Summary of Interagency Working Comments Received on Draft Rule under EO 12866 Review. Subject to Further Policy Review

1 Below is a summary of interagency comments received during EO 12866 review of the draft proposed rule establishing GHG emissions standard s and fuel efficiency standards for medium and heavy duty trucks. They are for your consideration and subject to further policy review.



### A. Conceptual Framework for Evaluating Impacts

This regulation is motivated primarily by the goals of reducing emissions of greenhousegases and promoting U.S. energy security by reducing consumption and imports of petroleumbased fuels. These motivations involve classic externalities, meaning that private decisions do not incorporate all the costs associated with thes e problems; these costs are not borne completely by the households or businesses whose actions are responsible for them. In the absence of some mechanism to “internalize” these costs – that is, to transfer their burden to individuals or firms whose decisions impose them – individuals and firms will consume more petroleum-based fuels than is socially optimal. Externalities are a classic motivation for government intervention in markets. These externalities, as well as effects due to changes in emissions of other pollutants and other impacts, are discussed in Sections VIII.H – VIII.J.

These classic externalities are not by themselves enough to justify the costs of these fuelsaving technologies under all of the scenarios. I.e. for some discount rates, and some projected social costs of carbon, the reductions in these external costs are less than the costs of the new fuel saving technologies. (See table 9-10 and 9-11 in the RIA.) However, by their very nature, the regulation reduces truck companies fuel costs, and according to our estimates, these fuel cost savings by themselves pay for the technologies over short periods of time under the assumptions used for this analysis (e.g. AEO 2010 projected fuel prices).

The fact that we can identify cost-effective fuel-saving technologies that truck companies are not taking advantage of is a puzzle – commonly known as the “energy paradox.” Standard economic theory suggests that in normally func tioning competitive markets, interactions between vehicle buyers and producers would lead producer s to incorporate all cost-effective technology into the vehicles that they offer, without gov ernment intervention. Unlike in the light-duty vehicle market, the vast majority of vehicles in the medium- and heavy-duty truck market are purchased and operated by businesses operating on thin profit margins, and for which fuel costs represent a substantial operating expense.

Even in the presence of uncertainty and imperfect information – conditions that hold to some degree in every market – we generally expect firms to attempt to minimize their costs in an effort to survive in a competitive marketplace, and therefore to make decisions that are in the best interest of the company and its owners and/or shareholders. In this case, the rules would produce external benefits. However, as discusse d below in Section VIII.E, the agencies haveSummary of Interagency Working Comments Received on Draft Rule under EO 12866 Review. Subject to Further Policy Review

2 estimated that the application of fuel-saving t echnologies in response to the proposed standards would yield private returns to truck owners of 140% to 420% (see Table VIII-21 below). The agencies have also estimated that the applica tion of these technologies would be significantly lower in the absence of the proposed standards ( i.e. , under the “no action” re gulatory alternative), meaning that truck buyers and operators ignore oppo rtunities to make investments in higher fuel economy that appear to offer significant cost savings.

There are three possible explanations fo r why trucking companies do not adopt technologies forecast to increase their profits: (1) There is a market failure in the trucking industry – market power, externalities, or asym metric information; (2) There are institutional rigidities in the industry (union rules, standard operating proc edures, statutory requirements, etc.), whereby participants collectively do not mini mize costs; or (3) the engineering estimates of fuel savings from these technologies overstate thei r benefits or understate their costs in realworld application.

To try to understand why trucking companies have not adopted these seemingly costeffective fuel-saving technologies, the agencies have surveyed the academic and policy literature about the energy paradox, and held discussions with numerous truck market participants. Below, we have listed five categories of explanations we have heard. These five hypotheses may explain the disconnect between the engineering analysis, which finds a number of cost-effective methods of improving fuel economy, and the observation that many of these technologies are not widely adopted. These include imperfect information in the original and resale markets, split incentives, uncertainty about future fuel prices, a nd adjustment and transactions costs. As the discussion will indicate, some of these explana tions suggest failures in the private market for fuel-saving technology in addition to the external failures that are the motivation for the rules. Other explanations suggest market-based behaviors that may imply additional costs not accounted for in this analysis. Anecdotal evidence from various segments of the trucking industry suggests that many of these hypotheses may play a role in explaining the puzzle of why truck purchasers appear to under-invest in fuel economy, although different explanations may apply to different segments, or even different companies. The published literature does not appear to include analysis or data related to this question.

