1

 UNITED STATES ENVIRONMENTAL PROTECTION AGENCY

 ANN ARBOR, MI 48105

 

May 20, 2011

 OFFICE OF

AIR AND RADIATION

MEMORANDUM

SUBJECT: Economy-Wide Impacts of Heavy-Duty Truck Greenhouse Gas Emissions 

and Fuel Efficiency Standards

FROM: Sharyn Lie and Michael Shelby, Office of Transportation and Air Quality

TO: Docket EPA-HQ-OAR-2010-0162

EPA has undertaken an analysis of the economy-wide impacts of the heavy-duty 

(HD) vehicle fuel efficiency and GHG standards. The results were not a factor regarding 

the appropriateness of the GHG or fuel efficiency standards. It is important to note that 

the results of this modeling exercise are dependent on the assumptions associated with 

how producers will make fuel efficiency improvements and how consumers will respond 

to increases in higher vehicle costs and improved vehicle fuel efficiency as a result of the 

program.

It is anticipated that the HD vehicle standards will have impacts on the U.S. 

economy that extend beyond the transportation sector. The price of HD vehicles would 

increase with this program; at the same time, the program would also lower the demand 

for transportation fuels, resulting in a lower overall world oil price. This combination of 

effects—price increases for HD vehicles and lower fuel demand and world oil prices—

would impact all sectors of the economy that use HD vehicles and petroleum-based 

energy as intermediate inputs to produce final goods. Households would also be 

impacted indirectly as consumers of final goods. Furthermore, as discussed in the RIA 

Chapter 9, HD VMT is largely driven by changes in economic activity. To the extent that 

we have accounted for the increase in truck use due to the rebound effect in our analysis, 

it seems appropriate to also take into account the change in economic activity associated 

with increased truck travel as a result of the program. 

It is important to note, however, that these potential impacts do not represent 

additional benefits or costs from the regulation. Instead, they represent the effects on the 

U.S. economy as its direct benefits and costs are transmitted through changes in prices 

and quantities sold in the affected markets, including those for vehicles and their 

components, fuel, and the various resources used to supply them. The predicted impacts 

of the regulations on economic activity depend on what we assume with regard to fuel 
2

savings. In particular, it depends on the extent to which market failures affecting demand 

for vehicle fuel economy are present, and when they are not, the extent to which they are 

offset by costs not captured in EPA and NHTSA’s analysis. Such costs include changes 

in economic welfare due to the purchase of more fuel economy than businesses would 

otherwise elect to purchase absent the regulations. As discussed in Section VIII.A., cost 

and fuel saving calculations presented in the RIA are predicated on the argument that 

there are inefficiencies in the market for fuel-saving technology in the trucking industry.

To estimate the impacts of this program on U.S. GDP and personal consumption, 

EPA has used an economy-wide, computable general equilibrium (CGE) model. Over 

the past twenty years, the use of peer-reviewed CGE models to assess the economy-wide 

impacts of large-scale environmental policies has become a common practice. The 

features of CGE models make them particularly well-suited to such analyses1which, in 

turn, have led to strong endorsements for their use by EPA’s Science Advisory Board.2 

The economy-wide model used in this analysis is the Intertemporal General Equilibrium 

Model (IGEM).3 IGEM is a model of the U.S. economy with an emphasis on the 

economy’s energy and environmental aspects. IGEM is a dynamic model which depicts 

growth of the economy due to capital accumulation, technical change and population 

change. The model utilizes a unified accounting framework consistent with the National 

Income and Product Accounts and the Industry Classification System. It is a detailed 

multi-sector model covering thirty-five industries, consisting of five energy and thirty

non-energy sectors. The model ensures market balances (supply equals demand) in value 

and quantity terms, including limits placed on private investment dictated by domestic 

and foreign saving behavior and by the fiscal policies of federal, state and local 

governments. 

Capital accumulation in the model arises from the saving and investment behavior 

of households and businesses, and provides an essential input to production and 

consumption. Households in the model make perfect-foresight choices regarding present 

and future consumption (i.e., saving), and make choices regarding the allocation of their 

members’ time between labor and leisure. The model covers all aspects of long-run 

growth including the supply of capital, labor, imported and intermediate inputs to 

production; the rates and directions of exogenous and endogenous technical change for 

each producing sector; and the degrees of substitutability among inputs and commodities 

in production and final demand (consumption, investment, governments and foreign 

trade). The substitution possibilities for both producers and consumers in IGEM are 

driven by model parameters that are based on observed market behavior revealed over the 

past forty to fifty years. 

