In this analysis, the agency examines all jobs in the industry. 

 
Summary of interagency working comments received on draft rule under EO 12866 and EO 

13563 review. They are for your consideration and are subject to further policy review. 

24 

Table VII-17 

U.S. Light Duty Vehicle Production and Employment 

 

 U.S. Light Vehicle 

Production 

Motor Vehicle and 

Parts U.S. 

Employment41

Production per 

Employee 

2000 12,773,714 1,313,500 9.7 

2002 13,568,385 1,151,300 11.8 

2004 13,527,309 1,112,700 12.2 

2006 12,855,845 1,069,800 11.7 

2008 9,870,473 875,400 11.3 

2010 7,597,147 674,600 11.3 

Total/Average 70,192,873 6,197,300 11.3 

The Administration projects that full employment will return in 2018.42 When the economy is at 

full employment, a fuel economy regulation is unlikely to have much impact on net overall U.S. 

employment; instead, labor would primarily be shifted from one sector to another. These shifts in 

employment impose an opportunity cost on society, approximated by the wages of the 

employees, as regulation diverts workers from other activities in the economy. In this situation, 

any effects on net employment are likely to be transitory as workers change jobs (e.g., some 

workers may need to be retrained or require time to search for new jobs, while shortages in some 

sectors or regions could bid up wages to attract workers). 

On the other hand, if a regulation comes into effect during a period of high unemployment, a 

change in labor demand due to regulation may affect net overall U.S. employment because the 

labor market is not in equilibrium. 

Schmalansee and Stavins point out that net positive employment effects are possible in the near 

term when the economy is at less than full employment due to the potential hiring of idle labor 

resources by the regulated sector to meet new requirements (e.g., to install new equipment) and 

new economic activity in sectors related to the regulated sector.43 On the other hand, any 

reduction in demand due to higher cost vehicles may lead to a reduction in employment, but this 

employment reduction due to reduced unit sales would be at least partially offset by increased 

employment per vehicle sold (because of the additional fuel-saving technology content). In the 

 41 U.S. employment data is from the Bureau of Labor Statistics, available at

http://data.bls.gov/timeseries/CES3133600101?data_tool=XGtable (last accessed Aug. 10, 2012) 

42 http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/13msr.pdf 

43 Schmalensee, Richard, and Robert N. Stavins. “A Guide to Economic and Policy Analysis of EPA’s 

Transport Rule.” White paper commissioned by Excelon Corporation, March 2011. 
Summary of interagency working comments received on draft rule under EO 12866 and EO 

13563 review. They are for your consideration and are subject to further policy review. 

25 

longer run, the net effect on employment is more difficult to predict and will depend on the way 

in which the related industries respond to the regulatory requirements. 

This program is expected to affect employment in the regulated sector (auto manufacturing) and 

other sectors directly affected by the final rule: auto parts suppliers, auto dealers, the fuel supply 

market (which will face reduced petroleum production due to reduced fuel demand but which 

may see additional demand for electricity or other fuels). As discussed in the CAR and Ceres 

reports above, each of these sectors could potentially have ripple effects throughout the rest of 

the economy. These ripple effects depend much more heavily on the state of the economy than 

do the direct effects. As noted above, though, in a full-employment economy, any changes in 

employment will result from people changing jobs or voluntarily entering or exiting the 

workforce. In a full-employment economy, employment impacts of this proposal will change 

employment in specific sectors, but it will have small, if any, effect on aggregate employment. 

This rule would take effect in 2017 through 2025; by then, the current high unemployment may 

be moderated or ended. The Congressional Budget Office has predicted full employment by 

2018.44 To the extent that full employment is achieved, increases in employment are not 

possible. For that reason, this analysis does not include multiplier effects, but instead focuses on 

employment impacts in the most directly affected industries. Those sectors are likely to face the 

most concentrated employment impacts. 

Table VII-18 shows the potential impact on employment in job years. This table takes the results 

from sales and divides by 11.3 to obtain the impact on employment. To estimate the proportion 

of domestic employment affected by the change in sales, we use data from Ward’s Automotive 

Group for total car and truck production in the U.S. compared to total car and truck sales in the 

U.S. For the period 2001-2010, the proportion is 66.7 percent. We thus weight sales by this 

factor to get an estimate of the effect on U.S. employment in the motor vehicle manufacturing 

sector due to this rule. As in the sales analysis, the table shows the potential impact for the 

preferred alternative for both the MY 2010 baseline and for the MY 2008 baseline at the 3 

percent and 7 percent discount rates for 6 different cases. 

