Subject: Summary of additional interagency working comments received on draft rule under EO 12866 review

Sent: 11/04/2011 05:33 PM AST
From: "Achanta, Chandana L." [Chandana_L._Achanta@omb.eop .gov]
To: William Charmley; "Steve.Wood@dot.gov" <Steve.Wood@ dot.gov>; "Neil.Eisner@dot.gov" <Neil.Eisner@dot.gov>; "'james.tamm@dot.gov' (james .tamm@dot.gov)" <james.tamm@dot.gov>

Please find attached additional interagency working comments received on draft NPRM under EO 12866 and EO 13563 review. They are for yo ur consideration and are subject to further policy review.

Summary of Interagency Working Comments on draft ru le under EO 12866.pdfSubject: EPA and NHTSA responses to a subset of the Nov. 4, 2011 interagency comments Chandana

Date: 11/09/2011 11:43 PM From: William Charmley/AA/USEPA/US To: "Chandana Achanta" <Chandana_L._Achanta@omb.eop.gov > Cc: "Ed Nam" <Nam.Ed@epamail.epa.gov>, "Robin Moran" <M oran.robin@epa.gov>, "Rebecca Yoon"

<rebecca.yoon@dot.gov>, "Jim Tamm" <james.tamm@dot. gov> Attached are responses to many, though not all, of the comments from the interagency group provided to EPA and NHTSA on Friday evening (Novemb er 4). The interagency comments from November 4 included 60 questions. In the attached we have responded to the following; 3, 4, 6, 8, 10, 12, 16, and 21 - 56 EPA and NHTSA continue to work on the remaining que stions and we will provide responses as quickly as we can.

Thanks

Bill

EPA and NHTSA Subset of Responses to Interagency Co mments received 11.4.2011.docxSubject: Responses to interagency comments from Nov. 1 and N ov 4

Date: 11/10/2011 10:53 PM From: William Charmley/AA/USEPA/US To: "Chandana Achanta" <Chandana_L._Achanta@omb.eop.gov > Cc: "Robin Moran" <Moran.robin@epa.gov>, "Ed Nam" <Nam. Ed@epamail.epa.gov>, "Jim Tamm"

<james.tamm@dot.gov>, "Rebecca Yoon" <rebecca.yoon@ dot.gov>

Chandana,

Attached are additional responses to a number of th e interagency comments. Specifically:

- Question 1 from the November 1, 2011 interagency co mments (the one outstanding comment we have not yet responded to)

- Questions 7, 9, 11, 13, 15, 18, 20, 59, and 60 from the November 4, 2011 interagency comments. The outstanding comments we have not yet provided responses to from the November 4, 2011 interagency comments are questions 1, 2, 5, 14, 19, 57, and 58.

Thanks

Bill

Responses to subset of Interagency Comments receive d 11.4.2011, and Q1 from 11.1.2011.docxSubject: EPA and NHTSA responses to the remaining interagenc y comments from November 4, 2011.

Date: 11/11/2011 01:28 PM From: William Charmley/AA/USEPA/US To: "Chandana Achanta" <Chandana_L._Achanta@omb.eop.gov > Cc: "Jim Tamm" <james.tamm@dot.gov>, "Rebecca Yoon" <re becca.yoon@dot.gov>, "Robin Moran"

<Moran.robin@epa.gov>, "Ed Nam" <Nam.Ed@epamail.epa .gov>

Chandana

This document contains responses from EPA and NHTSA to the remaining interagency comments provided on 11.4.2011. EPA and NHTSA prov ided response to the other comments from the 11.4.2011 request on November 9, 2011 and November 10, 2011.

Thanks Bill

EPA and NHTSA 11.11.2011 Responses to Remaining Int eragency Comments received 11.4.2011.docxSubject: Summary of additional draft interagency working com ments received on draft rule under EO 12866 review

Sent: 11/11/2011 10:53 PM EST
From: "Achanta, Chandana L." [Chandana_L._Achanta@omb.eop .gov]
To: William Charmley; "'Steve.Wood@dot.gov'" <Steve.Woo d@dot.gov>; "'Neil.Eisner@dot.gov'" <Neil.Eisner@dot.gov>; "''james.tamm@dot.gov' (jame s.tamm@dot.gov)'" <james.tamm@dot.gov>; "'rebecca.yoon@dot.gov'" <rebecca.yoon@dot.gov>

Please find attached additional draft interagency w orking comments received on draft NPRM under EO 12866 and EO 13563 review. They are for your consid eration and are subject to further policy review.

Thanks.
Chandana

Summary of Draft Interagency Working Comments recei ved on draft rule under EO 12866.pdfSubject: EPA responses to interagency comments from November 8, 2011

Sent: 11/11/2011 12:46 PM EST
From: William Charmley
To: "Chandana Achanta" <Chandana_L._Achanta@omb.eop.gov > Cc: Ed Nam; "Robin Moran" <Moran.robin@epa.gov>; "Jim T amm" <james.tamm@dot.gov>; "Rebecca Yoon" <rebecca.yoon@dot.gov>

Chandana,

Attached you will find responses from EPA to the in teragency comments from November 8,
2011.

NHTSA is also reviewing these Interagency Comments, as well as the EPA responses below, and EPA may supplement our response based on further re view within EPA and/or information we
receive from NHTSA.

EPA response to 11.8.2011 Interagency comments.docxSummary 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 and EO 13563 review of the draft rule “Joint Rulemaking to Esta blish Light-Duty Vehicle Greenhouse Gas Emission Standards and Corporate Average Fuel Economy Standards”. They are for your consideration and subject to further policy review.

1. At least two unconventional assumptions appear to be necessary to yield a prediction that
sales of new vehicles will increase as a result of this rule. One is that all automakers consistently and predictably forego prof it opportunities amounting to hundreds, if not thousands, of dollars per vehicle. Another, though not explicitly stated in the analysis, is that the projections made today about future technology costs, fuel prices, consumer preferences, etc., in the years 2017-25 are more reliable than they will be at any time between now and when that time arrives. Interagency commenters request that agenciesmake both assumptions clearly explicit and provide empirical evidence such as peerreviewed research to support both.

2. In the analysis of consumer welfare in Sec tion III.H.1, the agencies include uncertainty and irreversibility as one explanation of consumers undervaluing fuel economy. However, commenters note that the argument is explicitly a “rational consumer” argument: it says that consumers rationally appl y a higher apparent discount rate to future fuel savings in the face of uncertainty about fuel prices. As a result, this argument does not appear to provide a justification for DOT /EPA’s use of deterministic projections of fuel savings to calculate consumer welfare. Commenters request agency views on this point.

3. Another potential factor in explaining consumer purchase decisions is lack of information about, and or/ the salience of, fuel economy in vehicle purchase decisions. The recent effort to revise the fuel economy label was in tended to address this problem. Interagency commenters request agency response on how the new fuel economy labels are likely to change the information available to consumers and/or the salience of fuel economy in those decisions and how vehicle purchase decisi ons are likely to change as a result of the new labels. Is there empirical evidence on whether and how past fuel economy labels have changed purchase decisions?

EPA RIA specific comments. Please note that interagency comments are included in the comment boxes. Text of relevant discussion is pasted below for context and easy reference:Summary of Interagency Working Comments Received on Draft rule under EO 12866 review. Subject to

further policy review.

2 4. 3-13: EPA TEXT: “While it is not possibl e to know with certainty the future fleetwide GHG emissions performance in the absence of more stringent standards, EPA believes that this approach is the most reasonable assumption for developing the reference case fleet for MY 2017-2025. One important element supporting the proposed approach is that AEO2011 projects relatively stable gasoline prices over the next 15 years, dropping to $3.25 in 2017 (less than the average gasoline price in 2011 to date), and then rising slowly to $3.54 per gallon in 2025 (similar to the average gasoline price in 2011).”

5. 3-14: “The 1975-1985 and 2004-2010 timeframes are not relevant in this regard due to either rising gasoline prices, rising CAFE standards, or both. Thus, the 1986-2003 period is an excellent analogue in many ways to the period out to MY 2025 during which AEO projects stable gasoline prices. EPA staff ha ve analyzed the fuel economy trends data from the 1986-2003 timeframe and there are three clear conclusions: 1) there was a small, industry-wide, over-compliance on the order of 1-2 mpg or 3-4%, 2) almost all of this industry-wide over-compliance was from 3 companies (Toyota, Honda, and Nissan) that produced smaller and lighter vehicles relative to the industry average and which therefore naturally and essentially necessar ily over-complied with the universal CAFE standards that did not vary by footprint, and 3) full line car and truck manufacturers, such as General Motors, Ford, and Chrysler, which produced larger and heavier vehicles relative to the industry average and which were constrained by the universal CAFE standards, rarely over-complied during the entire 18-year period .” [1]

6. 4-12: “Consistent with the MYs 2012-2016 rule analysis, EPA did not allow EVs and PHEVs (maximum penetration caps of zero) in the reference case. While the penetration of EVs and PHEVs in MY 2016 will like be non-zero, as they are being sold in MY 2011, EPA chose not to include these technologies in the reference case assessment due to their cost-distorting effects on the smallest companies. For further discussion see RIA Chapter

3.”

[1] See Regulatory Impact Analysis, Chapter 3. Comment [A1]: Dropping from what?

Comment [A2]: Please double check this. Fuel economy in AEO goes up over time for all types
listed.

Comment [A3]: AEO has gas prices rising about
10% over 2017 - 2025

Comment [A4]: Assuming the FE is lagged by one year following price changes the previous year, the last three years (2001-2003) are all over compliance years --- they also correspond to years (2000 – 2002) with the highest gas prices. A regression would likely show consumers and producers respond to higher gasoline prices. (e.g.,
see CBO 2008: http://www.cbo.gov/ftpdocs/88xx/doc8893/01-14- GasolinePrices.pdf) The average price 1986 – 1999 was $1.50; whereas 2000 – 2002 price averaged $1.67 (increase in 11%). This seems to suggests that when prices rise fuel economy is valued as a vehicle attribute. This point questions assumption of market failure for fuel economy. Interagency commenters request response from agencies on this point.

Comment [A5]: What is the projection for EVs
and PHEV’s in 2016 that was included in the final RIA for that rulemaking? What was assumed in the Fuel Economy Labeling rule?Summary of Interagency Working Comments Received on Draft rule under EO 12866 review. Subject to

further policy review.

3 7. 8-1: Interagency commenter notes that EPA uses the GDP deflator . Commenter requests clarity on why agencies do not use the CPI or the PCE deflators specific to cars and light

trucks?

8. 8-2: “The analysis starts with the increase in costs estimated by the OMEGA model. We assume that these costs are fully passed along to consumers. This assumption is appropriate for cost increases in perfectly competitive markets. “

9. 8-3: Interagency commenters note that the discussion of loans at 5.5% rate and personal

discount rate at 3% and 7% seems odd. Commenters understand that to mean that agencies are suggesting that borrowing money is saving money? Commenters request agency clarification. The risk-free rate of return is very low at the moment. Commenters note that borrowing to buy a car shouldn’t reduce the cost, but shou ld result in some increase in costs. Commenters request agencies to provide more discussion of this to explain the assumption better.

10. 8-3: “The fuel cost savings are based on th e five years of consumer ownership of the vehicle. The analysis is done for each model-year for an average vehicle. Chapter XX of this DRIA discusses the source of aggregate fuel savings, in dollars, for cars and trucks for each model year by year. “

11. 8-4: “The fuel cost savings are subtracted from the increase in costs associated with the rule to get the net effect of the rule on consumer expenditure. The higher cost leads consumers to purchase fewer new vehicles, but the fuel savings can counteract this

effect. This calculation uses an elastici ty of demand for new vehicles of -1: [i] that is, an increase of 1% in the price of a new vehicle will lead to a 1% reduction in new vehicle

sales. “

12. Commenters request clarity on what are the baseline sales assumptions?

13. Interagency commenters recommend that agencies provide an uncertainty analysis that provides a sensitivity of different fuel prices and different consumer responses to higher priced vehicles. Comment [A6]: Would this suggest that the repurchase decision will be delayed?

Comment [A7]: Where can commenters find
these in this RIA?

Comment [A8]: Commenters note that this is the same assumption since the 2008 CAFÉ. Is there any

new literature on this?Summary of Interagency Working Comments Received on Draft rule under EO 12866 review. Subject to

further policy review.

4 14. . “These complications add considerable uncertainty to our vehicle sales impact analysis.”

15. 8-6: . “The evidence from consumer vehicle choice models indicates a huge range of estimates for consumers’ willingness to pay for additional fuel economy. “

16. 8 – 6: . “Increases in fuel economy are likely to be attractive to consumers, but increases in price, as well as any detrimental changes in other vehicle characteristics, may be deterrents to purchase.”

17. 8 – 11: “Why Consumers May Not Buy, and Producers May Not Provide, Fuel Economy that Pays for Itself”

18. 8-11: Commenters note that relative to other costs of ownership (depreciation, insurance, O&M, etc) fuel expenditures are actually quite low (see AAA publication on costs of ownership). This might be anot her reason why consumers might view fuel economy as less of a concern. Commenters recommend that agencies provide some discussion of the relative role of fuel costs in a large durable good purchase.

19. 8 – 12: “Both theoretical and empirical research suggests that, in the context of fuel economy and elsewhere, many consumers do not make energy-efficient investments even when those investments would pay off in the relatively short-term. [ii] ”

20. 8:36: Because outlays on fuel are a part of consumer spending, it is not immediately clear to interagency commenters why lower expenditures on fuel would boost overall consumption.

21. 8-39: “There are also increases in private saving through 2038 and higher business profits through 2050.”

22. Commenters request clarity on whether it is common for some new technologies included in the rule require premium fuel. If yes, did agencies include costs associated with premium fuel? For example, it seems some of the smaller turbo models require premium
fuel.

23. Interagency commenters request agencies to conduct an analysis of impacts of this rule
on State revenues.

EPA RIA 1.3 Comment [A9]: Commenters request that agencies add uncertainty analysis showing the results if consumers do not internalize future fuel savings in their purchase.

Comment [A10]: Suggests a basis for sensitivity

Comment [A11]: Interagency commenters note that this is what can be expected particularly if gasoline prices are rising.

Comment [A12]: Interagency commenters note that since this seems to suggest high uncertainty on future sales, commenters recommend that agencies include sensitivity cases.

Comment [A13]: Interagency commenters note that if this is true then increased sales will not occur, Commenters note this provides further justification
for base case.

Comment [A14]: Commenters request clarity on what the assumption is about fuel economy after 2025? Why provide analysis out 50 years?Summary of Interagency Working Comments Received on Draft rule under EO 12866 review. Subject to

further policy review.

5 24. Interagency commenters request clarity on how EPA “averaged” the 19 different vehicle types to arrive at the “average vehicle” used in the analysis?

25. Commenters request clarity on whether EPA conducted sensitivity analysis on the towing assumption?

26. Interagency commenters note that the following assumption is likely to over inflate the estimated electric vehicle purchase. Did EPA ru n sensitivity analysis on this assumption? EPA RIA TEXT READS: “We believe that buyers of electric vehicles in the 2017-2025 timeframe will be purchasing the vehicles with a full understanding of the range limitations and will not attempt to use their EV s for long duration towing trips. As such, we believe that the buyers will expe rience no practical loss of utility.”

27. Commenters request clarity on whether th e OMEGA model has been peer reviewed?

28. Table 1-3.1 Interagency commenters request clarity on why the baseline engine is assumed to be 4sp AT? Do the agencies believe it is a reasonable assumption?

29. Commenters request explanation of the difference between Tables 1.2-8 through 1.2-10
and Table 1.3-10.

30. Interagency commenters request clarity on what the baseline projection of sales and the
sales under the standard are?

31. Commenters recommend that agencies discuss the robustness of the Ricardo results vs.
the LP results.

32. EPA RIA 2.4.1 “Since the EPA’s full vehicle si mulation tool is still in the development phase, it has not been fully validated against actual vehicle test data yet.” Interagency commenters request clarity on whether this tool has been used in this rulemaking or not.

33. EPA RIA 3.2 OMEGA incorporates “the value which the consumer is likely to place on improved fuel economy” (p. 3-3). Commenters request clarity on how the model incorporates this value contrary to the literature on energy paradox.

34. EPA RIA 3.4.1.2 Commenters request agencies to please explain how this rule accounted
for the baseline of the 2016 MY standard.