The agencies invite comment on these hypothes es, and on any data or information to that could be used to investigate the role of any or all of these five hypotheses in explaining this energy paradox as it applies to trucks. . The agencies also request comment and information regarding any other hypotheses that could explai n the appearance that cost-effective fuel-saving technologies have not been incorporated into trucks.

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### Information Issues in the Original Sale Markets

One potential hypothesis for why the trucking industry does not adopt what appear to be inexpensive fuel saving technologies is that there is inadequate or unreliable informationSummary of Interagency Working Comments Received on Draft Rule under EO 12866 Review. Subject to Further Policy Review

3 available about the effectiveness of many fuel-s aving technologies for new vehicles. As the NAS report notes, “Reliable, peer-reviewed data on fuel saving performance is available only for a few technologies in a few applications. As a result, the committee had to rely on information from a wide range of sources, ... including many re sults that have not been duplicated by other researchers or verified over a range of duty cycles.” If reliable information on the effectiveness of many new technologies is absent, truck buyers will understa ndably be reluctant to spend additional money to purchase vehicles equipped with unproven technologies. This lack of information can manifest itself in multiple wa ys. For instance, the problem may arise purely because collecting reliable information on technologies is costly (also see section 5 on transaction costs). Moreover, information has asp ects of a public good: no single firm has the incentive to do the costly experimentation to determine whether or not particular technologies are cost-effective, while all firms benefit from th e knowledge gained from that experimentation. Similarly, if multiple firms must conduct the same tests to get the same information, costs could be reduced by some form of coordination of information gathering.

There are several possible reasons why trucking firms may experience difficulty gathering or interpreting information about fuel saving technologies. It may be difficult for truck drivers and fleet operators to separate the in dividual effects of various technologies and operating strategies from one another, particularly when they tend to be used in conjunction. It may also be difficult for truck op erators to assess the applicabilit y of even objective and reliable test results to their own specifi c vehicle configurations and opera ting practices; at the same time, the effects of specific technologies or operatin g practices may vary with geography, season of the year, or other factors. Boat tails, roof fa irings, and other aerodynamic features may provide substantial fuel savings to trucks traveling at high speeds over long distances, but may not becost ef fective for trucks operating at lower speeds in stop-and-go traffic. If so, then costeffective technological improvements may not be adopted because they cannot be reliably distinguished from inefficient technologies.

To some extent, information about the effectiv eness of some selected technologies does exist, and some appear to be very cost-effective. The SmartWay Transport Partnership is a complementary partnership between EPA and the freight goods industry (shippers, truck and rail carriers, and logistics companies) whose aim is to provide better information on fuel-efficient, low-carbon technologies and operational practices to help accelerate their deployment. SmartWay initially focused on evaluating and tes ting technologies for use in over-the-road class 8 tractor-trailers, commonly operated by the large, national trucking fleets. For this reason, more information is available about the configuration and operation of these types of trucks. Many of the technologies that SmartWay selected for evaluation can also save fuel and reduce greenhouse gas emissions in other types of trucks and trucking operations. However, due to the wide diversity among other types of trucks and truck operations, and lack of precise information about the effectiveness of technologies in each one of these types of truck and trucking operations, it is difficult for the program to provide good information that is specific to each company. This makes it much more challenging to improve market confidence in fuel-saving technologies in the Comment [A1]: Recommend citing the whole two sentence quote to make clear that NAS doesn’t

have info either.Summary of Interagency Working Comments Received on Draft Rule under EO 12866 Review. Subject to Further Policy Review

4 same way that SmartWay has done with its existi ng partners. SmartWay will continue to serve as a test bed for emerging technologies and as a conduit for technical information by developing and sharing information on other types of medium and heavy duty vehicles, helping to build market confidence in innovative financial, technical and operational solutions for medium- and heavy-duty vehicles across the freight goods industry, and promoting retrofit fuel-saving technologies within the existing legacy fleet. In formation provision, such as the efforts of the SmartWay program, is a direct, non-regulatory approach to addressing the problem of the availability of information, as long as truck purchasers are able and willing to act on the

information.