Since the impact of this final rule on sales is very difficult to predict, and sales have the largest 

potential effect on employment, the impact of this final rule on employment is also very difficult 

to predict. As with sales, the impact on employment is heavily affected by the difference 

between manufacturers’ investments in fuel-saving technologies45 and consumers’ valuation of 

fuel savings. However, since any negative impact of the rule on unit sales is partially offset by 

 44 Based on the Congressional Budget Office January 2012 Report, “The Budget and Economic Outlook, 

Fiscal Years 2012-2022,” which predicted unemployment levels of 5.5% in 2018. See 

http://www.cbo.gov/publication/42905 (last accessed Aug. 10, 2012). 45 As discussed above, these investments are affected both by manufacturers’ beliefs about consumers’ 

valuation of fuel economy, and by competitive dynamics, since the industry is composed of multiple firms, each of 

which considers the case where a competitor that doesn’t invest ends up in a better position due to gas prices at the 

low end of the expected distribution. 
Summary of interagency working comments received on draft rule under EO 12866 and EO 

13563 review. They are for your consideration and are subject to further policy review. 

26 

increased employment per vehicle sold, it is highly unlikely that the rule would lead to 

significant job losses in the short term in the automotive industry 
Summary of interagency working comments received on draft rule under EO 12866 and EO 13563

review. They are for your consideration and are subject to further policy review.  

Below is a summary of interagency working comments received during EO 12866 and EO 13563 

review of the draft final rule “Joint Rulemaking to Establish Light-Duty Vehicle Greenhouse Gas 

Emission Standards and Corporate Average Fuel Economy Standards”. They are for your 

consideration and subject to further policy review. 

1. Baseline 

Interagency commenters do not find the justification for a “flat” baseline compelling. The 

primary empirical evidence in support of a flat baseline appears be based on the experience 

during the period 1986-2003. Commenters question the relevance of this period to projecting 

that, in the absence of further regulation, the market would supply no increases in fuel economy 

(beyond the minimum required in 2016) at any time before model year 2026. While it is true 

that from 1986-2003 most manufacturers did not substantially exceed the applicable standards, 

commenters note that during that period real gas prices were lower than $2.00/gallon ($2012) 

and fell to as low as $1.45/gallon in the late 1990s. [EIA Short-Term Energy Outlook, Aug. 

2012] 

Commenters note that the choice of that period appears to be based on the relative stability of 

gasoline prices and the assumption that gasoline price stability is more predictive of fuel 

economy increases than is the gasoline price level. Commenters disagree that the stability of 

gasoline prices is, per se, more important. Economic theory suggests the demand for fuel 

economy would be greater in a world with stable gasoline prices at $4.00 per gallon than one 

with prices fluctuating between, say, $1.50 and $3.00. Furthermore, more recent data (e.g., MYS 

2009-11) show substantial “over-compliance” with CAFÉ standards. [BTS National 

Transportation Statistics 2012, Table 4-23] Commenters believe that this over-compliance is 

due in large part, if not to primarily high gasoline prices. Gasoline prices during recent years are 

consistent with those projected for 2017 and beyond in the rule and substantially higher than 

those used to justify the claim that manufacturers are unlikely to produce fleets with fuel 

economy greater than those required for MY 2016. 

Interagency commenters request that agencies respond to these points in the Preamble and RIA 

sections regarding the baseline. 

2. EPA description of the alternative baseline. In addition to address comment number 1 

above, interagency commenters request EPA to include the following insert in EPA RIA 

3.4.3.1: 

 

Based on the historical data discussed above, EPA believes that there is a very low likelihood 

that any manufacturers will voluntarily achieve higher fuel economy than their footprint-based 

targets relative to the projected fleet average 35.5 mpg level of MY 2016 standards in MYs 
Summary of interagency working comments received on draft rule under EO 12866 and EO 13563

review. They are for your consideration and are subject to further policy review.  

2017-2025, in the absence of more stringent standards. There are several reasons for 

this: gasoline prices through MY 2025 are projected to be only slightly higher than today’s 

levels, footprint-based standards are constraining for all manufacturers, and manufacturers may 

use future technology to support other vehicle attributes preferred by consumers such as power 

and utility. In addition, even if some individual manufacturers were to voluntarily over comply, 

it is possible that they would sell their GHG credits to other manufacturers who might find that it 

is more cost-effective to purchase credits than to continue to meet the 35.5 mpg level.[1] We do 

note, however, that to date there have been no trading of credits. In this scenario, if all credits 

were sold to other manufacturers, there would be no meaningful impact on the agency’s 

projected costs and benefits. But, the agency recognizes that it is possible that, under certain 

circumstances, there might be some industry-wide over compliance. For example, oil prices 

much higher than projected by AEO 2012 early release could lead to a higher baseline due to 

industry-wide over compliance. But under this higher baseline costs and benefits would both be 

lower and it is impossible to know whether net consumer and societal benefits would be higher 

or lower. NHTSA analyzed an alternative market-driven baseline as a sensitivity case in their 

RIA but the primary baseline that both agencies are using does not assume any fuel economy 

improvements absent regulation. 