35. EPA RIA 3.4.1.3. Commenters request agencies to please explain how the analytic approach allowed “the agency to provide costs for a technology assessment that includesSummary of Interagency Working Comments Received on Draft rule under EO 12866 review. Subject to

further policy review.

6 no net additional fatalities to the fleet” (p . 3-8), and yet the analysis incorporates additional projected fatalities associated with the standard.

36. EPA RIA 3.5.1.1. Commenters request clarity on why EPA would need to determine the costs associated with meeting the MY 2016 standards. Why not use the results of the promulgated rulemaking?

37. 3.7. Given that the average ownership of li ght duty vehicles is 5 years, how many technologies would have payback periods of 5 years or less? Commenters request agencies to please identify.

38. Footnote KK: TARF used in OMEGA used only 3% discount rate. Commenters request clarity on what are the implications of this assumption?

39. 3.11. Commenters note that the discussion on why NAS report was not used seems to be incomplete. Please explain further the additional insights offered by new studies incorporated in this RIA.

40. 4.1. 1 st para, Commenters request that agenci es please state how significant light duty vehicles are for GHG emission inventory. Commenters suggest agencies consider providing a percentage.

41. 4.1 2 nd para, Commenters request clarity on why there would be significant SO2 reduction associated with light duty vehicles? Commenters request agencies to provide explanation in rule.

42. 4.3.1. Commenters recommend that agencies include “upstream” emissions associated with coal/natural gas extraction associated w ith electricity generation for completeness. Also, how much of the upstream extraction emissions associated with gasoline is
domestic?

43. 4.3.2.4. Commenters request clarity on how the agency was able to forecast beyond the years forecasted in AEO2011?

44. Are the vehicle growth rates of 1% and 0.5% increasing linearly or compounding?

45. 4.3.2.5 Commenters request clarity on whether the VMT equation suffers from simultaneity problem since GR1 and GR2 are endogenously determined?Summary of Interagency Working Comments Received on Draft rule under EO 12866 review. Subject to

further policy review.

7 46. 4.3.2.6 Commenters request clarity on what are the assumptions and modeling features used in MOVES 2010a, Argon National Labs Greet 1.8 and IPM consistent with each
other?

47. 4.3.3.1. Commenters request clarity on what is “indirect air conditioning?”

48. 4.3.3.1.1. “As discussed in Section III.B of the preamble, the cap for EVs and PHEVs at zero g/mile is related to the standard level proposed. For purposes of this modeling, we assume that this cap is never reached.” Commenters request agencies to explain this assumption, especially in light of estimatin g GHG emission associated with increased electricity consumption.

49. Table 4-17: Commenters request agencies to please explain the relative magnitudes of the
emission reductions. The monetized benefits associated with these reductions are approximately $3 billion in 2030 and increases to over $4 billion in 2050 (Table 7.2-4).

50. 4.4. Commenters request agencies to explain what the basis is for the increase safety associated with light trucks.

51. 5.1. Commenters request agencies to please provide estimates for the learning discount.

52. 5.4.2. How did EPA project fuel prices beyond 2035 (AEO 2011 forecast limit)?

53. 6.1.2.1. Commenters suggest deleting the di scussion on visibility degradation since the
bulk of the emission reduction is from reduction associated with fuel production/retribution of gasoline, not tailpipe emission from vehicles (See Table 4-17).

54. 6.4 . Commenters request clarity on whether the predicted values associated with this section are statistically different than zero? If not commenters suggest deleting this
section.

55. Table 7.2-4 (and other corresponding tables). Commenters suggest distinguishing accidents/congestion/noise costs more clearly. Commenters also suggest changing the
table title to reduce some confusion. Al so, commenters request EPA to explain what
constitutes “increased travel benefits.”

56. Editorial. Table headings should clearly describe the contents of the table to reduce confusion. Each table should be marked with appropriate units to aid understanding.

57. Proposed additional incentives. The proposed rule includes several additional incentives that manufacturers could be eligible for on the basis of production of certain volumes ofSummary of Interagency Working Comments Received on Draft rule under EO 12866 review. Subject to

further policy review.

8 vehicles with particular characteristics. Su ch incentives include multipliers for EVs, PHEVs, and FCVs, and credits for trucks th at are HEV or that meet a performance threshold. To inform decision-making in the final rulemaking and to elicit useful comments on these incentives, interagency commenters recommend that the agencies include in the NPRM’s preamble estimates of the economic magnitude of these incentives, including how incentives would vary depending on the circumstances of a particular manufacturer.

58. Stemming from comment above, for example, EPA is proposing granting a credit equivalent to 10g/mi to truck manufacturers for each full sized pickup truck that achieves 15 percent better fuel consumption than its footprint-based target, provided that this performance standard is met or exceeded by at least 15 percent of their full sized pickup truck fleet. Commenters note that this begs a question of the magnitude of the incentive created by this credit for a manufacturer, first in general, and also for manufacturers that would otherwise produce a sufficient number of trucks achieving a performance level just below the required standard (e.g., 14 percent better fuel consumption than the required target) or for manufacturers that would otherwise produce trucks that exceeded the performance level but these trucks would compose less than 15 percent of their full sized fleet. Commenters request clarity on what is the implied cost per ton of emissions
reductions associated with the incentives created in these various scenarios?

59. Interagency commenters also recommend that EPA and NHTSA request comment on the circumstances in which such additional incentives—for the use of particular technologies or achievement of particular performance metrics—are appropriate, given that the proposed rule will create broad incentives for increasing fuel economy and reducing GHG emissions, and given that the provision of credits for particular technologies may
distort manufacturers’ decisions about whic h technologies to employ to achieve these goals.

60. Interagency commenters also recommend that EPA and NHTSA request comment on alternative designs for some of the proposed additional incentives th at might achieve the goals that motivate the additional incentives while avoiding any excessive or perverse incentives. This would include requesting comment on: a) The proposed production cap on eligibility for the 0 gram per mile incentive for EVs, PHEVs, and FCVs. The low production cap in MY 2022-2025 for automakers that did not sell sufficient numbers of eligible vehicles in earlier years could unintentionally limit the introduction of game-changing technologies from some manufacturers and lock in competitive advantages to first movers. To the extent the goal is encourage early leadership in commercialization of these technologies, it is not clear that differential production caps in later years are the optimal tool to encourage such leadership, rather than, for example, increasing incentives for these vehicles in earlier years.Summary of Interagency Working Comments Received on Draft rule under EO 12866 review. Subject to

further policy review.

9 b) The proposed credit for full size HEV pickup trucks, and in particular whether such trucks should face eligibility thresholds. Given that the credit is available to all HEV trucks, including those with emissions above th eir footprint standard, it is not clear that there is a public policy rationale for increasing the incentive to produce an HEV pickup truck that has higher emissions than a conventional but lower-emitting pickup truck. Additionally, as with the production cap discussed above, the restriction on access to this credit for only those manufacturers that achieve a minimum penetration of HEV trucks within their fleets could limit incentives for deployment among certain manufacturers while locking in competitive advantages for others. To the extent the goal is to encourage broad penetration into the marketplace, it is not clear that alternative crediting designs, such as a broad-based credit that was available to all full size HEV trucks or a credit that increased as a linear function of the penetration level of the technology in a manufacturer’s full size pickup fleet, would not more effectively achieve this goal.

c) the proposed performance-based incentive credits for full size pickup trucks and whether instead of discrete crediting levels these credits could be awarded on the basis of a linear formula to avoid particularly strong (weak) incentives when near to (far from) a “notch” in the incentive level. (This credit could be designed, for example, as a 1 g/mi CO2 credit for each X percent improvement in fuel consumption relative to the footprint target up to a maximum credit level.)1



### Interagency Comments Provided to EPA and NHTSA on N ovember 4, 2011

regarding the 2017-2025 Light-duty GHG/CAFE NPRM

This document contains responses to many, though no t all, of the interagency comments provided to EPA and NHTSA on 11.4.2011. The agenci es are still working on the remaining interagency comments.

Interagency Comment 3. Another potential factor in explaining consumer pu rchase decisions is lack of information about, and or/ the salience of, fuel economy in vehicle purchase decisions. The recent effort to revise the fuel economy label was intended to address this problem. Interagency commenters request agency response on h ow the new fuel economy labels are likely to change the information available to consumers an d/or the salience of fuel economy in those decisions and how vehicle purchase decisions are likely to change as a result of the new labels. Is there empirical evidence on whether and how past fuel economy labels have changed purchase decisions?

EPA and NHTSA Response: We are not aware of empirical evidence on how or wh ether past fuel economy labels have changed purchase decisions. A literature review th at contributed to the fuel economy labeling

rule 1 points out that consumers increasingly do a great deal of research on the internet before going to an auto dealer. In the pre-focus group su rvey results found in the final reports for the recently revised label puts some quantification to the importance of fuel economy in purchase decisions (found at www.nhtsa.gov/fuel-economy ). In addition, manufacturers often use information of this type (from NCAP or other labels ) in their advertising. To the extent that advertising and the label improve consumers underst anding of the value of fuel economy, purchase decisions could change. Until the newly r evised labels enter the marketplace with MY13 vehicles (or optionally sooner), the agencies may not be able to determine how vehicle purchase decisions are likely to change as a result of the new labels. Whether it will play a more prominent role in affecting consumer decisions is a s yet unknown.

EPA RIA specific comments.

Interagency Comment 4 3-13: EPA TEXT: “While it is not possible to know with certainty th e future fleetwide GHG emissions performance in the a bsence of more stringent standards, EPA believes that this approach is the most reasonable assumption for developing the reference case fleet for MY 2017-2025. One important element suppo rting the proposed approach is that AEO2011 projects relatively stable gasoline pr ices over the next 15 years, dropping to $3.25 in 2017 (less than the average gasoline pr ice in 2011 to date), and then rising slowly to $3.54 per gallon in 2025 (similar to the average gasoline price in 2011).”

1 PRR, Inc., “Environmental Protection Agency Fuel E conomy Label: Literature Review.” EPA-420-R-10-90 6, August 2010, available at http://www.epa.gov/fueleconomy/l abel/420r10906.pdf .2

Comment [A1]: Dropping from what? Comment [A2]: Please double check this. Fuel economy in AEO goes up over time for all types
listed.

EPA Response: We have inserted additional text to clarify that th e average retail price of regular gasoline in the U.S. for the first nine mon ths of 2011 was $3.57 ($3.38 in 2009 dollars). However, the AEO 2011 reference case projects a 201 1 price of $2.80 per gallon (in 2009 dollars), well below actual prices. Prices are pro jected to be $3.25 per gallon in 2017, rising slightly to $3.54 per gallon in 2025. From 2017 to 2025, AEO2011 reference case estimates the average increase per year is less than 4 cents per gallon.

Interagency Comment 6. 4-12: “Consistent with the MYs 2012-2016 rule analysis, E PA did not allow EVs and PHEVs (maximum penetration caps o f zero) in the reference case. While the penetration of EVs and PHEVs in MY 2016 will like b e non-zero, as they are being sold in MY 2011, EPA chose not to include these technologies i n the reference case assessment due to their cost-distorting effects on the smallest companies. For further discussion see RIA Chapter 3.”

Comment [A5]: What is the projection for EVs and PHEV’s in 2016 t hat was included in the final RIA for that rulemaking? What was assumed in the Fuel Economy Labeling rule?

EPA Response: As the cited Draft RIA text above makes clear, EPA did not project the addition of any EVs or PHEVs in the 2012-2016 final rule. In addition, the Fuel Economy Labeling rule did not make future projections of th e light-duty vehicle fleet for any technology, including EVs or PHEVs.

Interagency Comment 8. 8-2: “The analysis starts with the increase in costs est imated by the OMEGA model. We assume that these costs are fully p assed along to consumers. This assumption is appropriate for cost increases in per fectly competitive markets.“

Comment [A6]: Would this suggest that the repurchase decision wil l be delayed?

EPA Response: If the only effect of the rule would be an increase in up-front costs, then repurchase might well be delayed. However, the rule also reduces fuel co nsumption, which buyers are expected to find desirable. Whether delayed purchase occurs depends on how consumers account for fuel savings in their purchase decisions. This tradeoff is rais ed explicitly in the second paragraph of Section 8.1.1. In addition, Preamble Section III.H.10.a (i n the third paragraph before Section III.H.10.b) discusses this tradeoff explicitly in the context o f scrappage and fleet turnover.3

Interagency Comment 10 . 8-3: “The fuel cost savings are based on the five years of consumer ownership of the vehicle. The analysis is done for each model-year for an average vehicle. Chapter XX of this DRIA discusses the source of agg regate fuel savings, in dollars, for cars and trucks for each model year by year.“

Comment [A7]: Where can commenters find these in this RIA?

EPA Response: Chapter 5.3 of the DRIA. We have filled in the ref erence in DRIA Chapter 8.3.

Interagency Comment 12 . Commenters request clarity on what are the baseli ne sales assumptions?

EPA Response: Joint Draft TSD Chapter 1 discusses the baseline an d the reference sales forecast, and provides the values for the baseline year-over-year for each company and for the industry, for the passenger car fleet and the truck fleet.

Interagency Comment 16 . 8 – 6: “Increases in fuel economy are likely to be attract ive to consumers, but increases in price, as well as any d etrimental changes in other vehicle characteristics, may be deterrents to purchase.”

Comment [A11]: Interagency commenters note that thi s is what can be expected particularly if gasoline prices are rising.

EPA Response: What is the “this” that is expected – the attractiv eness of fuel economy or the deterrence to purchase from increased price?

An increase in gasoline price is likely to make imp roved fuel economy more attractive.

Interagency Comment 18 . 8-11: Commenters note that relative to other cost s of ownership (depreciation, insurance, O&M, etc) fuel expenditur es are actually quite low (see AAA publication on costs of ownership). This might be a nother reason why consumers might view fuel economy as less of a concern. Commenters recom mend that agencies provide some
discussion of the relative role of fuel costs in a large durable good purchase.4

EPA Response: The Department of Energy Transportation Energy Data Book 2 estimates that 15.4% of the total cost per mile for a vehicle is g as and oil. Between 1985 and 2010, the percentage has varied from a low of 9.4% to a high of 19.9%.

This issue ties into the salience of fuel expenditu res at the time of vehicle purchase, one of the hypotheses raised in this section. To keep the dis cussion of manageable size, we have raised a number of hypotheses in the DRIA without going into depth on any of them. In the Preamble, we have added, in a short discussion of salience, t he following footnote: “U.S. Department of Energy, 2011. “Transportation and the Economy,” Ch apter 10 in “Transportation Energy Data Book,” http://cta.ornl.gov/data/tedb30/Edition30_Ch apter10.pdf, Table 10.13 , estimates that gas and oil costs were 15.4% of vehicle costs per mile in 2010.”

Interagency Comment 21 . 8-39: “There are also increases in private saving through 2038 and higher business profits through 2050.” Comment [A14]: Commenters request clarity on what t he assumption is about fuel economy after 2025? Why provide analysis out 50 years?

EPA Response: EPA’s proposed standards do not end in 2025; our st andards for MY2025
continue into MY2026 and later – and thus out into the future. As such, EPA assumes that fuel economy for new vehicles in the U.S. remains consta nt after 2025. Overall fuel savings as a result of this proposal will continue to increase a fter 2025 as the fleet turns over. Increasing fuel savings, as well as higher vehicle costs and lower world oil prices, from this proposal impact the U.S. economy through 2050 and beyond. Consistent wi th the timeframe we use to present costs and benefits, we present economy-wide impacts throu gh 2050 to capture the impacts of our proposal far enough into the future so that almost the entire fleet of vehicles on the road is compliant with the MY2017-2025 standards. In the M Y2012-2016 rule, we analyzed calendar years out to 2050 since that was the year that all vehicles on the road were projected to be compliant with the standards (because we assume no vehicles from a particular model year will be on the road 38 years after introduction). Consi stent with the assessment for the MY2012- 2016 rule, we have analyzed out to 2050 for this pr oposal, although there will likely be a small
number of vehicles on the road that still do not co mply with the MY2017-2025 standards. This general approach is consistent with EPA’s normal pr actice for several decades when performing transportation-related analysis for rulemakings. S ee also EPA’s response to Interagency Comment #18 provided to EPA on November 1, 2011 whi ch we responded to on November 4,
2011.

Interagency Comment 22. Commenters request clarity on whether it is com mon for some new technologies included in the rule require premium f uel. If yes, did agencies include costs associated with premium fuel? For example, it seems some of the smaller turbo models require premium fuel.

