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

To: William Charmley/AA/USEPA/US@EPA, Robin Moran/AA/USEPA/US@EPA, 

<rebecca.yoon@dot.gov>, <james.tamm@dot.gov>, <Steve.Wood@dot.gov>, Maureen 

Delaney/DC/USEPA/US@EPA 

Date: 03/26/2010 03:23 PM 

Subjec

t: 

Summary of Interagency working comments on draft final rule under EO 12866 

Please find attached a summary of interagency working comments received on the draft final

rule under EO 12866 review. They are for your consideration, and subject to further policy

review.

  

Thanks.[attachment "Summary of Interagency working comments on draft rule under EO 12866

3.26.pdf" deleted by Tad Wysor/AA/USEPA/US]  
Summary of Interagency Working Comments on Draft Final Rule under EO 12866 review. These are

subject to further policy review.

1

Below is a summary of interagency comments received during EO 12866 review of the draft 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. 

Expanded discussion of the 41 square-foot cutpoint for passenger cars in Section II.C. of 

the preamble:

II.C. Development of Attribute-Based Curve Shapes 

In the NPRM, NHTSA and EPA proposed to set attribute-based CAFE and CO2

standards that are defined by a mathematical function for MYs 2012-2016 passenger cars and 

light trucks. EPCA, as amended by EISA, expressly requires that CAFE standards for passenger 

cars and light trucks be based on one or more vehicle attributes related to fuel economy, and be 

expressed in the form of a mathematical function.1

 The CAA has no such requirement, though in 

past rules, EPA has relied on both universal and attribute-based standards (e.g., for nonroad 

engines, EPA uses the attribute of horsepower). However, given the advantages of using 

attribute-based standards and given the goal of coordinating and harmonizing CO2 standards 

promulgated under the CAA and CAFE standards promulgated under EPCA, EPA also proposed 

to issue standards that are attribute-based and defined by mathematical functions. There was 

consensus in the public comments that EPA should develop attribute-based CO2 standards. 

 Comments received in response to the agencies’ decision to base standards on vehicle 

footprint were largely supportive. Several commenters (BMW, NADA, NESCAUM) expressed 

support for attribute-based (as opposed to flat or universal) standards generally, and agreed with 

EPA’s decision to harmonize with NHTSA in this respect. Many commenters (Aluminum 

Association, BMW, ICCT, NESCAUM, NY DEC, Schade, Toyota) also supported the agencies’ 

decision to continue setting CAFE standards, and begin setting GHG standards, on the basis of 

vehicle footprint, although one commenter (NJ DEP) opposed the use of footprint due to concern 

that it encourages manufacturers to upsize vehicles and undercut the gains of the standard. Of 

the commenters supporting the use of footprint, several focused on the benefits of 

harmonization—both between EPA and NHTSA, and between the U.S. and the rest of the world. 

BMW commented, for example, that many other countries use weight-based standards rather 

than footprint-based. While BMW did not object to NHTSA’s and EPA’s use of footprint-based 

standards, it emphasized the impact of this non-harmonization on manufacturers who sell 

vehicles globally, and asked the agencies to consider these effects. NADA supported the use of 

                                                           

1

 49 U.S.C. 32902(a)(3)(A). 
Summary of Interagency Working Comments on Draft Final Rule under EO 12866 review. These are

subject to further policy review.

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footprint, but cautioned that the agencies must be careful in setting the footprint curve for light 

trucks to ensure that manufacturers can continue to provide functionality like 4WD and 

towing/hauling capacity. 

 Some commenters requested that the agencies consider other or more attributes in 

addition to footprint, largely reiterating comments submitted to the MYs 2011-2015 CAFE 

NPRM. Cummins supported the agencies using a secondary attribute to account for towing and 

hauling capacity in large trucks, for example, while Ferrari asked the agencies to consider a 

multi-attribute approach incorporating curb weight, maximum engine power or torque, and/or 

engine displacement, as it had requested in the previous round of CAFE rulemaking. An 

individual, Mr. Kenneth Johnson, commented that weight-based standards would be preferable to 

footprint-based ones, because weight correlates better with fuel economy than footprint, because 

the use of footprint does not necessarily guarantee safety the way the agencies say it does, and 

because weight-based standards would be fairer to manufacturers. 

 In response, EPA and NHTSA continue to believe that the benefits of footprint-attributebased standards outweigh any potential drawbacks raised by commenters, and that harmonization 

between the two agencies should be the overriding goal on this issue. As discussed by NHTSA 

in the MY 2011 CAFE final rule,2

 the agencies believe that the possibility of gaming is lowest 

with footprint-based standards, as opposed to weight-based or multi-attribute-based standards. 