3. Interagency commenters provided the following suggestions for NHTSA’s Preamble 

Section IV: 

a. Pg. 164, footnote 343 – 

“We emphasize, nevertheless, that the augural standards for MYs 2022-2025 

represent the agency’s best estimate judgment of what standards would be 

maximum feasible for those model years, based on the information before us 

today, if the agency had authority to set standards for 9 model years at a time.” 

b. Pg. 167 – Interagency commenters note that the last sentence is very confusing and 

might not be necessary. Commenters also believe that the last sentence might be 

problematic because it seems to suggest that, rather than the regulatory outcomes 

being different (stringency increases at different rates over these time period) that the 

agency took a different approach in evaluating the appropriate stringency of standards 

for these two periods, which commenters believe is not accurate. Commenters 

suggest the following edits: 

“The question of the tipping point is slightly different in the context of the final 

standards and augural standards. The final standards for MYs 2017-2021 are 

nearer-term, albeit still several years away; the augural standards for MYs 2022-

2025, clearly, are even more distant, and the inputs that inform our balancing are 

less certain. Based on the information currently before the agency, we continue to 

believe that the standards as proposed are maximum feasible for MYs 2017-

2025., but the relative stringency of the final and augural standards (both for cars 

and trucks) in those model years as compared to the other regulatory alternatives 

is different in the different phases. That is, the final standards for cars and trucks 

                                                            

[1] Oates, Wallace E., Paul R. Portney, and Albert M. McGartland.  “The Net Benefits of Incentive‐Based

Regulation:  A Case Study of Environmental Standard Setting."  American Economic Review 79(5) (December

1989):  1233‐1242. (Docket No. EPA‐HQ‐OAR‐2010‐0799‐0833).
Summary of interagency working comments received on draft rule under EO 12866 and EO 13563

review. They are for your consideration and are subject to further policy review.  

may fall between different regulatory alternatives in MYs 2017-2021 and in MYs 

2022-2025. This is because the agency’s approach to balancing is different for 

the final standards and for the augural standards, as discussed below.” 

4. Commenters noted that the NHTSA RIA Executive Summary seems to have an error for 

NHTSA’s Total Cost=Total Benefit analysis. Commenters noted that the net benefits 

reported for this option are close to (sometimes greater than) the ‘max net benefits.’ 

Commenters request clarity on whether they should be close to zero since net 

benefits=TB-TC. Commenters note that this approach seems more consistent with the 

PRIA from November 2011. Commenters request NHTSA to provide additional 

explanation regarding what total costs and benefits represent. 
EPA Staff Draft – Deliberative Material – Do Not Cite or Quote 

EPA Responses to Interagency Comments Received 8/18/12 

1 

OMB Issue # 1- the Flat Baseline 

OMB Stated - Interagency commenters do not find the justification for a “flat” baseline 

compelling. The primary empirical evidence in support of a flat baseline appears be based on the 

experience during the period 1986-2003. Commenters question the relevance of this period to 

projecting that, in the absence of further regulation, the market would supply no increases in fuel 

economy (beyond the minimum required in 2016) at any time before model year 2026. While it 

is true that from 1986-2003 most manufacturers did not substantially exceed the applicable 

standards, commenters note that during that period real gas prices were lower than $2.00/gallon 

($2012) and fell to as low as $1.45/gallon in the late 1990s. [EIA Short-Term Energy Outlook, 

Aug. 2012] Commenters note that the choice of that period appears to be based on the relative 

stability of gasoline prices and the assumption that gasoline price stability is more predictive of 

fuel economy increases than is the gasoline price level. Commenters disagree that the stability of 

gasoline prices is, per se, more important. Economic theory suggests the demand for fuel 

economy would be greater in a world with stable gasoline prices at $4.00 per gallon than one 

with prices fluctuating between, say, $1.50 and $3.00. Furthermore, more recent data (e.g., MYS 

2009-11) show substantial “over-compliance” with CAFÉ standards. [BTS National 

Transportation Statistics 2012, Table 4-23] Commenters believe that this over-compliance is 

due in large part, if not to primarily high gasoline prices. Gasoline prices during recent years are 

consistent with those projected for 2017 and beyond in the rule and substantially higher than 

those used to justify the claim that manufacturers are unlikely to produce fleets with fuel 

economy greater than those required for MY 2016. 

Interagency commenters request that agencies respond to these points in the Preamble and RIA 

sections regarding the baseline. 

