Proposed Rulemaking To Establish Light-Duty Vehicle Greenhouse Gas Emission Standards and Corporate Average Fuel Economy Standards

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[Federal Register: September 28, 2009 (Volume 74, Number 186)]
[Proposed Rules]
[Page 49603-49652]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28se09-27]

Proposed Rulemaking To Establish Light-Duty Vehicle Greenhouse
Gas Emission Standards and Corporate Average Fuel Economy Standards

[[Continued from page 49602]]

[[Page 49603]]

are based on sales of existing vehicles, vehicle models are likely to
change, both independently and in response to this proposed rule; the
models may not predict well in response to these changes. Instead, EPA
compares the value of the fuel savings associated with this rule with
the increase in technology costs. EPA will continue its efforts to
review the literature, but, given the known difficulties, EPA has not
conducted an analysis using these models for this proposal.
    Consumer vehicle choice models (referred to as ``market shift''
models by NHTSA in Section IV.C.4.c) are a tool that attempts to
estimate how consumers decide what vehicles they buy. The models
typically take into consideration both household characteristics (such
as income, family size, and age) and vehicle characteristics (including
a vehicle's power, price, and fuel economy). These models are often
used to examine how a consumer's vehicle purchase decision is affected
by a change in vehicle or personal characteristics. Although these
models focus on the consumer, some have also linked consumer choice
models with information on vehicle technologies and costs, to estimate
an integrated system of consumer and auto maker response.
    The outputs from consumer vehicle choice models typically include
the market shares of each category of vehicle in the model. In
addition, consumer vehicle choice models are often used to estimate the
effect of market or regulatory changes on consumer surplus. Consumer
surplus is the benefit that a consumer gets over and above the market
price paid for the good. For instance, if a consumer is willing to pay
up to $30,000 for a car but is able to negotiate a price of $25,000,
the $5,000 difference is consumer surplus. Information on consumer
surplus can be used in benefit-cost analysis to measure whether
consumers are likely to consider themselves better or worse off due to
the changes.
    Consumer vehicle choice modeling has not previously been applied in
Federal regulatory analysis of fuel economy, and EPA has not used a
consumer vehicle choice model in its analysis of the effects of this
proposed rule. EPA has not done so, to this point, due to concern over
the wide variation in the methods and results of existing models, as
well as some of the limitations of existing applications of consumer
choice modeling. Our preliminary review of the literature indicates
that these models vary in a number of dimensions, including data
sources used, modeling methods, vehicle characteristics included in the
analysis, and the research questions for which they were designed.
These dimensions are likely to affect the models' results and their
interpretation. In addition, their ability to incorporate major changes
in the vehicle fleet appears unproven.
    One problem for this rule is the variation in the value that
consumers place on fuel economy in their vehicle purchase decisions. A
number of consumer vehicle choice models make the assumption that auto
producers provide as much fuel economy in their vehicles as consumers
are willing to purchase, and consumers are satisfied with the current
combinations of vehicle fuel economy and price in the marketplace.\336\
If this assumption is true, then consumers will not benefit from
required improvements in fuel economy, even if the fuel savings that
they receive exceed the additional costs from the fuel-saving
technology. Other vehicle choice models, in contrast, find that
consumers are willing to pay more for additional fuel economy than the
costs to auto producers of installing that technology.\337\ If this
result is true, then both consumers and producers would benefit from
increased fuel economy. This result leaves open the question why auto
producers do not follow the market incentive to provide more fuel
economy, and why consumers do not seek out more fuel-efficient vehicles.
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    \336\ E.g., Kleit, Andrew N. (2004). ``Impacts of Long-Range
Increases in the Fuel Economy (CAFE) Standard.'' Economic Inquiry
42(2): 279-294 (Docket EPA-HQ-OAR-2009-0472); Austin, David, and
Terry Dinan (2005). ``Clearing the Air: The Costs and Consequences
of Higher CAFE Standards and Increased Gasoline Taxes.'' Journal of
Environmental Economics and Management 50: 562-582 (Docket EPA-HQ-
OAR-2009-0472); Klier, Thomas, and Joshua Linn (2008). ``New Vehicle
Characteristics and the Cost of the Corporate Average Fuel Economy
Standard,'' working paper. http://www.chicagofed.org/publications/
workingpapers/wp2008_13.pdf  (Docket EPA-HQ-OAR-2009-0472);
Jacobsen, Mark. ``Evaluating U.S. Fuel Economy Standards In a Model
with Producer and Household Heterogeneity,'' http://
www.econ.ucsd.edu/~m3jacobs/Jacobsen_CAFE.pdf,  accessed 5/11/09
(Docket EPA-HQ-OAR-2009-0472).
    \337\ E.g., Gramlich, Jacob (2008). ``Gas Prices and Endogenous
Product Selection in the U.S. Automobile Industry,'' http://
www.econ.yale.edu/seminars/apmicro/am08/gramlich-081216.pdf, 
accessed 5/11/09 (Docket EPA-HQ-OAR-2009-0472); McManus, Walter M.
(2007). ``The Impact of Attribute-Based Corporate Average Fuel
Economy (CAFE) Standards: Preliminary Findings.'' University of
Michigan Transportation Research Institute paper UMTRI-2007-31
(Docket EPA-HQ-OAR-2009-0472); McManus, W. and R. Kleinbaum (2009).
``Fixing Detroit: How Far, How Fast, How Fuel Efficient.'' Working
Paper, Transportation Research Institute, University of Michigan
(Docket EPA-HQ-OAR-2009-0472).
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    Whether consumers and producers will benefit from improved fuel
economy depends on the value of improved fuel economy to consumers.
There may be a difference between the fuel savings that consumers would
receive from improved fuel economy, and the amount that consumers would
be willing to spend on a vehicle to get improved fuel economy. A 1988
review of consumers' willingness to pay for improved fuel economy found
estimates that varied by more than an order of magnitude: for a $1 per
year reduction in vehicle operating costs, consumers would be willing
to spend between $0.74 and $25.97 in increased vehicle price.\338\ For
comparison, the present value of saving $1 per year on fuel for 15
years at a 3% discount rate is $11.94, while a 7% discount rate
produces a present value of $8.78. Thus, this study finds that
consumers may be willing to pay either far too much or far too little
for the fuel savings they will receive.
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    \338\ Greene, David L., and Jin-Tan Liu (1988). ``Automotive
Fuel Economy Improvements and Consumers' Surplus.'' Transportation
Research Part A 22A(3): 203-218 (Docket EPA-HQ-OAR-2009-0472). The
study actually calculated the willingness to pay for reduced vehicle
operating costs, of which vehicle fuel economy is a major component.
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    Although EPA has not found an updated survey of these values, a few
examples suggest that the existing consumer vehicle choice models still
demonstrate wide variation in estimates of how much people are willing
to pay for fuel savings. For instance, Espey and Nair (2005) and
McManus (2006) find that consumers are willing to pay around $600 for
one additional mile per gallon.\339\ In contrast, Gramlich (2008) finds
that consumers' willingness to pay for an increase from 25 mpg to 30
mpg varies between $4,100 (for luxury cars when gasoline costs $2/
gallon) to $20,560 (for SUVs when gasoline costs $3.50/gallon).\340\
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    \339\ Espey, Molly, and Santosh Nair (2005). ``Automobile Fuel
Economy: What is it Worth?'' Contemporary Economic Policy 23(3):
317-323 (Docket EPA-HQ-OAR-2009-0472); McManus, Walter M. (2006).
``Can Proactive Fuel Economy Strategies Help Automakers Mitigate
Fuel-Price Risks?'' University of Michigan Transportation Research
Institute (Docket EPA-HQ-OAR-2009-0472).
    \340\ Gramlich, Jacob (2008). ``Gas Prices and Endogenous
Product Selection in the U.S. Automobile Industry,'' http://
www.econ.yale.edu/seminars/apmicro/am08/gramlich-081216.pdf, 
accessed 5/11/09 (Docket EPA-HQ-OAR-2009-0472).
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    As noted, lack of information is one possible reason for the
variation. Consumers face difficulty in predicting the fuel savings
that they are likely to get from a vehicle, for a number of reasons.
For instance, the calculation of fuel savings is complex, and consumers

[[Page 49604]]

may not make it correctly.\341\ In addition, future fuel price (a major
component of fuel savings) is highly uncertain. Consumer fuel savings
also vary across individuals, who travel different amounts and have
different driving styles. Studies regularly show that fuel economy
plays a role in consumers' vehicle purchases, but modeling that role
may still be in development.\342\
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    \341\ Turrentine, T. and K. Kurani (2007). ``Car Buyers and Fuel
Economy?'' Energy Policy 35: 1213-1223 (Docket EPA-HQ-OAR-2009-
0472); Larrick, R.P., and J.B. Soll (2008). ``The MPG illusion.''
Science 320: 1593-1594 (Docket EPA-HQ-OAR-2009-0472).
    \342\ Busse, Meghan R., Christopher R. Knittel, and Florian
Zettelmeyer (2009). ``Pain at the Pump: How Gasoline Prices Affect
Automobile Purchasing in New and Used Markets,'' Working paper
(accessed 6/30/09), available at http://www.econ.ucdavis.edu/
faculty/knittel/papers/gaspaper_latest.pdf  (Docket EPA-HQ-OAR-2009-0472).
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    If there is a difference between fuel savings and consumers'
willingness to pay for fuel savings, the next question is, which is the
appropriate measure of consumer benefit? Fuel savings measure the
actual monetary value that consumers will receive after purchasing a
vehicle; the willingness to pay for fuel economy measures the value
that, before a purchase, consumers place on additional fuel economy. As
noted, there are a number of reasons that consumers may incorrectly
estimate the benefits that they get from improved fuel economy,
including risk or loss aversion, poor ability to estimate savings, and
a lack of salience of fuel economy savings.
    Considerable evidence suggests that consumers discount future
benefits more than the government when evaluating energy efficiency
gains. The Energy Information Agency (1996) has used discount rates as
high as 111 percent for water heaters and 120 percent for electric
clothes dryers.\343\ In the transportation sector, evidence also points
to high private discount rates: Kubik (2006) conducts a representative
survey that finds consumers are impatient or myopic (e.g., use a high
discount rate) with regard to vehicle fuel savings.\344\ On average,
consumers indicated that fuel savings would have to pay back the
additional cost in only 2.9 years to persuade them to buy a higher
fuel-economy vehicle. EPA also incorporate a relatively short ``payback
period'' into OMEGA to evaluate and order technologies that can be used
to increase fuel economy, assuming that buyers value the resulting fuel
savings over the first five years of a new vehicle's lifetime. This
assumption is based on the current average term of consumer loans to
finance the purchase of new vehicles. That said, there is no consensus
in the literature on what the private discount rate is or should be in
this context.
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    \343\ Energy Information Administration, U.S. Department of
Energy (1996). Issues in Midterm Analysis and Forecasting 1996, DOE/
EIA-0607(96), Washington, DC., http://www.osti.gov/bridge/
purl.cover.jsp?purl=/366567-BvCFp0/webviewable/, accessed 7/7/09.
    \344\ Kubik, M. (2006). Consumer Views on Transportation and Energy.
Second Edition. Technical Report: National Renewable Energy Laboratory.
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    One possibility is that the discounting framework may not be a good
model for consumer decision-making and for determining consumer welfare
regarding fuel economy. Buying a vehicle involves trading off among
dozens of vehicle characteristics, including price, vehicle class,
safety, performance, and even audio systems and cupholders. Fuel
economy is only one of these attributes, and its role in consumer
vehicle purchase decisions is not well understood (see DRIA Section
8.1.2 for further discussion). As noted above, if consumers do not
fully consider fuel economy at the time of vehicle purchase, then the
fuel savings from this rule provide a realized benefit to consumers
after purchase. There are two distinct ideas at work here: one is that
efficiency improvements change the nature of the cost of the car,
requiring higher up-front vehicle costs while enabling lower long-run
fuel costs; the other is that while consumers may benefit from the
lower long-run fuel costs, they may also experience some loss in
welfare on account of the possible change in vehicle mix.
    A second problem with use of consumer vehicle choice models, as
they now stand, is that they are even less reliable in the face of
significant changes otherwise occurring in fleet composition. One
attempt to analyze the effect of the oil shock of 1973 on consumer
vehicle choice found that, after two years, the particular model did
not predict well due to changes in the vehicle fleet.\345\ It is likely
that, in the next few years, many of the vehicles that will be offered
for sale will change. In coming years, new vehicles will be developed,
and existing vehicles will be redesigned. For instance, over the next
few years, new vehicles that have both high fuel economy and high
safety factors, in combinations that consumers have not previously been
offered, are likely to appear in the market. Models based on the
existing vehicle fleet may not do well in predicting consumers' choices
among the new vehicles offered. Given that consumer vehicle choice
models appear to be less effective in predicting vehicle choices when
the vehicles are likely to change, EPA is reluctant to use the models
for this proposed rulemaking.
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    \345\ Berry, Steven, James Levinsohn, and Ariel Pakes (July
1995). ``Automobile Prices in Market Equilibrium,'' Econometrica
63(4): 841-940 (Docket EPA-HQ-OAR-2009-0472).
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    In sum, the estimates of consumer surplus from consumer vehicle
choice models depend heavily on the value to consumers of improved fuel
economy, a value for which estimates are highly varied. In addition,
the predictive ability of consumer vehicle choice models may be limited
as consumers face new vehicle choices that they previously did not have.
    Nonetheless, because there are potential advantages to using
consumer vehicle choice models if these difficulties can be addressed,
EPA plans to continue our investigation and evaluation of consumer
vehicle choice models. This effort includes further review of existing
consumer vehicle choice models and the estimates of consumers'
willingness to pay for increased fuel economy. In addition, EPA is
developing capacity to examine the factors that may affect the results
of consumer vehicle choice models, and to explore their impact on
analysis of regulatory scenarios.
    A detailed discussion of the state of the art of consumer choice
modeling is provided in the DRIA. For this rulemaking, EPA is not able
to estimate the consumer welfare loss which may accompany the actual
fuel savings from the proposal, and so any such loss must remain
unquantified. EPA seeks comments on how to assess these difficult
questions in the future.
2. Costs Associated With the Vehicle Program
    In this section EPA presents our estimate of the costs associated
with the proposed vehicle program. The presentation here summarizes the
costs associated with the new vehicle technology expected to be added
to meet the proposed GHG standards, including hardware costs to comply
with the proposed A/C credit program. The analysis summarized here
provides our estimate of incremental costs on a per vehicle basis and
on an annual total basis.
    The presentation here summarizes the outputs of the OMEGA model
that was discussed in some detail in Section III.D of this preamble.
For details behind the analysis such as the OMEGA model inputs and the
estimates of costs associated with individual technologies, the reader
is directed to Chapters 1 and 2 of the DRIA, and Chapter 3 of the Draft
Joint TSD. For more detail on the

[[Page 49605]]

outputs of the OMEGA model and the overall vehicle program costs
summarized here, the reader is directed to Chapters 4 and 7 of the DRIA.
    With respect to the cost estimates for vehicle technologies, EPA
notes that, because these estimates relate to technologies which are in
most cases already available, these cost estimates are technically
robust. EPA notes further that, in all instances, its estimates are
within the range of estimates in the most widely-utilized sources and
studies. In that way, EPA believes that we have been conservative in
estimating the vehicle hardware costs associated with this proposal.
    With respect to the aggregate cost estimations presented in Section
III.H.2.b, EPA notes that there are a number of areas where the results
of our analysis may be conservative and, in general, EPA believes we
have directionally overestimated the costs of compliance with these
proposed standards, especially in not accounting for the full range of
credit opportunities available to manufacturers. For example, some cost
saving programs are considered in our analysis, such as full car/truck
trading, while others are not, such as cross-manufacturer trading and
advanced technology credits.
a. Vehicle Compliance Costs Associated With the Proposed CO₂ Standards
    For the technology and vehicle package costs associated with adding
new CO₂-reducing technology to vehicles, EPA began with
EPA's 2008 Staff Report and NHTSA's 2011 CAFE FRM both of which
presented costs generated using existing literature, meetings with
manufacturers and parts suppliers, and meetings with other experts in
the field of automotive cost estimation.\346\ EPA has updated some of
those technology costs with new information from our contract with FEV,
through further discussion with NHTSA, and by converting from 2006
dollars to 2007 dollars using the GDP price deflator. The estimated
costs presented here represent the incremental costs associated with
this proposal relative to what the future vehicle fleet would be
expected to look like absent this proposed rule. A more detailed
description of the factors considered in our reference case is
presented in Section III.D.
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    \346\ ``EPA Staff Technical Report: Cost and Effectiveness
Estimates of Technologies Used to Reduce Light-duty Vehicle Carbon
Dioxide Emissions,'' EPA 420-R-08-008; NHTSA 2011 CAFE FRM is at 74
FR 14196; both documents are contained in Docket EPA-HQ-OAR-2009-0472.
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    The estimates of vehicle compliance costs cover the years of
implementation of the program--2012 through 2016. EPA has also
estimated compliance costs for the years following implementation so
that we can shed light on the long term--2022 and later--cost impacts
of the proposal.\347\ EPA used the year 2022 here because our short-
term and long-term markup factors described shortly below are applied
in five year increments with the 2012 through 2016 implementation span
and the 2017 through 2021 span both representing the short-term. Some
of the individual technology cost estimates are presented in brief in
Section III.D, and account for both the direct and indirect costs
incurred in the automobile manufacturing and dealer industries (for a
complete presentation of technology costs, please refer to Chapter 3 of
the Draft Joint TSD). To account for the indirect costs, EPA has
applied an indirect cost markup (ICM) factor to all of our direct costs
to arrive at the estimated technology cost.\348\ The ICM factors used
range from 1.11 to 1.64 in the short-term (2012 through 2021),
depending on the complexity of the given technology, to account for
differences in the levels of R&D, tooling, and other indirect costs
that would be incurred. Once the program has been fully implemented,
some of the indirect costs would no longer be attributable to these
proposed standards and, as such, a lower ICM factor is applied to
direct costs in years following full implementation. The ICM factors
used range from 1.07 to 1.39 in the long-term (2022 and later)
depending on the complexity of the given technology.\349\ Note that the
short-term ICMs are used in the 2012 through 2016 years of
implementation and continue through 2021. EPA does this since the
proposed standards are still being implemented during the 2012 through
2016 model years. Therefore, EPA considers the five year period
following full implementation also to be short-term.
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    \347\ Note that the assumption made here is that the standards
proposed would continue to apply for years beyond 2016 so that new
vehicles sold in model years 2017 and later would continue to incur
costs as a result of this rule. Those costs are estimated to get
lower in 2022 because some of the indirect costs attributable to this
proposal in the years prior to 2022 would be eliminated in 2022 and later.
    \348\ Alex Rogozhin et al., Automobile Industry Retail Price
Equivalent and Indirect Cost Multipliers. Prepared for EPA by RTI
International and Transportation Research Institute, University of
Michigan. EPA-420-R-09-003, February 2009 (Docket EPA-HQ-OAR-2009-0472).
    \349\ Gloria Helfand and Todd Sherwood, ``Documentation of the
Development of Indirect Cost Multipliers for Three Automotive
Technologies,'' Office of Transportation and Air Quality, USEPA,
August 2009 (Docket EPA-HQ-OAR-2009-0472).
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    The argument has been made that the ICM approach may be more
appropriate for regulatory cost estimation than the more traditional
retail price equivalent, or RPE, markup. The RPE is based on the
historical relationship between direct costs and consumer prices; it is
intended to reflect the average markup over time required to sustain
the industry as a viable operation. Unlike the RPE approach, the ICM
focuses more narrowly on the changes that are required in direct
response to regulation-induced vehicle design changes which may not
directly influence all of the indirect costs that are incurred in the
normal course of business. For example, an RPE markup captures all
indirect costs including costs such as the retirement benefits of
retired employees. However, the retirement benefits for retired
employees are not expected to change as a result of a new GHG
regulation and, therefore, those indirect costs should not increase in
relation to newly added hardware in response to a regulation. So, under
the ICM approach, if a newly added piece of technology has an
incremental direct cost of $1, its direct plus indirect costs should
not be $1 multiplied by an RPE markup of say 1.5, or $1.50, but rather
something less since the manufacturer is not paying more for retired-
employee retirement benefits as a direct result of adding the new piece
of technology. Further, as noted above, the indirect cost multiplier
can be adjusted for different levels of technological complexity. For
example, a move to low rolling resistance tires is less complex than
converting a gasoline vehicle to a plug-in hybrid. Therefore, the
incremental indirect costs for the tires should be lower in magnitude
than those for the plug-in hybrid. For the analysis underlying these
proposed standards, the agencies have based our estimates on the ICM
approach, but EPA notes that discussion continues about the use of the
RPE approach and the ICM approach for safety and environmental
regulations. We discuss our ICM factors and the complexity levels used
in our analysis in more detail in Chapter 3 of the Draft Joint TSD and
EPA requests comment on the approach described there as well as the
general concepts of both the ICM and RPE approaches.
    EPA has also considered the impacts of manufacturer learning on the
technology cost estimates. Consistent with past EPA rulemakings, EPA
has estimated that some costs would decline by 20 percent with each of
the first two doublings of production beginning with the first year of
implementation. These

[[Page 49606]]

volume-based cost declines--which EPA calls ``volume'' based learning--
take place after manufacturers have had the opportunity to find ways to
improve upon their manufacturing processes or otherwise manufacture
these technologies in a more efficient way. After two 20 percent cost
reduction steps, the cost reduction learning curve flattens out
considerably as only minor improvements in manufacturing techniques and
efficiencies remain to be had. By then, costs decline roughly three
percent per year as manufacturers and suppliers continually strive to
reduce costs. These time-based cost declines--which EPA calls ``time''
based learning--take place at a rate of three percent per year. EPA has
considered learning impacts on most but not all of the technologies
expected to be used because some of the expected technologies are
already used rather widely in the industry and, presumably, learning
impacts have already occurred. EPA has considered volume-based learning
for only a handful of technologies that EPA considers to be new or
emerging technologies such as the hybrids and electric vehicles. For
most technologies, EPA has considered them to be more established given
their current use in the fleet and, hence, we have applied the lower
time based learning. We have more discussion of our learning approach
and the technologies to which we have applied which type of learning in
the Draft Joint TSD.
    The technology cost estimates discussed in Section III.D and
detailed in Chapter 3 of the Draft Joint TSD are used to build up
package cost estimates which are then used as inputs to the OMEGA
model. EPA discusses our packages and package costs in Chapter 1 of the
DRIA. The model determines what level of CO₂ improvement is
required considering the reference case for each manufacturer's fleet.
The vehicle compliance costs are the outputs of the model and take into
account FFV credits through 2015, TLAASP, full car/truck trading, and
the A/C credit program. Table III.H.2-1 presents the fleet average
incremental vehicle compliance costs for this proposal. As the table
indicates, 2012-2016 costs increase every year as the standards become
more stringent. Costs per car and per truck then remain stable through
2021 while cost per vehicle (car/truck combined) decline slightly as
the fleet mix trends slowly to increasing car sales. In 2022, costs per
car and per truck decline as the long-term ICM kicks in because some
indirect costs are no longer considered attributable to the proposed
program. Costs per car and per truck remain constant thereafter while
the cost per vehicle declines slightly as the fleet continues to trend
toward cars. By 2030, projections of fleet mix changes become static
and the cost per vehicle remains constant. EPA has a more detailed
presentation of vehicle compliance costs on a manufacturer by
manufacturer basis in the DRIA.

 Table III.H.2-1--Industry Average Vehicle Compliance Costs Associated With the Proposed Tailpipe CO2 Standards
                                           [$/vehicle in 2007 dollars]
----------------------------------------------------------------------------------------------------------------
                                                                                                  $/vehicle (car
                          Calendar year                                $/car          $/truck         & truck
                                                                                                     combined)
----------------------------------------------------------------------------------------------------------------
2012............................................................             374             358             368
2013............................................................             531             539             534
2014............................................................             663             682             670
2015............................................................             813             886             838
2016............................................................             968           1,213           1,050
2017............................................................             968           1,213           1,047
2018............................................................             968           1,213           1,044
2019............................................................             968           1,213           1,042
2020............................................................             968           1,213           1,040
2021............................................................             968           1,213           1,039
2022............................................................             890           1,116             955
2030............................................................             890           1,116             953
2040............................................................             890           1,116             953
2050............................................................             890           1,116             953
----------------------------------------------------------------------------------------------------------------

b. Annual Costs of the Proposed Vehicle Program
    The costs presented here represent the incremental costs for newly
added technology to comply with the proposed program. Together with the
projected increases in car and light-truck sales, the increases in per-
vehicle average costs shown in Table III.H.2-1 above result in the
total annual costs reported in Table III.H.2-2 below. Note that the
costs presented in Table III.H.2-2 do not include the savings that
would occur as a result of the improvements to fuel consumption. Those
impacts are presented in Section III.H.4.