Specifically, standards that incorporate weight, torque, power, towing capability, and/or off-road 

capability in addition to footprint would not only be significantly more complex, but by 

providing degrees of freedom with respect to more easily-adjusted attributes, they would make it 

less certain that the future fleet would actually achieve the average fuel economy and CO2 levels 

projected by the agencies. The agencies recognize that based on economic and consumer 

demand factors that are external to this rule, the distribution of footprints in the future may be 

different (either smaller or larger) than what is projected in this rule. However, the agencies 

continue to believe that there will not be significant shifts in this distribution as a direct 

consequence of this rule. The agencies are therefore finalizing MYs 2012-2016 CAFE and GHG 

standards based on footprint.” 

...... [late in this same section II.C ] 

                                                           

2

 See 74 FR 14359 (Mar. 30, 2009). 
Summary of Interagency Working Comments on Draft Final Rule under EO 12866 review. These are

subject to further policy review.

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Before fitting the sloped portion of the constrained linear form, NHTSA and EPA 

selected footprints above and below which to apply constraints (i.e., minimum and maximum 

values) on the function. The agencies believe that the linear form performs well in describing 

the observed relationship between footprint and fuel consumption or CO2 emissions for vehicle 

models within the footprint ranges covering most vehicle models, but that the single (as opposed 

to piecewise) linear form does not perform well in describing this relationship for the smallest 

and largest vehicle models. For passenger cars, the agency noted that several manufacturers 

offer small, sporty coupes below 41 square feet, such as the BMW Z4 and Mini, Honda S2000, 

Mazda MX-5 Miata, Porsche Carrera and 911, and Volkswagen New Beetle. Because such 

vehicles represent a small portion (less than 10 percent) of the passenger car market, yet often 

have performance, utility, and/or structural characteristics that could make it technologically 

infeasible and/or economically impracticable for manufacturers focusing on such vehicles to 

achieve the very challenging average requirements that could apply in the absence of a 

constraint, EPA and NHTSA proposed to “cut off” the linear portion of the passenger car 

function at 41 square feet. The agencies recognize that for manufacturers who make small 

vehicles in this size range, this cut offe creates re is some incentive to downsize (i.e., further 

reduce the size and weight, and/or increase the production, of models currently smaller than 41 

sq. ft.) to make it easier to meet the target. The cut off may also create an incentive for 

manufacturers who do not currently offer such models to do so in the future. However, at the 

same time, the agencies believe that there is a limit to the market for ever-smaller cars smaller 

than 41 sq ft. Most consumers likely have some minimum expectation about interior volume, 

among other things. The agencies thus believe that the number of consumers who will want 

vehicles smaller than 41sq ft. (regardless of how they are priced) to be downsized even further is 

extremely small, and that the incentive to downsize, if present, will be minimal. For consistency, 

the agency proposed to do the same”cut off” for the light truck function at the same footprint, 

although no light trucks are currently offered below 41 square feet. The agencies further noted 

that above 56 square feet, the only passenger car model present in the MY 2008 fleet were four 

luxury vehicles with extremely low sales volumes—the Bentley Arnage and three versions of the 

Rolls Royce Phantom. NHTSA and EPA therefore also proposed to “cut off” the linear portion 

of the passenger car function at 56 square feet. Finally, the agencies noted that although public 

information is limited regarding the sales volumes of the many different configurations (cab 

designs and bed sizes) of pickup trucks, most of the largest pickups (e.g., the Ford F-150, GM 

Sierra/Silverado, Nissan Titan, and Toyota Tundra) appear to fall just above 66 square feet in 

footprint. EPA and NHTSA therefore proposed to “cut off” the linear portion of the light truck 

function at 66 square feet. 
Summary of Interagency Working Comments on Draft Final Rule under EO 12866 review. These are

subject to further policy review.

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5. Impacts on U.S. Vehicle Sales and Payback Period

a. Vehicle Sales Impacts 

 

 This analysis compares two effects. On the one hand, the vehicles 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. This rulemaking will not change the 

ways in which consumers value fuel economy. If some consumers make mistakes in how they 

trade off upfront costs and fuel savings over time, they will continue to make those errors. To 

the extent that some consumers more fully account for fuel savings in their decisions, they will 

also continue to do so. , which could makes them more attractive to consumers if consumers 

perceive and take into account these future fuel savings. The basic question is, then, which 

effect dominates? In general we would expect that the net effect would be a non-positive effect 

on aggregate vehicle sales. If consumers were satisfied with their purchase decisions prior to the 

standard, then we would expect a certain number of consumers to decide that the now higher cost 

of the vehicle no longer justifies purchase (while others may purchase the same vehicle or adjust 

their purchase in favor of other attributes). This result would apply regardless of whether 

consumer-side market failures currently lead to under-consumption of fuel economy. 