EPA Response:

EPA disagrees with the interagency commenters. The interagency commenters “question 

the relevance” of the 1986-2003 time frame to predicting the 2017-2025 timeframe because real 

gasoline prices were lower than $2 per gallon in the 1986-2003 and are projected to be in the $4 

per gallon range in 2025 and later. But the interagency commenters failed to recognize that 

fleetwide CAFE levels were 23-24 mpg in the 1986-2003 timeframe, while the assumed baseline 

for 2017 is 35.5 mpg, so the assumed baseline is already 50% higher than CAFE levels in the 

1986-2003 timeframe. EPA notes that the very over compliance cited by the interagency 

commenters still leaves the industry below the 35.5 mpg level that is the assumed baseline for 

2017, and EPA believes that some (and likely most if not all) of this over compliance is due to 

the manufacturers expecting and preparing for more stringent standards in the future. EPA is not 

aware of any empirical evidence that consumers will demand, or automakers will provide, fuel 

economy levels in excess of 35.5 mpg at fuel prices similar to today’s fuel prices, and the 

interagency commenters have not provided any. EPA was very clear in the rulemaking package 

that we considered the 1986-2003 time frame to be relevant to the 2017-2025 baseline for two 

reasons—relatively stable fuel prices (based on AEO projections) and flat standards—and the 
EPA Staff Draft – Deliberative Material – Do Not Cite or Quote 

EPA Responses to Interagency Comments Received 8/18/12 

2 

interagency commenters do not suggest any alternative historical time frame on which to learn 

how automakers would be likely to behave in the absence of rising fuel prices or standards. 

OMB Baseline – Suggested Edits to EPA Final RIA

EPA description of the alternative baseline. In addition to address comment number 1 

above, interagency commenters request EPA to include the following insert in EPA RIA 

3.4.3.1: 

EPA Response – EPA is prepared to make the following edits to this paragraph in RIA Section 

3.4.3.1, shown in track changes against the interagency suggestions. 

“Based on the historical data discussed above, EPA believes that there is a very low 

likelihood that any manufacturers will voluntarily achieve higher fuel economy than their 

footprint-based targets relative to the projected fleet average 35.5 mpg level of MY 2016 

standards in MYs 2017-2025, in the absence of more stringent standards. There are several 

reasons for this: gasoline prices through MY 2025 are projected to be only slightly higher than 

today’s levels, footprint-based standards are constraining for all manufacturers, and 

manufacturers may use future technology to support other vehicle attributes preferred by 

consumers such as power and utility. In addition, even if some individual manufacturers were to 

voluntarily over comply, it is possible that they would sell their GHG credits to other 

manufacturers who might find that it is more cost-effective to purchase credits than to continue 

to meet the 35.5 mpg level. We do note, however, that to date there have been no trading of 

credits. EPA is aware of several automakers that have already purchased, or in the process of 

negotiating to purchase, credits for MY 2012. In this scenario, if all credits 

were sold to other manufacturers, there would be no meaningful impact on the agency’s 

projected costs and benefits. But, the agency recognizes that it is possible that, under certain 

circumstances, there might be some industry-wide over compliance. For example, oil prices 

much higher than projected by AEO 2012 early release could lead to a higher baseline due to 

industry-wide over compliance. But under this higher baseline costs and benefits would both be 

lower and it is impossible to know whether net consumer and societal benefits would be higher 

or lower. Both agencies assume no fuel economy improvement in their primary analyses, but we 

note that NHTSA chose to analyzed an alternative, market-driven baseline as a sensitivity case in 

their RIA but the primary baseline that both agencies are using does not assume any fuel 

economy improvements absent regulation.” 

 
EPA Staff Draft – Deliberative Material – Do Not Cite or Quote 

EPA Responses to Interagency Comments Received 8/18/12 

3 

OMB Issue # 2- Sales/Employment Assessment 

OMB Request - Interagency commenters provided a revised section for sales and employment 

for NHTSA. Commenters request agencies to make conforming edits to the preamble sections on 

sales and jobs and EPA’s RIA section on sales and jobs. Because of multiple edits, the following 

includes a simplified clean version of the section for your consideration. 

EPA Response: 

EPA’s qualitative discussion of vehicle sales and employment is much different from NHTSA’s 

quantitative analysis. On employment, EPA quantifies the employment associated with adding 

technology to vehicles, but does not quantify employment associated with changes in vehicle 

sales; NHTSA takes the opposite approach. For these reasons, we do not consider it appropriate 

to adopt all of the interagency language provided for NHTSA. 

We have sought to identify language in the interagency comments that are appropriate to add to 

EPA’s discussion of vehicle sales. The attached document shows changes that EPA will make to 

the Preamble III.H.11.a discussion, in response to the interagency comments. 