  Table III.H.2-2--Quantified Annual Costs Associated With the Proposed
                             Vehicle Program
                       [$Millions of 2007 dollars]
------------------------------------------------------------------------
                                                            Quantified
                          Year                             annual costs
------------------------------------------------------------------------
2012....................................................          $5,400
2013....................................................          $8,400
2014....................................................         $10,900
2015....................................................         $13,900
2016....................................................         $17,500
2020....................................................         $18,000
2030....................................................         $17,900
2040....................................................         $19,300
2050....................................................         $20,900
NPV, 3%.................................................        $390,000
NPV, 7%.................................................        $216,600
------------------------------------------------------------------------

3. Cost per Ton of Emissions Reduced
    EPA has calculated the cost per ton of GHG (CO₂-
equivalent, or CO₂e) reductions associated with this
proposal using the above costs and the emissions reductions described
in Section III.F. More detail on the costs, emission reductions, and
the cost per ton can be found in the DRIA and Draft Joint TSD. EPA has
calculated the cost per metric ton of GHG emissions reductions in the
years 2020, 2030, 2040, and 2050 using the annual vehicle compliance
costs and emission reductions for each of those years. The value in
2050 represents the long-term cost per ton of the emissions reduced.
Note that EPA has not included the savings associated with

[[Page 49607]]

reduced fuel consumption, nor any of the other benefits of this
proposal in the cost per ton calculations. If EPA were to include fuel
savings in the cost estimates, the cost per ton would be less than $0,
since the estimated value of fuel savings outweighs these costs. With
regard to the proposed CH₄ and N₂O standards,
since these standards would be emissions caps designed to ensure
manufacturers do not backslide from current levels, EPA has not
estimated costs associated with the standards (since the standards
would not require any change from current practices nor does EPA
estimate they would result in emissions reductions).
    The results for CO₂e costs per ton under the proposed
vehicle program are shown in Table III.H.3-1.

                  Table III.H.3-1--Annual Cost Per Metric Ton of CO2e Reduced, in $2007 Dollars
----------------------------------------------------------------------------------------------------------------
                                                                                   CO2e  Reduced
                              Year                                   Cost \a\        (million      Cost per ton
                                                                    ($millions)    metric tons)
----------------------------------------------------------------------------------------------------------------
2020............................................................         $18,000             170            $110
2030............................................................          17,900             320              60
2040............................................................          19,300             420              50
2050............................................................          20,900             520              40
----------------------------------------------------------------------------------------------------------------
\a\ Costs here include vehicle compliance costs and do not include any fuel savings (discussed in Section
  III.H.4) or other benefits of this proposal (discussed in Sections III.H.6 through III.H 10).

4. Reduction in Fuel Consumption and Its Impacts
a. What Are the Projected Changes in Fuel Consumption?
    The proposed CO₂ standards would result in significant
improvements in the fuel efficiency of affected vehicles. Drivers of
those vehicles would see corresponding savings associated with reduced
fuel expenditures. EPA has estimated the impacts on fuel consumption
for both the proposed tailpipe CO₂ standards and the
proposed A/C credit program. To do this, fuel consumption is calculated
using both current CO₂ emission levels and the proposed
CO₂ standards. The difference between these estimates
represents the net savings from the proposed CO₂ standards.
Note that the total number of miles that vehicles are driven each year
is different under each of the control case scenarios than in the
reference case due to the ``rebound effect,'' which is discussed in
Section III.H.4.c.
    The expected impacts on fuel consumption are shown in Table
III.H.4-1. The gallons shown in the tables reflect impacts from the
proposed CO₂ standards, including the proposed A/C credit
program, and include increased consumption resulting from the rebound effect.

    Table III.H.4-1--Fuel Consumption Impacts of the Proposed Vehicle
                    Standards and A/C Credit Programs
                            [Million gallons]
------------------------------------------------------------------------
                             Year                                Total
------------------------------------------------------------------------
2012.........................................................        530
2013.........................................................      1,320
2014.........................................................      2,410
2015.........................................................      3,910
2016.........................................................      5,930
2020.........................................................     13,350
2030.........................................................     26,180
2040.........................................................     33,930
2050.........................................................     42,570
------------------------------------------------------------------------

b. What Are the Fuel Savings to the Consumer?
    Using the fuel consumption estimates presented in Section
III.H.4.a, EPA can calculate the monetized fuel savings associated with
the proposed CO₂ standards. To do this, we multiply reduced
fuel consumption in each year by the corresponding estimated average
fuel price in that year, using the reference case taken from the AEO
2009.\350\ AEO is the government consensus estimate used by NHTSA and
many other government agencies to estimate the projected price of fuel.
EPA has included all fuel taxes in these estimates since these are the
prices paid by consumers. As such, the savings shown reflect savings to
the consumer. These results are shown in Table III.H.4-2. Note that EPA
presents the monetized fuel savings using pre-tax fuel prices in
Section III.H.10. The fuel savings based on pre-tax fuel prices reflect
the societal savings in contrast to the consumer savings presented in
Table III.H.4-2. Also in Section III.H.10, EPA presents the benefit-
cost of the proposal and, for that reason, present the fuel impacts as
negative costs of the program while here EPA presents them as positive savings.
---------------------------------------------------------------------------

    \350\ Energy Information Administration, Supplemental tables to
the Annual Energy Outlook 2009, Updated Reference Case with American
Recovery and Reinvestment Act. Available http://www.eia.doe.gov/
oiaf/aeo/supplement/stimulus/regionalarra.html. April 2009.

 Table III.H.4-2--Estimated Fuel Consumption Savings to the Consumer \a\
                       [Millions of 2007 dollars]
------------------------------------------------------------------------
                      Calendar year                            Total
------------------------------------------------------------------------
2012....................................................          $1,400
2013....................................................           3,800
2014....................................................           7,200
2015....................................................          12,400
2016....................................................          19,400
2020....................................................          48,400
2030....................................................         100,000
2040....................................................         136,800
2050....................................................         181,000
NPV, 3%.................................................       1,850,200
NPV, 7%.................................................         826,900
------------------------------------------------------------------------
\a\ Fuel consumption savings calculated using taxed fuel prices. Fuel
  consumption impacts using pre-tax fuel prices are presented in Section
  III.H.10 as negative costs of the vehicle program

    As shown in Table III.H.4-2, EPA is projecting that consumers would
realize very large fuel savings as a result of the standards contained
in this proposal. There are several ways to view this value. Some, as
demonstrated below in Section III.H.5, view these fuel savings as a
reduction in the cost of owning a vehicle, whose full benefits
consumers realize. This approach assumes that, regardless how consumers
in fact make their decisions on how much fuel economy to purchase, they
will gain these fuel savings. Another view says that consumers do not
necessarily value fuel savings as equal to the results of this
calculation. Instead, consumers may either undervalue or overvalue fuel
economy relative to these savings, based

[[Page 49608]]

on their personal preferences. This issue is discussed further in
Section III.H.5 and in Chapter 8 of the DRIA.
c. VMT Rebound Effect
    The fuel economy rebound effect refers to the fraction of fuel
savings expected to result from an increase in vehicle fuel economy--
particularly one required by higher fuel efficiency standards--that is
offset by additional vehicle use. The increase in vehicle use occurs
because higher fuel economy reduces the fuel cost of driving, which is
typically the largest single component of the monetary cost of
operating a vehicle, and vehicle owners respond to this reduction in
operating costs by driving slightly more.
    For this proposal, EPA is using an estimate of 10% for the rebound
effect. This value is based on the most recent time period analyzed in
the Small and Van Dender 2007 paper,\351\ and falls within the range of
the larger body of historical work on the rebound effect.\352\ Recent
work by David Greene on the rebound effect for light-duty vehicles in
the U.S. further supports the hypothesis that the rebound effect is
decreasing over time.\353\ If we were to use a dynamic estimate of the
future rebound effect, our analysis shows that the rebound effect could
be in the range of 5% or lower.\354\ The rebound effect is also
discussed in Section II.F of the preamble; the TSD, Section 4.2.5,
reviews the relevant literature and discusses in more depth the
reasoning for the rebound values used here.
---------------------------------------------------------------------------

    \351\ Small, K. and K. Van Dender, 2007a. ``Fuel Efficiency and
Motor Vehicle Travel: The Declining Rebound Effect'', The Energy
Journal, vol. 28, no. 1, pp. 25-51 (Docket EPA-HQ-OAR-2009-0472).
    \352\ Sorrell, S. and J. Dimitropoulos, 2007. ``UKERC Review of
Evidence for the Rebound Effect, Technical Report 2: Econometric
Studies'', UKERC/WP/TPA/2007/010, UK Energy Research Centre, London,
October (Docket EPA-HQ-OAR-2009-0472).
    \353\ Report by Kenneth A. Small of University of California at
Irvine to EPA, ``The Rebound Effect from Fuel Efficiency Standards:
Measurement and Projection to 2030'', June 12, 2009 (Docket EPA-HQ-
OAR-2009-0472).
    \354\ Report by David Greene of Oak Ridge National Laboratory to
EPA, ``Rebound 2007: Analysis of National Light-Duty Vehicle Travel
Statistics,'' March 24, 2009 (Docket EPA-HQ-OAR-2009-0472). Note,
this report has been submitted for peer review. Completion of the
peer review process is expected prior to the final rule.
---------------------------------------------------------------------------

    EPA also invites comments on other alternatives for estimating the
rebound effect. As one illustration, variation in the price per gallon
of gasoline directly affects the per-mile cost of driving, and drivers
may respond just as they would to a change in the cost of driving
resulting from a change in fuel economy, by varying the number of miles
they drive. Because vehicles' fuel economy is fixed in the short run,
variation in the number of miles driven in response to changes in fuel
prices will be reflected in changes in gasoline consumption. Under the
assumption that drivers respond similarly to changes in the cost of
driving whether they are caused by variation in fuel prices or fuel
economy, the short-run price elasticity of demand for gasoline--which
measures the sensitivity of gasoline consumption to changes in its
price per gallon--may provide some indication about the magnitude of
the rebound effect itself. EPA invites comment on the extent to which
the short run elasticity of demand for gasoline with respect to its
price can provide useful information about the size of the rebound
effect. Specifically, we seek comment on whether it would be
appropriate to use the price elasticity of demand for gasoline, or
other alternative approaches, to guide the choice of a value for the
rebound effect.
5. Impacts on U.S. Vehicle Sales and Payback Period
a. Vehicle Sales Impacts
    The methodology EPA used for estimating the impact on vehicle sales
is relatively straightforward, but makes a number of simplifying
assumptions. According to the literature, the price elasticity of
demand for vehicles is commonly estimated to be -1.0.\355\ In other
words, a one percent increase in the price of a vehicle would be
expected to decrease sales by one percent, holding all other factors
constant. For our estimates, EPA calculated the effect of an increase
in vehicle costs due to the proposed standards and assume that
consumers will face the full increase in costs, not an actual
(estimated) change in vehicle price. (The estimated increases in
vehicle cost due to the rule are discussed in Section III.H.2) This is
a conservative methodology, since an increase in cost may not pass
fully into an increase in market price in an oligopolistic industry
such as the automotive sector.\356\ EPA also notes that we have not
used these estimated sales impacts in the OMEGA Model.
---------------------------------------------------------------------------

    \355\ Kleit A.N., 1990. ``The Effect of Annual Changes in
Automobile Fuel Economy Standards.'' Journal of Regulatory Economics
2: 151-172 (Docket EPA-HQ-OAR-2009-0472); McCarthy, Patrick S.,
1996. ``Market Price and Income Elasticities of New Vehicle
Demands.'' Review of Economics and Statistics 78: 543-547 (Docket
EPA-HQ-OAR-2009-0472); Goldberg, Pinelopi K., 1998. ``The Effects of
the Corporate Average Fuel Efficiency Standards in the U.S.,''
Journal of Industrial Economics 46(1): 1-33 (Docket EPA-HQ-OAR-2009-0472).
    \356\ See, for instance, Gron, Ann, and Deborah Swenson, 2000.
``Cost Pass-Through in the U.S. Automobile Market,'' Review of
Economics and Statistics 82: 316-324 (Docket EPA-HQ-OAR-2009-0472).
---------------------------------------------------------------------------

    Although EPA uses the one percent price elasticity of demand for
vehicles as the basis for our vehicle sales impact estimates, we
assumed that the consumer would take into account both the higher
vehicle purchasing costs as well as some of the fuel savings benefits
when deciding whether to purchase a new vehicle. Therefore, the
incremental cost increase of a new vehicle would be offset by reduced
fuel expenditures over a certain period of time (i.e., the ``payback
period''). For the purposes of this rulemaking, EPA used a five-year
payback period, which is consistent with the length of a typical new
light-duty vehicle loan.\357\ This approach may not accurately reflect
the role of fuel savings in consumers' purchase decisions, as the
discussion in Section III.H.1 suggests. If consumers consider fuel
savings in a different fashion than modeled here, then this approach
will not accurately reflect the impact of this rule on vehicle sales.
---------------------------------------------------------------------------

    \357\ There is not a consensus in the literature on how
consumers consider fuel economy in their vehicle purchases. Results
are inconsistent, possibly due to fuel economy not being a major
focus of many of the studies. Espey, Molly, and Santosh Nair (1995,
``Automobile Fuel Economy: What Is It Worth?'' Contemporary Economic
Policy 23: 317-323, (Docket EPA-HQ-OAR-2009-0472) find that their
results are consistent with consumers using the lifetime of the
vehicle, not just the first five years, in their fuel economy
purchase decisions. This result suggests that the five-year time
horizon used here may be an underestimate.
---------------------------------------------------------------------------

    This increase in costs has other effects on consumers as well: If
vehicle prices increase, consumers will face higher insurance costs and
sales tax, and additional finance costs if the vehicle is bought on
credit. In addition, the resale value of the vehicles will increase.
EPA estimates that, with corrections for these factors, the effect on
consumer expenditures of the cost of the new technology should be 0.932
times the cost of the technology at a 3% discount rate, and 0.892 times
the cost of the technology at a 7% discount rate. The details of this
calculation are in the DRIA, Chapter 8.l.
    Once the cost estimates are adjusted for these additional factors,
the fuel cost savings associated with the rule, discussed in Section
III.H.4, are subtracted to get the net effect on consumer expenditures
for a new vehicle. With the assumed elasticity of demand of -1, the
percent change in this ``effective price,'' estimated as the adjusted
increase in cost, is equal to the negative of the percent change in
vehicle purchases. The net effect of this calculation is in Table
III.H.5-1 and Table III.H.5-2.

[[Page 49609]]

    The estimates provided in Table III.H.5-1 and Table III.H.5-2 are
meant to be illustrative rather than a definitive prediction. When
viewed at the industry-wide level, they give a general indication of
the potential impact on vehicle sales. As shown below, the overall
impact is positive and growing over time for both cars and trucks,
because the estimated value of fuel savings exceeds the costs of
meeting the higher standards. If, however, consumers do not take fuel
savings and other costs into account as modeled here when they purchase
vehicles, the results presented here may not reflect actual impacts on
vehicle sales.

                         Table III.H.5-1--Vehicle Sales Impacts Using a 3% Discount Rate
----------------------------------------------------------------------------------------------------------------
                                            Change in car                      Change in truck
                                                sales        Percent change         sales        Percent change
----------------------------------------------------------------------------------------------------------------
2012....................................            66,600               0.7            27,300               0.5
2013....................................            93,300               0.9           161,300               2.8
2014....................................           134,400               1.3           254,400               4.4
2015....................................           236,300               2.2           368,400               6.5
2016....................................           375,400               3.4           519,000               9.4
----------------------------------------------------------------------------------------------------------------

    Table III.H.5-1 shows the impacts on new vehicle sales using a 3%
discount rate. The fuel savings are always higher than the technology
costs. Although both cars and trucks show very small effects initially,
over time vehicle sales become increasingly positive, as increased fuel
prices make improved fuel economy more desirable. The increases in
sales for trucks are larger than the increases for trucks (except in
2012) in both absolute numbers and percentage terms.

                       Table III.H.5-2--New Vehicle Sales Impacts Using a 7% Discount Rate
----------------------------------------------------------------------------------------------------------------
                                          Change in car                       Change in truck
                                              sales         Percent change         sales         Percent change
----------------------------------------------------------------------------------------------------------------
2012..................................            61,900                0.7            25,300                0.5
2013..................................            86,600                0.9            60,000                1
2014..................................           125,200                1.2           122,900                2.1
2015..................................           221,400                2             198,100                3.5
2016..................................           353,100                3.2           291,500                5.3
----------------------------------------------------------------------------------------------------------------

    Table III.H.5-2 shows the impacts on new vehicle sales using a 7%
interest rate. While a 7% interest rate shows slightly lower impacts
than using a 3% discount rate, the results are qualitatively similar to
those using a 3% discount rate. Sales increase for every year. For both
cars and trucks, sales become increasingly positive over time, as
higher fuel prices make improved fuel economy more valuable. The car
market grows more than the truck market in absolute numbers, but less
on a percentage basis.
    The effect of this rule on the use and scrappage of older vehicles
will be related to its effects on new vehicle prices, the fuel
efficiency of new vehicle models, and the total sales of new vehicles.
If the value of fuel savings resulting from improved fuel efficiency to
the typical potential buyer of a new vehicle outweighs the average
increase in new models' prices, sales of new vehicles will rise, while
scrappage rates of used vehicles will increase slightly. This will
cause the ``turnover'' of the vehicle fleet--that is, the retirement of
used vehicles and their replacement by new models--to accelerate
slightly, thus accentuating the anticipated effect of the rule on
fleet-wide fuel consumption and CO₂ emissions. However, if
potential buyers value future fuel savings resulting from the increased
fuel efficiency of new models at less than the increase in their
average selling price, sales of new vehicles will decline, as will the
rate at which used vehicles are retired from service. This effect will
slow the replacement of used vehicles by new models, and thus partly
offset the anticipated effects of the proposed rules on fuel use and emissions.
    Because the agencies are uncertain about how the value of projected
fuel savings from the proposed rules to potential buyers will compare
to their estimates of increases in new vehicle prices, we have not
attempted to estimate explicitly the effects of the rule on scrappage
of older vehicles and the turnover of the vehicle fleet. We seek
comment on the methods that might be used to estimate the effect of the
proposed rule on the scrappage and use of older vehicles as part of the
analysis to be conducted for the final rule.
    A detailed discussion of the vehicle sales impacts methodology is
provided in the DRIA. EPA invites comments on this approach to
estimating the vehicle sales impacts of this proposal.
b. Consumer Payback Period and Lifetime Savings on New Vehicle Purchases
    Another factor of interest is the payback period on the purchase of
a new vehicle that complies with the proposed standards. In other
words, how long would it take for the expected fuel savings to outweigh
the increased cost of a new vehicle? For example, a new 2016 MY vehicle
is estimated to cost $1,050 more (on average, and relative to the
reference case vehicle) due to the addition of new GHG reducing
technology (see Section III.D.6 for details on this cost estimate).
This new technology will result in lower fuel consumption and,
therefore, savings in fuel expenditures (see Section III.F.1 for
details on fuel savings). But how many months or years would pass
before the fuel savings exceed the upfront cost of $1,050?
    Table III.H.5-3 provides the answer to this question for a vehicle
purchaser who pays for the new vehicle upfront in cash (we discuss
later in this section the payback period for consumers who finance the
new vehicle purchase with a loan). The table uses annual miles driven
(vehicle miles traveled, or VMT) and survival rates consistent with the
emission and benefits analyses

[[Page 49610]]

presented in Chapter 4 of the draft joint TSD. The control case
includes rebound VMT but the reference case does not, consistent with
other parts of the analysis. Also included are fuel savings associated
with A/C controls (in the control case only), but the expected A/C-
related maintenance savings are not included. The likely A/C-related
maintenance savings are discussed in Chapter 2 of EPA's draft RIA.
Further, this analysis does not include other societal impacts such as
the value of increased driving, or noise, congestion and accidents
since the focus is meant to be on those factors consumers consider most
while in the showroom considering a new car purchase. Car/truck fleet
weighting is handled as described in Chapter 1 of the draft joint TSD.
As can be seen in the table, it will take under 3 years (2 years and 8
months at a 3% discount rate, 2 years and 10 months at a 7% discount
rate) for the cumulative discounted fuel savings to exceed the upfront
increase in vehicle cost. More detail on this analysis can be found in
Chapter 8 of EPA's draft RIA.

                   Table III.H.5-3--Payback Period on a 2016 MY New Vehicle Purchase via Cash
                                                 [2007 dollars]
----------------------------------------------------------------------------------------------------------------
                                                                                 Cumulative        Cumulative
            Year of ownership                 Increased        Annual fuel     discounted fuel   discounted fuel
                                          vehicle cost \a\     savings \b\      savings at 3%     savings at 7%
----------------------------------------------------------------------------------------------------------------
1.......................................            $1,128              $443              $436              $428
2.......................................  ................               444               860               829
3.......................................  ................               443             1,272             1,203
4.......................................  ................               434             1,663             1,546
----------------------------------------------------------------------------------------------------------------
\a\ Increased cost of the proposed rule is $1,050; the value here includes nationwide average sales tax of 5.3%
  and increased insurance premiums of 1.98%; both of these percentages are discussed in Section 8.1.1 of EPA's
  draft RIA.
\b\ Calculated using AEO 2009 reference case fuel price including taxes.

    However, most people purchase a new vehicle using credit rather
than paying cash up front. The typical car loan today is a five year,
60 month loan. As of August 24, 2009, the national average interest
rate for a 5 year new car loan was 7.41 percent. If the increased
vehicle cost is spread out over 5 years at 7.41 percent, the analysis
would look like that shown in Table III.H.5-4. As can be seen in this
table, the fuel savings immediately outweigh the increased payments on
the car loan, amounting to $162 in discounted net savings (3% discount
rate) saved in the first year and similar savings for the next two
years before reduced VMT starts to cause the fuel savings to fall.
Results are similar using a 7% discount rate. This means that for every
month that the average owner is making a payment for the financing of
the average new vehicle their monthly fuel savings would be greater
than the increase in the loan payments. This amounts to a savings on
the order of $9 to $14 per month throughout the duration of the 5 year
loan. Note that in year six when the car loan is paid off, the net
savings equal the fuel savings (as would be the case for the remaining
years of ownership).

                  Table III.H.5-4--Payback Period on a 2016 MY New Vehicle Purchase via Credit
                                                 [2007 dollars]
----------------------------------------------------------------------------------------------------------------
                                                                                   Annual            Annual
            Year of ownership                 Increased        Annual fuel     discounted net    discounted net
                                          vehicle cost \a\     savings \b\      savings at 3%     savings at 7%
----------------------------------------------------------------------------------------------------------------
1.......................................              $278              $443              $162              $159
2.......................................               278               444               158               150
3.......................................               278               443               153               139
4.......................................               278               434               141               123
5.......................................               278               423               127               107
6.......................................                 0               403               343               278
----------------------------------------------------------------------------------------------------------------
\a\ This uses the same increased cost as Table III.H.4-3 but spreads it out over 5 years assuming a 5 year car
  loan at 7.41 percent.
\b\ Calculated using AEO 2009 reference case fuel price including taxes.

    The lifetime fuel savings and net savings can also be calculated
for those who purchase the vehicle using cash and for those who
purchase the vehicle with credit. This calculation applies to the
vehicle owner who retains the vehicle for its entire life and drives
the vehicle each year at the rate equal to the national projected
average. The results are shown in Table III.H.5-5. In either case, the
present value of the lifetime net savings is greater than $3,200 at a
3% discount rate, or $2,400 at a 7% discount rate.

[[Page 49611]]

               Table III.H.5-5--Lifetime Discounted Net Savings on a 2016 MY New Vehicle Purchase
                                                 [2007 dollars]
----------------------------------------------------------------------------------------------------------------
                                                                Increased         Lifetime          Lifetime
                      Purchase option                          discounted      discounted fuel   discounted net
                                                              vehicle cost       savings \b\         savings
----------------------------------------------------------------------------------------------------------------
                                                3% discount rate
----------------------------------------------------------------------------------------------------------------
Cash......................................................            $1,128            $4,558            $3,446
Credit \a\................................................             1,293             4,558             3,265
----------------------------------------------------------------------------------------------------------------
                                                7% discount rate
----------------------------------------------------------------------------------------------------------------
Cash......................................................             1,128             3,586             2,495
Credit \a\................................................             1,180             3,586             2,406
----------------------------------------------------------------------------------------------------------------
\a\ Assumes a 5 year loan at 7.41 percent.
\b\ Fuel savings here were calculated using AEO 2009 reference case fuel price including taxes.