2 U.S. Department of Energy, 2011. “Transportation and the Economy,” Chapter 10 in “Transportation Ene rgy Data Book,” http://cta.ornl.gov/data/tedb30/Edition30_Ch apter10.pdf, Table 10.13.5

EPA Response: Our gasoline engine technology cost and effectivene ss estimates are based on the use of regular unleaded gasoline fuel. We do n ot project that premium fuel will be required to achieve the proposed standards.

Interagency Comment 23. Interagency commenters request agencies to cond uct an analysis of impacts of this rule on State revenues.

EPA Response: EPA notes in preamble section III.H.4.b and in RIA5 .4.2 the potential lost tax revenues associated with the fuel consumption decre ase. We do not attempt to break that out into federal versus state revenues or to specific s tate-level impacts.



## EPA RIA 1.3

Interagency Comment 24. Interagency commenters request clarity on how E PA “averaged” the 19 different vehicle types to arrive at the “averag e vehicle” used in the analysis?

EPA Response: Any such averaging is done on a sales-weighted basi s. Note that there is no “average vehicle” in our analysis of compliance. I nstead, we determine costs/reductions/etc. for each vehicle model, then, for ease of presentation, average the results to arrive at a fleet average
cost/reduction/etc.

Interagency Comment 25. Commenters request clarity on whether EPA condu cted sensitivity analysis on the towing assumption?

EPA Response: EPA has not conducted any sensitivity on towing and we do not understand what sort of sensitivity the commenter might sugges t. The vast majority of all of the technology packages which we have added to vehicles maintain t owing capability. All full size pickup trucks have been modeled to maintain towing (gasoli ne, diesel, and hybrids). All gasoline and diesel vehicles are modeled to maintain towing. Fo r HEV vehicles (other than full size pickup trucks, where we have not utilized Atkinson-cycle e ngines), we have utilized Atkinson-cycle engines, but with no downsizing of the engine. Thu s, when combined with the electric motor on the vehicle, towing capability is maintained, excep t for those instances where a vehicle is at or near the maximum towing load and operation is on a sustained grade (e.g., going uphill for a long period of time) – and it is possible OEMs may reduce the rated maximum towing limit for such vehicles. Given the relatively small number o f HEVs we project (which are not full size pickups), this impact is modest. It is not clear w hat part of our analysis regarding towing would be a basis for a towing sensitivity assessment, and what type of sensitivity would be performed.6

Interagency Comment 26. Interagency commenters note that the following assumption is likely to over inflate the estimated electric vehic le purchase. Did EPA run sensitivity analysis on this assumption?

EPA RIA TEXT READS: “We believe that buyers of elec tric vehicles in the 2017-2025 timeframe will be purchasing the vehicles with a fu ll understanding of the range limitations and will not attempt to use their EVs for long duration towing trips. As such, we believe that the buyers will experience no practical loss of utility .”

EPA Response: Over the period of time from MY2017 to MY2025, EPA projects that less than
1% of all vehicles will be all electric vehicles. It seems plausible that at least 1% of new car purchasers would understand the range and towing li mitations of an electric vehicle when they make such a purchase. In addition, our estimated s ales of EVs is very small (<1%) and this does not seem to warrant a sensitivity analysis for such a small element of the analysis.

Interagency Comment 27. Commenters request clarity on whether the OMEGA model has been peer reviewed?

EPA Response: OMEGA was peer reviewed in September 2009. The peer review material in on the EPA web site, and is referenced in the EPA Draft RIA Chapter 3, the t hird paragraph.

Interagency Comment 28. Table 1-3.1 Interagency commenters request clar ity on why the baseline engine is assumed to be 4sp AT? Do the age ncies believe it is a reasonable assumption?

EPA Response: The baseline engine is simply a reference point fro m which to estimate the
additional cost and effectiveness of additional tec hnologies. As discussed in RIA chapter 3, EPA fully accounts for technology on vehicles in its mo deling. EPA could pick any engine as the baseline engine and the end results would be the sa me. It is a reasonable assumption when considered in conjunction with how we estimate our costs and effectiveness levels when running
OMEGA. We have not assumed that all vehicles are e quipped with the “baseline” engine when running OMEGA. We assume that baseline only when b uilding packages and we determine the cost and effectiveness of each package relative to that common baseline. We then determine the set of technologies on each given vehicle in our ba seline fleet and we determine the cost and effectiveness of each particular vehicle given that set of baseline technology. We then compare the package to the vehicle and determine which is b etter. If the vehicle is better than a given package, the vehicle is left as is. If the package is better in any way (engine, transmission, vehicle), then the elements of the package not alre ady on the vehicle are applied to the vehicle
and the costs and effectiveness levels are determin ed based on what elements of the package have been added. In the end, it does not really ma tter what our baseline engine is provided we appropriately account for the differences between i t, the actual vehicle and the resultant, newly compliant vehicle.7

Interagency Comment 29. Commenters request explanation of the differenc e between Tables 1.2-8 through 1.2-10 and Table 1.3-10.

EPA Response: Assuming these are references to tables in EPA’s dr aft RIA, Table 1.2-8 through 1.2-10 show the technology costs for plug-in hybrids (PHEV) having a 20 mile range, PHEVs having a 40 mile range and electric vehicles having a 75 mile range. Table 1.3-10 shows
the package costs for PHEVs/EVs used for a 2025MY OMEGA run. This latter table includes the technology costs shown in Tables 1.2-8 through 1.2-12 and also includes costs for other technologies such as lower rolling resistance tires , electric power steering, aero treatments, etc. So Table 1.3-10 provides the costs of adding a comp lete package of technologies to a vehicle while the tables in RIA 1.2 present only the techno logy-level costs.

Interagency Comment 30. Interagency commenters request clarity on what the baseline projection of sales and the sales under the standar d are?

EPA Response: Joint Draft TSD Chapter 1 provides a detailed descr iption of the baseline. gives the baseline sales projections (see response to Interagency Comment 12 above). Sales are held constant in our modeling, thus the sales does not change between the reference case (no new standards) and the control case (assessment with th e proposed standards).

Interagency Comment 31. Commenters recommend that agencies discuss the robustness of the
Ricardo results vs. the LP results.

EPA Response: The lumped parameter model effectiveness of individ ual technologies that comprise the various Ricardo simulation packages we re calibrated so that the LP model results were comparable to the Ricardo nominal run results. This is described in section 3.3.2.2 of the Joint TSD which includes figures comparing LP model ed results to the associated Ricardo package results. Additionally, Chapter 1.5.8 of EP A's RIA elaborates on packages with notable
differences between the LP and Ricardo results.

Interagency Comment 32 . EPA RIA 2.4.1 “Since the EPA’s full vehicle simul ation tool is still in the development phase, it has not been fully val idated against actual vehicle test data yet.” Interagency commenters request clarity on whether t his tool has been used in this rulemaking or

not.8

EPA Response: The EPA’s full vehicle simulation tool has been use d in this rule making for A/C indirect and some of the off-cycle credit gener ations. EPA believes that the simulation tool was adequate to be used since the purpose of its us e was to assess only the differences in CO2 between A/C on and off cases as well as off-cycle t echnology on and off cases.

Interagency Comment 33 . EPA RIA 3.2 OMEGA incorporates “the value which t he consumer is likely to place on improved fuel economy” (p. 3- 3). Commenters request clarity on how the model incorporates this value contrary to the liter ature on energy paradox.

EPA Response: In our TARF equation, we assume that consumers valu e the first five years of fuel savings at a 3% discount rate. If consumers f ully valued fuel economy, we would value the full life of the vehicles fuel savings, but we are only assessing the first 5 years for the purposes o f the additional of technologies to vehicles.

Interagency Comment 34. EPA RIA 3.4.1.2 Commenters request agencies to please explain
how this rule accounted for the baseline of the 201 6 MY standard.

EPA Response: This topic is discussed in detail in RIA Section 3. 5.1, and in preamble III.D.

Interagency Comment 35 . EPA RIA 3.4.1.3. Commenters request agencies to p lease explain how the analytic approach allowed “the agency to pr ovide costs for a technology assessment that
includes no net additional fatalities to the fleet” (p. 3-8), and yet the analysis incorporates additional projected fatalities associated with the standard.

EPA and NHTSA Response: RIA table 4-25 shows a net decrease in fatalities o f 201.
Preamble table II-4 shows the same result. Comment ers appear to be responding to NHTSA’s analysis. The NHTSA has an updated analysis shows a net decrease in fatalities of 13. There are costs for material substitution because on average those materials cost more per pound than steel and the savings in weight don’t overcome the increa sed cost per pound. The decrease in fatalities comes about by taking more weight out of heavy light trucks than weight out of small

passenger cars.

Interagency Comment 36 . EPA RIA 3.5.1.1. Commenters request clarity on wh y EPA would need to determine the costs associated with meeting the MY 2016 standards. Why not use the results of the promulgated rulemaking?9

EPA Response: Between the two rulemaking, a number of different a ssumptions have been made on sales (AEO 2011 is an obvious change), tech nology costs (ie, mass reduction and hybridization) and technology effectiveness. These updates to the inputs require updating EPA’s
estimate of costs.

Interagency Comment 37 . 3.7. Given that the average ownership of light du ty vehicles is 5 years, how many technologies would have payback per iods of 5 years or less? Commenters request agencies to please identify.

EPA Response: The payback period depends on a number of factors. Technology costs depend on the location on the learning curve, which in tur n depends on the year applied. Similarly, fuel savings depend on VMT which also differs by MY. T he relative payback also depends on the technology being replaced. A highly downsized engi ne may payback over five years relative to a base engine, but perhaps not relative to a slightly less highly downsized engine.

Interagency Comment 38 . Footnote KK: TARF used in OMEGA used only 3% disc ount rate. Commenters request clarity on what are the implicat ions of this assumption?

EPA Response: EPA has added clarifying text. For this NPRM analy sis, the impacts of using a
7% discount rate in the TARF are minimal.

Interagency Comment 39 . 3.11. Commenters note that the discussion on why NAS report was not used seems to be incomplete. Please explain fur ther the additional insights offered by new studies incorporated in this RIA.

EPA Response: EPA will expand upon this discussion in an updated version of this Draft RIA Chapter.

Interagency Comment 40 . 4.1. 1st para, Commenters request that agencies p lease state how significant light duty vehicles are for GHG emissio n inventory. Commenters suggest agencies consider providing a percentage.

EPA Response: Text response to this question from preamble sectio n III.A has been copied to
this DRIA section.

Interagency Comment 41 . 4.1 2nd para, Commenters request clarity on why t here would be significant SO2 reduction associated with light dut y vehicles? Commenters request agencies to provide explanation in rule.10

EPA Response: While this is explained in TSD 4, clarifying text h as been added to this section. Sulfur is regulated on a gram/gallon basis rather t han a gram/mile basis - Less gallons equals less
sulfur related emissions.

Interagency Comment 42 . 4.3.1. Commenters recommend that agencies include “upstream” emissions associated with coal/natural gas extracti on associated with electricity generation for completeness. Also, how much of the upstream extra ction emissions associated with gasoline is
domestic?

EPA Response: As discussed in TSD 4, feedstock gathering is alrea dy included in the emission factors. EPA only models the domestic criteria pol lutant emissions, as discussed in “ Calculation
of Upstream Emissions for the GHG Vehicle Rule (EPA-HQ-OAR-2009-0472-021 6)”

Interagency Comment 43 . 4.3.2.4. Commenters request clarity on how the ag ency was able to forecast beyond the years forecasted in AEO2011?

EPA Response: We assume that this comment is related to VMT. Thi s discussion is fully presented in TSD 4. If this comment relates to fuel price, please see o ur response to Interagency
Comment 52 below.

Interagency Comment 44 . Are the vehicle growth rates of 1% and 0.5% incre asing linearly or compounding?

EPA Response: Compounding.

Interagency Comment 45 . 4.3.2.5 Commenters request clarity on whether the VMT equation suffers from simultaneity problem since GR1 and GR2 are endogenously determined?

EPA Response: We are not attempting to infer a causal relationsh ip between GR1, GR2 and VMT, but rather to match the growth rates (and appr oximate total VMT) from AEO 2011 after considering driver responses to changes in fuel cos t per mile in the relevant years. These methods are highly similar to those used in the 201 2-2016 rule and in the TAR. In the TSD and RIA, We request comment on these methods.11

Interagency Comment 46 . 4.3.2.6 Commenters request clarity on what are th e assumptions and modeling features used in MOVES 2010a, Argon Nation al Labs Greet 1.8 and IPM consistent
with each other?

EPA Response: When configuring the models, the agencies attempted to make the modeling assumptions consistent. All assumptions are made p ublic for review. The modeling assumptions
for MOVES 2010a are described in Draft Joint TSD 4. The IPM assumptions, as described in
TSD 4 can be found http://www.epa.gov/airmarkets/progsregs/epa-ipm/Bas eCasev410.html , and fuel upstream assumptions can be found in Calculation of Upstream Emissions for the GHG Vehicle Rule (EPA-HQ-OAR-2009-0472-0216)”

Interagency Comment 47 . 4.3.3.1. Commenters request clarity on what is “i ndirect air conditioning?”

EPA Response: Clarifying text has been added – generally in this rulemaking, the term indirect air conditioning emissions refer to the additional load that air conditioning puts on the vehicle engine.

Interagency Comment 48 . 4.3.3.1.1. “As discussed in Section III.B of the preamble, the cap for EVs and PHEVs at zero g/mile is related to the stan dard level proposed. For purposes of this modeling, we assume that this cap is never reached. ” Commenters request agencies to explain this assumption, especially in light of estimating GHG emission associated with increased electricity consumption.

EPA Response: The level of the standard is inherently related to the credits available, and cannot be fully separated. EPA would not necessari ly propose the same volume of electric vehicle subject to the zero gram per mile provision if the level of the standard was set differently. This simplifying analytic assumption recognizes tha t concern, and appropriately caveats it in the next sentence: “This does not imply that EPA has p roposed a cap based on this criteria.”

With regard to the second point, regardless of EV c ompliance value, EPA has included in our impacts assessment estimates of the incremental emi ssions due to electricity generation.

Interagency Comment 49 . Table 4-17: Commenters request agencies to please explain the relative magnitudes of the emission reductions. The monetized benefits associated with these reductions are approximately $3 billion in 2030 and increases to over $4 billion in 2050 (Table 7.2-4).12

EPA Response: While the total national impact of this rule is sma ll on a percentage basis, this is largely because total national inventories (whic h are the basis of the comparison) are quite large. Refer to Section III.H.6 and Joint TSD Chap ter 4 for more information regarding the
values used to monetize reductions in PM 2.5 -related pollutants.

Interagency Comment 50 . 4.4. Commenters request agencies to explain what the basis is for the increase safety associated with light trucks.

EPA Response: The basis for our projection is described in detail in Preamble section II.G of the preamble (referenced in this section), where th e 2011 Kahane study is discussed.

Interagency Comment 51 . 5.1. Commenters request agencies to please provid e estimates for the learning discount.

EPA Response: For a detailed showing of technology costs by year, see Chapter 1 of EPA’s
draft RIA. For additional discussion of the learni ng curve, see Chapter 3 of the draft Joint Technical Support Document. Tables 1.2-1 through 1 .2-14 present costs for technologies on a year-by-year basis. These DRIA tables show the im pacts of learning over time on our technology costs.

Interagency Comment 52. 5.4.2. How did EPA project fuel prices beyond 2 035 (AEO 2011 forecast limit)?

EPA Response: Please see the draft Joint Technical Support Docume nt Chapter 4.2.2, where we discuss the extrapolation EPA and NHTSA used for fuel prices beyond 2035 at the rate
forecast in AEO 2011 for 2017-2035.

Interagency Comment 53 . 6.1.2.1. Commenters suggest deleting the discussi on on visibility degradation since the bulk of the emission reductio n is from reduction associated with fuel production/retribution of gasoline, not tailpipe em ission from vehicles (See Table 4-17).

EPA Response: EPA has deleted the first sentence of Section 6.1. 2.1.

Interagency Comment 54 . 6.4 . Commenters request clarity on whether the p redicted values associated with this section are statistically diff erent than zero? If not commenters suggest deleting this section.13

EPA Response: The model used to produce these results does not in clude any climate noise. Therefore, the predicted values are a consistent re sult of the input values, and therefore, the results qualify as statistically different than zer o.