We presume that this will close out the issue of vehicle sales and employment with respect to 

interagency review. 
EPA Staff Draft – Do Not Cite or Quote 

EPA Responses to Interagency Comments Received 8/18/12 

1 

In response to interagency comments received on August 18, 2012, EPA will make the 

following edits to the EPA preamble section III.H 

EPA Preamble Language: 

1. What are the Estimated Cost, Economic, and Other Impacts of the Rule? 

1. U.S. Vehicle Sales Impacts and Affordability of New Vehicles 

a. Vehicle Sales Impacts 

Predicting the effects of this rule on vehicle sales entails comparing two effects. On the 

one hand, the vehicles designed to meet the standards will become more expensive, which 

would, by itself, discourage sales. On the other hand, the vehicles will have improved fuel 

economy and thus lower operating costs due to significant fuel savings, which could encourage 

sales. Which of these effects dominates for potential vehicle buyers when they are considering a 

purchase will determine the effect on sales. Assessing the net effect of these two competing 

effects is uncertain, as it rests on how consumers value fuel savings at the time of purchase and 

the extent to which manufacturers and dealers reflect technology costs in the purchase price. The 

empirical literature does not provide clear evidence on how much of the value of fuel savings 

consumers consider at the time of purchase. It also generally does not speak to the efficiency of 

manufacturing and dealer pricing decisions. Thus, we do not provide quantified estimates of 

potential sales impacts in this final rule. However, as discussed later in this section, there are 

several reasons why EPA believes this rulemaking will lead to an increase in vehicle sales, 

though we do not quantify a specific impact. 

An additional source of uncertainty in the analysis is understanding what would happen 

in the absence of this rule. Standard economic theory would suggest that, if automakers could 

profitably increase sales by adding more fuel-saving technologies to their vehicles, then 

manufacturers’ profit motives would lead them to voluntarily add those technologies in the 

absence of this rule. As discussed in Preamble Section III.D.1, we project, based on historical 

patterns, that auto makers would not go beyond the MY 2016 standards in the absence of this 

rule. Yet, if consumers consider just over three years’ worth of fuel savings in their vehicle 

purchase decisions, the payback period analysis in Section III.H.5 suggests that sales would 

increase in response to this rule. Are these analyses in conflict? 

Although it is possible that manufacturers could add at least some of the vehicle 

technologies in the absence of the rule (see Section III.H.1.a for a discussion), there are also a 

number of reasons for potential increases in vehicle sales as a result of the rule notwithstanding 

our assumption of a flat baseline. These explanations focus on conditions where the rule 

stimulates investments that would not happen in the rule’s absence. The explanations posed 

below raise possibilities that the rule, by requiring all automakers to meet the standards, may 

lead to mutually beneficial outcomes that might not happen in the absence of the rule. 

Deleted: would

Deleted: they would do so 
EPA Staff Draft – Do Not Cite or Quote 

EPA Responses to Interagency Comments Received 8/18/12 

2 

Consumers would then have the opportunity to purchase vehicles that would not be available in 

the absence of the rule; if consumers consider at least as many years of fuel savings when buying 

new vehicles as the payback period for the new technologies, positive sales impacts could occur 

as a result of these final standards. The three possibilities we suggest for such outcomes are 

promotion of social learning, reduction of risk and uncertainty for manufacturers, and promotion 

of innovation. 

i. Social Learning 

For many years, fuel economy standards did not change (see Preamble III.D.1).1

 As 

discussed in Preamble III.H.1.a, consumers may not have focused on fuel economy, or may have 

found it difficult to do calculations involving the tradeoffs between fuel economy and increased 

vehicle costs, or may not have found vehicles with their preferred combination of fuel economy 

and other features. In recent years, though, fuel economy standards have started to increase.2 In 

addition, high fuel prices have helped to focus consumer attention toward vehicle fuel economy. 

Finally, the recently revised fuel economy label, with prominent information on fuel savings, are 

starting to appear on new vehicles. These factors may contribute to consumers gaining 

experience with the benefits that accrue to them from owning and operating vehicles with greater 

fuel efficiency. Consumer households that include vehicles with a fairly wide range of fuel 

economy have an opportunity to learn about the value of fuel economy on their own. Consumer 

demand may be shifting towards such vehicles, not only because of higher fuel prices but also if 

many consumers are learning about the value of purchases based not only on initial costs but also 

on the total cost of owning and operating a vehicle over its lifetime. This type of learning should 

continue before and during the model years affected by this rule. 

Today’s rule, combined with the new and easier-to-understand fuel economy labels 

required to be on all new vehicles in MY 2013, may increase sales by hastening this very type of 

consumer learning. As more consumers experience the savings in time and expense from owning 

more fuel efficient vehicles, demand may shift yet further in the direction of the vehicles with 

improved fuel economy and reduced GHG emissions mandated under the rule. This social 

learning can take place both within and across households, as consumers learn from one another. 

