Memorandum

To: Docket EPA

- HQ

- OAR

- 2009

- 0472 & Docket NHTSA

- 2009

- 0059

Date: March 24, 2010
Subject: Energy Information Administration’s Annual Energy Outlook 2009 and 2010.

From: Ari Kahan EPA/OTAQ/ASD and Don Pickrell, DOT Volpe Center

The Enviro nmental Protection Agency (EPA) and National Highway Traffic Safety
Administration (NHTSA) used inputs from a variety of sources to analyze the cos ts, benefits and
impacts of the ir respective components of the national program to reduce greenhouse gases an d
improve fuel economy for cars and trucks ( RIN 2060

– AP58; RIN 2127

– AK5 0 )

. A number of
inputs were derived from the U.S. Department of Energy , Energy Information Administration’s

An nual Energy Outlook 2009 (AEO 2009) and Annual Energy Outlook 2010 (AEO 20 10) for the
proposal and final rule respectively. Specifically, the Agencies used forecasts of fuel prices and

vehicle sales fro m AEO 2009 and AEO 2010 in their analyse s.

Why were EIA forecasts used?

As stated in the documentation to the rule

, i f edera l government agencies generally use EIA’s

projections in their assessments of future energy

- related policies. EIA provides a comprehensive
suite of forecasts on energy related issues, and normally incorporat es new and/or significant
market developments an d government policies in each release. The AEO forecasts are
particularly relevant because they are detailed, wi dely used, and released on a semi

- annual
schedule (when the early release is included). During the public comment period, no comments

were rece ived that significantly challenged the agencies’ use of AEO 2009 in the analyses
supporting the proposal.

Generally, e nergy forecasts are driven by an intertwined set of regulatory, eco nomic and
legislative forces. The Energy Information Administration ’s National E nergy Modeling System
(NEMS), which is used to produce the AEO forecasts, incorporates the interactions of these
components through a complex system of sector

- specific modules ( Appendix A ). The frequent

releases from EIA are particularly rele vant because of the rapidly changing economic and
regulatory landscape that a ffects energy production, consumption, and distribution.
Consequently, each AEO report incorporat e s significant national scale drivers into each revised

AEO forecast. As an exam ple, the final 2009 forecast incorporated new information pertaining

to the American Recove ry and Reinvestment Act of 2009, while the 2010 forecast was updated
with data as specific as gas shale production, and as broad as changes in investment activity
(“ increased investment costs”). ii

The Energy Independence and Security Act of 2007

R ecent AEO releases have reflected the provisions of the Energy Independence and Security Act
of 2007 (EISA), including the requirement that the combined CAFE MPG level of U. S. cars and
light trucks reach 35 miles per gallon by model year 2020. Therefore, EPA and NHTSA were

concern ed that the effect s of EISA might be reflected in the baseline 2009 forecasts, which could
potentially bias the rulemaking analysis. This section discusses the impact of EISA with regard
to EIA’s forecasts of fuel prices and market share by light

- duty vehicle category (cars vs. trucks).2

Regarding fuel prices

, EPA and NHTSA note that EIA issued a revised version of AEO 2008 in

June 2008, which mo dified its previous December 2007 Early Release of AEO 2008 to reflect

the effects of the n recently

- passed EISA legislation. The fuel price forecasts reported in EIA’s

Revised Release of AEO 2008 differed by less than one cent per gallon over the entire fo recast period (2008

– 2030) from those previously issued as part of its initial release of AEO 2008. Thus,
the agencies are reasonably confident that the fuel price forecasts presented in AEO 2009 , which

were used to analyze the value of fuel savings project ed to result from th e proposed rule

, we re not unduly affected by the CAFE provisions of EISA, and therefore the d o not cause a baseline
problem. An excerpt from t his data is presented in Table 1 (below). As can be seen from this
table, in some years the post

- EISA release of AEO 2008 forecast higher fuel prices, while in

others it forecast lower prices . No consistent difference between the pre

- and po st

- EISA

forecasts is evident in Table 1.

Table 1 : Sample Motor Gasoline Prices presented in

AEO 2008 E arly Release and Reference Case.

Reflects

EISA? 2005 2010 2015 2020 2025 2030

AEO 2008 Early No $2.40 $2.44 $2.23 $2.30 $2.41 $2.49

AEO 2008 Revised Yes $2.40 $2.55 $2.25 $2.36 $2.36 $2.45

With respect to the composition of new vehicle sales, an analysis of past AEO reports indicates

that the effects of macroeconomic developments are generally more significant than those of
policy initiatives such as EISA. Table 2 shows forecasts of the shares of total light

- duty vehicle

sales accounte d for by passenger cars from five past major AEO releases. AEO 2007 does not

include the CAFE component of EISA (nor any other), iii but its forecast differs little from AEO

2008 Revised

– which does reflect the effects of EISA

– in the relative market share of cars . By
contrast, between AEO 2008 and the March 2009 release of AEO 2009, a sharp increase in the

share of car sales is evident. While attributing th is increase to any specific cause would be
speculative, Table 2 shows that the shift between AEO 20 08 and AEO 2009 (both of which

include EISA), i s greater than the relative car/ truck sales shifting between AEO 2007 and AEO

2008 (where only AEO 2008 inc orporates EISA)

.