Interagency Comment 55 . Table 7.2-4 (and other corresponding tables). Com menters suggest distinguishing accidents/congestion/noise costs mor e clearly. Commenters also suggest changing the table title to reduce some confusion. Also, com menters request EPA to explain what
constitutes “increased travel benefits.”

EPA Response: It is not clear what the comment is suggesting rega rding the accidents/congestion/noise be distinguished more cl early. If the suggestion is to have a separate line item for each, then we disagree given the alre ady busy nature of the table. EPA does present a table in preamble section III.H.8 that shows each as a separate line item. We describe the
benefits of increased travel in draft Joint TSD4.2. 6 as, “The increase in vehicle use from the rebound effect provides additional benefits to thei r drivers and occupants, since it is likely to take the form of more frequent trips or travel to more d istant but desirable destinations. In either case, it provides benefits to drivers and their pas sengers by improving their access to social and economic opportunities away from home. As evidence d by their decisions to make more frequent or longer trips when improved fuel economy reduces their costs for driving, the benefits
from this additional travel exceed the costs driver s and passengers incur in making those more frequent or longer trips.” We have attempted to im prove the table titles.

Interagency Comment 56. Editorial. Table headings should clearly descri be the contents of the
table to reduce confusion. Each table should be mar ked with appropriate units to aid understanding.

EPA Response: We have attempted to improve the table titles in th e draft RIA.1



### Interagency Comments Provided to EPA and NHTSA on N ovember 4, 2011 regarding the 2017-2025 Light-duty GHG/CAFE NPRM an d Interagency Comment #1 provided to EPA and NHTSA on November 1, 2011

This document contains responses to several of the interagency comments provided to EPA and NHTSA on 11.4.2011. EPA and NHTSA provided respons e to a number of the interagency comments from the 11.4.2011 request on November 9, 2011.

The outstanding requests from the November 4 docume nt are interagency comments 1, 2, 5, 14, 19, 57, and 58. We expect to provide responses to those questions as soon as possible.

We also provide a response to interagency comment # 1 from the November 1, 2011 submission to EPA and NHTSA, which we have not previously resp onded to.

Interagency Comments #1 from November 1, 2011 Submi ssion to EPA and NHTSA

Interagency Comment 1) Many interagency commenters strongly recommend tha t agencies remove all discussion of GDP impacts, sales increas es, and employment increases from
Preamble, both RIAs, and TSD. The increases do not seem to be based on sound empirical evidence, and are highly speculative. Given the hig h uncertainty with respect to the direction of these impacts (positive or negative), interagency c ommenters recommend that agencies drop all discussion of GDP, sales increases and employment i ncreases altogether.

NHTSA Response: Related to sales and employment effects, we agree there is uncertainty in the analysis and recommend discussion of that uncer tainty be included with the analysis of sales and employment effects. Despite the uncertainty, w e believe it is important to show analyses that the public can review and comment to. Failure to attempt to quantify uncertain effects can present legal risk.

EPA Response: Based on EPA’s commitment in previous Notice’s of I ntent for Rulemaking for the 2017-2025 program (each of which went throu gh review by OMB and other agencies within the Executive Office of the President) and t he strong technical basis for our assessments, EPA does not agree to remove the analysis from the proposal regarding the potential impacts of the proposed standards on automotive sales, employm ent impacts, or impacts on gross domestic product (GDP) and household consumption. We elabor ate on these topics below.2

The 2017-2025 Light-duty Vehicle Joint NPRM is just the most recent action by EPA and NHTSA regarding potential GHG and CAFE standards fo r these model years which began with a memorandum from the President issued in May of 2010 . Since that time the two agencies have issued three separate joint Federal Register notice s regarding the development of a proposal, each of which were reviewed by OMB and other agenci es within the Executive Office of the President. EPA and NHTSA have consistently inform ed the public (and EOP agencies) of our intention to perform a broad range of analysis to s upport the proposal, including assessments of vehicle sales and impacts of the proposed standards on automotive industry employment.

The presidential memorandum states: “The program should also seek to achieve substantia l annual progress in reducing transportation sector greenhouse gas emissions and fossil fuel consumption, consistent with my Administration's overall energy and climate security goals, through the increased domestic production and use of existing, advanced, and emerging technologies, and should strengthen the industry and enhance job crea tion in the United States

. As part of implementing the national program, I request that t he Administrators of the EPA and the
NHTSA:

“a) Work with the State of California to develop by September 1, 2010, a technical assessment to inform the rulemaking process, reflec ting input from an array of stakeholders on relevant factors, including viable technologies, costs, benefits, lead time to develop and deploy new and emerging technologies , incentives and other flexibilities to encourage development and deployment of new and emerging technologies, impacts on jobs and the automotive manufacturing base in th e United States , and infrastructure for advanced vehicle technologies...” (emphasis add ed)

In the October 13, 2010 Joint Notice of Intent, EPA and NHTSA stated: “The agencies expect that the new standards will ha ve effects on vehicle sales. For the forthcoming rulemaking, EPA and NHTSA will further investigate the impacts of the proposed standards on the auto industry, including employment.” (75 FR 62444) and “NHTSA and EPA also will perform a more thorough as sessment of the impacts of proposed standards, as was done for the MY 2012–201 6 rulemaking, including analysis of improved energy security, monetized benefits of CO2 reductions, co-pollutant impacts,
an assessment of the societal costs and benefits of potential standards, an assessment of potential safety impacts, an assessment of impacts on automobile sales and re lated employment , and other relevant impacts.” (75 FR 62747, empha sis added).

In the December 8, 2010 Joint Supplemental Notice o f Intent, EPA and NHTSA stated: “NHTSA and EPA also will perform a more thorough as sessment of the impacts of proposed standards, as was done for the model year 2012–2016 rulemaking, including analysis of improved energy security, monetized ben efits of CO2 reductions, impacts of other pollutants, an assessment of the societal cos ts and benefits of potential standards, an assessment of potential safety impacts, an assessment of impacts on automobile sales, an assessment of employment impacts, an assessment of the regulatory program’s key desi gn3

elements and flexibility mechanisms, and related is sues.” (75 FR 76344 – 76345, emphasis added)

Executive Order 13563, “Improving Regulation and Re gulatory Review” (January 18, 2011), states, “Our regulatory system must protect public health, welfare, safety, and our environment while promoting economic growth, innovation, compet itiveness, and job creation ” (emphasis added).

EPA has put forward a robust analysis based on the available data to quantify the impact on vehicle sales, employment, GDP, and household consu mption. In the case of vehicle sales and the employment impacts related to vehicle sales, we have used the analytical approach which both EPA and NHTSA used for the 2012-2016 proposal and final rule, which is also the same framework which NHTSA has used in at least the prev ious 3 CAFE rulemakings (if not more) – including the MY2005-2006 light truck CAFE standard , the MY2008-2011 light truck CAFE standards, and the MY2011 passenger car and light t ruck CAFE standards. The elasticity used in the analysis is based on results from several peer- reviewed academic studies, and the other data are taken from reliable sources (such as the Insura nce Information Institute for information on insurance costs). Some recent literature (e.g., Tu rrentine and Kurani; Larrick and Soll) suggests that vehicle buyers are not good at making calculat ions over fuel economy. Using five years of fuel savings as the amount that consumers consider when buying vehicles accounts for only about 40 percent of the fuel-saving benefits in pre sent value.

The employment analysis draws both from NHTSA’s ana lysis in the 2012-2016 light-duty GHG
and CAFE rule, and further refinement based on acad emic literature (Morgenstern et al., Journal of Environmental Economics and Management , 2002, for the conceptual framework), other government data sources (the Bureau of Labor Statis tics and the Census Bureau), and Ward’s
Automotive Research. The framework of demand, cost , and factor shift effects comes from Morgenstern et al. and has been used in a number o f EPA rulemakings, including: MATS proposal (March 2011), CSAPR final rule (June 2011 ), Boiler MACT final rule (February 2011), CISWI final rule (February 2011), Portland C ement final rule (August 2010), Heavy-duty GHG final rule (August 2011) (in a qualitative asse ssment), and the Boilers and Process Heaters proposal (February 2011).

We note that, in all subsequent comments received i n the interagency review on November 4 and November 8, the focus is on the vehicle sales analy sis and, as a consequence, the “demand effect” in the employment analysis. The only subst antive comment on the “cost effect” is a query about using an average value (we will provide response to that concern in our replies to the comments from 11/8).4

With respect to EPA’s assessment of the impacts of the proposal on GDP and household consumption, EPA has estimated impacts using the I ntertemporal General Equilibrium Model (IGEM) developed by Dale Jorgenson and Peter Wilcox en, which is a well-established model that has been used for over 20 years to analyze the economy-wide impacts of environmental policies. IGEM has been used in several peer-revie wed publications. EPA used IGEM for the 1997 Report to Congress on the benefits and costs o f the Clean Air Act and to evaluate several GHG cap-and-trade legislative proposals, including the recent Waxman-Markey bill (HR 2454). In addition, EPA utilized IGEM to assess the impact s of the proposed and final rules for the 2012-2016 light-duty GHG standards, and the propose d and final rules for the MY2014-2018 heavy-duty GHG standards. In September of 2009, du ring interagency review of the 2012-2016 rulemaking, OMB requested that EPA remove the GDP & household consumption assessment from EPA’s preamble and draft RIA and place the inf ormation into a memorandum to the docket, because OMB and the interagency reviewers h ad not had sufficient time to review the assessment in detail. EPA agreed to this approach for the 2012-2016 rulemaking. However, the interagency reviewers have now had more than two ye ars to review and provide specific

comments on the use of IGEM in the context of evalu ating potential light-duty GHG standards. EPA believes this assessment is useful and provides important information both for the EPA Administrator as well as the public regarding the p otential impacts of the proposed standards.

Interagency Comments from November 4, 2011 Submissi on to EPA and NHTSA

EPA RIA specific comments.

Interagency Comment 7. 8-1: Interagency commenter notes that EPA uses the GDP deflator . Commenter requests clarity on why agencies do not u se the CPI or the PCE deflators specific to cars and light trucks?

EPA Response: We have at times in the past used CPI and PPI for a djusting costs as appropriate for a given analysis. In developing th e 2012-2016 GHG and CAFE proposal, both NHTSA and EPA chose to use of the GDP price deflato r largely because it represented the best estimate of the value of the dollar from year-to-ye ar. Using the PPI is unwieldy as it requires every piece of technology for which costs are being estimated to be categorized into an appropriate PPI series. Also, both the PPI and CPI can be limiting as they do not account for possible substitution of goods or materials. In th e end, our goal is to adjust the cost of an item estimated in some prior year’s dollars to a more re cent year’s dollars. We are not trying to reflect the impact of commodity price changes or co nsumer purchase decisions on our technology costs. The most straight forward metric for meeting our goal is the GDP price
deflator.5

Interagency Comment 9 . 8-3: Interagency commenters note that the discuss ion of loans at 5.5% rate and personal discount rate at 3% and 7% s eems odd. Commenters understand that to mean that agencies are suggesting that borrowing mo ney is saving money? Commenters request agency clarification. The risk-free rate of return is very low at the moment. Commenters note that borrowing to buy a car shouldn’t reduce the co st, but should result in some increase in costs. Commenters request agencies to provide more discuss ion of this to explain the assumption
better.

EPA Response:
The 5.5% loan rate is used in the vehicle sales ana lysis to calculate the finance costs that a vehicle buyer would face. We note that the only us es of this interest rate are in the vehicle sales and payback period analyses, not in the rest of the analysis. To vehicle buyers, that interest rate measures how much they will pay on a monthly basis to purchase their vehicles. We include it in the vehicle sales analysis in recognition of the fact that the cost of buying a more expensive vehicle includes an addition to the monthly payment

.

To calculate the present value of the stream of pay ments that consumers will make, we use the standard risk-free discount rates (from the social planner perspective) intended to reflect the opportunity costs of consumption and capital, respe ctively, 3% and 7%, as we do throughout the
rule.

We note that the difference in vehicle sales analys is results between the 3% and 7% rates is generally quite small, because, for both the loan p eriod and the fuel savings, we consider only 5

years.

Interagency Comment 11 . 8-4: “The fuel cost savings are subtracted from the incr ease in costs associated with the rule to get the net effect of t he rule on consumer expenditure. The higher cost leads consumers to purchase fewer new vehicles, but the fuel savings can counteract this effect. This calculation uses an elasticity of demand for n ew vehicles of -1:[i] that is, an increase of 1% in the price of a new vehicle will lead to a 1% red uction in new vehicle sales.“

Comment [A8]: Commenters note that this is the same assumption si nce the 2008 CAFÉ. Is here any new literature on this?

EPA Response:
Most of the literature focuses on short run elastic ities. Our assumed own-price elasticity reflects
this literature. There are more recent estimates a vailable for the short run elasticity. For instance, Bento et al. 1 report “ mean rental elasticities” of -0.88 for all vehicles and -1.97 for new vehicles only. They note that their model is quite different from other models, in using crosssectional data rather than historical data as in ot her studies. Because it is not obvious that this

1 Bento, Antonio, Lawrence H. Goulder, Mark R. Jacob sen, and Roger H. von Haefen, “Distributional and E fficiency Impacts of Increased US Gasoline Taxes,” American E conomic Review 99 (2009): 667-699.6

elasticity is directly comparable to the other elas ticities, we have not included it in our study. Unfortunately, the latest long run elasticity estim ate we found is from a 1970 publication by Hyman. 2 It comports with the idea that demand for durable goods is less elastic in the long run (the preferred estimate of the author’s is -0.46). However, as this estimate is now over 40 years old, we do not use it to reflect how automobile dem and responds to prices today.

Interagency Comment 13. Interagency commenters recommend that agencies pro vide an uncertainty analysis that provides a sensitivity of different fuel prices and different consumer responses to higher priced vehicles.

EPA Response : As discussed in the draft proposal, our princi ple sales impact assessment is based on a 5-year payback consideration from the ve hicle purchaser. As noted above, using five years of fuel savings as the amount that consumers consider when buying vehicles accounts for only about 40 percent of the fuel-saving benefits i n present value. EPA is willing to consider adding sensitivity assessment of plus and minus 1 y ear from the 5-year primary analysis, or plus and minus 20%, which would be a 4-year and a 6-year assessment, in addition to the 5-year

assessment.

Interagency Comment 15 . 8-6: “The evidence from consumer vehicle choice models n dicates a huge range of estimates for consumers’ willingnes s to pay for additional fuel economy. “ Comment [A10]: Suggests a basis for sensitivity

EPA Response: Greene, 3 Table ES-1, shows willingness to pay as a percent of discounted present value of fuel economy improvements to range from -420% to +1,410% . As noted in response to Interagency Comment 5, we are concerned that many of these esti mates suffer from statistical issues that are likely to cause them to be poor estimates of actual values. Please also see response to Interagency Comment 13 above regarding potential se nsitivity assessment.

Interagency Comment 17 . 8 – 11: “Why Consumers May Not Buy, and Producers May Not Provide, Fuel Economy that Pays for Itself”

Comment [A12]: Interagency commenters note that sin ce this seems to suggest high uncertainty on future sales, commenters recommend that agencies include sensitivity cases.

EPA Response: See response to Interagency Comment 13 above.

2 Hyman, Saul. “Consumer Durable Spending: Explanati on and Prediction.” Brookings Papers on Economic Ac tivity (1970): 173-206.

3 Greene, David L. “How Consumers Value Fuel Economy : A Literature Review,” EPA Report EPA-420-R-10-00 8, March 2010, available at http://www.epa.gov/otaq/cl imate/regulations/420r10008.pdf .7

Interagency Comment 18 . 8-11: Commenters note that relative to other cost s of ownership (depreciation, insurance, O&M, etc) fuel expenditur es are actually quite low (see AAA publication on costs of ownership). This might be a nother reason why consumers might view fuel economy as less of a concern. Commenters recom mend that agencies provide some
discussion of the relative role of fuel costs in a large durable good purchase.

EPA Response: The Department of Energy Transportation Energy Data Book 4 estimates that 15.4% of the total cost per mile for a vehicle is g as and oil. Between 1985 and 2010, the percentage has varied from a low of 9.4% to a high of 19.9%.