First and most directly, the time and fuel savings associated with operating more fuel efficient 

vehicles may be more salient to individuals who own them, which might cause their subsequent 

purchase decisions to shift closer to minimizing the total cost of ownership over the lifetime of 

the vehicle. Second, this appreciation may spread across households through word of mouth, 

marketing and advertising, and other forms of communications. Third, as more motorists 

experience the time and fuel savings associated with greater fuel efficiency, the price of used 

cars may better reflect such efficiency, further reducing the cost of owning more efficient 

vehicles for the buyers of new vehicles (since the resale price may increase). If these induced 

learning effects are strong, the rule could potentially increase total vehicle sales over time. This 

effect may be speeded or slowed by other factors that enter into a consumer’s valuation of fuel 

efficiency in selecting vehicles. 

 

1

 Car CAFE standards did not change from MYs 1990 through 2010. Truck CAFE standards did not change from 

MYs 1996 through 2004, and changed only 0.5 mpg cumulatively from MYs 1991 through 2004. See "Summary of 

Fuel Economy Performance," March 12, 2012, DOT/NHTSA, http://www.nhtsa.gov/fuel-economy. 

2

 Truck CAFE standards began to rise in MY 2005 and have risen every year since. Car CAFE standards began to 

rise in MY 2011. Ibid.
EPA Staff Draft – Do Not Cite or Quote 

EPA Responses to Interagency Comments Received 8/18/12 

3 

The possibility that the rule could (after a lag for consumer learning) increase sales need 

not rest on the assumption that automobile manufacturers are failing to pursue profitable 

opportunities to supply the vehicles that consumers demand. In the absence of the rule, no 

individual automobile manufacturer would find it profitable to move toward more efficient 

vehicles to increase consumer learning because no individual company can fully internalize the 

potential future boost to demand. If one company were to make more efficient vehicles, counting 

on consumer learning to enhance demand in the future, that company would capture only a 

fraction of the extra sales so generated, because the learning at issue is not specific to any one 

company's fleet. Many of the extra sales could accrue to that company's competitors. 

In other words, consumer learning about the benefits of fuel efficient vehicles involves 

positive externalities (spillovers) from one company to the others.3 These positive externalities 

may lead to benefits for manufacturers as a whole if they increase the demand for vehicles. We 

emphasize that this discussion has been tentative and qualified. It is not possible to quantify these 

learning effects years in advance, and these effects may be speeded or slowed by other factors 

that enter into a consumer’s valuation of fuel efficiency in selecting vehicles. To be sure, social 

learning of related kinds has been identified in a number of contexts.4 We asked for comments 

on the discussion offered here, with particular reference to any relevant empirical findings. 76 

FR 75150. We continue to explore this issue but did not receive any comments on the role of 

social learning, except in the context (discussed in Section III.H.1.a) of the effect of the rule on 

the visibility of and status associated with owning vehicles with improved fuel economy. 

ii. Reduction in Risk and Uncertainty for Manufacturers

As discussed in Preamble III.H.1.a, there appears to be a great deal of uncertainty about 

how consumers will respond to increases in fuel economy. Automakers may be cautious about 

adding more fuel-saving technology to vehicles if they are uncertain how buyers will respond. 

Even if they believe that buyers will respond positively, if a company is risk-averse, it may 

nevertheless hesitate to make the substantial major investments in new technologies and in 

research that would lead to increases in fuel economy across its fleet.5 If a manufacturer invests 

substantially in fuel efficient technologies expecting higher consumer demand than realized, then 

the manufacturer has incurred the costs of investment but not reaped the benefits of those 

investments. On the other hand, if a manufacturer does not invest in fuel-efficient technologies, 

then the manufacturers may lose some sales in the short run if demand for fuel economy is 

higher than expected, but it still retains the option of investing in fuel-efficient technologies. If 

 

3

 Industrywide positive spillovers of this type are hardly unique to this situation. In many industries, companies form 

trade associations to promote industry-wide public goods. For example, merchants in a given locale may band 

together to promote tourism in that locale. Antitrust law recognizes that this type of coordination can increase 

output. 

4

 See Hunt Alcott, Social Norms and Energy Conservation, Journal of Public Economics (forthcoming 2011), 

available at http://web.mit.edu/allcott/www/Allcott%202011%20JPubEc%20-

%20Social%20Norms%20and%20Energy%20Conservation.pdf (Docket EPA-HQ-OAR-0799-0825); Christophe 

Chamley, Rational Herds: Economic Models of Social Learning (Cambridge, 2003) (Docket EPA-HQ-OAR-0799-

1110). 

5

 Sunding, David, and David Zilberman, “The Agricultural Innovation Process: Research and Technology Adoption 

in a Changing Agricultural Sector,” Chapter 4 in Handbook of Agricultural Economics, Volume 1, edited by B. 

Gardner and G. Rausser (Elsevier, 2001) show how delaying adoption of a new technology in order to gain more 

information may be a more profitable activity than adopting a technology, even if it has positive net benefits, when a 

potential adopter is risk-averse. 