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### While its effect on information is indirect, we expect the requirement

for the use of new technologies included in this proposal could

encourage their adoption, thus providing more readily available

information about their benefits. The agencies appreciate, however,

that the diversity of truck uses, driving situations, and driver

behavior may still lead to variation in the fuel savings that individual

trucks or fleets experience. Information Issues in the Resale

Market

In addition to issues in the new vehicle market, a second hypothesis for why trucking companies may not adopt what appear to be cost-effective technologies to save fuel is that the resale market may not reward the addition of fuel-saving technology to vehicles adequately to ensure their original purchase by new truck buyers. This lack of payback for users beyond the original owner may contribute to the short payback period that new purchasers appear to expect. The agencies seek data and information on the extent to which costs of fuel saving equipment

can be recovered in the resale truck market.

Some of this unwillingness to pay for fuel-s aving technology may be due to the extension of the information problems in the new vehicle mark et into resale markets. Buyers in the resale market have no more reason to trust information on fuel-saving technologies than buyers in the original market. Because actual fuel economy of trucks on the road depends on many factors, including geography and driving styles or habits, even objective sources such as logs of truck performance for used vehicles may not provide reliable information about the fuel economy that potential purchasers of used trucks will experience.

A related possibility is that vehicles will be used for different purposes by their second owners than those for which they were originally designed. For instance, a vehicle originally purchased for long hauls might be used by its second owner instead for regional or intrastate trips, in which case some of the fuel-saving meas ures that proved effective in its original use may not be equally effective in these new uses. If information were more widely available and reliable, then purchasers in the re sale market would seek vehicles with technologies that best Comment [A2]: This discussion appears to contradicts baseline assumption of zero tech progress. Could EPA provide more explanation of the relationship between this assumption and the tech progress assumptions?

Comment [A3]: Why change “will” to “could”? Doesn’t the reg require adoption? Commenter recommends retaining “will”

Comment [A4]: Again, “speed” implies adoption would take place anyway, albeit more slowly, in apparent contrast to the baseline assumption.

Comment [A5]: Same as above. Commenter is

unsure what “well documented’ means.

Comment [A6]: Commenter suggests deleting this section because it suggests nobody knows whether these technologies work, or not

Comment [A7]: Are there data or studies available on this point? If so, pleasinclude citations. If not, recommend including the suggested language highlighted here.Summary of Interagency Working Comments Received on Draft Rule under EO 12866 Review. Subject to Further Policy Review

5 suited their purposes, and buyers would be matched with sellers so that used vehicles would be used in primarily for purposes in which their fuel-saving technologies were most valuable.

It is also possible, though, that the fuel savings experienced by the secondary purchasers may not match those experienced by their original owners if the optimal secondary use of thevehicle does not earn as many benefits from the technologies. In that case, the premium for fuelsaving technology in the secondary market should accurately reflect its value in that market, even if it is lower than its value in the original market, and the market has not failed. Because the information necessary to optimize use in the secondary market may not be readily available or reliable, however, buyers in the resale mark et may have less ability th an purchasers of new vehicles to identify and gain the advantages of new fuel-saving technologies, and may thus be even less likely to pay a premium for them.

For these reasons, technology adoption may be even lower in the resale market than in the original market. Even when fuel-saving tech nologies will provide benefits in the resale markets, purchasers of used vehicles may not be willing to compensate their original owners fully for their remaining value. As a result, the purchasers of original equipment may expect the resale market to provide inadequate compensa tion for the new technologies, even when those technologies would reduce costs for the new buyers. This information issue may explain what appear to be very short payback period required for new technologies in the new vehicle market.

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### Split incentives in the medium ­ and heavy

­ duty truck industry

A third hypothesis explaining the energy para dox as applied to truc king involves split incentives. When markets work effectively, signals provided by transactions in one market are quickly transmitted to related markets and influence the decisions of buyers and sellers in those related markets. For instance, in a well-functioning market system, changes in the expected future price of fuel should be transmitted rapidl y to those who purchase trucks, who will then reevaluate the amount of fuel-saving technology to purchase for new vehicles. If for some reason a truck purchaser will not be responsible for future fuel costs, or the individual who will be responsible for fuel costs does not get to deci de which truck characteristics to purchase, then those price signals may not be transmitted effectively, and incentives can described as “split.”