This issue ties into the salience of fuel expenditu res at the time of vehicle purchase, one of the hypotheses raised in this section. To keep the dis cussion of manageable size, we have raised a number of hypotheses in the DRIA without going into depth on any of them. In the Preamble, we have added, in a short discussion of salience, t he following footnote: “U.S. Department of Energy, 2011. “Transportation and the Economy,” Ch apter 10 in “Transportation Energy Data Book,” http://cta.ornl.gov/data/tedb30/Edition30_Ch apter10.pdf, Table 10.13 , estimates that gas and oil costs were 15.4% of vehicle costs per mile in 2010.”

Interagency Comment 20 . 8:36: Because outlays on fuel are a part of consu mer spending, it is not immediately clear to interagency commenters why lower expenditures on fuel would boost overall consumption.

EPA Response: There are multiple ways that fuel savings from this rule can boost overall consumption in the U.S. economy. Computable general equilibrium (CGE) models of the U.S. economy attempt to capture the complex combination of economic impacts of policies like this proposal (e.g., impacts on productivity, prices, la bor and capital formation). As one example, discussed in RIA Chapter 8, fuel savings from this proposal lead to lower prices of generally all goods and services except for vehicles. As a resul t, U.S. households can purchase more goods and services, which leads to higher levels of real U.S. household consumption.

Interagency Comment 59. Interagency commenters also recommend that EPA and NHTSA request comment on the circumstances in which such additional incentives—for the use of particular technologies or achievement of particula r performance metrics—are appropriate, given that the proposed rule will create broad incentives for increasing fuel economy and reducing GHG emissions, and given that the provision of cred its for particular technologies may distort manufacturers’ decisions about which technologies t o employ to achieve these goals.

EPA Response: In both the discussion of the EV/PHEV/FCV advanced technology incentive multipliers and the full size pickup trucks technol ogy incentive credit we request comment

4 U.S. Department of Energy, 2011. “Transportation and the Economy,” Chapter 10 in “Transportation Energy Data Book,” http://cta.ornl.gov/data/tedb30/ Edition30_Chapter10.pdf, Table 10.13.8

regarding the incentives. Given that EPA believes this incentive is appropriate, we don’t see a need to request comment on its appropriateness. If commenters’ believe that these incentives are not appropriate, they will comment so, independent of a specific request for comment on their appropriateness.

Interagency Comment 60. Interagency commenters also recommend that EPA and NHTSA request comment on alternative designs for some of the proposed additional incentives that might achieve the goals that motivate the additional ince ntives while avoiding any excessive or perverse incentives. This would include requesting comment on:

a) The proposed production cap on eligibility for t he 0 gram per mile incentive for EVs, PHEVs, and FCVs. The low production cap in MY 2022-2025 fo r automakers that did not sell sufficient numbers of eligible vehicles in earlier years could unintentionally limit the introduction of gamechanging technologies from some manufacturers and l ock in competitive advantages to first movers. To the extent the goal is encourage early l eadership in commercialization of these technologies, it is not clear that differential pro duction caps in later years are the optimal tool to encourage such leadership, rather than, for example , increasing incentives for these vehicles in earlier years.

b) The proposed credit for full size HEV pickup tru cks, and in particular whether such trucks should face eligibility thresholds. Given that the credit is available to all HEV trucks, including those with emissions above their footprint standard , it is not clear that there is a public policy rationale for increasing the incentive to produce a n HEV pickup truck that has higher emissions than a conventional but lower-emitting pickup truck . Additionally, as with the production cap discussed above, the restriction on access to this credit for only those manufacturers that achieve a minimum penetration of HEV trucks within their fl eets could limit incentives for deployment among certain manufacturers while locking in compet itive advantages for others. To the extent the goal is to encourage broad penetration into the marketplace, it is not clear that alternative crediting designs, such as a broad-based credit tha t was available to all full size HEV trucks or a credit that increased as a linear function of the p enetration level of the technology in a manufacturer’s full size pickup fleet, would not mo re effectively achieve this goal.

c) the proposed performance-based incentive credits for full size pickup trucks and whether instead of discrete crediting levels these credits could be awarded on the basis of a linear formula to avoid particularly strong (weak) incentives when near to (far from) a “notch” in the incentive level. (This credit could be designed, for example, as a 1 g/mi CO2 credit for each X percent improvement in fuel consumption relative to the foo tprint target up to a maximum credit level.)

EPA Response: Regarding 60a, the preamble requests comment on all aspects of the eligibility requirements and the thresholds, as well as on alte rnative designs for the EV/PHEV/FCV incentive multiplier. With respect to 60b, EPA als o requests comment in the discussion of the proposed full size pickup truck technology incentiv e credit on the minimum percentage thresholds. With respect to having a sliding scale , for the amount of credit, this would not provide the type of incentive for which EPA is prop osing this incentive. As discussed in the9

August 2011 Joint SNOI, and in the draft preamble f or the Joint NPRM, the intent of the full size pickup truck market is to provide an incentive for the pull ahead of advanced technologies into this market segment. Providing a 1 g/mi incentive for a pickup truck which is 1 or 2% below its applicable target would not provide an incentive fo r a pull-ahead of technology, and is actually incentivize a level of technology which is less the n what a company would typically add to a vehicle during a vehicle redesign.1



### Responses from EPA and NHTSA to the Interagency Com ments Provided on November 4, 2011 regarding the 2017-2025 Light-duty GHG/CAFE NPRM

This document contains responses from EPA and NHTSA to the remaining interagency comments provided on 11.4.2011. EPA and NHTSA prov ided response to the other comments from the 11.4.2011 request on November 9, 2011 and November 10, 2011.

Interagency Comment 1. At least two unconventional assumptions appear to be necessary to yield a prediction that sales of new vehicles will increase as a result of this rule. One is that all automakers consistently and predictably forego prof it opportunities amounting to hundreds, if not thousands, of dollars per vehicle. Another, tho ugh not explicitly stated in the analysis, is that the projections made today about future techno logy costs, fuel prices, consumer preferences, etc., in the years 2017-25 are more re liable than they will be at any time between now and when that time arrives. Interagency commenters request that agencies make both assumptions clearly explicit and provide empirical evidence such as peer reviewed research to support both.

EPA Response: EPA acknowledges in the preamble that auto makers w ould have to consistently forego the potential for increased vehicle sales in order for our assessment to show the results that it does. We state in Preamble III.H.10.a,

If consumers do not accurately compare the value of fuel savings with the increased cost of fuel economy technology in their vehicle purchas e decisions, as discussed in Preamble III.H.1, they will continue to behave in this way a fter this rule. If auto makers have accurately gauged how consumers consider fuel econo my when purchasing vehicles and have provided the amount that consumers want in veh icles, then consumers should not be expected to want the more fuel-efficient vehicles. After all, auto makers would already have provided as much fuel economy as consumers wan t. If, on the other hand, auto
makers underestimated consumer demand for fuel econ omy, then this rule may lead to production of more desirable vehicles, and vehicle sales may increase. This assumption implies that auto makers may have, for various reas ons, missed some profit-making opportunities.

The reasoning underlying potential market failures leading to this result is provided in Preamble Section III.H.1 and RIA Chapter 8.1 (and is referen ced just before the above). As we discuss in those sections, research has neither proven nor dis proven any of the hypotheses that might explain what appears to be lack of market adoption of cost-effective fuel-saving technologies. We there provide an extensive review of the literat ure.

On the second point, we do not understand the inter agency statement “Another, though not explicitly stated in the analysis, is that the proj ections made today about future technology costs,2

fuel prices, consumer preferences, etc., in the yea rs 2017-25 are more reliable than they will be at any time between now and when that time arrives”

Interagency Comment 2. In the analysis of consumer welfare in Section III .H.1, the agencies include uncertainty and irreversibility as one expl anation of consumers undervaluing fuel economy. However, commenters note that the argument is explicitly a “rational consumer” argument: it says that consumers rationally apply a higher apparent discount rate to future fuel savings in the face of uncertainty about fuel prices. As a result, this argument does not appear to provide a justification for DOT/EPA’s use of deterministic projections of fuel savings to calculate consumer welfare. Comment ers request agency views on this point.

EPA Response: In Preamble Section III.H.1, we have sought to prov ide the range of reasons that the literature has provided that might explain the energy paradox. Some of these are market failures, and others not. Some have been studied empirically, an d others have not. We, as well as researchers in the field, consider this an area where solid con clusions cannot yet be drawn. The effect of this rule on vehicle sales will be affected by which rea sons affect consumer vehicle buying behavior.

The fuel savings projections used in the net benefi ts calculation are based on the effects of the
standards on fuel use in the reference vehicle flee t. Their market value is based on AEO predictions of fuel prices. They are independent o f consumer vehicle buying behavior, which is where consumer attitudes toward fuel economy comes into play.

EPA RIA specific comments.

Interagency Comment 5. 3-14: “The 1975-1985 and 2004-2010 timeframes are not rel evant in this regard due to either rising gasoline prices, r ising CAFE standards, or both. Thus, the 1986- 2003 period is an excellent analogue in many ways t o the period out to MY 2025 during which AEO projects stable gasoline prices. EPA staff have analyzed the fuel economy trends data from the 1986-2003 timeframe and there are three cl ear conclusions: 1) there was a small, industry-wide, over-compliance on the order of 1-2 mpg or 3-4%, 2) almost all of this industry-wide over-compliance was from 3 compa nies (Toyota, Honda, and Nissan) that produced smaller and lighter vehicles relative to the industry average and which therefore naturally and essentially necessarily ove r-complied with the universal CAFE standards that did not vary by footprint, and 3) fu ll line car and truck manufacturers, such as General Motors, Ford, and Chrysler, which produc ed larger and heavier vehicles relative to the industry average and which were con strained by the universal CAFE standards, rarely over-complied during the entire 1 8-year period .” Comment [A3]: AEO has gas prices rising about 10% over 2017 - 202 5 Comment [A4]: Assuming the FE is lagged by one year following pri ce changes the previous year, the last three years (2001-2003) are all over compliance years --- they also correspond to years (2000 – 2002) with the highest gas prices. A regression would likely show consumers and3

producers respond to higher gasoline prices. (e.g., see CBO 2008: http://www.cbo.gov/ftpdocs/88xx/doc8893/01-14-Gasol inePrices.pdf) The average price 1986 – 1999 was $1.50; whereas 2000 – 2002 price averaged $1.67 (increase in 11%). This seems to suggests that when prices rise fuel economy is valu ed as a vehicle attribute. This point questions assumption of market failure for fuel economy. Inte ragency commenters request response from agencies on this point.

EPA Response: We agree that vehicle buyers are responsive to gaso line price; what is unclear is how responsive consumers are. As discussed in P reamble III.H.1 and RIA Chapter 8.1, the willingness to pay to reduce future fuel costs appe ars not to be well estimated in studies, but we agree that the value is not zero, as reflected in o ur use of the 5-year payback period in the vehicle sales analysis.

Interagency Comment 13. Interagency commenters recommend that agencies pro vide an uncertainty analysis that provides a sensitivity of different fuel prices and different consumer responses to higher priced vehicles.

EPA Response : As discussed in the draft proposal, our princi ple sales impact assessment is based on a 5-year payback consideration from the ve hicle purchaser. As noted above, using five years of fuel savings as the amount that consumers consider when buying vehicles accounts for only about 40 percent of the fuel-saving benefits i n present value. EPA is willing to consider adding sensitivity assessment of a plus and minus 1 year from the 5-year primary analysis, or plus and minus 20%, which would be a 4-year and a 6 -year assessment, in addition to the 5-year

assessment.

NHTSA Response : In addition to estimating sales and employment impacts under the assumption that consumers value fuel savings for fi ve years (or the average life of a vehicle loans), NHTSA determined that the breakeven point b etween the length of time that consumers value fuel savings and there is no impact on sales is roughly three years.

Interagency Comment 14

. “These complications add considerable uncertainty t o our vehicle sales impact analysis.” Comment [A9]: Commenters request that agencies add uncertainty an alysis showing the results if consumers do not internalize future fuel savings in their purchase.

EPA Response: As noted in response to Interagency Comment 5, abov e, we consider it implausible to include an analysis where future fue l savings are completely ignored in the vehicle purchase decision.

Interagency Comment 19 . 8 – 12 : “Both theoretical and empirical research suggests that, in the context of fuel economy and elsewhere, many con sumers do not make energy-efficient investments even when those investments would pay o ff in the relatively short-term.[ii]”4

Comment [A13]: Interagency commenters note that if this is true then increased sales will not occur, Commenters note this provides further justif ication for base case.

EPA Response: As discussed in response to Comment #1, we currentl y note that this proposed rule is not intended to change how consumers make t heir decisions on vehicle purchase. Vehicle sales could be expected to increase if the standard s lead auto makers to provide consumers with choices over fuel economy that they find desirable with their current decision-making processes.

Interagency Comment 57 . Proposed additional incentives. The proposed rule includes several
additional incentives that manufacturers could be e ligible for on the basis of production of
certain volumes of vehicles with particular characteristics. Such ince ntives include multipliers for EVs, PHEVs, and FCVs, and credits for trucks that a re HEV or that meet a performance threshold. To inform decision-making in the final r ulemaking and to elicit useful comments on these incentives, interagency commenters recommend that the agencies include in the NPRM’s preamble estimates of the economic magnitude of the se incentives, including how incentives would vary depending on the circumstances of a part icular manufacturer.

EPA and NHTSA Response: See response to Interagency Comment 58 below.

Interagency Comment 58. Stemming from comment above, for example, EPA is p roposing granting a credit equivalent to 10g/mi to truck man ufacturers for each full sized pickup truck that achieves 15 percent better fuel consumption than it s footprint-based target, provided that this performance standard is met or exceeded by at least 15 percent of their full sized pickup truck fleet. Commenters note that this begs a question of the magnitude of the incentive created by this credit for a manufacturer, first in general, and al so for manufacturers that would otherwise produce a sufficient number of trucks achieving a p erformance level just below the required standard (e.g., 14 percent better fuel consumption than the required target) or for manufacturers that would otherwise produce trucks that exceeded t he performance level but these trucks would compose less than 15 percent of their full sized fl eet. Commenters request clarity on what is the implied cost per ton of emissions reductions associ ated with the incentives created in these
various scenarios?

EPA Response: Comment 57 and 58 request information on the econom ic value of the EV/PHEV/FCV incentive multiplier and the full-size pickup truck incentive credit. EPA will include additional information in the proposal with illustrative vehicle examples using a metric of $/gram/mile as one way auto firms may look at th ese incentives – we will provide an example using an all electric vehicle and the EV incentive multiplier and a HEV full size pickup truck and
the HEV incentive credit.

NHTSA Response: The NHTSA program proposes incentives for full si ze pick-up trucks, but not for PHEV/EV/FCV technologies. NHTSA has include d an analysis of the potential effects of5

the full size pick-up truck incentives in the PRIA Chapter XI. Staff estimated an upper bound level of penetration of Strong HEV technology and c alculated the potential effects on required CAFE standards for each manufacturer of full size p ick-ups and for the industry. The analysis included estimated effects on achieved fuel economy , technology outlays, average vehicle cost increase, fuel savings and CO2 reductions.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 working comments received duri ng EO 12866 and EO 13563 review of the draft rule “Joint Rulemaking to Establish Light-Duty Vehicle Greenhouse Gas Emission Standards and Corporate Average Fu el Economy Standards”. They are for your consideration and are subject to further policy review.

1) Interagency commenters thank agencies for the following responses. Commenters recommend that the agencies incorporate a summary of the following responses that the agencies provided into the Preamble so that public commenters can benefit from these

clarifications:

“ EPA Response: The Department of Energy Tran sportation Energy Data Book 1 estimates that 15.4% of the total cost per mile for a vehi cle is gas and oil. Between 1985 and 2010, the percentage has varied from a low of 9.4% to a high of 19.9%.

This issue ties into the salience of fuel expenditu res at the time of vehi cle purchase, one of the hypotheses raised in this section. To keep the di scussion of manageable size, we have raised a number of hypotheses in the DRIA without going into depth on any of them. In the Preamble, we have added, in a short discussion of salience, the following footnote: “U.S. Department of Energy, 2011. “Transportation and the Economy,” Ch apter 10 in “Transportation Energy Data Book,” http://cta.ornl.gov/data/te db30/Edition30_Chapter 10.pdf, Table 10.13 , estimates that gas
and oil costs were 15.4% of ve hicle costs per mile in 2010.”

“EPA Response: Our gasoline engine technology cost a nd effectiveness estimates are based on the use of regular unleaded gasoline fuel. We do not project that premium fuel will be required to achieve the proposed standards.”

