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: 08/09/2012 06:59 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 final rule under EO 12866 and EO 13563 review.pdf 
Summary of interagency working comments received on draft final rule under EO 12866 and EO 13563

review. These 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. 

Interagency commenters provided the following comments on agency responses to initial 

interagency comments: 

Interagency commenters note that the agencies assume a fixed number of workers are required to 

make each car sold. NHTSA’s assumption that the average US domestic employee in the motor 

vehicle and parts industry will continue to produce a constant 11.3 vehicles per year seems 

puzzling in light of the fact that this regulation is estimated to lead to about $1,000 in increased 

content per car. Commenters note that someone has to produce this content (additional 

turbochargers, more engineering that enables use of lighter-weight but unfamiliar materials, etc.) 

Commenters note that the NRDC/, UAW/, NWF study cited in note 38 provides a few examples 

of ways in which the employment associated with a given level of vehicle production might be 

higher for more fuel-efficient vehicles. 

 Commenters note that since some scenarios may show a sales decrease, it might be useful to 

include this point. Commenters note that even if in the long term there is full employment, it 

might be helpful to point out that the route to achieving full employment does not necessarily 

include significant CAFE-induced dips or dislocations along the way. 

Commenters also note that the agencies continue to insist on a sales increase as the main case 

they analyze. The agencies’ desired results are that a) private fuel savings due to the rule are 

large, because consumers have suboptimally short payback periods for valuing fuel economy and 

b) consumers’ payback periods are longer than automakers’ implicit payback periods, so that 

when automakers are forced by the rule to offer more fuel economy, consumers value the savings 

in fuel costs at greater than the price increase required to pay for the technology that generates 

the fuel savings. Interagency commenters note that the agencies believe: 

Optimal payback period (OP) > Consumers’ actual payback period (CP) > Automakers’ 

implicit payback period (AP) 

Commenters note that in the agencies’ analysis, the gross social benefits of the rule are largely a 

function of OP - AP . The change in sales is a function of CP - AP. In their analyses of sales 

impacts of the rule, the agencies discuss the impact of varying measures of CP (consumer 

payback period). However, commenters note that analyzing the level of CP is not germane to 

understanding sales impacts, which depend on the difference between CP and AP. 

Commenters note that responses to initial interagency comments begin to do this. Commenters 

note that NHTSA (p2-3) gives plausible reasons that automakers might value fuel economy less 

than consumers do (i.e., that automakers have to make risky investments to obtain fuel economy 

improvements (investments that are risky in two senses: a) the fuel economy achieved from the 

investment may be less than forecast and b) consumers do not value this investment much if gas 
Summary of interagency working comments received on draft final rule under EO 12866 and EO 13563

review. These are for your consideration and are subject to further policy review.  

2

prices happen to be low at the time they are making their purchase. This analysis implies CP > 

AP, but does not say that AP = 0 (i.e., that automakers provide NO additional fuel economy 

beyond that required by the 2016 rule). EPA (p. 7) provides some arguments for a flat baseline, 

based on observed behavior by automakers (i.e., that automakers generally haven’t overcomplied 

with CAFÉ except when fuel prices rise, and fuel prices aren’t projected to rise). 

Commenters note that these arguments about automaker risk aversion do not necessarily imply 

that automakers don’t understand how consumers think1

. Rather, commenters believe that the 

point is that if the auto industry had a single manufacturer, it would behave differently (would 

invest more in fuel economy) than if the industry is made of multiple firms that have to worry 

about 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 distribution2

. Commenters believe 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). 

Commenters note that NHTSA’s analysis on p. 20 seems useful in this regard. Commenters note 

that this analysis shows that if automakers voluntarily put in technologies that have a 1-year or 

less payback for consumers, then sales will increase as long as consumers value paybacks at 3.1 

years or longer. If automakers make no voluntary improvements, then sales increase if 

consumers value fuel savings over at least 2.3 years. Their research suggests that consumers 

value fuel savings over a 1.5- 3 year period (p. 9-10), suggesting that the change in sales as a 

result of the rule will be small. 

Commenters suggest : 

1) Consideration of the case of a rising baseline (e.g., the case where manufacturers 

voluntarily implement fuel-saving technologies with 1-year payback to consumers) and 

include the analysis on p. 20. 

2) More explicit justification of the argument that manufacturers’ implicit payback period 

for fuel-saving technologies is less than consumers’. Commenters note that this 

justification could include both empirical arguments (what has been observed in the past) 

and theoretical arguments about why we would continue to observe this behavior in the 

future (eg, uncertain returns on investment).3

 

                                                            

1 Commenters note that the automaker risk aversion is measured here in terms of years consumers will wait for

payback only to facilitate analysis by using common units.   2 Additionally, commenters note that the external suppliers are in many technologies the firms in the best position

to provide fuel‐saving innovations. However, commenters note that these firms typically supply many automakers,

so an industry‐wide signal could play an important role in assuring suppliers that investing scarce resources in fuel

economy will yield a competitive return.   

3 Commenters note this possible version of the argument:  

Commenters note that investments in fuel‐saving innovations may be risky for any one automaker or

supplier to undertake alone, because they must be made years before the gas price that will prevail in a

particular model year is known, and the consequences for a manufacturer that guesses wrong and ends

up producing cars that are not of a type consumers want to buy can be devastating.  Further,
Summary of interagency working comments received on draft final rule under EO 12866 and EO 13563

review. These are for your consideration and are subject to further policy review.  

3

3) Addressing previous comment about employment per vehicle sold increasing. 

Commenters note that agencies could do this by discussing in this section the total value 

of vehicles sold (rather than the number of units sold). Commenters believe that since the 

value of each vehicle sold will rise by about $1000 due to the additional fuel-saving 

equipment, increases in the number of workers required to produce each vehicle might at 

least partially offset employment declines that might occur if there was a reduction in the 

number of units sold. 

                                                                                                                                                                                               

commenters note that it might be possible that certainty of 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 to invest in creating future

fuel‐efficient technologies.  Commenters note that this risk aversion by itself does not indicate a market

failure; it is only the possibility that the risk aversion leads to underprovision of social benefits (eg,

reduction in greenhouse gas emissions). Commenters note that  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) may provide evidence

that consumer pressure alone is rarely sufficient to achieve broad diffusion of environmentally‐friendly

technologies.