 However, if there is a market failure on the producer side that currently inhibits 

manufacturers from offering the level of vehicle fuel economy that would maximize their profits, 

then it is possible that vehicle sales would increase as a result of the new standards. Potential 

explanations for producer market failures are discussed in sections X and Y.

The methodology EPA used for estimating the impact on vehicle sales is relatively 

straightforward, but makes a number of simplifying assumptions. According to the literature, the 

price elasticity of demand for vehicles is commonly estimated to be -1.0.3

 In other words, a one 

                                                           

3

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

Journal of Regulatory Economics 2: 151-172 (Docket EPA-HQ-OAR-2009-0472-0015); McCarthy, Patrick S., 

1996. “Market Price and Income Elasticities of New Vehicle Demands.” Review of Economics and Statistics 78: 

543-547 (Docket EPA-HQ-OAR-2009-0472-0016); Goldberg, Pinelopi K., 1998. “The Effects of the Corporate 

Average Fuel Efficiency Standards in the U.S.,” Journal of Industrial Economics 46(1): 1-33 (Docket EPA-HQOAR-2009-0472-0017). 
Summary of Interagency Working Comments on Draft Final Rule under EO 12866 review. These are

subject to further policy review.

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percent increase in the price of a vehicle would be expected to decrease sales by one percent, 

holding all other factors constant. For our estimates, EPA calculated the effect of an increase in 

vehicle costs due to the GHG standards and assumes that consumers will face the full increase in 

costs, not an actual (estimated) change in vehicle price. (The estimated increases in vehicle cost 

due to the rule are discussed in Section III.H.2) This is a conservative methodology, since an 

increase in cost may not pass fully into an increase in market price in an oligopolistic industry 

such as the automotive sector.4

 EPA also notes that we have not used these estimated sales 

impacts in the OMEGA Model. 

Although EPA uses the one percent price elasticity of demand for vehicles as the basis 

for our vehicle sales impact estimates, we assumed that the consumer would take into account 

both the higher vehicle purchasing costs as well as some of the fuel savings benefits when 

deciding whether to purchase a new vehicle. Therefore, the incremental cost increase of a new 

vehicle would be offset by reduced fuel expenditures over a certain period of time (i.e., the 

“payback period”). For the purposes of this rulemaking, EPA used a five-year payback period, 

which is consistent with the length of a typical new light-duty vehicle loan.5

 The one commenter 

on this analysis stated that use of the five-year payback period was reasonable. This approach 

may not accurately reflect the role of fuel savings in consumers’ purchase decisions, as the 

discussion in Section III.H.1 suggests. If consumers consider fuel savings in a different fashion 

than modeled here, then this approach will not accurately reflect the impact of this rule on 

vehicle sales. 

This increase in costs has other effects on consumers as well: if vehicle prices increase, 

consumers will face higher insurance costs and sales tax, and additional finance costs if the 

vehicle is bought on credit. In addition, the resale value of the vehicles will increase. EPA 

received no comments on these adjustments. The only change to these adjustments between the 

NPRM and this discussion is an updating of the interest rate on auto loans. EPA estimates that, 

with corrections for these factors, the effect on consumer expenditures of the cost of the new 

                                                           

4

 See, for instance, Gron, Ann, and Deborah Swenson, 2000. “Cost Pass-Through in the U.S. Automobile Market,” 

Review of Economics and Statistics 82: 316-324 (Docket EPA-HQ-OAR-2009-0472-0007). 

5

 As discussed further in Section III.H.1, there is not a consensus in the literature on how consumers consider fuel 

economy in their vehicle purchases. Results are inconsistent, possibly due to fuel economy not being a major focus 

of many of the studies, and possibly due to sensitivity of results to modeling and data used. A survey by Greene 

(2010) finds that estimates in the literature of the value that consumers place on fuel economy when buying a 

vehicle range from negative – consumers would pay to reduce fuel economy – to more than 1000 times the value of 

fuel savings. 
Summary of Interagency Working Comments on Draft Final Rule under EO 12866 review. These are

subject to further policy review.

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technology should be 0.914 times the cost of the technology at a 3% discount rate, and 0.876 

times the cost of the technology at a 7% discount rate. The details of this calculation are in the 

RIA, Chapter 8.l. 

Once the cost estimates are adjusted for these additional factors, the fuel cost savings 

associated with the rule, discussed in Section III.H.4, are subtracted to get the net effect on 

consumer expenditures for a new vehicle. With the assumed elasticity of demand of -1, the 

percent change in this “effective price,” estimated as the adjusted increase in cost, is equal to the 

negative of the percent change in vehicle purchases. The net effect of this calculation is in Table 

III.H.5-1 and Table III.H.5-2. The values have changed slightly from the NPRM, due to changes 

in fuel prices and fuel savings, technology costs, and baseline vehicle sales projections, in 

addition to the adjustment in financing costs. 