“EPA Response: EPA has not conducted any sensitivity on towing. The vast majority of all of the technology packages which we have added to vehicles maintain towing capability. All full size pickup trucks have been modeled to mainta in towing (gasoline, diesel, and hybrids). All gasoline and diesel vehicles are modeled to main tain towing. For HEV vehicles (other than full size pickup trucks, where we have not utilized Atkinson-cycle engines) , we have utilized Atkinson-cycle engines, but with no downsizing of the engine. Thus, when combined with the electric motor on the vehicle, towing capability is maintained, except for those instances where a
vehicle is at or near the maxi mum towing load and operation is on a sustained grade (e.g., going uphill for a long period of time) – and it is possible OEMs may reduce the rated maximum towing limit for such vehicles. Given the relati vely small number of HEVs we project (which are not full size pickups), this impact is modest . It is not clear what part of our analysis

1 U.S. Department of Energy, 2011. “Transportation and the Economy,” Chapter 10 in “Transportation Energy Data Book,” http://cta.ornl.gov/data/tedb30/Edition30_Chapter10.pdf, Table 10.13.Summary of Interagency Working Comments Received on Draft rule under EO 12866 review. Subject to

further policy review.

2 regarding towing would be a basis for a towing sensitivity assessment, and what type of sensitivity would be performed.”

2) Refueling benefits. Interagency comments r ecommend that the agencies include language seeking public comment from manufacturer s on whether all improvements to fuel economy will translate directly into driving ra nge or if manufacturer s will alternatively

reduce tank size to some extent to maintain driving range.

3) Interagency commenters recommend that the agencies include a discussion in the

Preamble about substitution between new and ol der vehicles in light of increases in vehicle prices. Commenters sugg est that the agencies seek co mment on the effect of rule

on scrappage rates.

1) Interagency commenters recommend that the ag encies insert the fo llowing language in the Preamble on page 61 towards the end of “Section C. Summary of Costs and Benefits for the Proposed National Program”:

“In the RIAs and TSD chapters, the agencies project that some advanced technologies, such as 8-speed automatic transmissions, ha ve negative costs. In other words, these technologies reduce both fuel consumption and vehicle production cost s at the same time. One might expect that auto manufacturers would be able to iden tify such technologies with negative costs and incorporate them into their designs absent regulation. However, for reasons x and y [please insert agency explanation], auto manufacturers will not incorporate these technologies into their designs absent re gulation. For that reason, these negative cost technologies do not belong in the baseline. We seek comment on the estimates of costs of all the technologi es projected to ha ve negative costs.”

2) Interagency commenters recommend that the ag encies insert the fo llowing language in the Preamble on page 61 towards the end of “Section C. Summary of Costs and Benefits for the Proposed National Program”:

“EPA and NHTSA included discussion of lear ning cost assumptions in the RIAs and TSD Chapter X. Since the agencies had to project how learning will occur with new technologies over a long period of time, we request comments on the assumptions of learning costs and methodology. In particular , we are interested in input on the assumptions for certain advanced technologies not expected to be available until 2017,Summary of Interagency Working Comments Received on Draft rule under EO 12866 review. Subject to

further policy review.

3 but for which we assume that learning (and th e associated cost reduc tions) begin as early as 2012. We seek comment on the appropriate ness of these pre-produ ction applications of learning.”

3) Interagency commenters recommend that the ag encies insert the fo llowing language in the Preamble section of energy security benefits:

“The calculation of energy securi ty benefits does not include en ergy security costs associated with reliance on foreign sources of lithium and rare earth metals for HEVs and EVs. The agencies intend to quantify this impact for th e final rule stage and seek public input on information that would enable agencies to deve lop this analysis. EPA and DOT also seek public input on the projections that energy securi ty benefits will grow rapidly through 2025.”

4) Interagency commenters recommend that the agencies include the following language in the Preamble on page 61 towards the end of “Section C. Summary of Costs and Benefits for the Proposed National Program”:

“Due to time constraints, the analysis accompanying this joint rule did not include additional costs that may be associated with adoption of certain technologies included in the packages such as:

‐ EV/HEV/PHEV battery disposal costs

‐ Infrastructure costs associated with building new charging stations for EVs

‐ Changes in vehicle maintenance and repair costs

‐ Premium fuel requirements for certain advanced technologies

The agencies intend to quantify these additiona l costs for the final rule stage. DOT and

EPA seek comment on other costs or cost savings that are unaccounted for in this analysis, and agencies seek information on how to quantify impacts of these additional cost and savings categories for the final rule stage.”

5) Interagency commenters recommend that the agencies include the following language in the Preamble on page 61 towards the end of “Section C. Summary of Costs and BenefitsSummary of Interagency Working Comments Received on Draft rule under EO 12866 review. Subject to

further policy review.

4 for the Proposed National Program”. Interagency comments recommend that agencies title this section “Uncertainty Analysis and Additional Sensitivity Cases”

“Uncertainty Analysis and Additional Sensitivity Cases”

“Due to the uncertainty and difficulty in projecting costs and benefits through 2025, the agencies relied on a combination of methods to project costs and costeffectiveness of technologies. For example, for most advanced technologies, EPA

and DOT relied on new studies and resear ch conducted by EPA, and contracted work with FEV and Ricardo. For other technologies, EPA and DOT relied on cost

and cost-effectiveness estimates de veloped in the 2012-2016 rulemaking by applying learning to those estimates appropriate for the 2017-2025 time period.

DOT conducted a full uncertainty analysis , which is included in the RIA section x. Results of the uncertainty analysis are summarized below:

Total Benefits at 7% discount rate ____

Total Benefits at 3% discount rate ____

Total Costs and 7% discount rate ____

Total Costs at 3% discount rate _____

DOT also conducted sensitivity cases that are very close to the costs and costeffectiveness estimates used by the Nationa l Academy of Sciences in their report
titled, “PLEASE INCLUDE CORRECT TITLE.” As the agencies indicated in both RIAs, the NAS did not project costs and cost-effectiveness for technologies beyond 2015. NHTSA applied learning and di scounting similar to the learning and discounting applied to current agency projections of certain technologies to derive alternative sensitivity ca ses for 2017-2025. NHTSA estimated the following impacts on the costs and benefits of the rule when using the NAS-like

sensitivities:

Total Benefits at 7% discount rate ____

Total Benefits at 3% discount rate ____

Total Costs and 7% discount rate ____Summary of Interagency Working Comments Received on Draft rule under EO 12866 review. Subject to

further policy review.

5 Total Costs at 3% discount rate _____

The agencies seek comment on the methods used to conduct the uncertainty analysis and on the results from the additional sensitivity cases. The agencies also seek comment on whether the agencies shoul d use any of the sensitivity cases as part of the primary case for the final rule.”

6) Interagency commenters recommend that the ag encies remove this statement that first appears of pages 9-10 of the Preamble and ev erywhere else in the Preamble, both RIAs, and TSD chapters where this stat ement is repeated/summarized:

“The agencies have designed the proposed standards to preserve consumer choice -- that is, the proposed standards should not affect consumers’ opportunity to purchase the size of vehicle w ith the performance, utility and safety features that

meets their needs.”

7) Interagency commenters note th at Table X-10 on page 459 might be confusing because it

looks like the “market driven baseline” was much higher than it actually is. Interagency commenters recommend that the agencies clar ify what methodology was used to develop

the table and estimates.

8) Interagency commenters thank the agencies fo r their response on the model’s inability to accurately project PHEV penetration. As a follow-up, commenters recommend that agencies include a caveat with each table th at details the limitations of modeling PHEVs versus EVs and the fact that the analysis doe s not consider the imp act of the advanced vehicle incentives. Interagency commenters also request clarity from agencies on why agencies chose not to combine EV/PHEV proj ections in a single column as had been

done for the TAR?

Other Follow-up Interagency comments on Preamble:

9) Page 39 – “EPA is proposing that EVs and FC Vs start with a multiplier value of 2.0 in MY 2017, phasing down to a value of 1.5 in MY 2021. PHEVs would start at a multiplier value of 1.6 in MY 2017 and phase down to a value of 1.3 in MY 2021. 2 The multiplier would be 1.0 for MYs 2022-2025.” Interagency commenters note that the multipliers appear to be related to the hybrid ization degree of the powertrain (I.e., BEVs have a higher multiplier than PHEVs). If so, perhaps the multiplier should beSummary of Interagency Working Comments Received on Draft rule under EO 12866 review. Subject to

further policy review.

6 proportional to the hybridization degree. This would allow differe ntiating PHEVs with different EV ranges. Otherwise, a PHEV with a small battery (i.e., 4kWh) gets the same credit as a PHEV with a larger one (i.e., 16kWh).

10) Page 40 – “EPA is proposing that mild HEV pickup trucks would be eligible for a per vehicle credit of 10 g/mi 3 during MYs 2017-2021 if the technology is used on a minimum percentage of a company’s full size pickups...” Interagency commenters request clarity

on whether there is a credit for othe r technologies, such as PHEVs?

11) Page 61, Table I-21: Interagency comenters not e that the 7% discount rate Car Sum of Present Values may be incorrect. Commenters sugge st that agencies to double this table.

12) Page 84, Table II-2: Interagency commenter re commends that agencies define the term “MAV (Multi-Activity Vehicle)”.

13) Page 100 – “The agencies excluded diesels and dedicated AFVs because the agencies anticipate that advanced gaso line-fueled vehicles are li kely to be dominant through MY2025.” Interagency commenters request cl arity on how agencies arrived at this

conclusion.

14) Page 112 – “ Shift optimization is a strategy whereby the engine and/or transmission controller(s) emulates a CVT by continuously evaluating all possible gear options that would provide the necessary tractive power and select the best gear ratio that lets the engine run in the most efficient operating zo ne.” Interagency comme nters request agency views on whether the trade-off between drive qu ality and fuel consumption benefits with respect to CVT controls could be an issue, and if this has le d OEMs to scale back development of CVTs. Commenters would lik e to understand if drive quality suffers when fuel consumption benefits are ma ximized through CVT operation. Commenters also request clarity on whether drive-quality has been taken into acc ount with respect to the shift optimization strategy that emulates a CVT.

15) Page 113 – “ Mass Reduction can be achieved in many ways, such as material substitution, design optimization, part cons olidation, improving ma nufacturing process, etc. The agencies applied ma ss reduction of up to 20 percen t relative to MY 2008 levels in this NPRM compared to only 10 per cent in 2012-2016 final rule.” Interagency commenter recommends that agencies incl ude language to clarify what the 20% reduction includes (if this is for the en tire vehicle or just the glider).Summary of Interagency Working Comments Received on Draft rule under EO 12866 review. Subject to

further policy review.

7 16) Page 182 – Interagency commenters note th at the table lists the incentives for EV/PHEV/FCV multipliers in the same colum n. Interagency commenters note that this seems to be different than the statement on page 39 that mentions that EVs and FCVs

start with 2 and PHEVs with 1.6 in 2017. The same values ar e also in Table III-14 on page 263.

17) Page 271 – Interagency commenters find the CNG vehicle utility factor discussion for dual fuel CNG confusing in the second para graph of this page of the preamble. Interagency commenters request clarity in the text on how agencies derived the 95% CNG operation.

18) Page 314 – Table III – Interagency commenters note that it seems unusual that GM and Hyundai are shown as having 0% penetration of HEVs (and Ford at only 2%) in 2025 while they all have already HEVs in the mark et. Also, commenters no te that Toyota, the current market leader, has a lower percenta ge (12%) than BMW and Tata, who have no HEVs on the market. Interagency commneter s request clarity be hind these numbers.

19) Page 344 – Table III-50. Commenters suggest that agencies include a table comparing the current technology costs with the va lues in 2025 along with a percentage improvement per year to reach these values. Commenters suggest a similar table for Page

673 Table IV.G.4-1A

20) Page 324 – Table III-31 – Interagency comme nters request clarity on why idle-stop systems and mild HEVs are not considered in any of the analysis of this section. Commenters request clarity on whether these technologies are being considered in large production by auto manufacturers now.

21) Page 570 – “NHTSA notes that, in deve loping technology cost and effectiveness estimates, the agencies have made every e ffort to hold constant aspects of vehicle performance and utility typically valued by consumers, such as horsepower, carrying capacity, drivability, durability, noise, vibr ation and harshness (NVH) and towing and hauling capacity.” Interagency commenters request clarity on th e criteria used for durability, noise, vibration, and harshness.

22) Page 576 – Commenters suggest that agencies include language to describe the necessity to use two separate tools (VOLPE and OME GA) and provide further explanations about how the difference in the tool methodologi es and assumptions influence the overall

results.Summary of Interagency Working Comments Received on Draft rule under EO 12866 review. Subject to

further policy review.

8 23) Page 620 – “NHTSA notes that the Volpe model not only has been formally peerreviewed and tested and revi ewed through three rulemakings, but also has some features especially important for the analysis of CAFE standards under EPCA/EISA. Among these are the ability to perform year-by-year analysis, and the ab ility to account for engineering differences between specific vehicle models.“ Interagency commenters recommend that agencies include language a nd information elaborat ing about the impact

of these features and how it would affect results if they did not have them.

24) Page 620 – “By combining technologies incr ementally and on a model-by-model basis,

the CAFE model is able to account for important engineeri ng differences between vehicle models and avoid unlikely technology combin ations.” Interagency commenters suggest that agencies to add additional text elaborat ing on the impact of addressing technologies individually vs. packages.

25) Page 681/682 – Interagency commenters suggest that agencies include an explanation of why Table IV.G.4-4 shows that almost no HEVs are required when EPA states that as much as 15% would be necessary (Table III-23 page 314)?

26) Page 5-71: Commenters request clarity on whether it is likely or unlikely that the g/mi values shown for automobiles for start-stop technology and solar roofs would be so close (2.9 vs. 3.0, respectively). Interagency co mmenters note that the value of these technologies depends to a large part on climate or time of da y. Commenters also note that in particular, the value of start-stop might be much larger compared to solar since it is not dependent on weather (sunny in Dallas vs. rai ny in Seattle vs. snowy in Vermont) or time of day (daylight vs. night). Commenters note that the same argument could apply to solar control. Commenters request clarity on whet her agencies considered these potential

differences.1



### Responses from EPA to the Interagency Comments Prov ided to EPA on November 8, 2011 regarding the 2017-2025 Light-duty GHG/CAFE NPRM

This document contains responses from EPA to the in teragency comments provided to EPA on 11.4.2011. EPA provided response to the other comm ents from the 11.4.2011 request on November 9, 2011 and November 10, 2011.

NHTSA is also reviewing these Interagency Comments from November 8, as well as the EPA responses below, and EPA may supplement our respons es based on further review within EPA
and/or information we receive from NHTSA.

Interagency Comment 1. Interagency commenters find that there seems to be considerable confusion about how the mpg requirements of the rul e relate to the “real world” mpg numbers now included on vehicle labels. Please provide an e stimate of the real world mpg requirements for each year.

EPA Response: In Preamble Section I, the Executive Summary, the t hird paragraph (which is the first discussion of 2025 targets) we have inclu de the following footnote “Real-world CO 2 is typically 25 percent higher and real-world fuel eco nomy is typically 20 percent lower than the CO2 and CAFE compliance values discussed here.” We have this note in several places throughout the preamble, but we do not repeat it fo r the dozens and dozens of tables of the 2- cycle test procedure CO2 and mpg values. We have a dded a new table early in Preamble III (the discussion of the proposed EPA standards) which wil l provide an estimate of the real-world fuel economy and CO2 emission performance for cars and f or trucks for the MYs 2017-2025.

Interagency Comment 2. Interagency commenters request clarity on whether the reference fleet included in this rule is equivalent to the fleet ex actly as the analysis of the 2012-2016 rule projects to be in 2016? If not, did the agencies un der- or over-estimate costs and benefits in that rule? Given that the reference fleet is based on pr ojections from commercially available sources, is it the agencies’ intention to compare these proj ections to manufacturers’ plans and make adjustments to the projections when they diverge fr om manufacturers’ plans?

EPA Response: The reference fleet has been adjusted for some mino r technology information updates as well as scaled to a new AEO. This is di scussed in TSD 1. Given that we are focusing on later model years, EPA has not performed a detai led comparison back against the 2016 rule analysis, which compared against a different refere nce scenario (MY 2011 CAFE). A number of other inputs (VMT and fuel price) have also been up dated as a result of the new AEO, so a direct comparison of benefits is not obvious.