 

1

See Weyant, J.P., 2000. An Introduction to the economics of climate change policy. Pew Center on 

Global Climate Change Report (Docket ID: EPA-HQ-OAR-2010-0162-0023)

2

See EPA’s Guidelines for Preparing Economic Analyses, 2010 and 2000, available at 

http://yosemite.epa.gov/ee/epa/eed.nsf/pages/Guidelines.html (Docket ID: EPA-HQ-OAR-2010-0162-

0022)

3 The model is developed and run by Dale W. Jorgenson Associates for EPA. More information on the 

assumptions included in IGEM, such as the equations used, the elasticities employed, and the market 

clearing mechanisms assumed can be found on the model homepage: http://www.igem.insightworks.com/
3

In order to model these rules, the CGE model uses outputs of the transportation 

sector models as inputs to determine the economy-wide impacts of this program. 

Specifically, the model uses information from other sources on incremental costs of 

vehicle technologies, reductions in fuel consumption, and impacts on the world oil price. 

The incremental cost of vehicle technologies is used to generate a percentage change in 

vehicle cost that is applied to the IGEM motor vehicles sector. However, since the cost 

and fuel savings vary significantly across truck classes, we have used a weighted average 

cost and fuel savings for all truck classes in this analysis. In addition, since heavy-duty 

trucks make up less than 5 percent of the motor vehicles manufacturing sector, the cost 

increases represented here only apply to that portion of the IGEM sector. The data on 

reductions in fuel consumption are used as inputs to IGEM in order to reduce the amount 

of refined petroleum sector output required by the transportation sector and other sectors 

in the model. Finally, the estimates of reductions in the world oil price are directly used 

to reduce the oil price in the model. The changes in world oil price are estimated using 

the Energy Security Oil Premium Model maintained by Oak Ridge National Laboratory, 

which is discussed in more detail in Section VIII.I.

(1) Impacts on U.S. GDP

In order to use IGEM to estimate the real U.S. GDP impacts of these rules, we 

analyzed the impact of changes in the costs of heavy-duty trucks, changes in fuel 

consumption from the shift to a lower GHG-emitting vehicle stock, and the impacts of 

changes in the demand for motor fuels on fuel prices. (see the Preamble Section VIII.B 

for additional information on the change in vehicle technology costs, Section VIII.E for

details on changes in fuel demand, and Section VIII.I for a discussion of the effect of 

reduced U.S. fuel consumption on the world price of petroleum). It is important to note 

that the economy-wide analysis does not include a representation of a number of external

benefits summarized in the previous section (e.g., reducing greenhouse gas and non-GHG 

emissions), and thus differs in important respects from the analysis of costs and benefits 

reported in the previous section. Table 1 and Figure 1 show the Reference Case GDP and 

GDP with this rule from 2015 through 2050.

Table 1: Annual GDP Impacts Associated with this Program (Billions of 2008 dollars)

Year Reference Case 

GDP

GDP with Program % Change from 

Reference Case

2015 $16,637.5 $16,637.2 -0.002%

2020 $19,281.9 $19,281.1 -0.004%

2030 $24,913.9 $24,913.1 -0.003%

2040 $31,324.0 $31,324.9 0.003%

2050 $38,758.4 $38,757.6 -0.002%
4

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

2015 2020 2030 2040 2050

$2009 Billion

Reference Case

HD Regulations

Figure 1 Annual GDP Impacts

The combined direct market forces of this HD program have a negligible effect on 

the overall economy, its sectors and its industries. Though small in absolute magnitude, 

there are, however, very recognizable relative consequences arising from these forces in 

general equilibrium. The direct market forces divide on the cost side in the form of 

higher vehicle prices and on the benefit side in the form of fuel savings and lower world 

oil prices. These combine to yield lower prices economy-wide for generally everything 

except motor vehicles. With lower prices and national income virtually unchanged, each 

dollar of household spending buys more consumer goods and services, each dollar of 

household and business saving finances more investment and capital accumulation, and 