    Note that throughout this consumer payback discussion, the average
number of vehicle miles traveled per year has been used. Drivers who
drive more miles than the average would incur fuel related savings more
quickly and, therefore, the payback would come sooner. Drivers who
drive fewer miles than the average would incur fuel related savings
more slowly and, therefore, the payback would come later.
6. Benefits of Reducing GHG Emissions
a. Introduction
    This proposal is designed to reduce greenhouse gas (GHG) emissions
from light-duty vehicles. This section provides monetized estimates of
some of the economic benefits of this proposal's projected GHG
emissions reductions.\358\ The total benefit estimates were calculated
by multiplying a marginal dollar value (i.e., cost per ton) of carbon
emissions, also referred to as ``social cost of carbon'' (SCC), by the
anticipated level of emissions reductions in tons. We request comment
on the approach used to estimate the set of SCC values used for this
coordinated proposal as well as the other options considered.
---------------------------------------------------------------------------

    \358\ The marginal and total benefit estimates presented in this
section are limited to the impacts that can be monetized. Section
III.F.2 of this preamble discusses the physical impacts of climate
change, some of which are not monetized and are therefore omitted
from the monetized benefits discussed here.
---------------------------------------------------------------------------

    The estimates presented here are interim values. EPA and other
agencies will continue to explore the underlying assumptions and issues.
    As discussed below, the interim dollar estimates of the SCC
represent a partial accounting of climate change impacts. The
quantitative account presented here is accompanied by a qualitative
appraisal of climate-related impacts presented elsewhere in this
proposal. For example, Section III.F.2 of the preamble presents a
summary of the impacts and risks of climate change projected in the
absence of actions to mitigate GHG emissions. Section III.F.2 is based
on EPA documents that synthesize major findings from the best available
scientific assessments of the scientific literature that have gone
through rigorous and transparent peer review, including the major
assessment reports of both the Intergovernmental Panel on Climate
Change (IPCC) and the U.S. Climate Change Science Program.\359\
---------------------------------------------------------------------------

    \359\ U.S. Environmental Protection Agency, ``Advance Notice of
Proposed Rulemaking for Greenhouse Gases Under the Clean Air Act,
Technical Support Document on Benefits of Reducing GHG Emissions,''
June 2008. See www.regulations.gov and search for ID ``EPA-HQ-OAR-
2008-0138-0078.''
---------------------------------------------------------------------------

    The rest of this preamble section will provide the basis for the
interim SCC values, and the estimates of the total climate-related
benefits of the proposed rule that follow from these interim values.
b. Derivation of Interim Social Cost of Carbon Values
    The ``social cost of carbon'' (SCC) is intended to be a monetary
measure of the incremental damage resulting from carbon dioxide
(CO₂) emissions, including (but not limited to) net
agricultural productivity loss, human health effects, property damages
from sea level rise, and changes in ecosystem services. Any effort to
quantify and to monetize the consequences associated with climate
change will raise serious questions of science, economics, and ethics.
But with full regard for the limits of both quantification and
monetization, the SCC can be used to provide an estimate of the social
benefits of reductions in GHG emissions.
    For at least three reasons, any particular figure will be
contestable. First, scientific and economic knowledge about the impacts
of climate change continues to grow. With new and better information
about relevant questions, including the cost, burdens, and possibility
of adaptation, current estimates will inevitably change over time.
Second, some of the likely and potential damages from climate change--
for example, the loss of endangered species--are generally not included
in current SCC estimates. These omissions may turn out to be
significant, in the sense that they may mean that the best current
estimates are too low. As noted by the IPCC Fourth Assessment Report,
``It is very likely that globally aggregated figures underestimate the
damage costs because they cannot include many non-quantifiable
impacts.'' \360\ Third, when economic efficiency criteria, under
specific assumptions, are juxtaposed with ethical considerations, the
outcome may be controversial.\361\ These ethical considerations,
including those involving the treatment of future generations, should
and will also play a role in judgments about the SCC (see in particular
the discussion of the discount rate, below).
---------------------------------------------------------------------------

    \360\ IPCC WGII. 2007. Climate Change 2007--Impacts, Adaptation
and Vulnerability Contribution of Working Group II to the Fourth
Assessment Report of the IPCC. See EPA Docket, EPA-HQ-OAR-2009-0472.
    \361\ See, e.g., Discounting and Intergenerational Equity (Paul
Portney and John P. Weyant eds. 1999).
---------------------------------------------------------------------------

    To date, SCC estimates presented in recent regulatory documents
have varied within and among agencies, including DOT, DOE, and EPA. For
example, a regulation proposed by DOT in 2008 assumed a value of $7 per
metric ton CO₂ (2006$) for 2011 emission reductions (with a
range of $0-14 for sensitivity analysis; see EPA Docket, EPA-HQ-OAR-
2009-0472).\362\

[[Page 49612]]

A regulation proposed by DOE in 2009 used a range of $0-$20 (2007$).
Both of these ranges were designed to reflect the value of damages to
the United States resulting from carbon emissions, or the ``domestic''
SCC. In the final MY2011 CAFE EIS, DOT used both a domestic SCC value
of $2/tCO₂ and a global SCC value of $33/tCO₂
(with sensitivity analysis at $80/tCO₂) (in 2006 dollars for
2007 emissions), increasing at 2.4% per year thereafter. The final
MY2011 CAFE rule also presented a range from $2 to $80/tCO₂
(see EPA Docket, EPA-HQ-OAR-2009-0472, for the MY2011 EIS and final
rule). EPA's Advance Notice of Proposed Rulemaking for Greenhouse Gases
discussed the benefits of reducing GHG emissions and identified what it
described as ``very preliminary'' SCC estimates ``subject to revision''
that spanned three orders of magnitude. EPA's global mean values were
$68 and $40/tCO₂ for discount rates of 2% and 3%
respectively (in 2006 real dollars for 2007 emissions).\363\
---------------------------------------------------------------------------

    \362\ For the purposes of this discussion, we present all values
of the SCC as the cost per metric ton of CO₂ emissions.
Some discussions of the SCC in the literature use an alternative
presentation of a dollar per metric ton of carbon. The standard
adjustment factor is 3.67, which means, for example, that a SCC of
$10 per ton of CO₂ would be equivalent to a cost of
$36.70 for a ton of carbon emitted. Unless otherwise indicated, a
``ton'' refers to a metric ton.
    \363\ 73 FR 44416 (July 30, 2008). EPA, ``Advance Notice of
Proposed Rulemaking for Greenhouse Gases Under the Clean Air Act,
Technical Support Document on Benefits of Reducing GHG Emissions,''
June 2008. www.regulations.gov. Search for ID ``EPA-HQ-OAR-2008-
0318-0078.
---------------------------------------------------------------------------

    The current Administration has worked to develop a transparent
methodology for selecting a set of interim SCC estimates to use in
regulatory analyses until a more comprehensive characterization of the
SCC is developed. This discussion proposes a set of values for the
interim social cost of carbon resulting from this methodology. It
should be emphasized that the analysis here is preliminary. This
proposed joint rulemaking presents SCC estimates that reflect the
Administration's current understanding of the relevant literature and
will be used for the short-term while an interagency group develops a
more comprehensive characterization of the distribution of SCC values
for future economic and regulatory analyses. The interim values should
not be viewed as an expectation about the results of the longer-term
process. The Administration is seeking comment in this proposed rule on
all of the scientific, economic, and ethical issues before establishing
improved estimates for use in future rulemakings.
    The outcomes of the Administration's process to develop interim
values are judgments in favor of (a) global rather than domestic
values, (b) an annual growth rate of 3%, and (c) interim global SCC
estimates for 2007 (in 2007 dollars) of $56, $34, $20, $10, and $5 per
ton of CO₂. The proposed figures are based on the following judgments.
i. Global and Domestic Measures
    Because of the distinctive nature of the climate change problem, we
present both a global SCC and a fraction of that value that represents
impacts that may occur within the borders of the U.S. alone, or a
``domestic'' SCC, but fix our attention on the global measure. This
approach represents a departure from past practices, which relied, for
the most part, on domestic measures. As a matter of law, both global
and domestic values are permissible; the relevant statutory provisions
are ambiguous and allow selection of either measure.\364\
---------------------------------------------------------------------------

    \364\ It is true that Federal statutes are presumed not to have
extraterritorial effect, in part to ensure that the laws of the
United States respect the interests of foreign sovereigns. But use
of a global measure for the SCC does not give extraterritorial
effect to Federal law and hence does not intrude on such interests.
---------------------------------------------------------------------------

    It is true that under OMB guidance, analysis from the domestic
perspective is required, while analysis from the international
perspective is optional. The domestic decisions of one nation are not
typically based on a judgment about the effects of those decisions on
other nations. But the climate change problem is highly unusual in the
sense that it involves (a) a global public good in which (b) the
emissions of one nation may inflict significant damages on other
nations and (c) the United States is actively engaged in promoting an
international agreement to reduce worldwide emissions.
    In these circumstances, we believe that the global measure is
preferred. Use of a global measure reflects the reality of the problem
and is consistent with the continuing efforts of the United States to
ensure that emissions reductions occur in many nations.
    Domestic SCC values are also presented. The development of a
domestic SCC is greatly complicated by the relatively few region- or
country-specific estimates of the SCC in the literature. One potential
source of estimates comes from EPA's ANPR Benefits TSD, using the
Climate Framework for Uncertainty, Negotiation and Distribution (FUND)
model.\365\ The resulting estimates suggest that the ratio of domestic
to global benefits varies with key parameter assumptions. With a 3%
discount rate, for example, the U.S. benefit is about 6% of the global
benefit of GHG reductions for the ``central'' (mean) FUND results,
while, for the corresponding ``high'' estimates associated with a
higher climate sensitivity and lower global economic growth, the U.S.
benefit is less than 4% of the global benefit. With a 2% discount rate,
the U.S. share is about 2-5% of the global estimate. Comments are
requested on whether the share of U.S. SCC is correlated with the
discount rate.
---------------------------------------------------------------------------

    \365\ 73 FR 44416 (July 30, 2008). EPA, ``Advance Notice of
Proposed Rulemaking for Greenhouse Gases Under the Clean Air Act,
Technical Support Document on Benefits of Reducing GHG Emissions,''
June 2008. www.regulations.gov. Search for ID ``EPA-HQ-OAR-2008-
0318-0078.
---------------------------------------------------------------------------

    Based on this available evidence, an interim domestic SCC value
equal to 6% of the global damages is proposed. This figure is around
the middle of the range of available estimates cited above. It is
recognized that the 6% figure is approximate and highly speculative.
Alternative approaches will be explored before establishing improved
values for future rulemakings. However, it should be noted that it is
difficult to apportion global benefits to different regions. For
example, impacts outside the U.S. border can have significant welfare
implications for U.S. populations (e.g. tourism, disaster relief) and
if not included, these omissions will lead to an underestimation of the
``domestic'' SCC. We request comment on this issue.
ii. Filtering Existing Analyses
    There are numerous SCC estimates in the existing literature, and it
is reasonable to make use of those estimates in order to produce a
figure for current use. A starting point is provided by the meta-
analysis in Richard Tol, 2008.\366\ With that starting point, the
Administration proposes to ``filter'' existing SCC estimates by using
those that (1) are derived from peer-reviewed studies; (2) do not
weight the monetized damages to one country more than those in other
countries; (3) use a ``business as usual'' climate scenario; and (4)
are based on the most recent published version of each of the three
major integrated assessment models (IAMs): FUND, Policy Analysis for
the Greenhouse Effect (PAGE), and DICE.
---------------------------------------------------------------------------

    \366\ Richard Tol, The Social Cost of Carbon: Trends, Outliers,
and Catastrophes, Economics: The Open-Access, Open-Assessment E-
Journal, Vol. 2, 2008-25. http://www.economics-ejournal.org/
economics/journalarticles/2008-25  (2008). See also EPA Docket, EPA-
HQ-OAR-2009-0472.
---------------------------------------------------------------------------

    Proposal (1) is based on the view that those studies that have been
subject to peer review are more likely to be reliable than those that
have not. Proposal (2) avoids treating the citizens of one nation (or
different citizens within the U.S.) differently on the basis

[[Page 49613]]

of income considerations, which some may find controversial and in any
event would significantly complicate that analysis. In addition, that
approach is consistent with the potential compensation tests of Kaldor
(1939) and Hicks (1940), which form the conceptual foundations of
benefit-cost analysis and use unweighted sums of willingness to pay.
Finally, this is the approach used in rulemakings across a variety of
settings and consequently keeps USG policy consistent across contexts.
    Proposal (3) stems from the judgment that as a general rule, the
proper way to assess a policy decision is by comparing the
implementation of the policy against a counterfactual state where the
policy is not implemented. In addition, our expectation is that most
policies to be evaluated using these interim SCC estimates will
constitute sufficiently small changes to the larger economy to make it
safe to assume that the marginal benefits of emissions reductions will
not change between the baseline and policy scenarios.
    Proposal (4) is based on four complementary judgments. First, the
FUND, PAGE, and DICE models now stand as the most comprehensive and
reliable efforts to measure the economic damages from climate change.
Second, the latest versions of the three IAMs are likely to reflect the
most recent evidence and learning, and hence they are presumed to be
superior to those that preceded them.\367\
---------------------------------------------------------------------------

    \367\ However, it is acknowledged that the most recently
published results do not necessarily repeat prior modeling exercises
with an updated model, so valuable information may be lost, for
instance, estimates of the SCC using specific climate sensitivities
or economic scenarios. In addition, although some older model
versions were used to produce estimates between 1996 and 2001, there
have been no significant modeling paradigm changes since 1996.
---------------------------------------------------------------------------

    Third, any effort to choose among them, or to reject one in favor
of the others, would be difficult to defend at the present time. In the
absence of a clear reason to choose among them, it is reasonable to
base the SCC on all of them. Fourth, in light of the uncertainties
associated with the SCC, a range of values is more representative and
the additional information offered by different models should be taken
into account.
iii. Use a Model-Weighted Average of the Estimates at Each Discount Rate
    We have just noted that at this time, a strong reason to prefer any
of the three major IAMs (FUND, PAGE, and DICE) over the others has not
been identified. To address the concern that certain models not be
given unequal weight relative to the others, the estimates are based on
an equal weighting of the means of the estimates from each of the
models. Among estimates that remain after applying the filter, we begin
by taking the average of all estimates within a model. The estimated
SCC is then calculated as the average of the three model-specific
averages. This approach is used to ensure that models with a greater
number of published results do not exert unequal weight on the interim
SCC estimates.
    It should be noted, however, that the resulting set of SCC
estimates does not provide information about variability among or
within models except in so far as they have different discounting
assumptions. Comment is sought on whether model-weighting averaging of
published estimates is appropriate for developing interim SCC estimates.
iv. Apply a 3% Annual Growth Rate to the Chosen SCC Values
    SCC is expected to increase over time, because future emissions are
expected to produce larger incremental damages as physical and economic
systems become more stressed as the magnitude of climate change
increases. Indeed, an implied growth rate in the SCC can be produced by
most of the models that estimate economic damages caused by increased
GHG emissions in future years. But neither the rate itself nor the
information necessary to derive its implied value is commonly reported.
In light of the limited amount of debate thus far about the appropriate
growth rate of the SCC, applying a rate of 3% per year seems
appropriate at this stage. This value is consistent with the range
recommended by IPCC (2007) and close to the latest published estimate
(Hope 2008) (see EPA Docket, EPA-HQ-OAR-2009-0472, for both citations).
(1) Discount Rates
    For estimation of the benefits associated with the mitigation of
climate change, one of the most complex issues involves the appropriate
discount rate. OMB's current guidance offers a detailed discussion of
the relevant issues and calls for discount rates of 3% and 7%. It also
permits a sensitivity analysis with low rates (1-3%) for
intergenerational problems: ``If your rule will have important
intergenerational benefits or costs you might consider a further
sensitivity analysis using a lower but positive discount rate in
addition to calculating net benefits using discount rates of 3 and 7
percent.'' \368\
---------------------------------------------------------------------------

    \368\ See OMB Circular A-4, pp. 35-36, citing Portney and
Weyant, eds. (1999), Discounting and Intergenerational Equity,
Resources for the Future, Washington, DC. See EPA Docket, EPA-HQ-OAR-2009-0472.
---------------------------------------------------------------------------

    The choice of a discount rate, especially over long periods of
time, raises highly contested and exceedingly difficult questions of
science, economics, philosophy, and law. See, e.g., William Nordhaus,
The Challenge of Global Warming (2008); Nicholas Stern, The Economics
of Climate Change (2008); Discounting and Intergenerational Equity
(Paul Portney and John Weyant eds. 1999), in the EPA Docket, EPA-HQ-
OAR-2009-0472. Under imaginable assumptions, decisions based on cost-
benefit analysis with high discount rates might harm future
generations--at least if investments are not made for the benefit of
those generations. See Robert Lind, Analysis for Intergenerational
Discounting, id. at 173, 176-177 (1999), in the EPA Docket, EPA-HQ-OAR-
2009-0472. It is not clear that future generations would be willing to
trade environmental quality for consumption at the same rate as the
current generations. It is also possible that the use of low discount
rates for particular projects might itself harm future generations, by
diverting resources from private or public sector investments with
higher rates of return for future generations. In the context of
climate change, questions of intergenerational equity are especially important.
    Because of the substantial length of time in which CO₂
and other GHG emissions reside in the atmosphere, choosing a high
discount rate could result in irreversible changes in CO₂
concentrations, and possibly irreversible climate changes (unless
substantial reductions in short-lived climate forcing emissions are
achieved). Even if these changes are reversible, delaying mitigation
efforts could result in substantially higher costs of stabilizing
CO₂ concentrations. On the other hand, using too low a
discount rate in benefit-cost analysis may suggest some potentially
economically unwarranted investments in mitigation. It is also possible
that the use of low discount rates for particular projects might itself
harm future generations, by ensuring that resources are not used in a
way that would greatly benefit them. We invite comment on the methods
used to select discount rates for application in deriving SCC values,
and in particular, application of the Newell and Pizer work on
uncertainty in discount rates in developing the SCC used in evaluating
the climate-related benefits of this proposal. Comments are requested
on the use of the rates discussed in this preamble and on alternative
rates. We

[[Page 49614]]

also invite comment on how to best address the ethical and policy
concerns in the context of selecting the appropriate discount rate.
    Reasonable arguments support the use of a 3% discount rate. First,
that rate is among the two figures suggested by OMB guidance, and hence
it fits with existing national policy. Second, it is standard to base
the discount rate on the compensation that people receive for delaying
consumption, and the 3% is close to the risk-free rate of return,
proxied by the return on long term inflation-adjusted U.S. Treasury
Bonds, as of this writing. Although these rates are currently closer to
2.5%, the use of 3% provides an adjustment for the liquidity premium
that is reflected in these bonds' returns. However, this approach does
not adjust for the significantly longer time horizon associated with
climate change impacts. It could also be argued that the discount rate
should be lower than 3% if the benefits of climate mitigation policies
tend to be higher than expected in time periods when the returns to
investments in rest of the economy are lower than normal.
    At the same time, others would argue that a 5% discount rate can be
supported. The argument relies on several assumptions. First, this rate
can be justified by reference to the level of compensation for delaying
consumption, because it fits with market behavior with respect to
individuals' willingness to trade-off consumption across periods as
measured by the estimated post-tax average real returns to risky
private investments (e.g., the S&P 500). In the climate setting, the 5%
discount rate may be preferable to the riskless rate because the
benefits to mitigation are not known with certainty. In principal, the
correct discount rate would reflect the variance in payoff from climate
mitigation policy and the correlation between the payoffs of the policy
and the broader economy.\369\
---------------------------------------------------------------------------

    \369\ Specifically, if the benefits of the policy are highly
correlated with the returns from the broader economy, then the
market rate should be used to discount the benefits. If the benefits
are uncorrelated with the broader economy the long term government
bond rate should be applied. Furthermore, if the benefits are
negatively correlated with the broader economy, a rate less than
that on long term government bonds should be used (Lind, 1982 pp. 89-90).
---------------------------------------------------------------------------

    Second, 5%, and not 3%, is roughly consistent with estimates
implied by inputs to the theoretically derived Ramsey equation
presented below, which specifies the optimal time path for consumption.
That equation specifies the optimal discount rate as the sum of two
components. The first term (the product of the elasticity of the
marginal utility of consumption and the growth rate of consumption)
reflects the fact that consumption in the future is likely to be higher
than consumption today, so diminishing marginal utility implies that
the same monetary damage will cause a smaller reduction of utility in
the future. Standard estimates of this term from the economics
literature are in the range of 3%-5%.\370\ The second component
reflects the possibility that a lower weight should be placed on
utility in the future, to account for social impatience or extinction
risk, which is specified by a pure rate of time preference (PRTP). A
common estimate of the PRTP is 2%, though some observers believe that a
principle of intergenerational equity suggests that the PRTP should be
close to zero. It follows that discount rate of 5% is near the middle
of the range of values that are able to be derived from the Ramsey
equation.\371\
---------------------------------------------------------------------------

    \370\ For example, see: Arrow KJ, Cline WR, Maler K-G,
Munasinghe M, Squitieri R, Stiglitz JE. 1996. Intertemporal equity,
discounting, and economic efficiency. Chapter 4 in Economic and
Social Dimensions of Climate Change: Contribution of Working Group
III to the Second Assessment Report, Summary for Policy Makers.
Cambridge: Cambridge University Press; Dasgupta P. 2008. Discounting
climate change. Journal of Risk and Uncertainty 37:141-169; Hoel M,
Sterner T. 2007. Discounting and relative prices. Climatic Change
84:265-280; Nordhaus WD. 2008. A Question of Balance: Weighing the
Options on Global Warming Policies. New Haven, CT: Yale University
Press; Stern N. 2008. The economics of climate change. The American
Economic Review 98(2):1-37. See EPA Docket, EPA-HQ-OAR-2009-0472.
    \371\ Sterner and Persson (2008) note that a consistent
treatment of the marginal utility of consumption would require that
if higher discount rates are justified by the diminishing marginal
utility of consumption, e.g., a dollar of damages is worth less to
future generations because they have greater income, then so-called
equity weights should be used to account for the higher value that
countries with lower income would place on a dollar of damages
relative to the U.S. This is a consistent and logical outcome of
application of the Ramsey framework. Because the distribution of
climate change related damages is expected to be skewed towards
developing nations with lower incomes, this can have significant
implications for estimates of total global SCC if the Ramsey
framework is used to derive discount rates. See EPA Docket, EPA-HQ-
OAR-2009-0472 for Sterner and Persson (2008).
---------------------------------------------------------------------------

    It is recognized that the arguments above--for use of market
behavior and the Ramsey equation--face objections in the context of
climate change, and of course there are alternative approaches. In
light of climate change, it is possible that consumption in the future
will not be higher than consumption today, and if so, the Ramsey
equation will suggest a lower figure. The historical evidence is
consistent with rising consumption over time.\372\
---------------------------------------------------------------------------

    \372\ However, because climate change impacts may be outside the
bounds of historical evidence, predictions about future growth in
consumption based on past experience may be inaccurate.
---------------------------------------------------------------------------

    Some critics contend that using observed interest rates for inter-
generational decisions imposes current preferences on future
generations. For intergenerational equity, they argue that the discount
rate should be below market rates to correct for market distortions and
inefficiencies in intergenerational transfers of wealth (which are
presumed to compensate future generations for damage), and to treat
generations equitably based on ethical principles (see Broome 2008 in
the EPA Docket, EPA-HQ-OAR-2009-0472).\373\
---------------------------------------------------------------------------

    \373\ For relevant discussion, see Arrow, K.J., W.R. Cline, K-G
Maler, M. Munasinghe, R. Squiteri, J.E.Stiglitz, 1996.
``Intertemporal equity, discounting and economic efficiency,'' in
Climate Change 1995: Economic and Social Dimensions of Climate
Change, Contribution of Working Group III to the Second Assessment
Report of the Intergovernmental Panel on Climate Change. See also
Weitzman, M.L., 1999, in Portney P.R. and Weyant J.P. (eds.),
Discounting and Intergenerational Equity, Resources for the Future,
Washington, DC. See EPA Docket, EPA-HQ-OAR-2009-0472.
---------------------------------------------------------------------------

    Additionally, some analyses attempt to deal with uncertainty with
respect to interest rates over time. We explore below how this might be
done.\374\
---------------------------------------------------------------------------

    \374\ Richard Newell and William Pizer, Discounting the distant
future: how much do uncertain rates increase valuations? J. Environ.
Econ. Manage. 46 (2003) 52-71. See EPA Docket, EPA-HQ-OAR-2009-0472.
---------------------------------------------------------------------------

(2) Proposed Interim Estimates
    The application of the methodology outlined above yields interim
estimates of the SCC that are reported in Table III.H.6-1. These
estimates are reported separately using 3% and 5% discount rates. The
cells are empty in rows 10 and 11, because these studies did not report
estimates of the SCC at a 3% discount rate. The model-weighted means
are reported in the final or summary row; they are $34 per
tCO₂ at a 3% discount rate and $5 per tCO₂ with a
5% discount rate.

[[Page 49615]]

   Table III.H.6-1--Global Social Cost of Carbon (SCC) Estimates ($/tCO2 in 2007 (2007$)), Based on 3% and 5%
                                               Discount Rates \a\
----------------------------------------------------------------------------------------------------------------
                                 Model             Study \b\         Climate Scenario        3%           5%
----------------------------------------------------------------------------------------------------------------
1........................  FUND.............  Anthoff et al. 2009  FUND default.......            6           -1
2........................  FUND.............  Anthoff et al. 2009  SRES A1b...........            1           -1
3........................  FUND.............  Anthoff et al. 2009  SRES A2............            9           -1
4........................  FUND.............  Link and Tol 2004..  No THC.............           12            3
5........................  FUND.............  Link and Tol 2004..  THC continues......           12            2
6........................  FUND.............  Guo et al. 2006....  Constant PRTP......            5           -1
7........................  FUND.............  Guo et al. 2006....  Gollier discount 1.           14            0
8........................  FUND.............  Guo et al. 2006....  Gollier discount 2.            7           -1
                                                                   FUND Mean..........         8.47            0
9........................  PAGE.............  Wahba & Hope 2006..  A2-scen............           59            7
10.......................  PAGE.............  Hope 2006..........  ...................  ...........            7
11.......................  DICE.............  Nordhaus 2008......  ...................  ...........            8
Summary..................                                          Model-weighted Mean           34            5
----------------------------------------------------------------------------------------------------------------
\a\ The sample includes all peer reviewed, non-equity-weighted estimates included in Tol (2008), Nordhaus
  (2008), Hope (2008), and Anthoff et al. (2009), that are based on the most recent published version of FUND,
  PAGE, or DICE and use business-as-usual climate scenarios.375 376 All values are based on the best available
  information from the underlying studies about the base year and year dollars, rather than the Tol (2008)
  assumption that all estimates included in his review are 1995 values in 1995$. All values were updated to 2007
  using a 3% annual growth rate in the SCC, and adjusted for inflation using GDP deflator.
\b\ See EPA Docket, EPA-HQ-OAR-2009-0472, for each study.