With regard to manufacturer product plans, the issu es related to using confidential manufacturer product plans extensively in the MY 2012-2016 rule, see 75 FR at 2353. For the MY2017-20252

proposal, while NHTSA did request product plans fro m firms and the submissions were shared with EPA, many firms did not provide any response t o such requests, and the firms which did often did not forcase beyond MY2016, and the number of firms who provided information to the MY2020 and MY2025 time frame were very few.

Interagency Comment 3 . Interagency commenters request clarity on why con sumers’ experience with the more fuel efficient cars from t he 2012-2016 rule will not be sufficient to persuade them of the benefit of fuel efficiency. In other words, commenters request clarity on why experience is not sufficient to overcome appare nt myopia? More specifically, commenters request clarity on why fuel labels are not sufficie nt to overcome (or least mitigate to some extent) consumers’ myopia? Similarly, if there were a marke t failure that prevented manufacturers from foreseeing that producing more fuel efficient cars is a profit maximizing strategy, commenters request clarity on why their experience with the 20 12-2016 rule might not be sufficient to persuade them?

EPA Response: Because vehicles are a durable good, bought infrequ ently, any individual consumer has a relatively limited opportunity to develop experienc e. Experiments in economics often show that, consumer decisions improve with repeated participat ion in markets; when a consumer enters the market, on average, every five years, to a changed selection of vehicles, though, lessons from the previous market exposure may not carry over very we ll.

Regarding the label, we are not aware of empirical evidence on how or whether past fuel economy labels have changed purchase decisions. A literature review that contributed to the fuel economy labeling rule 1 points out that consumers increasingly do a great deal of research on the internet before going to an auto dealer. Whether t he new label will play a more prominent role in affecting consumer decisions is as yet unknown.

For automakers, the evidence from the mid-1980s – e arly 2000s, when fuel prices were low and relatively stable, suggests that fuel economy was n ot a priority in vehicle design. In recent years automakers have advertised fuel economy much more, but the passage of EISA in 2007, combined with much higher gasoline prices in 2004-8 , ensured that they would have to improve fuel economy; whether they would have done so in th e absence of the law or the regulations or higher gasoline prices is impossible to say. We ar e only starting to see evidence in the past few years of increasing options for improved fuel econo my: for instance, it is possible to get the Ford F-150 truck with either a V-8 engine or a V-6 with turbocharging, and consumers appear to be responding to the choice. We have no evidence e ither to support or to reject the idea that automaker behavior will be different in response to the 2012-16 standards than it has been for most of the last 30 years.

1 PRR, Inc., “Environmental Protection Agency Fuel E conomy Label: Literature Review.” EPA-420-R-10-90 6, August 2010, available at http://www.epa.gov/fuelec onomy/label/420r10906.pdf .3

Interagency Comment 4. Interagency commenters request clarity on why th e Max Net Benefit alternative does not maximize net benefits? (From T able 2, the Max Net Benefit option has the
4th or 6 th highest net benefits of those listed.)

EPA Response: This comment is directed to a specific assessment p erformed by NHTSA.

Interagency Comment 5 . Interagency commenters request clarity on whether the agencies considered the energy security costs of reliance on foreign sources of lithium and rare earth metals for hybrids and EVs?

EPA Response: As stated in the Preamble, EPA is considering explo ring the impact on energy security of PHEVs and EVs. EPA did not have suffic ient information to conduct this analysis for the NPRM but will attempt to collect this infor mation for the FRM.

Interagency Comment 6. Interagency commenters request clarity on whethe r the increased price of vehicles will induce individuals to keep t heir old cars for a longer time period? If this is the case, commenters request clarity on whether the re will be a reduction in safety as they delay acquiring cars with the latest safety technology?

EPA Response: Preamble III.H.10 currently states: “The effect of this rule on the use and scrappage o f older vehicles will be related to its effects on new vehicle prices, the fuel efficiency of new vehicle models, the fuel efficiency of used vehicles, and the total sales of new vehicl es. If the value of fuel savings resulting from improved fuel efficiency to the typical potent ial buyer of a new vehicle outweighs the average increase in new models’ prices, sales o f new vehicles will rise, while scrappage rates of used vehicles will increase slig htly. This will cause the “turnover” of the vehicle fleet (i.e., the retirement of used veh icles and their replacement by new models) to accelerate slightly, thus accentuating t he anticipated effect of the rule on fleetwide fuel consumption and CO 2 emissions. However, if potential buyers value fut ure fuel savings resulting from the increased fuel efficienc y of new models at less than the increase in their average selling price, sales of n ew vehicles will decline, as will the rate at which used vehicles are retired from service. T his effect will slow the replacement of used vehicles by new models, and thus partly reduce the anticipated effects of this rule on fuel use and emissions. Because of the uncertainty regarding how the value of projected fuel savings from this rule to potential buyers will compare to their esti mates of increases in new vehicle prices, we have not attempted to estimate explicitly the ef fects of the rule on scrappage of older vehicles and the turnover of the vehicle fleet.”4

The vehicle sales analysis suggests that new vehicl e sales will increase; if so, turnover should increase, as noted above.

Interagency Comment 7. Interagency commenters recommend that agencies i nclude an estimate of the average cost per vehicle of for the proposed rule, plus the costs attributable to the 2012-2016 rule (as well as costs of safety improvem ents). Commenters request agency response to whether it be appropriate to use a price which r eflects the costs attributable to the 2012-2016 rule and required safety improvements as the starti ng point for elasticity analysis of sales effects?

EPA Response: We present reference case costs per vehicle in RI A Table 3.6-1. EPA has
selected as a reference case the future as it would be without the proposed standards (that is, the
continuation of the MY2016 standards into the futur e). This is no different then what EPA has done in dozens of previous mobile source rules over the past 20+ years, and is consistent with
OMB Circular A-4 and EO 12866.

The vehicle sales analysis does use a price that in cludes the costs attributable to the 2012-16 standards. EPA Draft RIA Chapter 8.1.1 states:

“The baseline vehicle prices are drawn from the 201 2-16 greenhouse gas/fuel economy rule. The starting average car ($26,201) and truck ($29,678) values in 2007$ for model year 2011 have added to them the model year 2016 av erage technology costs for cars ($890) and trucks ($1,162). These values are conve rted to 2009$ using the GDP deflator, to yield starting prices of $27,984 for c ars, and $31,856 for trucks.”

Interagency Comment 8. Interagency commenters request clarity on how EV s are accounted for in the refueling analysis? Interagency commente rs request clarity on whether the cost of infrastructure for EVs (charging stations, addition al generation capacity, distribution infrastructure) are included in the analysis?

EPA Response: EPA conducts the refueling analysis on an average vehicle, and includes EVs in the vehicle population. As discussed in the pre amble, and EPA RIA, these vehicles feature unique refueling attributes, particularly in the sm all quantities (~1% of the new sales for MYs 2017-2025) projected in this rule. Some owners, pa rticularly of this early adopter population, may derive significant benefit from never refueling at a service station. While there are range concerns with electric vehicles, it is unlikely tha t these concerns are similarly shared by the owners of the first percent of the electric vehicle fleet. Given these counterbalancing concerns, EPA did not take any special actions to account for EVs in the refueling analysis. The monetized value may be underestimated if we haveunderestimate d the benefit that this small population derive from never refueling at a gas station. The analysis may be overestimated if EV owners derive less benefit from never refueling at a gas s tation.5

Infrastructure costs are included in terms of in-ho me charging stations, where we have included the costs of both the charging system and the home installation; see Chapter 3.4.4 of the draft Joint Technical Support Document. We have not incl ude costs for public charging stations or electricity grid upgrades since, given the low pene tration of PHEV and EVs we project from the proposed standards, we do not believe that these wo uld be required.

Interagency Comment 9. Interagency commenters note that the agencies ap pear to be making two market inefficiency arguments—that consumers un dervalue fuel efficiency when making purchasing decisions and (somewhat to the contrary) that manufacturers are not producing the
fuel efficient vehicles that consumers would be wil ling to buy irrespective of the extent of myopia. Commenters request agencies to provide the empirical evidence that agencies relied upon to support these hypotheses.

EPA Response: Preamble III.H.1 and RIA Chapter 8.1 include extens ive reviews of the literature on the role of fuel savings in consumer vehicle purchase decisions. During the 2012-16 rulemaking, EPA asked David Greene of Oak Ridge Nat ional Laboratory to review the literature on this question. He found that estimates were ver y highly varied, with many papers finding undervaluation, and others finding “about right” va luation or even overvaluation.

We have not been able to find any academic literatu re on how automakers decide how much fuel economy to build into vehicles. David Greene has n oted that several manufacturers say they use 2-4 year simple paybacks as rules of thumb.

Our primary empirical evidence is the assessment of the technology costs and the effectiveness. Our analyses have found many fuel-saving technologi es with short payback periods that are not in widespread use on vehicles. The cost calculatio ns for these technologies (with very minor exceptions, such as EVs) take into account the cost s of holding other vehicle attributes constant: for instance, instead of simply converting an engin e from 8 cylinders to 6 cylinders, the cost estimate includes the cost of turbo-charging, to ma intain performance. This energy paradox – the under-adoption of what appear to be many cost-e ffective energy-saving technologies – has also been observed in a number of different energy markets, such as building insulation, compact fluorescent bulbs, and appliances.

Interagency Comment 10. In evaluating the consumer welfare benefits of the rule, commenters note that DOT and EPA include the fuel savings from greater fuel economy over the vehicles’ entire lifetimes (Preamble, p. 397). As the agencie s explain (Section III.H.1), this approach rests on the assumption that for one of a variety of reas ons, consumers do not themselves accurately value the future fuel savings from more fuel-effici ent vehicles. As the agencies point out, this assumption is consistent with a considerable body o f empirical literature “suggesting that consumers do not give full or appropriate weight to fuel economy in purchasing decisions” (Preamble, p. 395). (Commenters note that the empir ical literature on its own does not establish whether consumers actually undervalue fuel economy or whether they consider it but find it to be outweighed by countervailing but unobserved costs.) Commenters note that in the analysis of sales and GDP impacts, however, the agencies make w hat appears to be a very different6

assumption. In that analysis (Sections III.H.10 and 11), the agencies assume explicitly that “the consumer would take into account both the higher ve hicle purchase costs as well as some of the fuel savings benefits when deciding whether to purc hase a new vehicle” (p. 436).

a) Commenters request clarity on whether, for purpo ses of consumer welfare calculations, agencies use the fuel savings over the vehicles’ en tire lifetimes or instead use fuel savings over some smaller period.

b) Interagency commenters request that DOT/EPA expl ain how welfare analysis (which rests on an assumption that consumers do not value fuel econ omy in making purchase decisions) is consistent with their analysis of sales and output (which assumes that consumers do value fuel economy in making purchase decisions).

c) Interagency commenters request agencies to show the results of the GDP/sales/employment analysis under a scenario using a payback period/mo del of consumer behavior that is fully consistent with the assumptions underlying their co nsumer welfare benefits calculation.

EPA Response: Regarding comment (a): If by “consumer welfare cal culations” the comment means the net benefits of the rule, then, yes, the rule analysis includes the present value of the stream of benefits from reduced fuel consumption. If, as the rule predicts, fuel consumption is reduced over a number of years, then we monetize th ose benefits using the expected market price
from AEO and use them in the net benefits calculati on.

Regarding comment (b): The welfare analysis is bas ed on a comparison of the benefits of reduced fuel consumption with the costs of reducing fuel consumption over a number of years into the future. If fuel consumption is not reduce d, then the rule does not reduce greenhouse gases as much as predicted. As just noted, the ben efits of the reduced fuel consumption include the market value of the fuel savings. Assumptions about how consumers think about fuel savings when buying new vehicles do not play a role in this calculation. The calculation is based on driving patterns (including rebound) while holdi ng the reference fleet constant.

We do not assert that consumers do not value fuel e conomy in making purchase decisions. The vehicle sales analysis is based on consumers taking into consideration five years’ worth of fuel savings, which is more than zero consideration (eve n though a “rational” buyer would consider the full stream of fuel savings over the lifetime o f the vehicle). Five years of fuel savings accounts for only 30 – 50 percent of the lifetime f uel savings benefits.

The fuel savings that people consider when buying v ehicles may not equal the fuel savings that they will actually experience once they buy the veh icles. Once the vehicle is purchased, though, consumers will buy less fuel, unless the rule does not reduce greenhouse gases as much as
estimated. As noted above, we use AEO estimated ma rket prices to calculate the value of that reduced consumption.7

Regarding comment (c) The GDP analysis does not inc orporate the vehicle sales or employment estimates. It is based only on the technology cost s and the estimated reduced fuel consumption. We could conduct a vehicle sales and employment ana lysis under the assumption that consumers consider the expected lifetime fuel savings, but we do not believe that consumers behave in this

way.

Interagency Comment 11. Commenters note that agencies have not used estima ted sales impacts in their model of compliance costs or benef its (Preamble, p. 436). Commenters request clarity on why agencies use sales impacts in the ec onomic analysis but not in their analysis of compliance with the rule. Commenters request clarit y on what the impact would be of including sales impacts in the OMEGA model, in terms of compl iance costs?

Commenters also request clarity on what would be th e impact of including sales if the agencies made a different assumption about how consumers tak e fuel economy into account in making purchase decisions?

EPA Response: As the reviewers note, the vehicle sales analysis d oes not circle back to the OMEGA analysis. If
we did circle back the effects, then the total sale s volume in OMEGA would change. Because the sales analysis is not specific to class or mode l (other than the car/truck differentiation), the market shares (except for total numbers of cars and trucks) would be unaffected. Total compliance costs would increase, because more vehic les would be affected.

Different assumptions about the role of fuel saving s in the vehicle sales analysis will have the expected effects: considering fewer years of fuel savings will lead to smaller increases, or even decreases, in vehicle sales, while considering more years of fuel savings will lead to larger

increases.

Interagency Comment 12. In estimating employment impacts, DOT/EPA note tha t “in a fullemployment economy, employment impacts of this prop osal ... will have small, if any, effect on aggregate employment” (p. 449) In light of this poi nt, interagency commenters request clarity on why agencies are including a quantitative jobs impa ct analysis of this rule?

EPA Response: The employment impacts of the rule depend, in part, on whether the U.S. economy is at full employment or not. When the econ omy is at full employment, an environmental regulation is unlikely to have much i mpact on net overall U.S. employment; instead, labor would primarily be shifted from one sector to another. On the other hand, if a regulation comes into effect during a period of hig h unemployment, a change in labor demand due to regulation may affect net overall U.S. emplo yment because the labor market is not in equilibrium. As Schmalansee and Stavins have pointe d out, net positive employment effects are possible in the near term when the economy is at le ss than full employment due to the potential8

hiring of idle labor resources by the regulated sec tor to meet new requirements (e.g., to install new equipment) and new economic activity in sectors related to the regulated sector. EPA provides a partial, bottom-up quantitative es timate of the effects of this proposal on the regulated sector, auto manufacturing, where the employment impacts are likely to be the most concentrated. Focusing on the regulated sector provides insight into employment effects in that sector without having to make assumptions abou t the state of the economy when this rule has its impacts, in the 2017-2025 time frame and be yond. We include a qualitative discussion of employment effects on other sectors to provide a br oader perspective on the impacts of this rule.

Interagency Comment 13. In calculating the “demand effect” of the rule on employment, the agencies multiply the estimated increase in vehicle sales by 0.096 workers per vehicle. Judging from the Preamble, commenters note that this appear s to be an estimate of average labor input per vehicle, presumably calculated as the total wor kforce divided by sales. Interagency ommenters request clarity on whether this is how th e 0.096 estimate is calculated? Does the 0.096 estimate reflect all employees or only employ ees involved in manufacturing? Interagency commenters request agencies to explain the rational e for assuming that the average labor input is equal to the additional labor input that would be r equired to produce additional vehicles? (In other words, interagency commenters request DOT/EPA to provide justification for the implicit assumption that labor input is perfectly variable.)

a. Additionally, how does this estimate account for increases in labor productivity over the next 15 years?

EPA Response: EPA’s DRIA Chapter 8.2.3.1.1 provides detail on th e calculation. The 0.096 workers per vehicle is found by dividing workers in the automot ive sector by vehicles produced over a 10- year period. This includes total employment in the Motor Vehicles and Parts Sector; it thus averages over all employment associated with vehicl e production.

