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

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

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

"'Timothy.Mullins@dot.gov'" <Timothy.Mullins@dot.go v>, 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 Rulem aking to

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

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

policy review.

Thanks.

Summary of interagency working comments received on draft final rule under EO 12866 and EO 13563 revie w.pdfSummary 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 duri ng EO 12866 and EO 13563

review of the draft final rule “Joint Rulema king to Establish Light-D uty Vehicle Greenhouse Gas

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

consideration and subject to further policy review.

Interagency commenters provide d the following comments on agen cy responses to initial

interagency comments:

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

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

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

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

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

turbochargers, more engineering that enables us e 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 w ith 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 not e that even if in the long te rm 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 th at a) private fuel savi ngs 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 offe r more fuel economy, consumers value the savings

in fuel costs at greater than th e 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 im pact of varying meas ures of CP (consumer

payback period). However, commen ters 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 inte ragency comments begin to do this. Commenters

note that NHTSA (p2-3) gives pl ausible 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 gasSummary 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 maki ng their purchase. This analysis implies CP >

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

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

based on observed behavior by auto makers (i.e., that automakers generally haven’t overcomplied with CAFÉ except when fuel prices rise, and fuel prices aren’t pr ojected to rise).

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

that automakers don’t understand how consumers think 1 

### . Rather, commenters believe that the

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

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

about the case where a competitor that doesn’t in vest ends up in a better position due to gas

prices at the low end of the expected distribution 2 

### . 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 volun tarily 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 vol untary improvements, then sales increase if

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

value fuel savings over a 1.5- 3 y ear period (p. 9-10), suggesting th at the change in sales as a

result of the rule will be small.

Commenters suggest :

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

voluntarily implement fuel-savi ng 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 bot h 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 empl oyment 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 un its sold). Commenters believe that since the

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

equipment, increases in the number of work ers 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.