each dollar of tax receipts supports more real purchases by Federal, state, and local 

governments. On the demand side, these serve to increase real GDP, but their effects are 

offset by reductions in net U.S. exports. In addition, the price benefits of the HD 

program increase over time. In turn, the decisions needed by forward-looking households 

to increase future consumption contribute, along with the noted export reductions, to 

small losses in real GDP. On the supply side, the increased availability of capital 

following greater investment and improved productivity permit and are accompanied by 

an almost undetectable reduction in labor supply (or, equivalently, increase in leisure 

demand) leaving national income very slightly lower. Whether viewed from the demand 

or supply sides, the changes in the overall economy as measured by real GDP are 

virtually zero.4

This simulation adopts the common practice in CGE modeling of assuming 

government deficits and current accounts are held constant (i.e., no changes from 

 

4 Note that GDP changes should not be confused with a measure of welfare since it focuses only on 

changes in what is produced by the economy, not what is consumed, and it does not include effects on 

externalities. 
5

reference case levels). Thus any changes in private investment arise solely from changes 

in household saving and business profitability.

5

 For governments, with nominal 

purchases more or less the same, lower prices economy-wide mean higher levels of real 

government purchases.6

The assumption that current accounts are held constant has additional 

consequences. Under the HD program, the U.S. economy becomes less intensive in 

petroleum use. The fuel savings lead to lower overall petroleum demand, and lower 

world oil prices further reduce petroleum import bills. This puts upward pressure on the 

dollar as fewer dollars seek foreign currency. A stronger dollar also is necessary to 

ensure current account balances are held constant in the face of relatively lower U.S. 

prices. The stronger dollar discourages real exports from the U.S. while encouraging real 

imports to the U.S. The decline in net exports arising from the stronger dollar works to 

partially offset the positive effects of consumption, investment and government purchases 

on real GDP. For additional information on GDP impacts, refer to the model outputs 

included in the docket.7

(2) Impacts on U.S. Consumption

In addition to showing the impacts of the HD program on U.S. GDP, EPA also 

shows the impacts on real U.S. personal consumption expenditures. Table 2 and Figure 2

show the Reference Case consumption and consumption with these rules from 2015 

through 2050. 

Table 2: Consumption Impacts of the Program (Billions of 2008 dollars)

Year Reference Case 

Consumption

Consumption with 

Program

% Change from 

Reference Case

2015 $10,373.4 $10,373.6 0.002%

2020 $11,732.5 $11,733.3 0.007%

2030 $15,126.2 $15,128.9 0.018%

2040 $19,109.0 $19,113.8 0.025%

2050 $23,573.0 $23,579.1 0.026%

 

5

In other words, there can be neither “crowding out” nor “crowding in” by reason of policy driven changes 

in the “twin” deficits. 

6 To preserve government deficit neutrality, any changes in nominal tax receipts are assumed to be matched 

by changes in nominal spending.

7

See, “IGEM 2011.05.20 FRM Economy-wide Impacts”, Document ID EPA-HQ-OAR-2010-0162-3359.
6

$0

$5,000

$10,000

$15,000

$20,000

$25,000

2015 2020 2030 2040 2050

$2009 Billion

Reference Case

HD Regulations

Figure 2 Annual Consumption Impacts

Under the HD program, since the prices of all commodities except for vehicles are 

decreasing, households can purchase more goods and services. As a result, real household 

consumption increases. In addition, households also can consume more leisure as more 

investment leads to a larger capital stock.8 The consumption impacts on a per household 

basis are presented in Table 3 and Figure 3. Consumption increases slightly as a result of 

this program.

9

 

Table 3: Consumption Impacts of This Program per Household (2008 dollars) 

Year Reference Case 

Consumption

Consumption with 

Program

Change from Reference 

Case

2015 $81,331 $81,333 $2

2020 $87,202 $87,208 $6

2030 $102,039 $102,058 $18

2040 $117,422 $117,451 $29

2050 $133,188 $133,223 $35

 

8 Note that this measure of consumption focuses only on goods and services sold in the market and 

therefore excludes effects on leisure. 

9 Note that this measure of consumption focuses only on goods and services sold in the market and 

therefore excludes effects on leisure. 
7

Figure 3 Annual Consumption per Household