    In this proposal, benefits of reducing GHG emissions have been
estimated using global SCC values of $34 and $5 as these represent the
estimates associated with the 3% and 5% discount rates,
respectively.\377\ The 3% and 5% estimates have independent appeal and
at this time a clear preference for one over the other is not
warranted. Thus, we have also included--and centered our current
attention on--the average of the estimates associated with these
discount rates, which is $20. (Based on the $20 global value, the
approximate domestic fraction of these benefits would be $1.20 per ton
of CO₂ assuming that domestic benefits are 6% of the global benefits.)
---------------------------------------------------------------------------

    \375\ Most of the estimates in Table 1 rely on climate scenarios
developed by the Intergovernmental Panel on Climate Change (IPCC).
The IPCC published a new set of scenarios in 2000 for use in the
Third Assessment Report (Special Report on Emissions Scenarios--
SRES). The SRES scenarios define four narrative storylines: A1, A2,
B1 and B2, describing the relationships between the forces driving
greenhouse gas and aerosol emissions and their evolution during the
21st century for large world regions and globally. Each storyline
represents different demographic, social, economic, technological,
and environmental developments that diverge in increasingly
irreversible ways. The storylines are summarized in the SRES report
(Nakicenovic et al., 2000; see also http://
sedac.ciesin.columbia.edu/ddc/sres/ ) (see EPA Docket, EPA-HQ-OAR-
2009-0472). Although they were intended to represent BAU scenarios,
at this point in time the B1 and B2 storylines are widely viewed as
representing policy cases rather than business-as-usual projections,
estimates derived from these scenarios to be less appropriate for
use in benefit-cost analysis. They are therefore excluded.
    \376\ Guo et al. (2006) report estimates based on two Gollier
discounting schemes. The Gollier discounting assumes complex
specifications about individual utility functions and risk
preferences. After various conditions are satisfied, declining
social discount rates emerge. Gollier Discounting Scheme 1 employs a
certainty-equivalent social rate of time preference (SRTP) derived
by assuming the regional growth rate is equally likely to be 1%
above or below the original forecast growth rate. Gollier
Discounting Scheme 2 calculates a certainty-equivalent social rate
of time preference (SRTP) using five possible growth rates, and
applies the new SRTP instead of the original. Hope (2008) conducts
Monte Carlo analysis on the PRTP component of the discount rate. The
PRTP is modeled as a triangular distribution with a min value of 1%/
yr, a most likely value of 2%/yr, and a max value of 3%/yr. See EPA
Docket, EPA-HQ-OAR-2009-0472 for the studies.
    \377\ It should be noted that reported discount rates may not be
consistently derived across models or specific applications of
models: While the discount rate may be identical, it may reflect
different assumptions about the individual components of the Ramsey
equation identified earlier.
---------------------------------------------------------------------------

    The distinctions between sets of estimates generated using
different discount rates are due only in part to discount rate
differences, because the models and parameters used to generate the
estimates in the sets associated with different discount rates also vary.
    It is true that there is uncertainty about interest rates over long
time horizons. Recognizing that point, Newell and Pizer (2003) have
made a careful effort to adjust for that uncertainty (see EPA Docket,
EPA-HQ-OAR-2009-0472). The Newell-Pizer approach models discount rate
uncertainty as something that evolves over time.\378\ This is a
different way to model discount rate uncertainty than the approach
outlined above, which assumes there is a single discount rate with
equal probability of 3% and 5%. Since Newell and Pizer (2003) is a
relatively recent contribution to the literature, estimates based on
this method are included with the aim of soliciting comment.
---------------------------------------------------------------------------

    \378\ In contrast, an alternative approach based on Weitzman
(2001) would assume that there is a constant discount rate that is
uncertain and represented by a probability distribution. The Newell
and Pizer, and Weitzman approaches are relatively recent
contributions and we invite comment on the advantages and
disadvantages of each. See EPA Docket, EPA-HQ-OAR-2009-0472.
---------------------------------------------------------------------------

    Table III.H.6-2 reports on the application of the Newell-Pizer
adjustments. The precise numbers depend on the assumptions about the
data generating process that governs interest rates. Columns (1a) and
(1b) assume that ``random walk'' model best describes the data and uses
3% and 5% discount rates, respectively. Columns (2a) and (2b) repeat
this, except that it assumes a ``mean-reverting'' process. While the
empirical evidence does not rule out a mean-reverting model, Newell and
Pizer find stronger empirical support for the random walk model. EPA
solicits comment on these and other models for representing the
variation in interest rates over time.

[[Page 49616]]

  Table III.H.6-2--Global Social Cost of Carbon (SCC) Estimates ($ per metric ton CO2 in 2007 (2007$)) a, Using
                     Newell & Pizer (2003) Adjustment for Future Discount Rate Uncertainty b
----------------------------------------------------------------------------------------------------------------
                                                                                 Random-walk     Mean-reverting
                                                                                    model             model
                             Model          Study \c\      Climate  scenario -----------------------------------
                                                                              3% (1a)  5% (1b)  3% (2a)  5% (2b)
----------------------------------------------------------------------------------------------------------------
1.....................  FUND..........  Anthoff et al.     FUND default.....       10        0        7       -1
                                         2009.
2.....................  FUND..........  Anthoff et al.     SRES A1b.........        2        0        1       -1
                                         2009.
3.....................  FUND..........  Anthoff et al.     SRES A2..........       15        0       10       -1
                                         2009.
4.....................  FUND..........  Link and Tol 2004  No THC...........       21        6       13        4
5.....................  FUND..........  Link and Tol 2004  THC continues....       21        4       13        2
6.....................  FUND..........  Guo et al. 2006..  Constant PRTP....        9        0        6       -1
7.....................  FUND..........  Guo et al. 2006..  Gollier discount        14        0       14        0
                                                            1.
8.....................  FUND..........  Guo et al. 2006..  Gollier discount         7       -1        7       -1
                                                            2.
                                                           FUND Mean........       12        1        9        0
9.....................  PAGE..........  Wahba & Hope 2006  A2-scen..........      100       13       65        8
10....................  PAGE..........  Hope 2006........  .................  .......       13  .......        8
11....................  DICE..........  Nordhaus 2008....  .................  .......       15  .......        9
Summary...............                                     Model-weighted          56       10       37        6
                                                            Mean.
----------------------------------------------------------------------------------------------------------------
\a\ The sample includes all peer reviewed, non-equity-weighted estimates included in Tol (2008), Nordhaus
  (2008), Hope (2008), and Anthoff et al. (2009), that are based on the most recent published version of FUND,
  PAGE, or DICE and use business-as-usual climate scenarios. All values are based on the best available
  information from the underlying studies about the base year and year dollars, rather than the Tol (2008)
  assumption that all estimates included in his review are 1995 values in 1995$. All values were updated to 2007
  using a 3% annual growth rate in the SCC, and adjusted for inflation using GDP deflator. See the Notes to
  Table III.H.6-1 for further details.
\b\ Assumes a starting discount rate of 3% or 5%. Newell and Pizer (2003) based adjustment factors are not
  applied to estimates from Guo et al. (2006) that use a different approach to account for discount rate
  uncertainty (rows 7-8).
Note that the correction factor from Newell and Pizer is based on the DICE model. The proper adjustment may
  differ for other integrated assessment models that produce different time schedules of marginal damages. We
  would expect this difference to be minor.
\c\ See EPA Docket, EPA-HQ-OAR-2009-0472, for each study.

    The resulting estimates of the social cost of carbon are
necessarily greater. When the adjustments from the random walk model
are applied, the estimates of the social cost of carbon are $10 and $56
per ton of CO₂, with the 5% and 3% discount rates,
respectively. The application of the mean-reverting adjustment yields
estimates of $6 and $37. Relying on the random walk model, analyses are
also conducted with the value of the SCC set at $10 and $56.
(3) Caveats
    There are at least four caveats to the approach outlined above.
    First, and as noted, the existing IAMs do not currently
individually account for and assign value to all of the important
physical and other impacts of climate change that are recognized in the
climate change literature.\379\ The impacts of climate change are
expected to be widespread, diverse, and heterogeneous. In addition, the
exact magnitude of these impacts is uncertain, because of the inherent
randomness in the Earth's atmospheric processes, the U.S. and global
economies, and the behaviors of current and future populations. To this
extent, as emphasized by the IPCC, SCC estimates are ``very likely''
underestimated.\380\ In addition, the SCC approach also likely
underestimates the value of GHG reductions because the marginal values
apply only to CO₂ emissions, which have different impacts
than non-CO₂ emissions because of variances in atmospheric
lifetimes and radiative forcing.\381\ Although it is likely that our
capability to quantify and monetize impacts will improve with time, it
is also likely that even in future applications, a number of
potentially significant benefits categories will remain unmonetized. In
order to capture the benefits of mitigation these non-monetized
benefits should be discussed along with monetized benefits based on the SCC.
---------------------------------------------------------------------------

    \379\ Examples of impacts that are difficult to monetize, and
have generally not been included in SCC estimates, include risks
from extreme weather (death, disease, agricultural damage, and other
economic damage from droughts, floods and wildfires) and possible
long-term catastrophic events, such as collapse of the West
Antarctic ice sheet or the release of large amounts of methane from
melting permafrost.
    \380\ IPCC WGII. 2007. Climate Change 2007--Impacts, Adaptation
and Vulnerability Contribution of Working Group II to the Fourth
Assessment Report of the IPCC. See EPA Docket, EPA-HQ-OAR-2009-0472.
    \381\ Radiative forcing is the change in the balance between
solar radiation entering the atmosphere and the Earth's radiation
going out. On average, a positive radiative forcing tends to warm
the surface of the Earth while negative forcing tends to cool the
surface. Greenhouse gases have a positive radiative forcing because
they absorb and emit heat. See http://www.epa.gov/climatechange/
science/recentac.html for more general information about GHGs and
climate science. See EPA Docket, EPA-HQ-OAR-2009-0472.
---------------------------------------------------------------------------

    Second, in the opposite direction, it is unlikely that the damage
estimates adequately account for the directed technological change that
climate change will cause. In particular, climate change will increase
the return on investment to develop technologies that allow individuals
to cope with climate change. For example, it is likely that scientists
will develop crops that are better able to withstand high temperatures.
In this respect, the current estimates may overstate the likely
quantified damages, though the costs associated with the investments in
adaptive technologies must also be considered (technologies must also
be included in the calculations, as the benefits should reflect net
welfare changes to society).
    Third, there has been considerable recent discussion of the risk of
catastrophic impacts and of how best to account for worst-case
scenarios. Recent work by Weitzman (2009) specifies some conditions
under which the possibility of catastrophe would undermine the use of
IAMs and conventional cost-benefit analysis.\382\ This research
requires further exploration before its generality is known and the
proper way to incorporate it into regulatory reviews is understood. We
also request comments on approaches for measuring the premium
associated with reductions in

[[Page 49617]]

climate-related risks such as catastrophic events.
---------------------------------------------------------------------------

    \382\ Weitzman, Martin, 2009. On Modeling and Interpreting the
Economics of Catastrophic Climate Change. Review of Economics and
Statistics 9(1): 1-19. See EPA Docket, EPA-HQ-OAR-2009-0472.
---------------------------------------------------------------------------

    Fourth, it is also worth noting that the SCC estimates are only
relevant for incremental policies relative to the projected baselines,
which capture business-as-usual scenarios. To evaluate non-marginal
changes, such as might occur if the U.S. acts in tandem with other
nations, it might be necessary to go beyond the simple expedient of
using the SCC along the BAU path. This approach would require
explicitly calculating the total benefits in a move from the BAU
scenario to the policy scenario, without imposing the restriction that
the marginal benefit remains constant over this range.
(4) Other options
    The Administration considered other interim SCC options in addition
to the approach described above; we request comment on each of them.
One alternative option was to bring in SCC estimates in studies
published after 1995, rather than limiting the estimates to those in
studies relying on the most recent published version of each of the
three major integrated assessment models: PAGE, FUND, and DICE.
Although some older model versions (and old versions of other models)
were used to produce estimates between 1996 and 2001, it appears that
there have been no significant modeling paradigm changes since 1996.
    Another option was to select a range of SCC values for separate
discount rates. For example, sensitivity analysis could be conducted at
the lowest and highest SCC values reported in the filtered set of
estimates for each discount rate considered. If considering SCC
estimates from studies published after 1995 and a discount rate of 2
percent, this option would result in a range of SCC values of $5/t-
CO₂ to $260/t-CO₂ (2007 emissions in 2007 dollars);
at a 3 percent discount rate, the range would be $0 to $58/t-CO₂.
    Finally, we considered the possibility that different assumptions
under the Ramsey framework, such as placing approximately equal weight
on the welfare of current and future generations, would imply a lower
discount rate, such as 2%. The Newell and Pizer (2003) method applied
to recent long-term risk free rates would likewise be approximately
consistent with a certainty equivalent rate of 2%.\383\
---------------------------------------------------------------------------

    \383\ Specifically, Newell and Pizer (2003) found that modeling
of uncertainty in economic growth causes the effective discount rate
to decline over time. When starting at a 4% discount rate, the
effective discount rate is 2% at 100 years and 1% at 200 years. See
EPA Docket, EPA-HQ-OAR-2009-0472.
---------------------------------------------------------------------------

(5) Ongoing SCC Development
    As noted, this is an emphatically interim SCC value. The judgments
described here will be subject to further scrutiny and exploration.
c. Application of Interim SCC Estimates to GHG Emissions Reductions
From This Proposed Rule
    The strategy underlying these joint proposals--to coordinate
Federal efforts to reduce GHGs--warrants consideration when assessing
the benefits. To be sure, while no single rule or action can
independently achieve the deep worldwide emissions reductions necessary
to halt and reverse the growth of GHGs. But the combined effects of
multiple strategies to reduce GHG emissions domestically and abroad
could make a major difference in the climate change impacts experienced
by future generations.\384\
---------------------------------------------------------------------------

    \384\ The Supreme Court recognized in Massachusetts v. EPA that
a single action will not on its own achieve all needed GHG
reductions, noting that ``[a]gencies, like legislatures, do not
generally resolve massive problems in one fell regulatory swoop.''
See Massachusetts v. EPA, 549 U.S. at 524 (2007). See EPA Docket,
EPA-HQ-OAR-2009-0472.
---------------------------------------------------------------------------

    The projected net GHG emissions reductions associated with the
proposal reflect an incremental change to projected total global
emissions. Therefore, as shown in Section III.F.3, the projected global
climate signal will be small but discernible--an incrementally lower
projected distribution of global mean surface temperatures.
    Given that the climate response is projected to be a marginal
change relative to the baseline climate, we estimate the marginal value
of changes in climate change impacts over time and use this value to
measure the monetized marginal benefits of the GHG emissions reductions
projected for this proposal.
    Accordingly, EPA and NHTSA have used the set of interim, global SCC
values described above to estimate the benefits of these coordinated
proposals. The interim SCC values, which reflect the Administration's
interim interpretation of the current literature, are $5 (based on a 5%
discount rate), $10 (5% using Newell-Pizer adjustment), $20 (average
SCC value from the average SCC estimates based on 5% and 3%), $34 (3%),
and $56 (3% using Newell-Pizer adjustment), in 2007 dollars, and are
based on a CO₂ emissions change of 1 metric ton in 2007.
Table III.H.6-3 presents the interim SCC values in other years in 2007
dollars. These values are presented as one of many considerations that
will inform the Administration's action on this proposed rule.

                                                          Table III.H.6-3--Interim SCC Schedule
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                            Interim SCC schedule (2007$) \a\
---------------------------------------------------------------------------------------------------------------------------------------------------------
                Discount rate assumption                       2007            2015            2020            2030            2040            2050
--------------------------------------------------------------------------------------------------------------------------------------------------------
5%......................................................              $5              $7              $8             $10             $14             $18
5% (Newell-Pizer) \b\...................................              10              13              15              20              27              37
Average SCC Values from 3% and 5%.......................              20              25              29              39              52              70
3%......................................................              34              43              50              67              90             120
3% (Newell-Pizer) \b\...................................              56              72              83             110             150             200
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ The SCC values are dollar-year and emissions-year specific. These values are presented in 2007$, for individual year of emissions. To determine
  values for years not presented in the table, use a 3% growth rate. SCC values represent only a partial accounting for climate impacts.
\b\ SCC values are adjusted based on Newell and Pizer (2003) to account to future uncertainty in discount rates. See EPA Docket, EPA-HQ-OAR-2009-0472.

    Tables III.H.6-4 to III.H.6-6 provide the annual benefits for each
year impacted by the proposed rule. As discussed above, marginal
benefits of GHG reductions are projected to grow over time. The tables
below summarize the total benefits for the lifetime of the rule, which
are calculated by using the five interim SCC values.
    Total monetized benefits in each specific year are calculated by

[[Page 49618]]

multiplying the marginal benefits estimates per metric ton of
CO₂ (the SCC) from Table III.H.6-3 by the reductions in
CO₂ for that year. Table III.H.6-5 approximates the total
monetized benefits for non-CO₂ GHGs by multiplying the SCC
value by the reductions in non-CO₂ GHGs for that year.
Marginal benefit estimates per metric ton of non-CO₂ GHGs
are currently unavailable, but work is on-going to monetize benefits
related to the mitigation of other non-CO₂ GHGs. Inclusion
of these benefits is planned for the final rule.

                                        Table III.H.6-4--Monetized GHG Benefits of Vehicle Program, CO2 Emissions
                                                                     [Million 2007$]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                             Emissions                                     Discount rate
                                                             reduction   -------------------------------------------------------------------------------
                          Year                               (million                       3% (Newell-     Average SCC                     5% (Newell-
                                                           metric tons)         3%            Pizer)      from 3% and 5%        5%            Pizer)
--------------------------------------------------------------------------------------------------------------------------------------------------------
2015....................................................            43.2          $1,900          $3,100          $1,100            $280            $560
2020....................................................             146           7,300          12,000           4,200           1,100           2,200
2030....................................................             289          19,000          32,000          11,000           2,900           5,900
2040....................................................             375          34,000          56,000          19,000           5,100          10,000
2050....................................................             470          57,000          95,000          33,000           8,600          17,000
--------------------------------------------------------------------------------------------------------------------------------------------------------


                            Table III.H.6-5--Monetized GHG Benefits of Vehicle Program, Non-CO2 Emissions in CO2-equivalents
                                                                     [Million 2007$]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                             Emissions                                     Discount rate
                                                             reduction   -------------------------------------------------------------------------------
                          Year                               (million                       3% (Newell-     Average SCC                     5% (Newell-
                                                           metric tons)         3%            Pizer)      from 3% and 5%        5%            Pizer)
--------------------------------------------------------------------------------------------------------------------------------------------------------
2015....................................................            5.86            $250            $400            $150             $38             $76
2020....................................................            17.7             880           1,500             510             130             270
2030....................................................            35.3           2,400           3,900           1,400             360             700
2040....................................................            42.7           3,800           6,400           2,200             580           1,200
2050....................................................            48.2           5,800           9,700           3,400             880           1,800
--------------------------------------------------------------------------------------------------------------------------------------------------------


                     Table III.H.6-6--Monetized GHG Benefits of Vehicle Program, Total CO2 and Non-CO2 Emissions in CO2-equivalents
                                                                   [Million 2007$] \a\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                             Emissions                                     Discount rate
                                                             reduction   -------------------------------------------------------------------------------
                          Year                               (million                       3% (Newell-     Average SCC                     5% (Newell-
                                                           metric tons)         3%            Pizer)      from 3% and 5%        5%            Pizer)
--------------------------------------------------------------------------------------------------------------------------------------------------------
2015....................................................            49.1          $2,100          $3,500          $1,200            $320            $640
2020....................................................             165           8,200          14,000           4,700           1,200           2,500
2030....................................................             325          22,000          36,000          12,000           3,300           6,600
2040....................................................             417          38,000          63,000          22,000           5,700          11,000
2050....................................................             518          63,000         100,000          36,000           9,500          19,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ Numbers may not add exactly from Tables III.H.6-4 and III.H.6-5 due to rounding.

7. Non-Greenhouse Gas Health and Environmental Impacts
    This section presents EPA's analysis of the non-GHG health and
environmental impacts that can be expected to occur as a result of the
proposed light-duty vehicle GHG rule. GHG emissions are predominantly
the byproduct of fossil fuel combustion processes that also produce
criteria and hazardous air pollutants. The vehicles that are subject to
the proposed standards are also significant sources of mobile source
air pollution such as direct PM, NO_X, VOCs and air toxics.
The proposed standards would affect exhaust emissions of these
pollutants from vehicles. They would also affect emissions from
upstream sources related to changes in fuel consumption. Changes in
ambient ozone, PM_2.5, and air toxics that would result from
the proposed standards are expected to affect human health in the form
of premature deaths and other serious human health effects, as well as
other important public health and welfare effects.
    It is important to quantify the health and environmental impacts
associated with the proposed standard because a failure to adequately
consider these ancillary co-pollutant impacts could lead to an
incorrect assessment of their net costs and benefits. Moreover, co-
pollutant impacts tend to accrue in the near term, while any effects
from reduced climate change mostly accrue over a time frame of several
decades or longer.
    EPA typically quantifies and monetizes the health and environmental
impacts related to both PM and ozone in its regulatory impact analyses
(RIAs), when possible. However, EPA was unable to do so in time for
this proposal. EPA attempts to make emissions and air quality modeling
decisions early in the analytical process so that we can complete the
photochemical air quality

[[Page 49619]]

modeling and use that data to inform the health and environmental
impacts analysis. Resource and time constraints precluded the Agency
from completing this work in time for the proposal. Instead, EPA is
using PM-related benefits-per-ton values as an interim approach to
estimating the PM-related benefits of the proposal. EPA also provides a
complete characterization of the health and environmental impacts that
will be quantified and monetized for the final rulemaking.
    This section is split into two sub-sections: the first presents the
PM-related benefits-per-ton values used to monetize the PM-related co-
benefits associated with the proposal; the second explains what PM- and
ozone-related health and environmental impacts EPA will quantify and
monetize in the analysis for the final rule. EPA bases its analyses on
peer-reviewed studies of air quality and health and welfare effects and
peer-reviewed studies of the monetary values of public health and
welfare improvements, and is generally consistent with benefits
analyses performed for the analysis of the final Ozone National Ambient
Air Quality Standard (NAAQS) and the final PM NAAQS analysis, as well
as the recent Portland Cement National Emissions Standards for
Hazardous Air Pollutants (NESHAP) RIA (U.S. EPA, 2009a), and
NO₂ NAAQS (U.S.> EPA, 2009b).385 386 387 388
---------------------------------------------------------------------------

    \385\ U.S. Environmental Protection Agency. (2008). Final Ozone
NAAQS Regulatory Impact Analysis. Prepared by: Office of Air and
Radiation, Office of Air Quality Planning and Standards. March.
    \386\ U.S. Environmental Protection Agency. October 2006. Final
Regulatory Impact Analysis (RIA) for the Proposed National Ambient
Air Quality Standards for Particulate Matter. Prepared by: Office of
Air and Radiation.
    \387\ U.S. Environmental Protection Agency (U.S. EPA). 2009a.
Regulatory Impact Analysis: National Emission Standards for
Hazardous Air Pollutants from the Portland Cement Manufacturing
Industry. Office of Air Quality Planning and Standards, Research
Triangle Park, NC. April. Available on the Internet at http://
www.epa.gov/ttn/ecas/regdata/RIAs/portlandcementria_4-20-09.pdf.
    \388\ U.S. Environmental Protection Agency (U.S. EPA). 2009b.
Proposed NO₂ NAAQS Regulatory Impact Analysis (RIA).
Office of Air Quality Planning and Standards, Research Triangle
Park, NC. April. Available on the Internet at http://www.epa.gov/
ttn/ecas/regdata/RIAs/proposedno2ria.pdf.
---------------------------------------------------------------------------

    Though EPA is characterizing the changes in emissions associated
with toxic pollutants, we will not be able to quantify or monetize the
human health effects associated with air toxic pollutants for either
the proposal or the final rule analyses. Please refer to Section III.G
for more information about the air toxics emissions impacts associated
with the proposed standards.
a. Economic Value of Reductions in Criteria Pollutants
    As described in Section III.G, the proposed standards would reduce
emissions of several criteria and toxic pollutants and precursors. In
this analysis, EPA estimates the economic value of the human health
benefits associated with reducing PM_2.5 exposure. Due to
analytical limitations, this analysis does not estimate benefits
related to other criteria pollutants (such as ozone, NO₂ or
SO₂) or toxics pollutants, nor does it monetize all of the
potential health and welfare effects associated with PM_2.5.
    This analysis uses a ``benefit-per-ton'' method to estimate a
selected suite of PM_2.5-related health benefits described
below. These PM_2.5 benefit-per-ton estimates provide the
total monetized human health benefits (the sum of premature mortality
and premature morbidity) of reducing one ton of directly emitted
PM_2.5, or its precursors (such as NO_X,
SO_X, and VOCs), from a specified source. Ideally, the human
health benefits would be estimated based on changes in ambient
PM_2.5 as determined by full-scale air quality modeling.
However, this modeling was not possible in the timeframe for this proposal.
    The dollar-per-ton estimates used in this analysis are provided in
Table III.H.7-1. In the summary of costs and benefits, Section III.H.10
of this preamble, EPA presents the monetized value of PM-related
improvements associated with the proposal.