One place where such a split may occur is between the owners and operators of trucks. Because they are generally responsible for purchasing fuel, truck operators have strong incentives to economize on its use, and are thus likely to support the use of fuel-saving technology. However, the owners of trucks or trailers are often different from their operators, and, when purchasing vehicles, may be more concerned about their longevity or maintenance costs than about their fuel efficiency. As a result, capital investments by truck owners may be channeled into equipment that improves vehicles’ durability or reduces their maintenance costs, rather than into fuel-saving technology. If operators can choose freely among the trucks they drive, competition among truck owners to employ operators would encourage owners to invest in Comment [A8]: This sentence says “slow” adoption, in contrast to baseline, and “is likely to”

without evidence. Therefore the reviewers recommend a change to “low” and “may”.Summary of Interagency Working Comments Received on Draft Rule under EO 12866 Review. Subject to Further Policy Review

6 fuel-saving technology. However, if truck owners have more ability to choose among operators, then market signals for improved fuel savings that would normally be transmitted to truck owners may instead be muted.

Anecdotal information about large truck fleets suggests that, even within a company, the office or department responsible for truck purchases is often different from that responsible for purchasing fuel. Therefore, the employees who purchase trucks may have strong incentives to lower their initial capital cost, but not equally strong incentives to lower operating costs.

Single-wide tires, which save fuel and allow more payload (thus increasing revenue), offer another example of split incentives. They require a different driving style; those concerned about retaining drivers may resist their purchase, because drivers may not like the slightly different "feel" of wheel torque needed. Maintenance and repair staff may resist them because the tires may not be as available as they would li ke on the road, or they may need to change road service providers. Finally, those who resell the tr ucks may believe that the resale market will not value the tires. While financial pressures should provide incentives for greater coordination, especially when fuel costs are a large share of op erating costs, it may be difficult institutionally to change budgeting procedures and to coordinate across offices. Thus, even within a company incentives for fuel savings may not be fully tr ansmitted to those responsible for purchasing

decisions.

In addition, the NAS report notes that split in centives can arise between tractor and trailer operators, Trailers affect the fuel efficiency of shipping, but trailer owners do not face strong incentives (which may provide a possible explana tion for fuel-saving measures) to coordinate with truck owners. Although some trucking fleets own or lease their own trailers, a significant part of the trucking business is “drop and hook” service, in which trucking fleets pick up and drop off trailers and containers. These trailers and containers can belong to shippers, other trucking companies, leasing companies, or ocean-g oing vessel lines, in which cases their owners may not face strong incentives to economize on fu el consumption by tractor operators. Though tractor operators should, in princi ple, have some ability to arra nge tractor-trailer combinations that provide increased fuel efficiency, the va lue of the resulting fuel savings may be small relative to the complexity and cost involved. EPA and NHTSA are not proposing to regulate trailers in this proposal.

By itself, information provision may be inadequate to a ddress the potential underinvestment in fuel economy resulting from such split incentives. In this setting, regulation may contribute to fuel savings that otherwise may be difficult to achieve.

The agencies seek evidence an d data on the extent to which split incentives effect purchasing choices in truck markets. For example, do trailer buyers that do not own their own tractors less likely to purchase aerodynamic trailers than those that purchase and drive both

tractors and trailers.Summary of Interagency Working Comments Received on Draft Rule under EO 12866 Review. Subject to Further Policy Review

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### Uncertainty about Future Cost Savings

Another hypothesis for the failure to adop t seemingly fuel saving technologies may be uncertainty about future fuel prices or truck maintenance costs. When purchasers have less than perfect foresight about future operating expenses, they may implicitly discount future savings in those costs due to uncertainty about potential returns from investme nts that reduce future costs. In contrast, the immediate costs of the fuel-saving or maintenance-reducing technologies are certain and immediate, and thus not subject to disc ounting. In this situat ion, both the expected return on capital investments in higher fuel ec onomy and potential variance about its expected rate may play a role in a firm’s calculation of its payback period on such investments.

In the context of energy efficiency investments for the home, Metcalf and Rosenthal (1995) and Metcalf and Hassett (1995) observe th at households weigh known, up-front costs that are essentially irreversible against an unknown stream of future fuel savings. 1 Uncertainty about the value of future energy savings may make risk-averse households reluctant to invest in energy-saving technologies that appear to offer attractive economic returns. These authors find that it is possible to replicate the observed adoption rates for household energy efficiency improvements by incorporating the effect of uncertainty about the value of future energy savings into an empirical model. Notably, in this situation, households’ slow adoption can be optimal. Requiring them to adopt technologies more quickly may make them worse off.