Table 2 : Relative Car Share in 2012

- 2016

AEO Edition Reflects

EISA? 2012 2013 2014 2015 2016

AEO2007 No 49.9% 49.0% 47.9% 47.4% 47.0%

AEO2008 Revised Yes 50.0% 49.3% 49.1% 48.2% 47.2%

AEO2009 March Yes 55.0% 56.1% 57.4% 58.5% 59.4%

AEO2009 ARRA Yes 52.0% 52.8% 54.1% 55.8% 57.1%

AEO2010 Early Yes 50.8% 52.8% 54.3% 55.4% 56.6%3

T he Transition from AEO 2009 to AEO 2010

Given the importance of updated economic, legislative and social factors to the AEO forecasts,
EPA and NHTSA carefully evaluated AEO 2010 before incorporating it in the final rule.
Specifically, EPA and NHTSA were c oncerned by the following statement in the AEO 2010
Early Release :

AEO2010 assumes the adoption of CAFE standards jointly proposed by the EPA and NHTSA for LDVs in model years 2012 through 2016. The proposed fuel economy
standards for model year 2016 th en modestly increase through the 2020 model year to meet the requirements of EISA2007. CAFE standards beyond 2020 are similar to those
used in the updated AEO2009 reference case. To attain the mandated fuel economy

levels, the AEO2010 reference case includ es a rapid increase in sales of unconventional
vehicle technologies, 3 such as flex

- fuel, hybrid, and diesel vehicles, as well as slower growth in sales of new light trucks. Sales of hybri d vehicles, including plug

- in hybrid electric vehicles (PHEVs), increase from 2.6 percent of new LDV sales in 2008 to 24.6 percent in 2035. PHEV sales grow rapidly as a result of the EIEA2008 tax credits,
increasing to about 90,000 vehicles annually in 201 5. In 2035, PHEVs account for 2.6
percent of new LDV sales and 1.7 percent of the total LDV stock.

As a result of this comment, the Agencies were concerned that because the AEO 2010
forecast of fuel economy incorporated the increases in fuel efficiency re quired by the proposed
rule, using it as the baseline for their analyses of the rule’s effects could lead to significant

underestimation of fuel savings and other impacts of the final rule. Table 4 compares AEO 2010

and AEO 2009 forecasts of fuel economy for new light

- duty vehicles

. iv Surprisingly, AEO 2010
actually features lower estimated fuel economy than the AEO 2009 ARRA release

, which was
used in the proposal. This may be due to external factors, but it is difficult to untangle the
relationship betw een the proposed standards and the fuel e conomy forecasts shown here. Given
the complexity of running NEMS, the relative advantage of using a common, widely used

forecast, and the uncertain interaction between the regulation an d fuel economy forecasts fro m NEMS, the Agencies did not adjust the AEO 2010 forecast to account for EIA’s comments.

Further, given the greater influence of macroeconomic factors such as the economic recovery on

the AEO forecasts , the Agencies believed it important to update the for ecasts to the newest set of

data.4

Table 4: Annual Energy Outlook 2009

- 2010 Fuel Economy Comparison 1

Estimated Fuel Economy (miles per gallon)

Vehicle Type 2012 2013 2014 2015 2016 AEO 2010 Early New Light

- Duty Vehicle s 28.6 29.2 29.9 30.8 31. 6

New Car s 33.8 34.3 35.0 35.8 36.7

New Light Truck s 24.7 25.1 25.5 26.2 26.8

AEO 2009 ARRA New Light

- Duty Vehicles 28.7 29.8 30.9 32.0 32.9

New Car 32.9 34.1 35.4 37.0 38.0

New Light Truck 25.2 26.1 26.9 27.4 27.9

AEO 2010 - AEO 2009 New Light

- Duty Vehicles (0.1) (0.6) (1.0) (1.3) (1.3)

New Car 1.0 0.2 (0.4) (1.1) (1.3)

New Light Truck (0.5) (1.1) (1.4) (1.3) (1.1)

1 AEO 2009 features “Tested” and “On

- road” vehicle MPG ratings, while AEO 2010 early features MPG ratings under the
categories “CAFE Standard,” “Compliance,” “Tested,” and “On

- road.” The comparison shown here is within the “Tested”

category, but similar deltas are seen in the “O n

- road ” category.

On t he basis of the analysis discussed in this memo

, t he agencies conclud e d that it is
reasonable to use the AEO 2010 projection in the ir analyses supporting the final rule.5

Appendix A

v6

References

i Joint TSD Chapter 4

ii EIA. AEO 2010 Website . http://www.eia.doe.gov/oiaf/aeo/index.html

iii EIA. AEO 2008 website. http://www.eia.doe.gov/oiaf/archive/aeo08/eisa.html

iv EIA. AE O Summary Table 7.

L in ks to the two source tables: http://www.eia.doe.gov/oiaf/aeo/excel/aeotab_7.xls

h ttp://www.eia.doe.gov/oiaf/servicerpt/stimulus/excel/aeostimtab_7.xls

v EIA NEMS documentation. http://www.eia.doe.gov/oiaf/aeo/overview/index.html