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4 

its investments proved unsuccessful, the company might face substantial losses. Even if the 

probability of being unsuccessful is low, the manufacturer may nevertheless perceive the losses 

in that scenario as a substantial risk. If the investment proved successful, the company would, of 

course, take market share from other companies – but only until the other auto companies caught 

up. In other words, for a risk-averse company, being a first mover may appear to have a greater 

downside risk than upside risk, even if the investment, on an expected-value basis, would pay 

off. If all companies are risk-averse, then they may all seek a strategy of waiting for some other 

company to be the first mover. In this case, caution about these major investments may lead to 

slow adoption of new technologies, in the absence of the rulemaking. This rulemaking, by 

requiring that all companies act at the same time, removes the scenario of one company bearing 

all the risk. 

In addition, there may be risk aversion on the consumer side. The simultaneous 

investment by all companies may also encourage consumer confidence in the new technologies. 

If only one company adopted new technologies, early adopters might gravitate toward that 

company, but early adopters tend to be a relatively small portion of the public. More cautious 

buyers, who are likely to be more numerous, might wait for greater information before moving 

away from well-known technologies. If all companies adopt advanced technologies at the same 

time, though, potential buyers may perceive the new technologies as the new norm rather than as 

a risky innovation. They will then be more willing to move to the new technologies. As some 

commenters have pointed out, simultaneous action required by the rule may change buyers’ 

expectations (their reference points) for fuel economy, and investing in more fuel economy may 

seem less risky than in the absence of the rule. 

The rule, then, may reduce manufacturers’ risk of making significant investments in fuelsaving technologies by providing a level playing field for all companies. Under this outcome, it 

is possible for the rule to facilitate investment that would not happen in the absence of the rule, 

and vehicle sales could increase as a result of the rule. 

iii. Promotion of Innovation 

Research among multiple parties can be a synergistic process: ideas by one researcher 

may stimulate new ideas by others, and more and better results occur than if the one researcher 

operated in isolation. One function that standards can serve is to promote research into low-CO2

technologies that would not take place in the absence of the standards. Because all companies 

(both auto firms and auto suppliers) will have incentives to find better, less expensive ways of 

meeting the standards in this rule, the possibilities for synergistic interactions may increase. 

Thus, the rule, by focusing all companies on finding more efficient ways of achieving the 

standards, may lead to better outcomes than if any one company operated on its own. 

An additional aspect of the standards is the possibility of greater standardization. As 

more companies adopt new technologies, the incentives increase for additional suppliers and 

more availability of after-market replacement parts; these suppliers would be likely to find ways 

to increase compatibility across vehicle types. For example, though electric vehicles (EVs) are 

not expected to be more than a few percent of the vehicles produced in response to this rule, their 

adoption depends on such factors as batteries and charging methods that are compatible across 

different companies. In the absence of the rule, fewer companies would be pursuing this 

technology, and it would be considered a specialty product; the incentives to coordinate might be 
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5 

low. If EVs become more common, though, compatible infrastructure and batteries may become 

more desirable, as potential buyers are likely to be encouraged toward this technology if they can 

easily find places to charge batteries. 

Thus, the rule may direct and promote innovation and standardization that would not 

happen in the absence of this rule. Such changes could reduce the costs and improve the 

qualities of the technologies, which could result in an increase in vehicle sales. Further, the 

certainty of the regulations reduces the costs of meeting them, because there will be more 

economies of scale and more learning curve benefits due to greater cumulative production of 

fuel-efficient technologies.

In these three plausible explanations for how the rule could increase vehicle sales, we 

have focused on ways that the rule could promote coordinated actions on the part of automakers 

and suppliers that lead to mutual benefit, but that might not happen in the absence of the rule. 

These actions could lead to automakers developing technologies that they would not have 

developed in the absence of the rule. Consumers may respond positively to the vehicles resulting 

from this coordinated action. 

Several commenters requested that we conduct a quantitative vehicle sales analysis. As 

discussed in the proposal, in previous rulemakings, EPA and NHTSA conducted vehicle sales 

analyses by comparing the up-front costs of the vehicles with the present value of five years’ 

worth of fuel savings; the direction of vehicle sales would depend on whether up-front costs 

exceeded fuel savings (in which case sales would be expected to decline), or vice versa (in which 

case sales would be expected to increase).6

 Some commenters specifically requested that we use 

the method found in the MYs 2012-16 rule; some specifically supported the five-year payback 

period; others argued for the importance of conducting the analysis without recommending 

methods. Ceres estimates that the rule will increase vehicle sales by 4.7 percent; the Defour 

Group provided estimates that the rule will decrease vehicle sales by 6-10 percent. The 

differences in the results appear to depend on the cost estimates used and on assumptions made 

about how vehicle buyers think about fuel savings when deciding on vehicle purchases. The 