Greene et al. (2009) also find support for this explanation in the context of light-duty fuel economy decisions: a loss-averse consumer's expected net present value of increasing the fuel economy of a passenger car can be very close to zero, even if a risk-neutral expected value calculation shows that its buyer can expect signifi cant net benefits from purchasing a more fuelefficient car. 2 These authors note that uncertainty regard ing the future price of gasoline is a less important source of this result than is uncertainty about the lifetime, expected use, and reliability of the vehicle. Supporting this hypothesis is a finding by Dasgupta et. al (2007) that consumers are more likely to lease than buy a vehicle with higher maintenance costs because it provides them with the option to return it before those costs become too high. 3 However, the agencies know of no studies that have estimated the impact of uncertainty on perceived future savings in fuel costs for medium and heavy-duty vehicles.

1 Metcalf, G., and D. Rosenthal (1995). “The ‘New’ View of Investment Decisions and Public Policy Analysis: An Application to Green Lights and Cold Refrigerators,” J ournal of Policy Analysis and Management 14: 517–531. Hassett and Metcalf (1995). “Energy Tax Credits and Resi dential Conservation Investment: Evidence from Panel Data” Journal of Public Economics 57 (1995): 201-217. Me tcalf, G., and K. Hassett (1999). “Measuring the Energy Savings from Home Improvement Investments: Evidence from Monthly Billing Data.” The Review of Economics and Statistics 81(3): 516-528.

2 Greene, D., J. German, and M. Delucchi (2009). “Fue l Economy: The Case for Market Failure” in Reducing Climate Impacts in the Transportation Sector, Sper ling, D., and J. Cannon, eds. Springer Science.

3 Dasgupta, S., S. Siddarth, and J. Silva-Risso (2007). “To Lease or to Buy? A Structural Model of a Consumer’s

Vehicle and Contract Choice Decisions.” Jour nal of Marketing Research 44: 490 – 502. Comment [A9]: Same comment – “slow” appears

to contradicts the baseline.Summary of Interagency Working Comments Received on Draft Rule under EO 12866 Review. Subject to Further Policy Review

8 Purchasers' uncertainty about future fuel prices implies that mandating improvements in fuel efficiency can reduce the expected utility asso ciated with truck purchases. This is because adopting such regulation requires purchasers to assume a greater level of risk than they would in its absence, even if the future fuel savings predicted by a risk-neutral calculation actually materialize. Thus the mere existence of uncertainty about future savings in fuel costs does not by itself assure that regulations requiring im proved fuel efficiency will necessarily provide economic benefits for truck purchasers and operators. On the other hand, because risk aversionreduces expected returns for businesses, competitive pressures can reduce risk aversion: riskneutral companies can make higher average profits over time. Thus, significant risk aversion is unlikely to survive competitive pressures.

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### Adjustment and Transactions Costs

Another hypothesis is that transactions costs of changing to new technologies (how easily drivers will adapt to the changes, e.g.) may preven t their adoption. Because of the diversity in the trucking industry, truck owners and fleets ma y like to see how a new technology works in the field, when applied to their specific operations, before they adopt it. If a conservative approach to new technologies leads truck buyers to fail to adopt new technologies, then the industry will fail to achieve their associated fuel saving, en vironmental, and energy security benefits.

In addition, there may be costs associated wi th training drivers to realize the potential fuel savings enabled by new technologies, or w ith accelerating fleet operators’ scheduled fleet turnover and replacement to hasten their acquisition of vehicles equipped with new fuel-saving technologies. Here, again, requiring the widespread use of these technologies may impose adjustment and transactions costs not included in this analysis. As in the discussion of the role of risk, these adjustment and transaction costs are typically immediate and undiscounted, while their benefits are future and uncertain; risk or loss aversion may further discourage companies from adopting new technologies.

To the extent that there may be transactions costs associated with the new technologies, then regulation gives all new truck purchasers a level playing field, because it will require them to adjust on approximately the same time schedule. If experience with the new technologies serves to reduce uncertainty and risk, the industry as a whole may become more accepting of new technologies. This could increase demand for future new technologies and induce additional benefits in the legacy fleet thro ugh complementary efforts such as SmartWay.