  Table III.H.7-1--Benefits-per-ton Values (2007$) Derived Using the ACS Cohort Study for PM-related Premature
                          Mortality (Pope et al., 2002) \a\ and a 3% Discount Rate \b\
----------------------------------------------------------------------------------------------------------------
                                         All sources \d\        Stationary (non-EGU)         Mobile sources
                                   --------------------------          sources         -------------------------
             Year \c\                                        --------------------------
                                        SOX          VOC                      Direct        NOX         Direct
                                                                  NOX         PM2.5                     PM2.5
----------------------------------------------------------------------------------------------------------------
2015..............................      $28,000       $1,200       $4,700     $220,000       $4,900     $270,000
2020..............................       31,000        1,300        5,100      240,000        5,300      290,000
2030..............................       36,000        1,500        6,100      280,000        6,400      350,000
2040..............................       43,000        1,800        7,200      330,000        7,600      420,000
----------------------------------------------------------------------------------------------------------------
\a\ The benefit-per-ton estimates presented in this table are based on an estimate of premature mortality
  derived from the ACS study (Pope et al., 2002). If the benefit-per-ton estimates were based on the Six Cities
  study (Laden et al., 2006), the values would be approximately 145% (nearly two-and-a-half times) larger.
\b\ The benefit-per-ton estimates presented in this table assume a 3% discount rate in the valuation of
  premature mortality to account for a twenty-year segmented cessation lag. If a 7% discount rate had been used,
  the values would be approximately 9% lower.
\c\ Benefit-per-ton values were estimated for the years 2015, 2020, and 2030. For 2040, EPA and NHTSA
  extrapolated exponentially based on the growth between 2020 and 2030.
\d\ Note that the benefit-per-ton value for SOX is based on the value for Stationary (Non-EGU) sources; no SOX
  value was estimated for mobile sources. The benefit-per-ton value for VOCs was estimated across all sources.

    The benefit per-ton technique has been used in previous analyses,
including EPA's recent Ozone National Ambient Air Quality Standards
(NAAQS) RIA (U.S. EPA, 2008a),\389\ Portland Cement National Emissions
Standards for Hazardous Air Pollutants (NESHAP) RIA (U.S. EPA,
2009a),\390\ and NO₂ NAAQS (U.S. EPA, 2009b).\391\

[[Page 49620]]

Table III.H.7-2 shows the quantified and unquantified PM_2.5-
related co-benefits captured in those benefit-per-ton estimates.
---------------------------------------------------------------------------

    \389\ U.S. Environmental Protection Agency (U.S. EPA). 2008a.
Regulatory Impact Analysis, 2008 National Ambient Air Quality
Standards for Ground-level Ozone, Chapter 6. Office of Air Quality
Planning and Standards, Research Triangle Park, NC. March. Available
at http://www.epa.gov/ttn/ecas/regdata/RIAs/6-ozoneriachapter6.pdf.
    \390\ U.S. Environmental Protection Agency (U.S. EPA). 2009a.
Regulatory Impact Analysis: National Emission Standards for
Hazardous Air Pollutants from the Portland Cement Manufacturing
Industry. Office of Air Quality Planning and Standards, Research
Triangle Park, NC. April. Available on the Internet at http://
www.epa.gov/ttn/ecas/regdata/RIAs/portlandcementria_4-20-09.pdf.
    \391\ U.S. Environmental Protection Agency (U.S. EPA). 2009b.
Proposed NO₂ NAAQS Regulatory Impact Analysis (RIA).
Office of Air Quality Planning and Standards, Research Triangle
Park, NC. April. Available on the Internet at http://www.epa.gov/
ttn/ecas/regdata/RIAs/proposedno2ria.pdf.

       Table III.H.7-2--Human Health and Welfare Effects of PM2.5
------------------------------------------------------------------------
                              Quantified and
   Pollutant/ effect       monetized in primary    Unquantified effects
                                estimates               changes in
------------------------------------------------------------------------
PM2.5..................  Adult premature          Subchronic bronchitis
                          mortality                cases
                         Bronchitis: chronic and  Low birth weight
                          acute                   Pulmonary function
                         Hospital admissions:     Chronic respiratory
                          respiratory and          diseases other than
                          cardiovascular           chronic bronchitis
                         Emergency room visits    Non-asthma respiratory
                          for asthma               emergency room visits
                         Nonfatal heart attacks   Visibility
                          (myocardial             Household soiling
                          infarction)
                         Lower and upper
                          respiratory illness
                         Minor restricted-
                          activity days
                         Work loss days
                         Asthma exacerbations
                          (asthmatic population)
                         Infant mortality
------------------------------------------------------------------------

    Consistent with the NO₂ NAAQS,\392\ the benefits
estimates utilize the concentration-response functions as reported in
the epidemiology literature. To calculate the total monetized impacts
associated with quantified health impacts, EPA applies values derived
from a number of sources. For premature mortality, EPA applies a value
of a statistical life (VSL) derived from the mortality valuation
literature. For certain health impacts, such as chronic bronchitis and
a number of respiratory-related ailments, EPA applies willingness-to-
pay estimates derived from the valuation literature. For the remaining
health impacts, EPA applies values derived from current cost-of-illness
and/or wage estimates.
---------------------------------------------------------------------------

    \392\ Although we summarize the main issues in this chapter, we
encourage interested readers to see benefits chapter of the
NO₂ NAAQS for a more detailed description of recent
changes to the PM benefits presentation and preference for the no-
threshold model.
---------------------------------------------------------------------------

    Readers interested in reviewing the complete methodology for
creating the benefit-per-ton estimates used in this analysis can
consult the Technical Support Document (TSD) \393\ accompanying the
recent final ozone NAAQS RIA (U.S. EPA, 2008a). Readers can also refer
to Fann et al. (2009) \394\ for a detailed description of the benefit-
per-ton methodology.\395\ A more detailed description of the benefit-
per-ton estimates is also provided in the Draft Joint TSD that
accompanies this rulemaking.
---------------------------------------------------------------------------

    \393\ U.S. Environmental Protection Agency (U.S. EPA). 2008b.
Technical Support Document: Calculating Benefit Per-Ton estimates,
Ozone NAAQS Docket #EPA-HQ-OAR-2007-0225-0284. Office of Air
Quality Planning and Standards, Research Triangle Park, NC. March.
Available on the Internet at http://www.regulations.gov.
    \394\ Fann, N. et al. (2009). The influence of location, source,
and emission type in estimates of the human health benefits of
reducing a ton of air pollution. Air Qual Atmos Health. Published
online: 09 June, 2009.
    \395\ The values included in this report are different from
those presented in the article cited above. Benefits methods change
to reflect new information and evaluation of the science. Since
publication of the June 2009 article, EPA has made two significant
changes to its benefits methods: (1) We no longer assume that a
threshold exists in PM-related models of health impacts; and (2) We
have revised the Value of a Statistical Life to equal $6.3 million
(year 2000$), up from an estimate of $5.5 million (year 2000$) used
in the June 2009 report. Please refer to the following Web site for
updates to the dollar-per-ton estimates: http://www.epa.gov/air/
benmap/bpt.html.
---------------------------------------------------------------------------

    As described in the documentation for the benefit per-ton estimates
cited above, national per-ton estimates were developed for selected
pollutant/source category combinations. The per-ton values calculated
therefore apply only to tons reduced from those specific pollutant/
source combinations (e.g., NO₂ emitted from mobile sources;
direct PM emitted from stationary sources). Our estimate of
PM_2.5 benefits is therefore based on the total direct
PM_2.5 and PM-related precursor emissions controlled by
sector and multiplied by each per-ton value.
    The benefit-per-ton estimates are subject to a number of
assumptions and uncertainties.
    • They do not reflect local variability in population
density, meteorology, exposure, baseline health incidence rates, or
other local factors that might lead to an overestimate or underestimate
of the actual benefits of controlling fine particulates. EPA will
conduct full-scale air quality modeling for the final rulemaking in an
effort to capture this variability.
    • This analysis assumes that all fine particles, regardless
of their chemical composition, are equally potent in causing premature
mortality. This is an important assumption, because PM_2.5
produced via transported precursors emitted from stationary sources may
differ significantly from direct PM_2.5 released from diesel
engines and other industrial sources, but no clear scientific grounds
exist for supporting differential effects estimates by particle type.
    • This analysis assumes that the health impact function for
fine particles is linear within the range of ambient concentrations
under consideration. Thus, the estimates include health benefits from
reducing fine particles in areas with varied concentrations of
PM_2.5, including both regions that are in attainment with
fine particle standard and those that do not meet the standard down to
the lowest modeled concentrations.
    • There are several health benefits categories that EPA was
unable to quantify due to limitations associated with using benefits-
per-ton estimates, several of which could be substantial. Because the
NO_X and VOC emission reductions associated with this
proposal are also precursors to ozone, reductions in NO_X and
VOC would also reduce ozone formation and the health effects associated
with ozone exposure. Unfortunately, benefits-per-ton estimates do not
exist due to issues associated with the complexity of the atmospheric
air chemistry and nonlinearities associated with ozone formation. The
PM-related benefits-per-ton estimates also do not include any human
welfare or ecological benefits. Please refer to Chapter 7.3 of the RIA
that accompanies this proposal for a description of the quantification
and monetization of health impact for the FRM and a description of the
unquantified co-pollutant benefits associated with this rulemaking.
    • There are many uncertainties associated with the health
impact functions used in this modeling effort. These include: Within-
study variability (the precision with which a given study estimates the
relationship between air quality changes and health effects); across-
study variation (different published studies of the same pollutant/

[[Page 49621]]

health effect relationship typically do not report identical findings
and in some instances the differences are substantial); the application
of concentration-response functions nationwide (does not account for
any relationship between region and health effect, to the extent that
such a relationship exists); extrapolation of impact functions across
population (we assumed that certain health impact functions applied to
age ranges broader than that considered in the original epidemiological
study); and various uncertainties in the concentration-response
function, including causality and thresholds. These uncertainties may
under- or over-estimate benefits.
    • EPA has investigated methods to characterize uncertainty
in the relationship between PM_2.5 exposure and premature
mortality. EPA's final PM_2.5 NAAQS analysis provides a more
complete picture about the overall uncertainty in PM_2.5
benefits estimates. For more information, please consult the
PM_2.5 NAAQS RIA (Table 5.5).
    • The benefit-per-ton estimates used in this analysis
incorporate projections of key variables, including atmospheric
conditions, source level emissions, population, health baselines and
incomes, technology. These projections introduce some uncertainties to
the benefit per ton estimates.
    • As described above, using the benefit-per-ton value
derived from the ACS study (Pope et al., 2002) alone provides an
incomplete characterization of PM_2.5 benefits. When placed
in the context of the Expert Elicitation results, this estimate falls
toward the lower end of the distribution. By contrast, the estimated
PM_2.5 benefits using the coefficient reported by Laden in
that author's reanalysis of the Harvard Six Cities cohort fall toward
the upper end of the Expert Elicitation distribution results.
    As mentioned above, emissions changes and benefits-per-ton
estimates alone are not a good indication of local or regional air
quality and health impacts, as there may be localized impacts
associated with the proposed rulemaking. Additionally, the atmospheric
chemistry related to ambient concentrations of PM_2.5, ozone
and air toxics is very complex. Full-scale photochemical modeling is
therefore necessary to provide the needed spatial and temporal detail
to more completely and accurately estimate the changes in ambient
levels of these pollutants and their associated health and welfare
impacts. As discussed above, timing and resource constraints precluded
from conducting a full-scale photochemical air quality modeling
analysis in time for the NPRM. For the final rule, however, a national-
scale air quality modeling analysis will be performed to analyze the
impacts of the standards on PM_2.5, ozone, and selected air
toxics. The benefits analysis plan for the final rulemaking is
discussed in the next section.
b. Human Health and Environmental Benefits for the Final Rule
i. Human Health and Environmental Impacts
    To model the ozone and PM air quality benefits of the final rule,
EPA will use the Community Multiscale Air Quality (CMAQ) model (see
Section III.G.5.b for a description of the CMAQ model). The modeled
ambient air quality data will serve as an input to the Environmental
Benefits Mapping and Analysis Program (BenMAP).\396\ BenMAP is a
computer program developed by EPA that integrates a number of the
modeling elements used in previous RIAs (e.g., interpolation functions,
population projections, health impact functions, valuation functions,
analysis and pooling methods) to translate modeled air concentration
estimates into health effects incidence estimates and monetized
benefits estimates.
---------------------------------------------------------------------------

    \396\ Information on BenMAP, including downloads of the
software, can be found at http://www.epa.gov/ttn/ecas/
benmodels.html.
---------------------------------------------------------------------------

    Chapter 7.3 in the DRIA that accompanies this proposal lists the
co-pollutant health effect exposure-response functions EPA will use to
quantify the co-pollutant incidence impacts associated with the final
light-duty vehicles standard. These include PM- and ozone-related
premature mortality, chronic bronchitis, nonfatal heart attacks,
hospital admissions (respiratory and cardiovascular), emergency room
visits, acute bronchitis, minor restricted activity days, and days of
work and school lost.
ii. Monetized Impacts
    To calculate the total monetized impacts associated with quantified
health impacts, EPA applies values derived from a number of sources.
For premature mortality, EPA applies a value of a statistical life
(VSL) derived from the mortality valuation literature. For certain
health impacts, such as chronic bronchitis and a number of respiratory-
related ailments, EPA applies willingness-to-pay estimates derived from
the valuation literature. For the remaining health impacts, EPA applies
values derived from current cost-of-illness and/or wage estimates.
Chapter 7.3 in the DRIA that accompanies this proposal presents the
monetary values EPA will apply to changes in the incidence of health
and welfare effects associated with reductions in non-GHG pollutants
that will occur when these GHG control strategies are finalized.
iii. Other Unquantified Health and Environmental Impacts
    In addition to the co-pollutant health and environmental impacts
EPA will quantify for the analysis of the final standard, there are a
number of other health and human welfare endpoints that EPA will not be
able to quantify or monetize because of current limitations in the
methods or available data. These impacts are associated with emissions
of air toxics (including benzene, 1,3-butadiene, formaldehyde,
acetaldehyde, acrolein, and ethanol), ambient ozone, and ambient
PM_2.5 exposures. Chapter 7.3 of the DRIA lists these
unquantified health and environmental impacts.
    While there will be impacts associated with air toxic pollutant
emission changes that result from the final standard, EPA will not
attempt to monetize those impacts. This is primarily because currently
available tools and methods to assess air toxics risk from mobile
sources at the national scale are not adequate for extrapolation to
incidence estimations or benefits assessment. The best suite of tools
and methods currently available for assessment at the national scale
are those used in the National-Scale Air Toxics Assessment (NATA). The
EPA Science Advisory Board specifically commented in their review of
the 1996 NATA that these tools were not yet ready for use in a
national-scale benefits analysis, because they did not consider the
full distribution of exposure and risk, or address sub-chronic health
effects.\397\ While EPA has since improved the tools, there remain
critical limitations for estimating incidence and assessing benefits of
reducing mobile source air toxics. EPA continues to work to address
these limitations; however, EPA does not anticipate having methods and
tools available for national-scale application in time for the analysis
of the final rules.\398\
---------------------------------------------------------------------------

    \397\ Science Advisory Board. 2001. NATA--Evaluating the
National-Scale Air Toxics Assessment for 1996--an SAB Advisory.
http://www.epa.gov/ttn/atw/sab/sabrev.html.
    \398\ In April, 2009, EPA hosted a workshop on estimating the
benefits of reducing hazardous air pollutants. This workshop built
upon the work accomplished in the June 2000 Science Advisory Board/
EPA Workshop on the Benefits of Reductions in Exposure to Hazardous
Air Pollutants, which generated thoughtful discussion on approaches
to estimating human health benefits from reductions in air toxics
exposure, but no consensus was reached on methods that could be
implemented in the near term for a broad selection of air toxics.
Please visit http://epa.gov/air/toxicair/2009workshop.html for more
information about the workshop and its associated materials.

---------------------------------------------------------------------------

[[Page 49622]]

8. Energy Security Impacts
    This proposal to reduce GHG emissions in light-duty vehicles
results in improved fuel efficiency which, in turn, helps to reduce
U.S. petroleum imports. A reduction of U.S. petroleum imports reduces
both financial and strategic risks associated with a potential
disruption in supply or a spike in cost of a particular energy source.
This reduction in risk is a measure of improved U.S. energy security.
This section summarizes our estimate of the monetary value of the
energy security benefits of the proposed GHG vehicle standards against
the reference case by estimating the impact of the expanded use of
lower-GHG vehicle technologies on U.S. oil imports and avoided U.S. oil
import expenditures. Additional discussion of this issue can be found
in Chapter 5.1 of EPA's RIA and Section 4.2.8 of the TSD.
a. Implications of Reduced Petroleum Use on U.S. Imports
    In 2008, U.S. petroleum import expenditures represented 21% of
total U.S. imports of all goods and services.\399\ In 2008, the U.S.
imported 66% of the petroleum it consumed, and the transportation
sector accounted for 70% of total U.S. petroleum consumption. This
compares to approximately 37% of petroleum from imports and 55%
consumption of petroleum in the transportation sector in 1975.\400\ It
is clear that petroleum imports have a significant impact on the U.S.
economy. Requiring lower-GHG vehicle technology in the U.S. is expected
to lower U.S. petroleum imports.
---------------------------------------------------------------------------

    \399\ Source: U.S. Bureau of Economic Analysis, U.S.
International Transactions Accounts Data, as shown on June 24, 2009.
    \400\ Source: U.S. Department of Energy, Annual Energy Review
2008, Report No. DOE/EIA-0384(2008), Tables 5.1 and 5.13c, June 26, 2009.
---------------------------------------------------------------------------

b. Energy Security Implications
    In order to understand the energy security implications of reducing
U.S. petroleum imports, EPA has worked with Oak Ridge National
Laboratory (ORNL), which has developed approaches for evaluating the
economic costs and energy security implications of oil use. The energy
security estimates provide below are based upon a methodology developed
in a peer-reviewed study entitled, ``The Energy Security Benefits of
Reduced Oil Use, 2006-2015,'' completed in March 2008. This recent
study is included as part of the docket for this rulemaking.401 402
---------------------------------------------------------------------------

    \401\ Leiby, Paul N. ``Estimating the Energy Security Benefits
of Reduced U.S. Oil Imports,'' Oak Ridge National Laboratory, ORNL/
TM-2007/028, Final Report, 2008. (Docket EPA-HQ-OAR-2009-0472)
    \402\ The ORNL study ``The Energy Security Benefits of Reduced
Oil Use, 2006-2015,'' completed in March 2008, is an update version
of the approach used for estimating the energy security benefits of
U.S. oil import reductions developed in an ORNL 1997 Report by
Leiby, Paul N., Donald W. Jones, T. Randall Curlee, and Russell Lee,
entitled ``Oil Imports: An Assessment of Benefits and Costs.''
(Docket EPA-HQ-OAR-2009-0472).
---------------------------------------------------------------------------

    When conducting this recent analysis, ORNL considered the economic
cost of importing petroleum into the U.S. The economic cost of
importing petroleum into the U.S. is defined to include two components
in addition to the purchase price of petroleum itself. These are: (1)
The higher costs for oil imports resulting from the effect of
increasing U.S. import demand on the world oil price and on OPEC market
power (i.e., the ``demand'' or ``monopsony'' costs); and (2) the risk
of reductions in U.S. economic output and disruption of the U.S.
economy caused by sudden disruptions in the supply of imported
petroleum to the U.S. (i.e., macroeconomic disruption/adjustment
costs). Maintaining a U.S. military presence to help secure stable oil
supply from potentially vulnerable regions of the world was not
included in this analysis because its attribution to particular
missions or activities is difficult.
    For this proposal, ORNL further updated the energy security premium
by incorporating the most recent oil price forecast in the in the
Energy Information Administration's 2009 Annual Energy Outlook into its
model. In order for the energy security premium estimated to be used in
EPA's OMEGA model, ORNL developed energy security estimates for a
number of different years; please refer to Table III.H.8-1 for this
information for years 2015, 2020, 2030 and 2040,\403\ as well as a
breakdown of the components of the energy security premium for each of
these years. The components of the energy security premium and their
values are discussed in detail in the TSD, Chapter 4.2.8.
---------------------------------------------------------------------------

    \403\ AEO 2009 forecasts energy market trends and values only to
2030. The energy security premium estimates post-2030 were assumed
to be the 2030 estimate.

                                  Table III.H.8-1--Energy Security Premium in 2015, 2020, 2030 and 2040 (2007$/Barrel)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                Macroeconomic disruption/
                         Year (range)                                     Monopsony                 adjustment costs               Total mid-point
--------------------------------------------------------------------------------------------------------------------------------------------------------
2015..........................................................         $11.79 ($4.26-$21.37)          $6.70 ($3.11-$10.67)         $18.49 ($9.80-$28.08)
2020..........................................................         $12.31 ($4.46-$22.53)          $7.62 ($3.77-$12.46)        $19.94 ($10.58-$30.47)
2030..........................................................         $10.57 ($3.84-$18.94)          $8.12 ($3.90-$13.04)        $18.69 ($10.52-$27.89)
2040..........................................................         $10.57 ($3.84-$18.94)          $8.12 ($3.90-$13.04)        $18.69 ($10.52-$27.89)
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The literature on the energy security for the last two decades has
routinely combined the monopsony and the macroeconomic disruption
components when calculating the total value of the energy security
premium. However, in the context of using a global value for the Social
Cost of Carbon (SCC) the question arises: How should the energy
security premium be used when some benefits from the proposed rule,
such as the benefits of reducing greenhouse gas emissions, are
calculated at a global level? Monopsony benefits represent avoided
payments by the U.S. to oil producers in foreign countries that result
from a decrease in the world oil price as the U.S. decreases its
consumption of imported oil. Although there is clearly a benefit to the
U.S. when considered from the domestic perspective, the decrease in
price due to decreased demand in the U.S. also represents a loss of
income to oil-producing countries. Given the redistributive nature of
this effect, do the negative effects on other countries ``net out'' the
positive impacts to the U.S.? If this is the case, then, the monopsony
portion of the energy security premium should be excluded from the net
benefits calculation for the rule.
    Based on this reasoning, EPA's estimates of net benefits for this
proposal exclude the portion of energy

[[Page 49623]]

security benefits stemming from the U.S. exercising its monopsony power
in oil markets. Thus, EPA only includes the macroeconomic disruption/
adjustment cost portion of the energy security premium.
    EPA invites comments on whether, when the global value for
greenhouse gas reduction benefits is used, it may still be appropriate
to include the monopsony benefits in net benefits calculation for the
proposed rule. From one perspective, the global SCC is used in these
calculations, not because the global net benefits of the rule are being
computed (they are not), but rather because in the context of a global
public good, the global marginal benefit is the correct domestic
benefit against which domestic costs are to be compared. Similarly,
energy security is inherently a domestic benefit. Thus, should the two
benefits, if they are both viewed from this domestic perspective, be
counted in the net benefits estimates for this rulemaking and more
generally what are the overall implications of this approach to
justifying regulation? If the monopsony benefits were included in this
case, they could be significant.
    Total annual energy security benefits are derived from the
estimated reductions in U.S. imports of finished petroleum products and
crude oil using only the macroeconomic disruption/adjustment portion of
the energy security premium. These values are shown in Table III.H.8-
2.\404\ The reduced oil estimates were derived from the OMEGA model, as
explained in Section VI of this preamble. EPA used the same assumption
that NHTSA used in its Corporate Average Fuel Economy and CAFE Reform
for MY 2008-2011 Light Trucks proposal, which assumed each gallon of
fuel saved reduces total U.S. imports of crude oil or refined products
by 0.95 gallons.\405\
---------------------------------------------------------------------------

    \404\ Estimated reductions in U.S. imports of finished petroleum
products and crude oil are 95% of 88 million barrels (MMB) in 2015,
302 MMB in 2020, 592 MMB in 2030, and 767 MMB in 2040.
    \405\ Preliminary Regulatory Impacts Analysis, April 2008. Based
on a detailed analysis of differences in fuel consumption, petroleum
imports, and imports of refined petroleum products among the
Reference Case, High Economic Growth, and Low Economic Growth
Scenarios presented in the Energy Information Administration's
Annual Energy Outlook 2007, NHTSA estimated that approximately 50
percent of the reduction in fuel consumption is likely to be
reflected in reduced U.S. imports of refined fuel, while the
remaining 50 percent would be expected to be reflected in reduced
domestic fuel refining. Of this latter figure, 90 percent is
anticipated to reduce U.S. imports of crude petroleum for use as a
refinery feedstock, while the remaining 10 percent is expected to
reduce U.S. domestic production of crude petroleum. Thus on balance,
each gallon of fuel saved is anticipated to reduce total U.S.
imports of crude petroleum or refined fuel by 0.95 gallons.