Defour Group, for instance, uses cost estimates of about $3000 per vehicle based on summing 

costs (but not benefits) across multiple rules (an estimate we consider to be unfounded for 

reasons explained in this section below and also in TSD Chapter 3.1.2) and the assumption that 

consumers consider only 25 percent of fuel savings in their vehicle purchase decisions (see 

discussion in Section III.H.1.a). Other commenters wanted specific information on the effect of 

the rule on vehicle costs and whether consumers will be willing to buy the new vehicles, while 

consumer and environmental organizations indicated that consumers want more fuel-efficient 

vehicles, even if the up-front costs of the vehicles increase. The costs of the rule are discussed in

Preamble Section III.H.2. As discussed in Preamble Section III.H.1.a, we do not at this point 

have sufficient confidence in the estimates of the role of fuel economy in consumers’ vehicle 

purchases to come to definitive conclusions about the impacts of the rule on vehicle sales. We 

do not, however, consider this uncertainty grounds for delaying the rule, as one comment 

 

6

 For instance, see U.S. Environmental Protection Agency (April 2010). “Final Rulemaking to Establish LightDuty Vehicle Greenhouse Gas Emission Standards and Corporate Average Fuel Economy Standards: Regulatory 

Impact Analysis.” EPA-420-R-10-009, Chapter 8.1.1, pp. 8-1 to 8-4. 

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suggested. The midterm evaluation provides an opportunity to revisit the impact of the rule on 

vehicle sales and consumer acceptance of the new technologies. 

This rule takes effect for MY 2017-2025. In the intervening years, it is possible that the 

assumptions underlying a quantitative analysis, as well as market conditions, might change. As 

the United Auto Workers points out, the state of the economy is a major, if not the primary, 

determinant of total vehicle sales. The impact of the rule on sales may therefore depend, among 

other factors, on changes in the state of the economy. Other commenters discussed the 

importance of consumer confidence, fuel prices, and even of publicity over fuel prices, in 

consumers’ interest in additional fuel economy. Sales could be negatively affected if gasoline 

prices are lower than expected or technology costs are higher than expected. In these cases, it is 

possible that the standards could require manufacturers to produce cars with higher levels of fuel 

economy than consumers would wish to buy. On the other hand, manufacturers’ marketing of

increased fuel economy levels is also likely to play a role in consumer response to these vehicles. 

EPA agrees that these factors are important, but we are not sufficiently confident in quantitative 

estimates of the impacts of those factors to develop numerical estimates. We instead provide this 

qualitative assessment to highlight the factors important for understanding the effects of this rule 

on vehicle sales. 

As several commenters point out, the effect of this rule on the use and scrappage of older 

vehicles will be related to its effects on new vehicle prices, the fuel efficiency of new vehicle 

models, the fuel efficiency of used vehicles, and the total sales of new vehicles. If the value of 

fuel savings resulting from improved fuel efficiency to the typical potential buyer of a new 

vehicle outweighs the average increase in new models’ prices, sales of new vehicles could rise, 

the used vehicle market may increase in volume as new vehicle buyers sell their older vehicles, 

and scrappage rates of used vehicles may increase slightly. This will cause both an influx of 

more efficient vehicles into the used vehicle market and an increase in the turnover of the vehicle 

fleet (i.e., the retirement of used vehicles and their replacement by new models), thus 

accentuating the anticipated effect of the rule on fleet-wide fuel consumption and CO2

emissions. However, if potential buyers value future fuel savings resulting from the increased 

fuel efficiency of new models at less than the increase in their average selling price, sales of new 

vehicles will decline, the used vehicle market may decrease in volume as people hold onto their 

vehicles longer, and there will be a reduction in the rate at which used vehicles are retired from 

service. These effects will partly reduce the anticipated effects of this rule on fuel use and 

emissions. Because we do not have good estimates of the relationships between the new and used 

vehicle markets, we have not attempted to estimate explicitly the effects of the rule on the used 

vehicle market, scrappage of older vehicles, and the turnover of the vehicle fleet. 

Consumer, environmental, and investor organizations, the United Auto Workers, as well 

as a citizens’ campaign suggested that the rule will help the domestic auto industry, including the 

domestic supply base, compete in the global marketplace, through its encouragement of 

advanced technologies that may be useful in meeting emissions standards and consumer 

demands in foreign markets. We agree that this is likely, as generally the emission standards 

established in this rule are similar in stringency to emissions and fuel economy standards being 

considered by Japan, the European Union, South Korea, Canada, China and other international 

markets. Global manufacturers also design vehicles using a common platform in order to reduce 

costs. Vehicles built on these common platforms are sold in many markets around the world. To 

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the extent the domestic OEMs and suppliers can focus their limited research and product 

development efforts on the same technologies for the U.S. market as for international markets, 

this should enable the companies to compete more effectively outside the U.S.