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### Summary

On the one hand, commercial vehicle operators are under competitive pressure to reduce operating costs, and thus their purchasers would normally be expected to pursue and rapidly adopt cost-effective fuel-saving technologies. On the other hand, the short payback period required by buyers of new trucks is a symptom that suggests some combination of uncertainty Comment [A10]: This entire reason appears to contradicts the baseline assumption of zero technology growth.Summary of Interagency Working Comments Received on Draft Rule under EO 12866 Review. Subject to Further Policy Review

9 about future cost savings, transactions costs, and imperfectly informed markets. In addition, widespread use of tractor-trailer combinations in troduces the possibility that owners of trailers may have weaker incentives than truck owners or operators to adopt fuel-saving technology for their trailers. The market for medium- and heavy-duty trucks may face these problems, both in

the new vehicle market and in the resale market.

Provision of information about fuel-saving t echnologies through voluntary programs such as SmartWay will assist in the adoption of new cost-saving technologies, but diffusion of new technologies can still be obstructed. Those who are willing to experiment with new technologies expect to find cost savings, but those may be difficult to prove. As noted above, because individual results of new technologies vary, new truck purchasers may find it difficult to identify or verify the effects of fuel-saving technologies. Those who are risk-averse are likely to avoid new technologies out of concerns over the possibility of inadequate returns on the investment, or with other adverse impacts. Competitive pressures in the freight transport industry can provide a strong incentive to reduce fuel consumption and improve environmental performance. However, not every driver or trucking fleet operating today has the requisite ability or interest to access the technical information, some of which is already provided by SmartWay, nor the resources necessary to evaluate this information within th e context of his or her own freight operation.

As noted at the beginning of this section, the agencies seek comments on all these hypotheses as well as any data that could inform our understanding of what appears to be slow adoption of cost-effective fuel-savi ng technologies in these industries.



### B. Averaging, Banking, and Trading (ABT) Program

Averaging, Banking, and Trading (ABT) of emissions credits have been an important part of many EPA mobile source pr ograms under CAA Title II, in cluding engine and vehicle programs. ABT programs can be important because they can help to address many issues of technological feasibility and lead-time, as well as considerations of cost. ABT programs are not just add-on provisions included to help reduce costs, but are usually an integral part of the standard setting itself. An ABT program is important because it provides manufacturers flexibilities that assist the development and impl ementation of new technologies efficiently and therefore enables new technologies to be implemented at a more progressive pace than without ABT. A well-designed ABT program can provide important environmental benefits and at the same time increase flexibility for and reduce costs to the regulated industry.

Section II above describes EPA’s proposed GHG emission standards and NHTSA’s proposed fuel consumption standards. For each of these respective sets of standards, the agencies are also proposing ABT provisions consistent with each agency’s statutory authority. The agencies have worked closely together to de sign these proposed provisions to be essentiallySummary of Interagency Working Comments Received on Draft Rule under EO 12866 Review. Subject to Further Policy Review

10 identical to each other in form and function. Because of this fundamental similarity, the remainder of this section refers to these provisions collectively as “the ABT program” except where agency-specific distinctions are required.

As discussed in detail below, the structure of this proposed GHG ABT program for HD engines is based closely on earlier ABT programs for HD engines; the proposed program for HD pickups and vans is built on the existing light-duty GHG program flexibility provisions; and we propose first-time ABT provisions for combination tractors and vocational vehicles that are as consistent as possible with our other HD vehi cle regulations. The flexibility provisions associated with this new regulatory category are intended to systematically build upon the structure of the existing programs.

As an overview, “averaging” means the exchange of emission credits between engine families or truck families within a given manufacturer’s regulatory subcategory. For example within each regulatory subcategory, engine manuf acturers divide their product line into “engine families” that are comprised of engines expect ed to have similar emission characteristics throughout their useful life. Averaging allows a manufacturer to certify one or more engine families within the same regulatory subcategory at levels above the applicable emission standard. The increased emissions over the standard would need to be offset by one or more engine families within that manufacturer’s regulatory subcategory that are certified below the same emission standard, such that the average emission s from all the manufactur er’s engine families, weighted by engine power, regulatory useful life, and production volume, are at or below the level of the emission standard. (The inclusion of engine power, useful life, and production volume in the averaging calculations allows the emissions credits or debits to be expressed in

total emissions over the useful life of the credit -using or generating engine sales.) Total credits for each regulatory category within each model year are determined by summing together the credits calculated for every engine family within that specific regulatory category.