The estimates provided in Table III.H.5-1 and Table III.H.5-2 are meant to be illustrative 

rather than a definitive prediction. When viewed at the industry-wide level, they give a general 

indication of the potential impact on vehicle sales. As shown below, the overall impact is 

positive and growing over time for both cars and trucks. Because the fuel savings associated 

with this rule are expected to exceed the technology costs, the effective prices of vehicles (the 

adjusted increase in technology cost less the fuel savings over five years) to consumers will fall, 

and consumers will buy more new vehicles. As a result, the lower net cost of the vehicles is 

projected to lead to an increase in sales for both cars and trucks. 

As discussed above, this result depends on the assumption that more fuel efficient 

vehicles that yield net consumer benefits over five years would not otherwise be offered on the 

vehicle market due to market failures on the part of vehicle manufacturers. If vehicles that 

achieve the fuel economy standards prescribed by today’s rulemaking would already be 

available, but consumers chose not to purchase them, then this rulemaking would not result in an 

increase in vehicle sales, because it does not alter how consumers make decisions about which 

vehicles to purchase. In addition, this analysis has not accounted for a number of factors that 

might affect consumer vehicle purchases, such as changing market conditions, changes in vehicle 

characteristics that might accompany improvements in fuel economy, or consumers considering 

a different “payback period” for their fuel economy purchases. If consumers use a shorter 

payback period, the sales impacts will be less positive, possibly negative; if consumers use a 

higher payback period, the impacts will be more positive. Also, this is an aggregate analysis; 
Summary of Interagency Working Comments on Draft Final Rule under EO 12866 review. These are

subject to further policy review.

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some individual consumers (those who drive less than estimated here) will face lower net 

benefits, while others (who drive more than estimated here) will have even greater savings. 

These complications add considerable uncertainty to our vehicle sales impact analysis. 

Table III.H.5-1 Vehicle Sales Impacts Using a 3% Discount Rate 

 Change in Car 

Sales 

% Change Change in 

Truck Sales 

% Change 

2012 67,500 0.7 62,100 1.1 

2013 76,000 0.8 190,200 3.2 

2014 114,000 1.1 254,900 4.3 

2015 222,200 2.1 352,800 6.1 

2016 360,500 3.3 488,000 8.6 

Table III.H.5-1 shows the impacts on new vehicle sales using a 3% discount rate. The 

fuel savings over five years are always higher than the technology costs. Although both cars and 

trucks show very small effects initially, over time vehicle sales become increasingly positive, as 

increased fuel prices make improved fuel economy more desirable. The increases in sales for 

trucks are larger than the increases for trucks (except in 2012) in both absolute numbers and 

percentage terms. 

Table III.H.5-2 New Vehicle Sales Impacts Using a 7% Discount Rate 

 Change in Car 

Sales 

% Change Change in 

Truck Sales 

% Change 

2012 62,800 0.7 58,300 1 

2013 70,500 0.7 92,300 1.5 

Comment [A1]: New language suggested by 

NHTSA/EPA in response to comments document. 
Summary of Interagency Working Comments on Draft Final Rule under EO 12866 review. These are

subject to further policy review.

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2014 106,100 1 127,700 2.1 

2015 208,400 2 194,200 3.3 

2016 339,400 3.1 280,000 4.9 

Table III.H.5-2 shows the impacts on new vehicle sales using a 7% interest rate. While a 

7% interest rate shows slightly lower impacts than using a 3% discount rate, the results are 

qualitatively similar to those using a 3% discount rate. Sales increase for every year. For both 

cars and trucks, sales become increasingly positive over time, as higher fuel prices make 

improved fuel economy more valuable. The car market grows more than the truck market in 

absolute numbers, but less on a percentage basis. 

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, 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 will rise, while scrappage rates of used vehicles will increase slightly. This will 

cause the “turnover” of the vehicle fleet (i.e., the retirement of used vehicles and their 

replacement by new models) to accelerate slightly, 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, as will the rate at which 

used vehicles are retired from service. This effect will slow the replacement of used vehicles by 

new models, and thus partly offset the anticipated effects of this rule on fuel use and emissions. 

Because the agencies are uncertain about how the value of projected fuel savings from 

this rule to potential buyers will compare to their estimates of increases in new vehicle prices, we 

have not attempted to estimate explicitly the effects of the rule on scrappage of older vehicles 

and the turnover of the vehicle fleet. 

A detailed discussion of the vehicle sales impacts methodology is provided in the Chapter 

8 of EPA’s RIA. 
Summary of Interagency Working Comments on Draft Final Rule under EO 12866 review. These are

subject to further policy review.

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