  Table III.H.8-2--Total Annual Energy Security Benefits Using Only the
  Macroeconomic Disruption/Adjustment Component of the Energy Security
                  Premium in 2015, 2020, 2030 and 2040
                           [Billions of 2007$]
------------------------------------------------------------------------
                          Year                               Benefits
------------------------------------------------------------------------
2015....................................................           $0.59
2020....................................................            2.30
2030....................................................            4.81
2040....................................................            6.23
------------------------------------------------------------------------

9. Other Impacts
    There are other impacts associated with the proposed CO₂
emissions standards and associated reduced fuel consumption that vary
with miles driven. Lower fuel consumption would, presumably, result in
fewer trips to the filling station to refuel and, thus, time saved. The
rebound effect, discussed in detail in Section III.H.4.c, produces
additional benefits to vehicle owners in the form of consumer surplus
from the increase in vehicle-miles driven, but may also increase the
societal costs associated with traffic congestion, motor vehicle
crashes, and noise. These effects are likely to be relatively small in
comparison to the value of fuel saved as a result of the proposed
standards, but they are nevertheless important to include. Table
III.H.9-1 summarizes the other economic impacts. Please refer to
Preamble Section II.F and the Draft Joint TSD that accompanies this
proposal for more information about these impacts and how EPA and NHTSA
use them in their analyses.

  Table III.H.9-1--Estimated Economic Externalities Associated With the Proposed Light-Duty Vehicle GHG Program
                                           [Millions of 2007 dollars]
----------------------------------------------------------------------------------------------------------------
      Economic externalities            2020         2030         2040         2050       NPV, 3%      NPV, 7%
----------------------------------------------------------------------------------------------------------------
Value of Less Frequent Refueling..       $2,500       $4,900       $6,400       $8,000      $89,600      $41,000
Value of Increased Driving \a\....        4,900       10,000       13,600       18,000      184,700       82,700
Accidents, Noise, Congestion......       -2,400       -4,900       -6,300       -7,900      -88,200      -40,200
                                   -----------------------------------------------------------------------------
    Annual Quantified Benefits....        5,000       10,000       13,700       18,100      186,100       83,500
----------------------------------------------------------------------------------------------------------------
\a\ Calculated using post-tax fuel prices.

10. Summary of Costs and Benefits
    In this section EPA presents a summary of costs, benefits, and net
benefits of the proposal. EPA presents fuel consumption impacts as
negative costs of the vehicle program.
    Table III.H.10-1 shows the estimated annual societal costs of the
vehicle program for the indicated calendar years. The table also shows
the net present values of those costs for the calendar years 2012-2050
using both a 3 percent and a seven percent discount rate. In this
table, fuel savings are calculated using pre-tax fuel prices and are
presented as negative costs associated with the vehicle program (rather
than positive savings).
    Consumers are expected to receive the fuel savings presented here.
The cost estimates for the fuel-saving technology are based on the
assumptions that, to comply with the rule, no vehicle attributes will
change except fuel economy and technology cost; that consumers will
consider reduced fuel costs as a substitute for increased purchase
price; and that consumers will not change the vehicles that they
purchase. Instead, automakers are likely to redesign vehicles as part
of their compliance strategies. If so, the redesigns may make the
vehicles either less or more attractive to consumers. In

[[Page 49624]]

addition, consumers may choose to purchase different vehicles than they
would in the absence of this rule. These changes may affect the
satisfaction that consumers receive from their vehicles. Because of the
unsettled state of the modeling of consumer choices (discussed in
Section III.H.1 and in DRIA Section 8.1.2), this analysis does not
measure these effects. To the extent that consumer satisfaction with
vehicles may decline due to changes in vehicles other than fuel
economy, or that consumers may take some of these fuel savings into
account when they purchase their vehicles, the fuel savings may
overstate the benefits of improved fuel economy to consumers.

                Table III.H.10-1--Estimated Societal Costs of the Light-Duty Vehicle GHG Program
                                           [Millions of 2007 dollars]
----------------------------------------------------------------------------------------------------------------
           Social costs                 2020         2030         2040         2050       NPV, 3%      NPV, 7%
----------------------------------------------------------------------------------------------------------------
Vehicle Compliance Costs..........      $18,000      $17,900      $19,300      $20,900     $390,000     $216,600
Fuel Savings \a\..................      -43,100      -90,400     -125,000     -167,000   -1,677,600     -746,100
                                   -----------------------------------------------------------------------------
    Quantified Annual Costs.......      -25,100      -72,500     -105,700     -146,100   -1,287,600     -529,500
----------------------------------------------------------------------------------------------------------------
\a\ Calculated using pre-tax fuel prices.

    Table III.H.10-2 presents estimated annual societal benefits for
the indicated calendar years. The table also shows the net present
values of those benefits for the calendar years 2012-2050 using both a
3 percent and a 7 percent discount rate. The table shows the benefits
of reduced GHG emissions--and consequently the annual quantified
benefits (i.e., total benefits)--for each of five interim SCC values
considered by EPA. As discussed in Section III.H.6, there is a very
high probability (very likely according to the IPCC) that the benefit
estimates from GHG reductions are underestimates. One of the primary
reasons is that models used to calculate SCC values do not include
information about impacts that have not been quantified.
    In addition, the total GHG reduction benefits presented below
likely underestimate the value of GHG reductions because they were
calculated using the marginal values for CO₂ emissions. The
impacts of non-CO₂ emissions vary from those of
CO₂ emissions because of differences in atmospheric
lifetimes and radiative forcing.\406\ As a result, the marginal benefit
values of non-CO₂ GHG reductions and their growth rates over
time will not be the same as the marginal benefits measured on a
CO₂-equivalent scale.\407\ Marginal benefit estimates per
metric ton of non-CO₂ GHGs are currently unavailable, but
work is on-going to monetize benefits related to the mitigation of
other non-CO₂ GHGs.
---------------------------------------------------------------------------

    \406\ Radiative forcing is the change in the balance between
solar radiation entering the atmosphere and the Earth's radiation
going out. On average, a positive radiative forcing tends to warm
the surface of the Earth while negative forcing tends to cool the
surface. Greenhouse gases have a positive radiative forcing because
they absorb and emit heat. See http://www.epa.gov/climatechange/
science/recentac.html for more general information about GHGs and
climate science.
    \407\ See IPCC WGII, 2007 for discussion about implications of
different marginal impacts among the GHGs.

    Table III.H.10-2--Estimated Societal Benefits Associated With the Proposed Light-Duty Vehicle GHG Program
                                           [Millions of 2007 dollars]
----------------------------------------------------------------------------------------------------------------
          Benefits                2020          2030          2040          2050         NPV, 3%       NPV, 7%
----------------------------------------------------------------------------------------------------------------
Reduced GHG Emissions at each assumed SCC value
----------------------------------------------------------------------------------------------------------------
    SCC 5%..................        $1,200        $3,300        $5,700        $9,500       $69,200       $28,600
    SCC 5% Newell-Pizer.....         2,500         6,600        11,000        19,000       138,400        57,100
    SCC from 3% and 5%......         4,700        12,000        22,000        36,000       263,000       108,500
    SCC 3%..................         8,200        22,000        38,000        63,000       456,900       188,500
    SCC 3% Newell-Pizer.....        14,000        36,000        63,000       100,000       761,400       314,200
PM2.5 Related Benefits a b c         1,400         3,000         4,600         6,700        59,800        26,300
Energy Security Impacts              2,300         4,800         6,200         7,800        85,800        38,800
 (price shock)..............
Reduced Refueling...........         2,500         4,900         6,400         8,000        89,600        41,000
Value of Increased Driving           4,900        10,000        13,600        18,000       184,700        82,700
 \d\........................
Accidents, Noise, Congestion        -2,400        -4,900        -6,300        -7,900       -88,200       -40,200
----------------------------------------------------------------------------------------------------------------
Quantified Annual Benefits at each assumed SCC value
----------------------------------------------------------------------------------------------------------------
    SCC 5%..................        $9,900       $21,100       $30,200       $42,100      $400,900      $177,200
    SCC 5% Newell-Pizer.....        11,200        24,400        35,500        51,600       470,100       205,700
    SCC from 3% and 5%......        13,400        29,800        46,500        68,600       594,700       257,100
    SCC 3%..................        16,900        39,800        62,500        95,600       788,600       337,100
    SCC 3% Newell-Pizer.....        22,700        53,800        87,500       132,600     1,093,100       462,800
----------------------------------------------------------------------------------------------------------------
\a\ Note that the co-pollutant impacts associated with the standards presented here do not include the full
  complement of endpoints that, if quantified and monetized, would change the total monetized estimate of rule-
  related impacts. Instead, the co-pollutant benefits are based on benefit-per-ton values that reflect only
  human health impacts associated with reductions in PM2.5 exposure. Ideally, human health and environmental
  benefits would be based on changes in ambient PM2.5 and ozone as determined by full-scale air quality
  modeling. However, EPA was unable to conduct a full-scale air quality modeling analysis in time for the
  proposal. We intend to more fully capture the co-pollutant benefits for the analysis of the final standards.

[[Page 49625]]

\b\ The PM2.5-related benefits (derived from benefit-per-ton values) presented in this table are based on an
  estimate of premature mortality derived from the ACS study (Pope et al., 2002). If the benefit-per-ton
  estimates were based on the Six Cities study (Laden et al., 2006), the values would be approximately 145%
  (nearly two-and-a-half times) larger.
\c\ The PM2.5-related benefits (derived from benefit-per-ton values) presented in this table assume a 3%
  discount rate in the valuation of premature mortality to account for a twenty-year segmented cessation lag. If
  a 7% discount rate had been used, the values would be approximately 9% lower.
\d\ Calculated using pre-tax fuel prices.

    Table III.H.10-3 presents estimated annual net benefits for the
indicated calendar years. The table also shows the net present values
of those net benefits for the calendar years 2012-2050 using both a 3
percent and a 7 percent discount rate. The table includes the benefits
of reduced GHG emissions--and consequently the annual net benefits--for
each of five interim SCC values considered by EPA. As noted above,
there is a very high probability (very likely according to the IPCC)
that the benefit estimates from GHG reductions are underestimates
because, in part, models used to calculate SCC values do not include
information about impacts that have not been quantified.

    Table III.H.10-3--Quantified Net Benefits Associated With the Proposed Light-Duty Vehicle GHG Program a b
                                           [Millions of 2007 dollars]
----------------------------------------------------------------------------------------------------------------
                                  2020          2030          2040          2050         NPV, 3%       NPV, 7%
----------------------------------------------------------------------------------------------------------------
Quantified Annual Costs.....      -$25,100      -$72,500     -$105,700     -$146,100   -$1,287,600     -$529,500
----------------------------------------------------------------------------------------------------------------
Quantified Annual Benefits at each assumed SCC value
----------------------------------------------------------------------------------------------------------------
    SCC 5%..................        $9,900       $21,100       $30,200       $42,100      $400,900      $177,200
    SCC 5% Newell-Pizer.....        11,200        24,400        35,500        51,600       470,100       205,700
    SCC from 3% and 5%......        13,400        29,800        46,500        68,600       594,700       257,100
    SCC 3%..................        16,900        39,800        62,500        95,600       788,600       337,100
    SCC 3% Newell-Pizer.....        22,700        53,800        87,500       132,600     1,093,100       462,800
----------------------------------------------------------------------------------------------------------------
Quantified Net Benefits at each assumed SCC value
----------------------------------------------------------------------------------------------------------------
    SCC 5%..................       $35,000       $93,600      $135,900      $188,200    $1,688,500      $706,700
    SCC 5% Newell-Pizer.....        36,300        96,900       141,200       197,700     1,757,700       735,200
    SCC from 3% and 5%......        38,500       102,300       152,200       214,700     1,882,300       786,600
    SCC 3%..................        42,000       112,300       168,200       241,700     2,076,200       866,600
    SCC 3% Newell-Pizer.....        47,800       126,300       193,200       278,700     2,380,700       992,300
----------------------------------------------------------------------------------------------------------------
\a\ Note that the co-pollutant impacts associated with the standards presented here do not include the full
  complement of endpoints that, if quantified and monetized, would change the total monetized estimate of rule-
  related impacts. Instead, the co-pollutant benefits are based on benefit-per-ton values that reflect only
  human health impacts associated with reductions in PM2.5 exposure. Ideally, human health and environmental
  benefits would be based on changes in ambient PM2.5 and ozone as determined by full-scale air quality
  modeling. However, EPA was unable to conduct a full-scale air quality modeling analysis in time for the
  proposal. We intend to more fully capture the co-pollutant benefits for the analysis of the final standards.
\b\ Fuel impacts were calculated using pre-tax fuel prices.

    EPA also conducted a separate analysis of the total benefits over
the model year lifetimes of the 2012 through 2016 model year vehicles.
In contrast to the calendar year analysis, the model year lifetime
analysis shows the lifetime impacts of the program on each of these MY
fleets over the course of its lifetime. Full details of the inputs to
this analysis can be found in DRIA Chapter 5. The societal benefits of
the full life of each of the five model years from 2012 through 2016
are shown in Tables III.H.10-4 and III.H.10-5 at both a 3 percent and a
7 percent discount rate, respectively. The net benefits are shown in
Tables III.H.10-6 and III.H.10-7 for both a 3 percent and a 7 percent
discount rate. Note that the quantified annual benefits shown in Table
III.H.10-4 and Table III.H.10-5 include fuel savings as a positive
benefit. As such, the quantified annual costs as shown in Table
III.H.10-6 and Table III.H.10-7 do not include fuel savings since those
are included as benefits. Also note that each of the Tables III.H.10-4
through Table III.H.10-7 include the benefits of reduced CO₂
emissions--and consequently the total benefits--for each of five
interim SCC values considered by EPA. As noted above, there is a very
high probability (very likely according to the IPCC) that the benefit
estimates from GHG reductions are underestimates because, in part,
models used to calculate SCC values do not include information about
impacts that have not been quantified.

Table III.H.10-4--Estimated Societal Benefits Associated With the Proposed Light-Duty Vehicle GHG Program, Model
                                                  Year Analysis
                                  [Millions of 2007 dollars; 3% discount rate]
----------------------------------------------------------------------------------------------------------------
    Monetized values (millions)        2012MY       2013MY       2014MY       2015MY       2016MY        Sum
----------------------------------------------------------------------------------------------------------------
Cost of Noise, Accident,                  -$900      -$1,400      -$1,900      -$2,800      -$3,900     -$11,000
 Congestion ($)...................
Pretax Fuel Savings ($)...........      $15,600      $24,400      $34,800      $49,800      $68,500     $193,300
Energy Security (price shock) ($).         $400         $600         $900       $1,200       $1,600       $4,700
Change in no. of Refuelings                 500          700        1,000        1,300        1,800        5,300
 (#)......................
Change in Refueling Time (hours)..            0          100          100          100          200          400

[[Page 49626]]

Value of Reduced Refueling Time            $900       $1,400       $1,900       $2,700       $3,700      $10,500
 ($)..............................
Value of Additional Driving ($)...       $2,000       $3,000       $4,100       $5,700       $7,900      $22,700
Value of PM2.5-related Health              $600         $900       $1,200       $1,700       $2,200       $6,600
 Impacts ($) a b c................
----------------------------------------------------------------------------------------------------------------
Social Cost of Carbon (SCC) at each assumed SCC value
----------------------------------------------------------------------------------------------------------------
    SCC 5%........................         $500         $700       $1,000       $1,400       $1,900       $5,600
    SCC 5% Newell-Pizer...........        1,000        1,500        2,000        2,900        3,800       11,000
    SCC from 3% and 5%............        1,800        2,800        3,900        5,400        7,200       21,000
    SCC 3%........................        3,200        4,800        6,700        9,400       13,000       37,000
    SCC 3% Newell-Pizer...........        5,300        8,100       11,000       16,000       21,000       61,000
----------------------------------------------------------------------------------------------------------------
Total Benefits at each assumed SCC value
----------------------------------------------------------------------------------------------------------------
    SCC 5%........................      $19,100      $29,600      $42,000      $59,700      $81,900     $232,400
    SCC 5% Newell-Pizer...........       19,600       30,400       43,000       61,200       83,800      237,800
    SCC from 3% and 5%............       20,400       31,700       44,900       63,700       87,200      247,800
    SCC 3%........................       21,800       33,700       47,700       67,700       93,000      263,800
    SCC 3% Newell-Pizer...........       23,900       37,000       52,000       74,300      101,000      287,800
----------------------------------------------------------------------------------------------------------------
\a\ Note that the co-pollutant impacts associated with the standards presented here do not include the full
  complement of endpoints that, if quantified and monetized, would change the total monetized estimate of rule-
  related impacts. Instead, the co-pollutant benefits are based on benefit-per-ton values that reflect only
  human health impacts associated with reductions in PM2.5 exposure. Ideally, human health and environmental
  benefits would be based on changes in ambient PM2.5 and ozone as determined by full-scale air quality
  modeling. However, EPA was unable to conduct a full-scale air quality modeling analysis in time for the
  proposal. We intend to more fully capture the co-pollutant benefits for the analysis of the final standards.
\b\ The PM2.5-related benefits (derived from benefit-per-ton values) presented in this table are based on an
  estimate of premature mortality derived from the ACS study (Pope et al., 2002). If the benefit-per-ton
  estimates were based on the Six Cities study (Laden et al., 2006), the values would be approximately 145%
  (nearly two-and-a-half times) larger.
\c\ The PM2.5-related benefits (derived from benefit-per-ton values) presented in this table assume a 3%
  discount rate in the valuation of premature mortality to account for a twenty-year segmented cessation lag. If
  a 7% discount rate had been used, the values would be approximately 9% lower.


Table III.H.10-5--Estimated Societal Benefits Associated With the Proposed Light-Duty Vehicle GHG Program, Model
                                                  Year Analysis
                                  [Millions of 2007 dollars; 7% discount rate]
----------------------------------------------------------------------------------------------------------------
    Monetized values (millions)        2012MY       2013MY       2014MY       2015MY       2016MY        Sum
----------------------------------------------------------------------------------------------------------------
Cost of Noise, Accident,                  -$700      -$1,100      -$1,500      -$2,200      -$3,100      -$8,700
 Congestion ($)...................
Pretax Fuel Savings ($)...........      $12,100      $19,000      $27,200      $39,000      $53,700     $150,900
Energy Security (price shock) ($).         $300         $500         $700         $900       $1,300       $3,700
Change in no. of Refuelings                 400          500          800        1,100        1,500        4,200
 (#)......................
Change in Refueling Time (hours)..            0            0          100          100          100          300
Value of Reduced Refueling Time            $700       $1,100       $1,500       $2,100       $2,900       $8,300
 ($)..............................
Value of Additional Driving ($)...       $1,500       $2,400       $3,200       $4,500       $6,300      $18,000
Value of PM2.5-related Health              $500         $700       $1,000       $1,300       $1,800       $5,300
 Impacts ($)a b c.................
----------------------------------------------------------------------------------------------------------------
Social Cost of Carbon (SCC) at each assumed SCC value
----------------------------------------------------------------------------------------------------------------
    SCC 5%........................         $400         $500         $700       $1,000       $1,300       $3,900
    SCC 5% Newell-Pizer...........          700        1,100        1,500        2,000        2,500        7,700
    SCC from 3% and 5%............        1,400        2,100        2,800        3,700        4,800       15,000
    SCC 3%........................        2,400        3,600        4,800        6,500        8,300       26,000
    SCC 3% Newell-Pizer...........        4,000        6,000        8,000       11,000       14,000       43,000
----------------------------------------------------------------------------------------------------------------
Total Benefits at each assumed SCC value
----------------------------------------------------------------------------------------------------------------
    SCC 5%........................      $14,800      $23,100      $32,800      $46,600      $64,200     $181,400
    SCC 5% Newell-Pizer...........       15,100       23,700       33,600       47,600       65,400      185,200
    SCC from 3% and 5%............       15,800       24,700       34,900       49,300       67,700      192,500
    SCC 3%........................       16,800       26,200       36,900       52,100       71,200      203,500
    SCC 3% Newell-Pizer...........       18,400       28,600       40,100       56,600       76,900      220,500
----------------------------------------------------------------------------------------------------------------
\a\ Note that the co-pollutant impacts associated with the standards presented here do not include the full
  complement of endpoints that, if quantified and monetized, would change the total monetized estimate of rule-
  related impacts. Instead, the co-pollutant benefits are based on benefit-per-ton values that reflect only
  human health impacts associated with reductions in PM2.5 exposure. Ideally, human health and environmental
  benefits would be based on changes in ambient PM2.5 and ozone as determined by full-scale air quality
  modeling. However, EPA was unable to conduct a full-scale air quality modeling analysis in time for the
  proposal. We intend to more fully capture the co-pollutant benefits for the analysis of the final standards.

[[Page 49627]]

\b\ The PM2.5-related benefits (derived from benefit-per-ton values) presented in this table are based on an
  estimate of premature mortality derived from the ACS study (Pope et al., 2002). If the benefit-per-ton
  estimates were based on the Six Cities study (Laden et al., 2006), the values would be approximately 145%
  (nearly two-and-a-half times) larger.
\c\ The PM2.5-related benefits (derived from benefit-per-ton values) presented in this table assume a 3%
  discount rate in the valuation of premature mortality to account for a twenty-year segmented cessation lag. If
  a 7% discount rate had been used, the values would be approximately 9% lower.


  Table III.H.10-6--Quantified Net Benefits Associated With the Proposed Light-Duty Vehicle GHG Program, Model
                                                Year Analysis \a\
                                  [millions of 2007 dollars; 3% discount rate]
----------------------------------------------------------------------------------------------------------------
    Monetized values (millions)        2012MY       2013MY       2014MY       2015MY       2016MY        Sum
----------------------------------------------------------------------------------------------------------------
Quantified Annual Costs (excluding       $5,400       $8,400      $10,900      $13,900      $17,500      $56,100
 fuel savings) \b\................
----------------------------------------------------------------------------------------------------------------
Quantified Annual Benefits at each assumed SCC value
----------------------------------------------------------------------------------------------------------------
    SCC 5%........................      $19,100      $29,600      $42,000      $59,700      $81,900     $232,400
    SCC 5% Newell-Pizer...........       19,600       30,400       43,000       61,200       83,800      237,800
    SCC from 3% and 5%............       20,400       31,700       44,900       63,700       87,200      247,800
    SCC 3%........................       21,800       33,700       47,700       67,700       93,000      263,800
    SCC 3% Newell-Pizer...........       23,900       37,000       52,000       74,300      101,000      287,800
----------------------------------------------------------------------------------------------------------------
Quantified Net Benefits at each assumed SCC value
----------------------------------------------------------------------------------------------------------------
    SCC 5%........................      $13,700      $21,200      $31,100      $45,800      $64,400     $176,300
    SCC 5% Newell-Pizer...........       14,200       22,000       32,100       47,300       66,300      181,700
    SCC from 3% and 5%............       15,000       23,300       34,000       49,800       69,700      191,700
    SCC 3%........................       16,400       25,300       36,800       53,800       75,500      207,700
    SCC 3% Newell-Pizer...........       18,500       28,600       41,100       60,400       83,500      231,700
----------------------------------------------------------------------------------------------------------------
\a\ Note that the co-pollutant impacts associated with the standards presented here do not include the full
  complement of endpoints that, if quantified and monetized, would change the total monetized estimate of rule-
  related impacts. Instead, the co-pollutant benefits are based on benefit-per-ton values that reflect only
  human health impacts associated with reductions in PM2.5 exposure. Ideally, human health and environmental
  benefits would be based on changes in ambient PM2.5 and ozone as determined by full-scale air quality
  modeling. However, EPA was unable to conduct a full-scale air quality modeling analysis in time for the
  proposal. We intend to more fully capture the co-pollutant benefits for the analysis of the final standards.
\b\ Quantified annual costs as shown here are the increased costs for new vehicles in each given model year.
  Since those costs are assumed to occur in the given model year (i.e., not over a several year time span), the
  discount rate does not affect the costs.