“Banking” means the retention of emission credits by the manufacturer for use in future model year averaging or trading. “Trading” means the exchange of emission credits between manufacturers, which can then be used for averaging purposes, banked for future use, or traded

to another manufacturer.

In the current program, the agencies are proposing to restrict manufacturers are restricted to only averaging, banking and trading credits generated within a regulatory class

. . However, the agencies are evaluating — and therefore request comment on — potential alternative approaches in which fewer restrictions are placed on the use of credits for averaging, banking, and trading. Particularly, the agencies request comment on removing prohibitions on averaging and trading between some or all regulatory clas ses in this rule, and on removing restrictions between some or all regulatory subcategories that are within the same regulatory category (e.g., allowing trading of credits between class 7 day cabs and class 8 sleeper cabs). Comment [A11]: Is there a difference between the regulatory “subcategory” mentioned previously in this paragraph and the category mentioned here? If so, can this difference be defined for clarity? If not, please use consistent terminology to reduce

confusion.

Comment [A12]: What is the relationship between a regulatory “category”, “subcategory”, and “class”? Any differences need to be clearly defined, and consistent terms need to be employed throughout.Summary of Interagency Working Comments Received on Draft Rule under EO 12866 Review. Subject to Further Policy Review

11 In the past, we have followed this the practice of allowing averaging and trading between like products for two primary reasons. First by only allowing because we have recognized that

the estimation of emission credits is not an ab solutely precise process, and actual emission reductions or increases “in-use” would vary due to differences in vehicle duty cycles, maintenance practices and any number of other factors. By restricting credit averaging , banking and trading to only allow averaging and trading between similar like products we can help ensure that the regulations do not , the agencies gain some degree of assurance that the operation and use of the vehicles generating credits and consuming credits would be similar. The agencies also note that some industry participants have expressed concern that, allowing credit averaging, banking and trading across different products may create an unlevel playing field for the regulated industry. Engine Specifically. engine and truck manufacturers have commonly expressed to us a concern that some manufacturers with a wide range of product offerings spanning a number of regulatory categories would be able to use the ABT program provisions to generate credits in regulatory class markets where they face less competition and then use those credits to compete unfairly in other regulator y categories where they face greater competition. Second, we have recognized that the estimation of emission credits is not an absolutely precise process and actual emission reductions or increases “in

- use” would vary due to differences in vehicle duty cycles, maintenance practices and any number of other factors. By restricting credit trading between like products, the agencies gain some degree of assurance that the operation and

use of the vehicles generating credits and consuming credits would be similar. However, the agencies request comment on the need to restrict credit use in this way, on whether averaging

should be allowed across a broader set of products , and on how the above iss ues could be

addressed if a program with reduced restrictions were pursued, such as through discounting of

credits.

The agencies are evaluating the possibility of placing fewer restrictions on averaging and trading because increasing the flexibility offered to manufacturers to average, bank, and trade credits across regulatory subcategories and categ ories could potentially significantly reduce the overall cost of the program. Specifically, to the extent that the marginal costs of compliance per gallon of fuel saved or ton of GHG reduced are expected to differ—or unexpectedly differ— across categories or subcategories, averaging and trading across categories and subcategories can

allow manufacturers to achieve the same overall reduction in fuel use and emissions at lower cost. While trading restrictions in the context of past EPA rulemakings have been motivated in part by the local or regional nature of the pollutant being regulated, in this instance, opportunities for greater flexibility may exist in light of the fact that greenhouse gases are a global pollutant whose local consequences are related to global, not local or regional atmospheric concentrations. However, trading ratios may need to be established for averaging and trading across categories, and potentially subcategories, to ensure that averaging and trading across categories and subcategories does not lead to a net increase in emissions or fuel use in light of differences in vehicle use patterns across categories and subcategorie s. Further, it is possible to design trading ratios that assure a net reduction in emissions and fuel use as a result of averaging and trading. The agencies also request comment on how the po tential cost savings from increasing flexibilitySummary of Interagency Working Comments Received on Draft Rule under EO 12866 Review. Subject to Further Policy Review

12 in averaging and trading provisions, how such averaging and trading flexibilities could be designed to ensure environmental neutrality, and whether trading ratios should be designed to achieve a net reduction in emissions and fuel use as a result of trading.