We are using average rather than marginal labor inp ut estimates. The marginal labor input required could be either higher or lower than that used here, depending on such factors as the current utilization levels of production facilities and the kinds of labor needed for additional production. As EPA notes in its discussion, averag es provide useful information on the magnitude of the expected effects.

In EPA’s analysis, we account for productivity incr eases over the next 15 years using estimates we derive from changes in the Bureau of Labor Stati stics’ Employment Requirements Matrix
coefficient for the auto sector from 1993-2008. As discussed in DRIA 8.2.3.1.1 and 8.2.3.1.2, we estimate a 4.4 percent per year productivity imp rovement in the Motor Vehicle Manufacturing Sector and apply that value to the wo rkers per vehicle calculation.

Interagency Comment 14. In calculating the “cost effect,” commenters no te that DOT/EPA
assume that the labor share of the cost of new tech nologies as a result of the rule is the same as9

the labor share of overall cost, i.e., that the add itional labor required per $1 million in expenditure for technology cost is the same as the average labor required per $1 million in total expenditure. Commenters request agencies to provide the basis for this assumption.

EPA Response: EPA discusses this point more thoroughly in our dis cussion of the factor shift effect, DRIA Chapter 8.2.3.1.3. As we note, it is possible that labor demand per $1 million for the advanced technologies could be higher or lower than the aver ages we use here. We are unable to develop specific labor demand changes for all the technolog ies we have studied. However, for a subset of technologies where we have conducted highly deta iled comparisons of the reference technology and the advanced technology (e.g., an ex isting transmission and a 6-speed or an 8- speed transmission), we have found increases in lab or costs with the new technologies compared to the baseline technologies. As we note, we are u nwilling to extrapolate from what may well be an unrepresentative sample, but it shows that, at l east for some of the technologies, labor demand may increase with the new technologies. As a resul t, using the averages may provide a

conservative estimate.

Interagency Comment 15. Projected technology mix and PHEVs – In additio n to providing appropriate caveats to clarify the limitations of m odeling fleetwide and company-by-company vehicle technology mixes, interagency commenters re commend that agencies explain the limitations of the model as they relate to PHEVs in particular (and other advanced technology vehicles, which may be difficult to model). Given t hat the model cannot weight attributes that are especially relevant to consumer adoption of PHEVs l ike vehicle range (which is a large part of their potential advantage over full EVs), the model seems to always choose EVs over significantly more expensive PHEVs. Commenters also recommend that each set of tables clearly explain that the modeling did not account f or the EV/PHEV/FCV multiplier provisions.

EPA Response: While the relevant equations and model capabilities are discussed in DRIA 3, additional discussion has been added on this topic. Discussion of the modeling is provided in
section III.D and DRIA 3 and 4.

Interagency Comment 16. Interagency commenters request EPA confirmation that the company-specific compliance modeling that will be r eleased in the proposal is consistent with the agency’s commitment to protect CBI? Commenter r equests clarity on how this will work. Is CBI data (such as product plans shared with the age ncies) fed into the model or is it totally
excluded?

EPA Response: While some inputs are informed by CBI, no OMEGA mod el inputs contain CBI, and product plans are totally excluded.10

Interagency Comment 17. EV/PHEV/FCV 0 g/mile cap – Interagency commente rs request agency to explain in the preamble how the 200,000 a nd 600,000 vehicle cap (and related 300,000 vehicle threshold for years 2019-2021) was chosen.

EPA Response: The preamble does explain, in III.C.2, the balancin g of various factors: encourage investment in advanced technologies, rewa rd early leadership, encourage additional manufacturers to invest over time, and limit the ov erall decrease in program GHG emissions
reductions associated with the incentives. EPA see ks and expects to receive comments on the proposed cap threshold and caps.

Interagency Comment 18. Upstream emissions:

a) Interagency commenters requests clarity on wheth er EPA is proposing that EVs produced beyond the cap for the 0 grams/mile incentive have their compliance values calculated as half of the upstream emissions. If this is intended to be a phase-in, commenter requests clarity on when full upstream accounting would be implemented?

b) Interagency commenters request clarity on whethe r the 2012-2016 EV emissions accounting methodology similarly subtracted 39 g/mile for gaso line vehicle upstream emissions to give “net upstream accounting”? To provide comparable net ups tream accounting if gasoline upstream emissions are counted, commenters request clarity o n whether EPA is also accounting for the upstream emissions from the production and transpor tation of fuel used in power plants?

EPA Response: Regarding comment (a), EPA is proposing that EVs pr oduced in MYs 2022- 2025 beyond the cap for the 0 grams/mile incentive would have their compliance values calculated as half of the electricity upstream GHG emissions. We have added a statement in
Preamble Section III.C.2 that EPA will revisit the issue of compliance treatment for MY 2026 and later EV/PHEV/FCVs in a future rulemaking.

Regarding comment (b), the methodologies for calcul ating “net upstream accounting” for both the 2012-2016 final rule and 2017-2025 proposal are consistent in that they both subtract off the upstream GHG emissions of a comparable-footprint ga soline vehicle. The specific upstream GHG emissions values associated with a midsize gaso line vehicle for the two rules differ, however, in that the 56 grams/mile value shown in t he example for the 2012-2016 rule is based on the CO2-footprint curves for MY 2016, while the 39 grams/mile value shown in the example for the 2017-2025 proposal is based on the CO2-foot print curves for MY 2025. The more efficient MY 2025 vehicle will have a lower upstrea m GHG emissions factor than the less
efficient MY 2016 vehicle. As stated in Preamble S ection III.C.2, the 0.574 grams GHG/watthour emissions factor does include emissions for “p owerplant plus feedstock” and we will add text to clarify that this includes inputs for feeds tock extraction, transportation, and processing.

Interagency Comment 19. Performance-based credits for “game changing” truc k technologies – Interagency commenters request clarity on how EPA i dentified 15% and 20% as the right level11

above the footprint based target for the performanc e-based truck technology credit? Are there technologies that EPA expects could meet these targ ets?

EPA Response: EPA and NHTSA responded to these comment based on t he interagency comments # 7 and #8 provided to the agencies on Nov ember 1, 2011. We have added additional analysis and discussion to the Joint TSD Chapter 5 regarding the selection of the 15% and 20%
thresholds.

Interagency Comment 20. Vehicle sales & employment analysis: a) Interagen cy commenters request agencies to provide more evidence of why a 5-year period is a best guess to estimate consumer’s willingness to pay for fuel savings. For example, commenters request clarity on whether this 5-year payback is consistent with othe r willingness to pay numbers from studies?

EPA Response: The empirical literature shows a large range of est imates for willingness to pay for fuel economy, ranging from overestimation to ne gative values, probably because of statistical issues in the analyses (multicollinearity, omitted variable bias, etc.). At a recent conference at NYU, Hunt Allcott (of NYU and MIT) argued that some recent working papers (Allcott and Wozny 2011; Sallee, West, and Fan 2011) seem to sho w that consumers are willing to pay between 60% and 80% of expected future fuel savings : far from zero (and more than 5 years of fuel savings), but not 100%. Unlike most previous research, these two papers seek specifically to identify the role of fuel economy in vehicle pur chase decisions. In doing so, they draw heavily on the used vehicle market, which may opera te differently than the new vehicle market. These are two works in progress, and they are only two papers out of many that provide information on this phenomenon.

As we discuss in the proposal, we use 5 years becau se it is the average ownership time of a new vehicle and it is the average length of time of a n ew vehicle loan. As noted, this calculation uses about 30-50 percent of the present value of fuel sa vings to vehicle buyers, a smaller estimate than that cited by Hunt Allcott.

Interagency Comment 20. Vehicle sales & employment analysis: b) Interagenc y commenters request clarity on whether EPA conducted sensitivit y analysis for the employment estimates that consider different willingness to pay numbers, incl uding the possibility that vehicles sales could
decrease?

EPA Response: EPA does not analyze the effects of different willi ngness to pay values. The demand effect is the only part of the employment an alysis subject to changes in vehicle sales.

Interagency Comment 20. Vehicle sales & employment analysis: c) Given that this component of the analysis is intended to reflect consumer beh avior (and not to estimate social costs or benefits), interagency commenters request clarity o n what the evidence is that consumers use a 7% discount rate when making these tradeoffs. For e xample, the NAS modeled consumer behavior by discounting for lifetime fuel savings a t 12%.12

EPA Response: Using a short payback period, as we do, is an alter native way of modeling high discount rates for lifetime fuel savings. They are different ways of incorporating the same observation, that consumers do not appear to consid er full lifetime fuel savings at their opportunity cost of consumption when buying vehicle s.

Interagency Comment 21. Interagency commenter requests clarity on where the analysis can be found in the documents that underlies the projectio ns given for the national program (EPA and NHTSA standards combined), presented in the “Overvi ew of the Joint EPA/NHTSAS Proposed 2017-2025 National Program” executive summary?

EPA Response: The analysis for all estimates found in the Executi ve Summary can be found in Preamble Sections I.B.2, I.C., III.D.5, III.F.1, II I.H.4, III.H.9, III.H.10.b, and EPA’s draft RIA Chapters 3.8.1, 4.3.6, 5.1, 5.4, and 5.5.

Interagency Comment 22. Vehicle sales & Employment analysis – In the 20 12-2016 rulemaking, commenters note that NHTSA used a 5-yea r period to estimate how much fuel savings consumers will be willing to pay for, but t he current proposal uses both 2-year and 5- year periods to generate two sets of “sensitivity a nalyses” of employment impacts. Interagency commenters request clarity on whether NHTSA now thi nks that the 2-year willingness to pay estimate is equally as likely as the 5-year estimat e? Are there data from the peer reviewed literature on willingness to pay for fuel economy i mprovements?

EPA Response: A s discussed elsewhere in these responses, and in th e draft preamble, there is
no consensus from the literature on the role of fue l economy in vehicle purchase decisions.

Interagency Comment 23. Interagency commenters note that the non-flat b aseline included in NHTSA’s RIA sensitivity analysis shows that this “m arket driven baseline” would result in a
fleet that is more efficient than the levels achiev ed under the “Preferred” policy scenario. From the explanation of this sensitivity analysis, it ap pears that NHTSA assumes manufacturers that have achieved the 2016 standards will adopt technol ogies with a one-year payback period from 2017-2025, while manufacturers that have not yet ac hieved the standards will adopt technologies with a five-year payback period. Interagency commen ters request agencies to provide more information on the assumptions that underlie this a nalysis, since it results in an outcome that is
non-intuitive?

EPA Response: EPA defers to NHTSA in responding to this question on the details of the NHTSA analysis.

Interagency Comment 24. Interagency commenters suggest that NHTSA impro ve clarity of exposition of the analysis in the NHTSA RIA. Intera gency commenters request clarity on why the ‘maximize net benefit’ option does not have the highest net benefits. Commenters also recommend that agencies explain the nature of the p referred option, and the nature of the13

alternative options, especially the one that maximi zes net benefits. Commenters also recommend that agencies expand on the rationale for not adopt ing the alternative that maximizes net benefits.

EPA Response: EPA defers to NHTSA in responding to this question on the details of the NHTSA analysis.

Interagency Comment 25. Interagency commenters request clarity from NHT SA and EPA and source/empirical evidence for why the energy securi ty and criteria pollutant benefits are projected to grow rapidly over the future. Commente rs recommend that agencies include this discussion in Preamble, and both RIAs and seek comm ent.

EPA Response: The following text is present in Joint TSD Chapter 4.2.9.2, but is not present in the preamble: “As Table 4-13 indicates, EPA projects that the per -ton values for reducing emissions of criteria pollutants from both vehicle use and stationary sou rces such as fuel refineries and storage facilities will increase over time. 2 These projected increases reflect rising income l evels, which are assumed to increase affected individuals’ willi ngness to pay for reduced exposure to health threats from air pollution. i They also reflect future population growth and in creased life expectancy, which expands the size of the populatio n exposed to air pollution in both urban and rural areas, especially in older age groups with th e highest mortality risk. 3 ” We will add this text to preamble Section III.H.6 ( updating the text to reference the appropriate table in the preamble). Note that the PM2.5-relate d benefit per ton values, and the underlying model and assumptions on which they are based (BenM AP), have been peer-reviewed and vetted through a number of recent rulemakings (both Preamb le Section III.H.6 and Section 4.2.9.2 of Joint TSD Chapter 4 include the relevant references ). This is consistent with the approach to monetizing PM2.5-related benefits used in the 2012- 2016 LD GHG FRM. We seek comment generally on our approach to monetizing the economi c impacts associated with the proposal, so we do not think it is necessary to seek comment on this topic specifically (and it is unclear on what exactly the commenter would like us to take co mment).

The following text has been added to Chaper 4.2.8.3 of the TSD: “The oil security premium rises over the future as a result of changing factors suc h as the world oil price, global supply/demand balances, U.S. oil imports and consumption, and U.S . GDP (i.e., the size of economy at risk to oil shocks). The principle factor is steadily rising w orld oil prices, but other effects interact. From 2020 to 2030, the macroeconomic disruption and adju stment component rises 17% by 2030 and then stabilizes, over a period where projected aver age real world oil prices rise 15%. U.S. oil import quantities fall by 3% but total domestic oil consumption still rises by 3% despite higher

2 As we discuss in the emissions chapter of EPA’s DR IA (Chapter 4), the rule would yield emission reduc tions from upstream refining and fuel distribution due to decr eased petroleum consumption.

3 For more information about EPA’s population projec tions, please refer to the following: http://www.epa.gov/air/benmap/models/BenMAPManualAp pendicesAugust2010.pdf (See Appendix K)14

prices. Looked at another way, U.S. GDP, the size of the economy potentially at risk to oil shocks, grows 30%, while the value share of oil in GDP stays high, declining only 9% by 2030.”

We will add the following text to the preamble Sect ion III.H.7.b.: “The oil security premium rises over the future as a result of changing facto rs such as the world oil price, global supply/demand balances, U.S. oil imports and consum ption, and U.S. GDP (the size of economy at risk to oil shocks). The principle factor is st eadily rising oil prices.”

Interagency Comment 26. Interagency commenters note that in Table 3-106 of the Joint TSD Chapter 3 (page 223), the PHEV1 is equal to a PHEV3 0. In all other parts of this document there are only two PHEVs: a PHEV20 and a PHEV40. Commente rs recommend that agencies fix this discrepancy.

EPA Response: EPA defers to NHTSA in responding to this question as “PHEV1” specifically refers to NHTSA modeling of PHEVs

Interagency Comment 27. Interagency commenters note that the DOT CAFE m odel and the EPA OMEGA model have slightly different baseline ve hicle assumptions (pages 224 and 225)
and results.

EPA Response: The slightly different baseline vehicle assumptio ns mentioned in this comment—for EPA, a vehicle with a port fuel-injecte d (PFI) engine and a 4 speed auto trans; for NHTSA, the actual 2008 MY vehicle—has no impact on the rule. EPA properly accounts for the
effectiveness and cost of actual 2008 MY vehicles r elative to the PFI/4speed auto trans “baseline”. In effect, EPA builds the actual vehic le virtually then measures improvements against that virtual vehicle when determining contr ol case costs and effectiveness.

Interagency Comment 28. Interagency commenters note that the overall b enefit and cost analysis assumes that there is not a relationship b etween VMT and fuel economy. In other words, commenters note that for example, individuals who c hose the hybrid Camry do not drive more miles than those who drive the conventional Camry. Interagency commenters request clarity on whether there is empirical evidence to support this assumption.

EPA Response: In TSD 4, the agencies describe the VMT equation, w hich includes fuel cost per mile. Thus, the fleet drives more when fuel ec onomy improves. EPA provides a sensitivity on this “rebound effect” EPA DRIA Chapter 4.

Interagency Comment 29. Interagency commenters understand that about 70 % of vehicle owners drive fewer than the average VMT (i.e the di stribution of VMT is skewed to the right). Interagency commenters request clarity on whether t he agency conducted any analysis of the distributions of net private benefits to vehicle ow ners based on differences in VMT.

EPA Response: EPA has not conducted such an analysis.15 i The issue is discussed in more detail in the PM NA AQS RIA from 2006. See U.S. Environmental Protecti on Agency. 2006. Final Regulatory Impact Analysis (R IA) for the Proposed National Ambient Air Quality S tandards for Particulate Matter. Prepared by: Office of Air and Radiation. October 2006. Available at http://www.epa.gov/ttn/ecas/ria.html.