  Table III.H.10-7--Quantified Net Benefits Associated With the Proposed Light-Duty Vehicle GHG Program, Model
                                                Year Analysis \a\
                                  [millions of 2007 dollars; 7% Discount Rate]
----------------------------------------------------------------------------------------------------------------
    Monetized values (millions)        2012MY       2013MY       2014MY       2015MY       2016MY        Sum
----------------------------------------------------------------------------------------------------------------
Quantified Annual Costs (excluding       $5,400       $8,400      $10,900      $13,900      $17,500      $56,100
 fuel savings) \b\................
----------------------------------------------------------------------------------------------------------------
Quantified Annual Benefits at each assumed SCC value
----------------------------------------------------------------------------------------------------------------
    SCC 5%........................      $14,800      $23,100      $32,800      $46,600      $64,200     $181,400
    SCC 5% Newell-Pizer...........       15,100       23,700       33,600       47,600       65,400      185,200
    SCC from 3% and 5%............       15,800       24,700       34,900       49,300       67,700      192,500
    SCC 3%........................       16,800       26,200       36,900       52,100       71,200      203,500
    SCC 3% Newell-Pizer...........       18,400       28,600       40,100       56,600       76,900      220,500
----------------------------------------------------------------------------------------------------------------
Quantified Net Benefits at each assumed SCC value
----------------------------------------------------------------------------------------------------------------
    SCC 5%........................       $9,400      $14,700      $21,900      $32,700      $46,700     $125,300
    SCC 5% Newell-Pizer...........        9,700       15,300       22,700       33,700       47,900      129,100
    SCC from 3% and 5%............       10,400       16,300       24,000       35,400       50,200      136,400
    SCC 3%........................       11,400       17,800       26,000       38,200       53,700      147,400
    SCC 3% Newell-Pizer...........       13,000       20,200       29,200       42,700       59,400      164,400
----------------------------------------------------------------------------------------------------------------
\a\ Note that the co-pollutant impacts associated with the standards presented here do not include the full
  complement of endpoints that, if quantified and monetized, would change the total monetized estimate of rule-
  related impacts. Instead, the co-pollutant benefits are based on benefit-per-ton values that reflect only
  human health impacts associated with reductions in PM2.5 exposure. Ideally, human health and environmental
  benefits would be based on changes in ambient PM2.5 and ozone as determined by full-scale air quality
  modeling. However, EPA was unable to conduct a full-scale air quality modeling analysis in time for the
  proposal. We intend to more fully capture the co-pollutant benefits for the analysis of the final standards.
\b\ Quantified annual costs as shown here are the increased costs for new vehicles in each given model year.
  Since those costs are assumed to occur in the given model year (i.e., not over a several year time span), the
  discount rate does not affect the costs.

[[Page 49628]]

I. Statutory and Executive Order Reviews

1. Executive Order 12866: Regulatory Planning and Review
    Under section 3(f)(1) of Executive Order (EO) 12866 (58 FR 51735,
October 4, 1993), this action is an ``economically significant
regulatory action'' because it is likely to have an annual effect on
the economy of $100 million or more. Accordingly, EPA submitted this
action to the Office of Management and Budget (OMB) for review under EO
12866 and any changes made in response to OMB recommendations have been
documented in the docket for this action.
    In addition, EPA prepared an analysis of the potential costs and
benefits associated with this action. This analysis is contained in the
Draft Regulatory Impact Analysis, which is available in the docket for
this rulemaking and at the docket Internet address listed under ADDRESSES above.
2. Paperwork Reduction Act
    The information collection requirements in this proposed rule have
been submitted for approval to the Office of Management and Budget
(OMB) under the Paperwork Reduction Act, 44 U.S.C. 3501 et seq. The
Information Collection Request (ICR) document prepared by EPA has been
assigned EPA ICR number 0783.56.
    The Agency proposes to collect information to ensure compliance
with the provisions in this rule. This includes a variety of
requirements for vehicle manufacturers. Section 208(a) of the Clean Air
Act requires that vehicle manufacturers provide information the
Administrator may reasonably require to determine compliance with the
regulations; submission of the information is therefore mandatory. We
will consider confidential all information meeting the requirements of
section 208(c) of the Clean Air Act.
    As shown in Table III.J.2-1, the total annual burden associated
with this proposal is about 39,900 hours and $5 million, based on a
projection of 33 respondents. The estimated burden for vehicle
manufacturers is a total estimate for both new and existing reporting
requirements. Burden means the total time, effort, or financial
resources expended by persons to generate, maintain, retain, or
disclose or provide information to or for a Federal agency. This
includes the time needed to review instructions; develop, acquire,
install, and utilize technology and systems for the purposes of
collecting, validating, and verifying information, processing and
maintaining information, and disclosing and providing information;
adjust the existing ways to comply with any previously applicable
instructions and requirements; train personnel to be able to respond to
a collection of information; search data sources; complete and review
the collection of information; and transmit or otherwise disclose the
information.

    Table III.J.2-1 Estimated Burden for Reporting and Recordkeeping
                              Requirements
------------------------------------------------------------------------
                                           Annual burden
          Number of respondents                hours       Annual costs
------------------------------------------------------------------------
33......................................          39,940      $5,001,000
------------------------------------------------------------------------

    An agency may not conduct or sponsor, and a person is not required
to respond to a collection of information unless it displays a
currently valid OMB control number. The OMB control numbers for EPA's
regulations in 40 CFR are listed in 40 CFR part 9.
    To comment on the Agency's need for this information, the accuracy
of the provided burden estimates, and any suggested methods for
minimizing respondent burden, including the use of automated collection
techniques, EPA has established a public docket for this rule, which
includes this ICR, under Docket ID number EPA-HQ-OAR-2007-0491. Submit
any comments related to the ICR for this proposed rule to EPA and OMB.
See ADDRESSES section at the beginning of this notice for where to
submit comments to EPA. Send comments to OMB at the Office of
Information and Regulatory Affairs, Office of Management and Budget,
725 17th Street, NW., Washington, DC 20503, Attention: Desk Office for
EPA. Since OMB is required to make a decision concerning the ICR
between 30 and 60 days after September 28, 2009, a comment to OMB is
best assured of having its full effect if OMB receives it by October
28, 2009. The final rule will respond to any OMB or public comments on
the information collection requirements contained in this proposal.
3. Regulatory Flexibility Act
a. Overview
    The Regulatory Flexibility Act (RFA) generally requires an agency
to prepare a regulatory flexibility analysis of any rule subject to
notice and comment rulemaking requirements under the Administrative
Procedure Act or any other statute unless the agency certifies that the
rule will not have a significant economic impact on a substantial
number of small entities. Small entities include small businesses,
small organizations, and small governmental jurisdictions.
    For purposes of assessing the impacts of this rule on small
entities, small entity is defined as: (1) A small business as defined
by the Small Business Administration's (SBA) regulations at 13 CFR
121.201 (see table below); (2) a small governmental jurisdiction that
is a government of a city, county, town, school district or special
district with a population of less than 50,000; and (3) a small
organization that is any not-for-profit enterprise which is
independently owned and operated and is not dominant in its field.
    Table III.J.3-1 provides an overview of the primary SBA small
business categories included in the light-duty vehicle sector:

Table III.J.3--1 Primary SBA Small Business Categories in the Light-Duty
                             Vehicle Sector
------------------------------------------------------------------------
                                   Defined as small
          Industry a             entity by SBA if less    NAICS codes b
                                   than or equal to:
------------------------------------------------------------------------
Light-duty vehicles:
    --Vehicle manufacturers     1,000 employees.......  336111
     (including small volume
     manufacturers).

[[Page 49629]]

    --Independent commercial    $7 million annual       811111, 811112,
     importers.                  sales.                  811198
                                $23 million annual      441120
                                 sales.
                                100 employees.........  423110, 424990
    --Alternative fuel vehicle  750 employees.........  336312, 336322,
     converters.                                         336399
                                1,000 employees.......  335312
                                $7 million annual       454312, 485310,
                                 sales.                  811198
------------------------------------------------------------------------
Notes:
\a\ Light-duty vehicle entities that qualify as small businesses would
  not be subject to this proposed rule. We are deferring action on small
  vehicle entities, and we intend to address these entities in a future rule.
\b\ North American Industrial Classification System.

b. Summary of Potentially Affected Small Entities
    EPA has not conducted a Regulatory Flexibility Analysis or a SBREFA
SBAR Panel for the proposed rule because we are proposing to certify
that the rule would not have a significant economic impact on a
substantial number of small entities. EPA is proposing to defer
standards for manufacturers meeting SBA's definition of small business
as described in 13 CFR 121.201 due to the short lead time to develop
this proposed rule, the extremely small emissions contribution of these
entities, and the potential need to develop a program that would be
structured differently for them (which would require more time). EPA
would instead consider appropriate GHG standards for these entities as
part of a future regulatory action. This includes small entities in
three distinct categories of businesses for light-duty vehicles: Small
volume manufacturers (SVMs), independent commercial importers (ICIs),
and alternative fuel vehicle converters. Based on preliminary
assessment, EPA has identified a total of about 47 vehicle businesses,
about 13 entities (or 28 percent) that fit the Small Business
Administration (SBA) criterion of a small business. There are about 2
SVMs, 8 ICIs, and 3 alternative fuel vehicle converters in the light-
duty vehicle market which are small businesses (no major vehicle
manufacturers meet the small-entity criteria as defined by SBA). EPA
estimates that these small entities comprise about 0.03 percent of the
total light-duty vehicle sales in the U.S. for the year 2007, and
therefore the proposed deferment will have a negligible impact on the
GHG emissions reductions from the proposed standards.
    To ensure that EPA is aware of which companies would be deferred,
EPA is proposing that such entities submit a declaration to EPA
containing a detailed written description of how that manufacturer
qualifies as a small entity under the provisions of 13 CFR 121.201.
Small entities are currently covered by a number of EPA motor vehicle
emission regulations, and they routinely submit information and data on
an annual basis as part of their compliance responsibilities. Because
such entities are not automatically exempted from other EPA regulations
for light-duty vehicles and light-duty trucks, absent such a
declaration, EPA would assume that the entity was subject to the
greenhouse gas control requirements in this GHG proposal. The
declaration would need to be submitted at time of vehicle emissions
certification under the EPA Tier 2 program. EPA expects that the
additional paperwork burden associated with completing and submitting a
small entity declaration to gain deferral from the proposed GHG
standards would be negligible and easily done in the context of other
routine submittals to EPA. However, EPA has accounted for this cost
with a nominal estimate included in the Information Collection Request
completed under the Paperwork Reduction Act. Additional information can
be found in the Paperwork Reduction Act discussion in Section III.I.2.
Based on this, EPA is proposing to certify that the rule would not have
a significant economic impact on a substantial number of small entities.
c. Conclusions
    I therefore certify that this proposed rule will not have a
significant economic impact on a substantial number of small entities.
However, EPA recognizes that some small entities continue to be
concerned about the potential impacts of the statutory imposition of
PSD requirements that may occur given the various EPA rulemakings
currently under consideration concerning greenhouse gas emissions. As
explained in the preamble for the proposed PSD tailoring rule, EPA is
using the discretion afforded to it under section 609(c) of the RFA to
consult with OMB and SBA, with input from outreach to small entities,
regarding the potential impacts of PSD regulatory requirements as that
might occur as EPA considers regulations of GHGs. Concerns about the
potential impacts of statutorily imposed PSD requirements on small
entities will be the subject of deliberations in that consultation and
outreach. Concerned small entities should direct any comments relating
to potential adverse economic impacts on small entities from PSD
requirements for GHG emissions to the docket for the PSD tailoring rule.
    EPA continues to be interested in the potential impacts of the
proposed rule on small entities and welcomes comments on issues related
to such impacts.
4. Unfunded Mandates Reform Act
    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Public
Law 104-4, establishes requirements for Federal agencies to assess the
effects of their regulatory actions on State, local, and tribal
governments and the private sector. Under section 202 of the UMRA, EPA
generally must prepare a written statement, including a cost-benefit
analysis, for proposed and final rules with ``Federal mandates'' that
may result in expenditures to State, local,

[[Page 49630]]

and tribal governments, in the aggregate, or to the private sector, of
$100 million or more in any one year. Before promulgating an EPA rule
for which a written statement is needed, section 205 of the UMRA
generally requires EPA to identify and consider a reasonable number of
regulatory alternatives and adopt the least costly, most cost-effective
or least burdensome alternative that achieves the objectives of the
rule. The provisions of section 205 do not apply when they are
inconsistent with applicable law. Moreover, section 205 allows EPA to
adopt an alternative other than the least costly, most cost-effective
or least burdensome alternative if the Administrator publishes with the
final rule an explanation why that alternative was not adopted.
    Before EPA establishes any regulatory requirements that may
significantly or uniquely affect small governments, including tribal
governments, it must have developed under section 203 of the UMRA a
small government agency plan. The plan must provide for notifying
potentially affected small governments, enabling officials of affected
small governments to have meaningful and timely input in the
development of EPA regulatory proposals with significant Federal
intergovernmental mandates, and informing, educating, and advising
small governments on compliance with the regulatory requirements.
    This proposal contains no Federal mandates (under the regulatory
provisions of Title II of the UMRA) for State, local, or tribal
governments. The rule imposes no enforceable duty on any State, local
or tribal governments. EPA has determined that this rule contains no
regulatory requirements that might significantly or uniquely affect
small governments. EPA has determined that this proposal contains a
Federal mandate that may result in expenditures of $100 million or more
for the private sector in any one year. EPA believes that the proposal
represents the least costly, most cost-effective approach to achieve
the statutory requirements of the rule. The costs and benefits
associated with the proposal are discussed above and in the Draft
Regulatory Impact Analysis, as required by the UMRA.
5. Executive Order 13132 (Federalism)
    This action does not have federalism implications. It will not have
substantial direct effects on the States, on the relationship between
the national government and the States, or on the distribution of power
and responsibilities among the various levels of government, as
specified in Executive Order 13132. This rulemaking would apply to
manufacturers of motor vehicles and not to State or local governments.
Thus, Executive Order 13132 does not apply to this action. Although
section 6 of Executive Order 13132 does not apply to this action, EPA
did consult with representatives of State governments in developing
this action.
    In the spirit of Executive Order 13132, and consistent with EPA
policy to promote communications between EPA and State and local
governments, EPA specifically solicits comment on this proposed action
from State and local officials.
6. Executive Order 13175 (Consultation and Coordination With Indian
Tribal Governments)
    This proposed rule does not have tribal implications, as specified
in Executive Order 13175 (59 FR 22951, November 9, 2000). This rule
will be implemented at the Federal level and impose compliance costs
only on vehicle manufacturers. Tribal governments would be affected
only to the extent they purchase and use regulated vehicles. Thus,
Executive Order 13175 does not apply to this rule. EPA specifically
solicits additional comment on this proposed rule from tribal officials.
7. Executive Order 13045: ``Protection of Children From Environmental
Health Risks and Safety Risks''
    This action is subject to EO 13045 (62 FR 19885, April 23, 1997)
because it is an economically significant regulatory action as defined
by EO 12866, and EPA believes that the environmental health or safety
risk addressed by this action may have a disproportionate effect on
children. A synthesis of the science and research regarding how climate
change may affect children and other vulnerable subpopulations is
contained in the Technical Support Document for Endangerment or Cause
or Contribute Findings for Greenhouse Gases under Section 202(a) of the
Clean Air Act, which can be found in the public docket for this
proposed rule.\408\ A summary of the analysis is presented below.
---------------------------------------------------------------------------

    \408\ U.S. EPA. (2009). Technical Support Document for
Endangerment or Cause or Contribute Findings for Greenhouse Gases
under Section 202(a) of the Clean Air Act. Washington, DC: U.S. EPA.
Retrieved on April 21, 2009 from http://epa.gov/climatechange/
endangerment/downloads/TSD_Endangerment.pdf.
---------------------------------------------------------------------------

    With respect to GHG emissions, the effects of climate change
observed to date and projected to occur in the future include the
increased likelihood of more frequent and intense heat waves.
Specifically, EPA's analysis has determined that severe heat waves are
projected to intensify in magnitude, frequency, and duration over the
portions of the U.S. where these events already occur, with potential
increases in mortality and morbidity, especially among the young,
elderly, and frail. EPA has estimated reductions in projected global
mean surface temperatures as a result of reductions in GHG emissions
associated with the standards proposed in this action (Section III.F).
Children may receive benefits from reductions in GHG emissions because
they are included in the segment of the population that is most
vulnerable to hot temperatures.
    For non-GHG pollutants, EPA has determined that climate change is
expected to increase regional ozone pollution, with associated risks in
respiratory infection, aggravation of asthma, and premature death. The
directional effect of climate change on ambient PM levels remains
uncertain. However, disturbances such as wildfires are increasing in
the U.S. and are likely to intensify in a warmer future with drier
soils and longer growing seasons. PM emissions from forest fires can
contribute to acute and chronic illnesses of the respiratory system,
particularly in children, including pneumonia, upper respiratory
diseases, asthma and chronic obstructive pulmonary diseases.
    The public is invited to submit comments or identify peer-reviewed
studies and data that assess effects of early life exposure to the
pollutants addressed by this proposed rule.
8. Executive Order 13211 (Energy Effects)
    This rule is not a ``significant energy action'' as defined in
Executive Order 13211, ``Actions Concerning Regulations That
Significantly Affect Energy Supply, Distribution, or Use'' (66 FR 28355
(May 22, 2001)) because it is not likely to have a significant adverse
effect on the supply, distribution, or use of energy. In fact, this
rule has a positive effect on energy supply and use. Because the GHG
emission standards proposed today result in significant fuel savings,
this rule encourages more efficient use of fuels. Therefore, we have
concluded that this rule is not likely to have any adverse energy
effects. Our energy effects analysis is described above in Section III.H.
9. National Technology Transfer Advancement Act
    Section 12(d) of the National Technology Transfer and Advancement
Act of 1995 (``NTTAA''), Public Law 104-113, 12(d) (15 U.S.C. 272 note)
directs EPA to use voluntary consensus standards in its regulatory
activities unless to do so would be inconsistent

[[Page 49631]]

with applicable law or otherwise impractical. Voluntary consensus
standards are technical standards (e.g., materials, specifications,
test methods, sampling procedures, and business practices) that are
developed or adopted by voluntary consensus standards bodies. NTTAA
directs EPA to provide Congress, through OMB, explanations when the Agency
decides not to use available and applicable voluntary consensus standards.
    For CO₂, N₂O, and CH₄ emissions,
EPA is proposing to collect data over the same tests that are used for
the CAFE program. This will minimize the amount of testing done by
manufacturers, since manufacturers are already required to run these
tests. For A/C credits, EPA is proposing to use a consensus methodology
developed by the Society of Automotive Engineers (SAE) and also a new A/C
idle test. EPA knows of no consensus standard available for the A/C idle test.
10. Executive Order 12898: Federal Actions To Address Environmental
Justice in Minority Populations and Low-Income Populations
    Executive Order (EO) 12898 (59 FR 7629 (Feb. 16, 1994)) establishes
Federal executive policy on environmental justice. Its main provision
directs Federal agencies, to the greatest extent practicable and
permitted by law, to make environmental justice part of their mission
by identifying and addressing, as appropriate, disproportionately high
and adverse human health or environmental effects of their programs,
policies, and activities on minority populations and low-income
populations in the United States.
    With respect to GHG emissions, EPA has determined that this
proposed rule will not have disproportionately high and adverse human
health or environmental effects on minority or low-income populations
because it increases the level of environmental protection for all
affected populations without having any disproportionately high and
adverse human health or environmental effects on any population,
including any minority or low-income population. The reductions in
CO₂ and other GHGs associated with the proposed standards
will affect climate change projections, and EPA has estimated
reductions in projected global mean surface temperatures (Section
III.F.3). Within settlements experiencing climate change, certain parts
of the population may be especially vulnerable; these include the poor,
the elderly, those already in poor health, the disabled, those living
alone, and/or indigenous populations dependent on one or a few
resources. \409\ Therefore, these populations may receive benefits from
reductions in GHGs.
---------------------------------------------------------------------------

    \409\ U.S. EPA. (2009). Technical Support Document for
Endangerment or Cause or Contribute Findings for Greenhouse Gases
under Section 202(a) of the Clean Air Act. Washington, DC: U.S. EPA.
Retrieved on April 21, 2009 from http://epa.gov/climatechange/
endangerment/downloads/TSD_Endangerment.pdf.
---------------------------------------------------------------------------

    For non-GHG co-pollutants such as ozone, PM_2.5, and
toxics, EPA has concluded that it is not practicable to determine
whether there would be disproportionately high and adverse human health
or environmental effects on minority and/or low income populations from
this proposed rule.

J. Statutory Provisions and Legal Authority

    Statutory authority for the vehicle controls proposed today is
found in section 202 (a) (which authorizes standards for emissions of
pollutants from new motor vehicles which emissions cause or contribute
to air pollution which may reasonably be anticipated to endanger public
health or welfare), 202 (d), 203-209, 216, and 301 of the Clean Air
Act, 42 U.S.C. 7521 (a), 7521 (d), 7522, 7523, 7524, 7525, 7541, 7542,
7543, 7550, and 7601.

IV. NHTSA Proposal for Passenger Car and Light Truck CAFE Standards for
MYs 2012-2016

A. Executive Overview of NHTSA Proposal

1. Introduction
    The National Highway Traffic Safety Administration (NHTSA) is
proposing to establish corporate average fuel economy standards for
passenger automobiles (passenger cars) and nonpassenger automobiles
(light trucks) for model years (MY) 2012-2016. Improving vehicle fuel
economy has been long and widely recognized as one of the key ways of
achieving energy independence, energy security, and a low carbon
economy.\410\ NHTSA's proposed standards will require passenger cars
and light trucks to meet an estimated combined average of 34.1 mpg in
MY 2016. This represents an average annual increase of 4.3 percent from
the 27.3 mpg combined fuel economy level in MY 2011. NHTSA's proposal
projects total fuel savings of approximately 61.6 billion gallons over
the lifetimes of the vehicles sold in model years 2012-2016, with
corresponding net societal benefits of approximately $201.7 billion.
---------------------------------------------------------------------------

    \410\ Among the reports and studies noting this point are the following:
    John Podesta, Todd Stern and Kim Batten, ``Capturing the Energy
Opportunity; Creating a Low-Carbon Economy,'' Center for American
Progress (November 2007), pp. 2, 6, 8, and 24-29, available at:
http://www.americanprogress.org/issues/2007/11/pdf/energy_
chapter.pdf  (last accessed August 9, 2009).
    Sarah Ladislaw, Kathryn Zyla, Jonathan Pershing, Frank
Verrastro, Jenna Goodward, David Pumphrey, and Britt Staley, ``A
Roadmap for a Secure, Low-Carbon Energy Economy; Balancing Energy
Security and Climate Change,'' World Resources Institute and Center
for Strategic and International Studies (January 2009), pp. 21-22;
available at: http://pdf.wri.org/secure_low_carbon_energy_
economy_roadmap.pdf  (last accessed August 9, 2009).
    Alliance to Save Energy et al., ``Reducing the Cost of
Addressing Climate Change Through Energy Efficiency (2009),
available at: http://Aceee.org/energy/climate/leg.htm  (last accessed
August 9, 2009).
    John DeCicco and Freda Fung, ``Global Warming on the Road; The
Climate Impact of America's Automobiles,'' Environmental Defense
(2006) pp. iv-vii; available at: http://www.edf.org/documents/5301_
Globalwarmingontheroad.pdf  (last accessed August 9, 2009).
    ``Why is Fuel Economy Important?,'' a Web page maintained by the
Department of Energy and Environmental Protection Agency, available
at http://www.fueleconomy.gov/feg/why.shtml (last accessed August 9, 2009);
    Robert Socolow, Roberta Hotinski, Jeffery B. Greenblatt, and
Stephen Pacala, ``Solving the Climate Problem: Technologies
Available to Curb CO₂ Emissions,'' Environment, volume
46, no. 10, 2004. Pages 8-19, available at: http://
www.princeton.edu/~cmi/resources/CMI_Resources_new_files/
Environ_08-21a.pdf  (last accessed August 9, 2009).
---------------------------------------------------------------------------

    The significance accorded improving fuel economy reflects several
factors. Conserving energy, especially reducing the nation's dependence
on petroleum, benefits the U.S. in several ways. Improving energy
efficiency has benefits for economic growth and the environment, as
well as other benefits, such as reducing pollution and improving
security of energy supply. More specifically, reducing total petroleum
use decreases our economy's vulnerability to oil price shocks. Reducing
dependence on oil imports from regions with uncertain conditions
enhances our energy security. Additionally, the emission of
CO₂ from the tailpipes of cars and light trucks is one of
the largest sources of U.S. CO₂ emissions.\411\ Using
vehicle technology to improve fuel economy, and thereby reducing
tailpipe emissions of CO₂, is one of the three main measures
of reducing those tailpipe emissions of CO₂.\412\ The two
other measures for

[[Page 49632]]

reducing the tailpipe emissions of CO₂ are switching to
vehicle fuels with lower carbon content and changing driver behavior,
i.e., inducing people to drive less.
---------------------------------------------------------------------------

    \411\ EPA Inventory of U.S. Greenhouse Gas Emissions and Sinks:
1990--2006 (April 2008), pp. ES-4, ES-8, and 2-24. Available at
http://www.epa.gov/climatechange/emissions/usgginv_archive.html
(last accessed August 9, 2009).
    \412\ Podesta et al., p. 25; Ladislaw et al. p. 21; DeCicco et
al. p. vii; ``Reduce Climate Change,'' a Web page maintained by the
Department of Energy and Environmental Protection Agency at http://
www.fueleconomy.gov/feg/climate.shtml (last accessed August 9, 2009).
---------------------------------------------------------------------------

    While NHTSA has been setting fuel economy standards since the
1970s, today's action represents the first-ever joint proposal by NHTSA
with another agency, the Environmental Protection Agency. As discussed
in Section I, NHTSA's proposed MYs 2012-2016 CAFE standards are part of
a joint National Program, such that a large majority of the projected
benefits are achieved jointly with EPA's GHG rule, described in detail
above in Section III of this preamble. These proposed CAFE standards
are consistent with the President's National Fuel Efficiency Policy
announcement of May 19, 2009, which calls for harmonized rules for all
automakers, instead of three overlapping and potentially inconsistent
requirements from DOT, EPA, and the California Air Resources Board. And
finally, the proposed CAFE standards and the analysis supporting them
also respond to President's Obama's January 26 memorandum regarding the
setting of CAFE standards for model years 2011 and beyond.
2. Role of Fuel Economy Improvements in Promoting Energy Independence,
Energy Security, and a Low Carbon Economy
    The need to reduce energy consumption is more crucial today than it
was when EPCA was enacted in the mid-1970s. U.S. energy consumption has
been outstripping U.S. energy production at an increasing rate. Net
petroleum imports now account for approximately 57 percent of U.S.
domestic petroleum consumption, and the share of U.S. oil consumption
for transportation is approximately 71 percent.\413\ Moreover, world
crude oil production continues to be highly concentrated, exacerbating
the risks of supply disruptions and their negative effects on both the
U.S. and global economies.
---------------------------------------------------------------------------

    \413\ Energy Information Administration, Petroleum Basic
Statistics, updated July 2009. Available at http://www.eia.doe.gov/
basics/quickoil.html (last accessed August 9, 2009).
---------------------------------------------------------------------------

    Gasoline consumption in the U.S. has historically been relatively
insensitive to fluctuations in both price and consumer income, and
people in most parts of the country tend to view gasoline consumption
as a non-discretionary expense. Thus, when gasoline's share in consumer
expenditures rises, the public experiences fiscal distress. This fiscal
distress can, in some cases, have macroeconomic consequences for the
economy at large. Additionally, since U.S. oil production is only
affected by fluctuations in prices over a period of years, any changes
in petroleum consumption (as through increased fuel economy) largely
flow into changes in the quantity of imports. Although petroleum
imports only account for about 2 percent of GDP, they are large enough
to create a discernible fiscal drag. As a consequence, however,
measures that reduce petroleum consumption, such as fuel economy
standards, will flow directly into the balance-of-payments account, and
strengthen the domestic economy to some degree. And finally, U.S.
foreign policy has been affected for decades by rising U.S. and world
dependency of crude oil as the basis for modern transportation systems,
although fuel economy standards have only an indirect and general
impact on U.S. foreign policy.
    The benefits of a low carbon economy are manifold. The U.S.
transportation sector is a significant contributor to total U.S. and
global anthropogenic emissions of greenhouse gases. Motor vehicles are
the second largest greenhouse gas-emitting sector in the U.S., after
electricity generation, and accounted for 24 percent of total U.S.
greenhouse gas emissions in 2006. Concentrations of greenhouse gases
are at unprecedented levels compared to the recent and distant past,
which means that fuel economy improvements to reduce those emissions
are a crucial step toward addressing the risks of global climate
change. These risks are well documented in section III of this notice.
3. The National Program
    NHTSA and EPA are each announcing proposed rules that have the
effect of addressing the urgent and closely intertwined challenges of
energy independence and security and global warming. These proposed
rules call for a strong and coordinated Federal greenhouse gas and fuel
economy program for passenger cars, light-duty-trucks, and medium-duty
passenger vehicles (hereafter light-duty vehicles), referred to as the
National Program. The proposed rules represent a coordinated program
that can achieve substantial reductions of greenhouse gas (GHG)
emissions and improvements in fuel economy from the light-duty vehicle
part of the transportation sector, based on technology that will be
commercially available and that can be incorporated at a reasonable
cost. The agencies' proposals will also provide regulatory certainty
and consistency for the automobile industry by setting harmonized
national standards. They were developed and are designed in ways that
recognize and accommodate the serious current economic situation faced
by this industry.
    This joint notice is consistent with the President's announcement
on May 19, 2009 of a National Fuel Efficiency Policy that will reduce
greenhouse gas emissions and improve fuel economy for all new cars and
light-duty trucks sold in the United States,\414\ and with the Notice
of Upcoming Joint Rulemaking signed by DOT and EPA on that date.\415\
This joint notice also responds to the President's January 26, 2009
memorandum on CAFE standards for model years 2011 and beyond, the
details of which can be found in Section IV of this joint notice.
---------------------------------------------------------------------------

    \414\ President Obama Announces National Fuel Efficiency Policy,
The White House, May 19, 2009.
    \415\ 74 FR 24007 (May 22, 2009).
---------------------------------------------------------------------------

a. Building Blocks of the National Program
    The National Program is both needed and possible because the
relationship between improving fuel economy and reducing CO₂
tailpipe emissions is a very direct and close one. CO₂ is
the natural by-product of the combustion of fuel in motor vehicle
engines. The more fuel efficient a vehicle is, the less fuel it burns
to travel a given distance. The less fuel it burns, the less
CO₂ it emits in traveling that distance.\416\ Since the
amount of CO₂ emissions is essentially constant per gallon
combusted of a given type of fuel, the amount of fuel consumption per
mile is directly related to the amount of CO₂ emissions per
mile. In the real world, there is a single pool of technologies for
reducing fuel consumption and CO₂ emissions. Using those
technologies in the way that minimizes fuel consumption also minimizes
CO₂ emissions. While there are emission control technologies
that can capture or destroy the pollutants (e.g., carbon monoxide) that
are produced by imperfect combustion of fuel, there is at present no
such technology for CO₂. In fact, the only way at present to
reduce tailpipe emissions of CO₂ is by reducing fuel
consumption. The National Program thus has dual benefits: It conserves
energy by improving fuel economy, as required of NHTSA by EPCA and
EISA; in the process, it necessarily reduces tailpipe

[[Page 49633]]

CO₂ emissions consonant with EPA's purposes and
responsibilities under the Clean Air Act.
---------------------------------------------------------------------------

    \416\ Panel on Policy Implications of Greenhouse Warming,
National Academy of Sciences, National Academy of Engineering,
Institute of Medicine, ``Policy Implications of Greenhouse Warming:
Mitigation, Adaptation, and the Science Base,'' National Academies
Press, 1992, at 287.
---------------------------------------------------------------------------

i. DOT's CAFE Program
    In 1975, Congress enacted the Energy Policy and Conservation Act
(EPCA), mandating a regulatory program for motor vehicle fuel economy
to meet the various facets of the need to conserve energy, including
ones having energy independence and security, environmental and foreign
policy implications. EPCA allocates the responsibility for implementing
the program between NHTSA and EPA as follows:
    • NHTSA sets Corporate Average Fuel Economy (CAFE) standards
for passenger cars and light trucks.
    • Because fuel economy performance is measured during
emissions regulation testing, EPA establishes the procedures for
testing, tests vehicles, collects and analyzes manufacturers' test
data, and calculates the average fuel economy of each manufacturer's
passenger cars and light trucks. EPA determines fuel economy by the
simple expedient of measuring the amount of CO₂ emitted from
the tailpipe, not by attempting to measure directly the amount of fuel
consumed during a vehicle test, a difficult task to accomplish with
precision. EPA then uses the carbon content of the test fuel\417\ to
calculate the amount of fuel that had to be consumed per mile in order
to produce that amount of CO_2. Finally, EPA converts that
fuel consumption figure into a miles-per-gallon figure.
---------------------------------------------------------------------------

    \417\ This is the method that EPA uses to determine compliance
with NHTSA's CAFE standards.
---------------------------------------------------------------------------

    • Based on EPA's calculation, NHTSA enforces the CAFE standards.
    The CAFE standards and compliance testing cannot capture all of the
real world CO₂ emissions, because EPCA requires EPA to use
the 1975 passenger car test procedures under which vehicle air
conditioners are not turned on during fuel economy testing.\418\ CAFE
standards also do not address the 5-8 percent of GHG emissions that are
not CO₂, i.e., nitrous oxide (N₂O), and methane
(CH₄) as well as emissions of CO₂ and hydrofluorocarbons
(HFCs) related to operation of the air conditioning system.
---------------------------------------------------------------------------

    \418\ See 49 U.S.C. 32904(c).
---------------------------------------------------------------------------

    NHTSA has been setting CAFE standards pursuant to EPCA since the
enactment of the statute. Fuel economy gains since 1975, due both to
the standards and market factors, have resulted in saving billions of
barrels of oil and avoiding billions of metric tons of CO₂
emissions. In December 2007, Congress enacted the Energy Independence
and Securities Act (EISA), amending EPCA to require, among other
things, attribute-based standards for passenger cars and light trucks.
The most recent CAFE rulemaking action was the issuance of standards
governing model years 2011 cars and trucks.
ii. EPA's Greenhouse Gas Program
    On April 2, 2007, the U.S. Supreme Court issued its opinion in
Massachusetts v. EPA,\419\ a case involving a 2003 order of the
Environmental Protection Agency (EPA) denying a petition for rulemaking
to regulate greenhouse gas emissions from motor vehicles under the
Clean Air Act.\420\ The Court ruled that greenhouse gases are
``pollutants'' under the CAA and that the Act therefore authorizes EPA
to regulate greenhouse gas emissions from motor vehicles if that agency
makes the necessary findings and determinations under section 202 of
the Act. The Court considered EPCA only briefly, stating that the two
obligations may overlap, but there is no reason to think the two
agencies cannot both administer their obligations and yet avoid inconsistency.
---------------------------------------------------------------------------

    \419\ 127 S.Ct. 1438 (2007).
    \420\ 68 FR 52922 (Sept. 8, 2003).
---------------------------------------------------------------------------

    EPA has been working on appropriate responses that are consistent
with the decision of the Supreme Court in Massachusetts v. EPA.\421\ As
part of those responses, in July 2008, EPA issued an Advance Notice of
Proposed Rulemaking seeking comments on the impact of greenhouse gases
on the environment and on ways to reduce greenhouse gas emissions from
motor vehicles. EPA recently also proposed to find that emissions of
GHGs from new motor vehicles and motor vehicle engines cause or
contribute to air pollution that may reasonably be anticipated to
endanger public health and welfare.\422\
---------------------------------------------------------------------------

    \421\ 549 U.S. 497 (2007). For further information on
Massachusetts v. EPA see the July 30, 2008 Advance Notice of
Proposed Rulemaking, ``Regulating Greenhouse Gas Emissions under the
Clean Air Act'', 73 FR 44354 at 44397. There is a comprehensive
discussion of the litigation's history, the Supreme Court's
findings, and subsequent actions undertaken by the EPA from 2007-
2008 in response to the Supreme Court remand.
    \422\ 74 FR 18886 (Apr. 24, 2009).
---------------------------------------------------------------------------

iii. California Air Resources Board's Greenhouse Gas Program
    In 2004, the California Air Resources Board approved standards for
new light-duty vehicles, which regulate the emission of not only
CO₂, but also other GHGs. Since then, thirteen States and
the District of Columbia, comprising approximately 40 percent of the
light-duty vehicle market, have adopted California's standards. These
standards apply to model years 2009 through 2016 and require reductions
in CO2 emissions for passenger cars and some light trucks of 323 g/mil
in 2009 up to 205 g/mi in 2016, and 439 g/mi for light trucks in 2009
up to 332 g/mi in 2016. In 2008, EPA denied a request by California for
a waiver of preemption under the CAA for its GHG emissions standards.
However, consistent with another Presidential Memorandum of January 26,
2009, EPA reconsidered the prior denial of California's request.\423\
EPA withdrew the prior denial and granted California's request for a
waiver on June 30, 2009.\424\ The granting of the waiver permits
California's emission standards to come into effect notwithstanding the
general preemption of State emission standards for new motor vehicles
that otherwise applies under the Clean Air Act.
---------------------------------------------------------------------------

    \423\ 74 FR 7040 (Feb. 12, 2009).
    \424\ 74 FR 32744 (July 8, 2009).
---------------------------------------------------------------------------

b. The President's Announcement of National Fuel Efficiency Policy (May 2009)
    The issue of three separate regulatory frameworks and overlapping
requirements for reducing fuel consumption and CO₂ emissions
has been a subject of much controversy and legal disputes. On May 19,
2009 President Obama announced a National Fuel Efficiency Policy aimed
at both increasing fuel economy and reducing greenhouse gas pollution
for all new cars and trucks sold in the United States, while also
providing a predictable regulatory framework for the automotive
industry. The policy seeks to set harmonized Federal standards to
regulate both fuel economy and greenhouse gas emissions while
preserving the legal authorities of the Department of Transportation,
the Environmental Protection Agency and the State of California. The
program covers model year 2012 to model year 2016 and ultimately
requires the equivalent of an average fuel economy of 35.5 mpg in 2016,
if all CO₂ reduction were achieved through fuel economy
improvements. Building on the MY 2011 standard that was set in March
2009, this represents an average of 5 percent increase in average fuel
economy each year between 2012 and 2016.
    In conjunction with the President's announcement, the Department of
Transportation and the Environmental Protection Agency issued on May
19, 2009, a Notice of Upcoming Joint

[[Page 49634]]

Rulemaking to propose a strong and coordinated fuel economy and
greenhouse gas National Program for Model Year (MY) 2012-2016 light
duty vehicles. Consistent, harmonized, and streamlined requirements
under that program hold out the promise of delivering environmental and
energy benefits, cost savings, and administrative efficiencies on a
nationwide basis that might not be available under a less coordinated
approach. The proposed National Program makes it possible for the
standards of two different Federal agencies and the standards of
California and other States to act in a unified fashion in providing
these benefits. Establishing a harmonized approach to regulating light-
duty vehicle greenhouse gas (GHG) emissions and fuel economy is
critically important given the interdependent goals of addressing
climate change and ensuring energy independence and security.
Additionally, establishing a harmonized approach may help to mitigate
the cost to manufacturers of having to comply with multiple sets of
Federal and State standards
4. Review of CAFE Standard Setting Methodology per the President's
January 26, 2009 Memorandum on CAFE Standards for MYs 2011 and Beyond
    On May 2, 2008, NHTSA published a Notice of Proposed Rulemaking
entitled Average Fuel Economy Standards, Passenger Cars and Light
Trucks; Model Years 2011-2015, 73 Fed. Reg. 24352. In mid-October, the
agency completed and released a final environmental impact statement in
anticipation of issuing standards for those years. Based on its
consideration of the public comments and other available information,
including information on the financial condition of the automotive
industry, the agency adjusted its analysis and the standards and
prepared a final rule for MYs 2011-2015. On November 14, the Office of
Information and Regulatory Affairs (OIRA) of the Office of Management
and Budget concluded review of the rule as consistent with the
Order.\425\ However, issuance of the final rule was held in abeyance.
On January 7, 2009, the Department of Transportation announced that the
final rule would not be issued, saying:
---------------------------------------------------------------------------

    \425\ Record of OIRA's action can be found at http://
www.reginfo.gov/public/do/eoHistReviewSearch (last accessed August
9, 2009). To find the report on the clearance of the draft final
rule, select ``Department of Transportation'' under ``Economically
Significant Reviews Completed'' and select ``2008'' under ``Select
Calendar Year.''
---------------------------------------------------------------------------

    The Bush Administration will not finalize its rulemaking on
Corporate Fuel Economy Standards. The recent financial difficulties of
the automobile industry will require the next administration to conduct
a thorough review of matters affecting the industry, including how to
effectively implement the Energy Independence and Security Act of 2007
(EISA). The National Highway Traffic Safety Administration has done
significant work that will position the next Transportation Secretary
to finalize a rule before the April 1, 2009 deadline.\426\
---------------------------------------------------------------------------

    \426\ The statement can be found at http://www.dot.gov/affairs/
dot0109.htm (last accessed August 9, 2009).
---------------------------------------------------------------------------

a. Requests in the President's Memorandum
    In light of the requirement to prescribe standards for MY 2011 by
March 30, 2009 and in order to provide additional time to consider
issues concerning the analysis used to determine the appropriate level
of standards for MYs 2012 and beyond, the President issued a memorandum
on January 26, 2009, requesting the Secretary of Transportation and
Administrator\427\ of the National Highway Traffic Safety
Administration NHTSA to divide the rulemaking into two parts: (1) MY
2011 standards, and (2) standards for MY 2012 and beyond.
---------------------------------------------------------------------------

    \427\ Currently, the National Highway Traffic Safety
Administration does not have an Administrator. Ronald L. Medford is
the Acting Deputy Administrator.
---------------------------------------------------------------------------

i. CAFE Standards for Model Year 2011
    The request that the final rule establishing CAFE standards for MY
2011 passenger cars and light trucks be prescribed by March 30, 2009
was based on several factors. One was the requirement that the final
rule regarding fuel economy standards for a given model year must be
adopted at least 18 months before the beginning of that model year (49
U.S.C. 32902(g)(2)). The other was that the beginning of MY 2011 is
considered for the purposes of CAFE standard setting to be October 1, 2010.
ii. CAFE Standards for Model Years 2012 and Beyond
    The President requested that, before promulgating a final rule
concerning the model years after model year 2011, NHTSA

    [C]onsider the appropriate legal factors under the EISA, the
comments filed in response to the Notice of Proposed Rulemaking, the
relevant technological and scientific considerations, and to the
extent feasible, the forthcoming report by the National Academy of
Sciences mandated under section 107 of EISA.

    In addition, the President requested that NHTSA consider whether
any provisions regarding preemption are appropriate under applicable
law and policy.
b. Implementing the President's Memorandum
    In keeping with the President's remarks on January 26 for new
national policies to address the closely intertwined issues of energy
independence, energy security and climate change, and for the
initiation of serious and sustained domestic and international action
to address them, NHTSA has developed CAFE standards for MY 2012 and
beyond after collecting new information, conducting a careful review of
technical and economic inputs and assumptions, and standard setting
methodology, and completing new analyses.
    The goal of the review and re-evaluation was to ensure that the
approach used for MY 2012 and thereafter would produce standards that
contribute, to the maximum extent possible under EPCA/EISA, to meeting
the energy and environmental challenges and goals outlined by the
President. We have sought to craft our program with the goal of
creating the maximum incentives for innovation, providing flexibility
to the regulated parties, and meeting the goal of making substantial
and continuing reductions in the consumption of fuel. To that end, we
have made every effort to ensure that the CAFE program for MYs 2012-
2016 is based on the best scientific, technical, and economic
information available, and that such information was developed in close
coordination with other Federal agencies and our stakeholders,
including the States and the vehicle manufacturers.
    We have also re-examined EPCA, as amended by EISA, to consider
whether additional opportunities exist to improve the effectiveness of
the CAFE program. For example, EPCA authorizes increasing the amount of
civil penalties for violating the CAFE standards.\428\ Further, if the
test procedures used for light trucks were revised to provide for the
operation of air conditioning during fuel economy testing, vehicle
manufacturers would have a regulatory incentive to increase the
efficiency and reduce the weight of air conditioning systems, thereby
reducing both fuel

[[Page 49635]]

consumption and tailpipe emissions of CO₂.
---------------------------------------------------------------------------

    \428\ Under 49 U.S.C. 32904(c), EPA must use the same procedures
for passenger automobiles that the Administrator used for model year
1975 (weighted 55 percent urban cycle and 45 percent highway cycle),
or procedures that give comparable results.
---------------------------------------------------------------------------

    With respect to the President's request that NHTSA consider the
issue of preemption, NHTSA is deferring further consideration of the
preemption issue. The agency believes that it is unnecessary to address
the issue further at this time because of the consistent and
coordinated Federal standards that would apply nationally under the
proposed National Program.
    The following paragraphs provide a summary addressing how NHTSA has
complied with the President's requests in the January 26 memorandum.
NHTSA has reviewed comments received on the MY 2011 rulemaking and
revisited its assumptions and methodologies for purposes of developing
the proposed MY 2012-2016 standards. For any given assumption or aspect
of NHTSA's analysis, comments rarely converged on a single position--
and for many issues, NHTSA received diametrically-opposed comments from
different parties--which makes it challenging to resolve the concerns
of all parties in a single stroke. However, NHTSA has taken a fresh
look at all the issues as part of its joint process with EPA, changing
some assumptions and methodologies and validating others. The agency is
confident that the assumptions and analysis used to develop these
proposed standards represent the best possible approach that is
consistent with NHTSA's statutory requirements for setting the required
fuel economy standards.
    The paragraphs below describe generally how the agency has reviewed
comments on different issues related to the setting of the standards,
and how the agency has either revised or validated its approach for the
MY 2012-2016 standards. Much more detail on how the agency addresses
all of these issues is found below in the rest of NHTSA's section of
this preamble, in the joint TSD, and in NHTSA's PRIA.
    How stringent should the standards be? How quickly should they increase?
    EPCA requires that NHTSA set its standards for each model year at
the ``maximum feasible average fuel economy level that the Secretary
decides the manufacturers can achieve in that model year'' considering
four factors: technological feasibility, economic practicability, the
effect of other standards of the Government on fuel economy, and the
need of the nation to conserve energy. None of these factors is further
defined in the statute, and ``maximum feasible average fuel economy
level'' is itself defined, if at all, only by reference to those four
factors and the Secretary's consideration of them.\429\ In addition,
the agency has the authority to and traditionally does consider other relevant
factors, such as the effect of the CAFE standards on motor vehicle safety.
---------------------------------------------------------------------------

    \429\ 49 U.S.C. 32902(a).
---------------------------------------------------------------------------

    In the previous CAFE rulemaking, NHTSA proposed to set standards at
the point at which societal net benefits were maximized, which drew a
number of comments from both manufacturers and environmental and public
interest groups. Manufacturers generally commented that standards
should be lower than the ``maximizing net benefits'' alternative, due
to lead time concerns and manufacturers' difficulties in raising
capital. Environmental and consumer groups, as well as a number of
State Attorneys General, commented that NHTSA should set standards
above that point, with some arguing in favor of standards as high as
those at the point at which total costs equaled total benefits.
Commenters also emphasized that NHTSA should ensure that standards
increased ratably, as required by EISA.
    For this NPRM, NHTSA has analyzed the costs and benefits of the
``maximizing net benefits'' alternative and other alternatives, using
inputs that diverge substantially from those used in the analyses in
the previous rulemakings to establish attribute-based standards. But
the agency has not sought to use ``maximizing net benefits'' as a
governing principle to select the applicable fuel economy standard in
this NPRM. NHTSA's balancing of the statutory factors in these
difficult financial times leads it to make a different conclusion this
time: NHTSA is proposing to set standards at 34.1 mpg in MY 2016, below
the point at which net benefits are maximized, due to economic
practicability concerns. The results of the alternatives analysis for
the ``maximizing net benefits'' alternative and the ``total costs =
total benefits'' alternative may be found in the DEIS and in the PRIA.
    Additionally, because today's proposed standards cover five model
years, as opposed to the single model year covered by the March final
rule, NHTSA is better able in this rulemaking to confirm that the
standards do, in fact, increase ratably, as required by EISA.
    What attribute should NHTSA use to set the standards?
    In the previous rulemaking, most commenters agreed with NHTSA's use
of footprint as the vehicle attribute for setting CAFE standards. Some
manufacturers commented that NHTSA should consider multiple
attributes--for example, sports car manufacturers suggested a mix of
footprint and horsepower, while truck manufacturers suggested a mix of
footprint and towing, hauling, or off-road capability. Several members
of Congress also supported the latter comment.
    For this NPRM, NHTSA and EPA together reconsidered the appropriate
attribute for setting CAFE and CO₂ standards, and conclude
that footprint best provides the ability address safety concerns
without creating undue risk that program benefits will be lost to
induced mix shifting. More information about this decision may be found
in Section IV.C.5 below, in the draft joint TSD, and in NHTSA's PRIA.
    What data should NHTSA use to develop the baseline market forecast?
    In the previous rulemaking, the proposed standards were based on
data from only the seven largest manufacturers. Several small and
limited-line manufacturers commented that either the passenger car
standards should be based on the plans of all manufacturers subject to
the standards, or some alternative form of standard should be set for
them. Ultimately, NHTSA set the MY 2011 standards based on the plans of
all manufacturers subject to the standards.
    However, a number of commenters also called for NHTSA to cease
using manufacturer's confidential product plans in any way for
developing the standards. Because manufacturers request confidentiality
when they submit their product plans to the agency out of competitive
concerns, NHTSA is prohibited by regulation from releasing that
information to the public. Thus, when NHTSA developed a baseline market
forecast using information from the manufacturer's product plans, NHTSA
could not release that forecast intact for public review.
    For this NPRM, in response to these concerns, NHTSA and EPA are
using a baseline market file developed almost entirely from publicly-
available data. Relying on adjusted MY 2008 CAFE compliance data
enables the agency to make the baseline public and helps to address
transparency concerns. However, by virtue of not being based on product
plans, some manufacturers' concerns that the baseline does not
represent their particular intentions for MYs 2012-2016 may not be
addressed. These issues are explained in more detail in Section IV.C.1
below, in the draft joint TSD, and in NHTSA's PRIA.
    Did commenters agree with NHTSA's technology assumptions?
    In the previous rulemaking, manufacturers generally commented that
NHTSA had underestimated the costs of technologies and overestimated

[[Page 49636]]

their effectiveness, and that the rate of diesel and hybrid application
required by the standards was too high, too quickly. Environmental and
consumer groups, and the States Attorneys General who commented,
largely argued the opposite. Environmental and consumer groups and the
States Attorneys General also commented that NHTSA should include
downweighting in its analysis for vehicles under 5,000 lbs GVWR, while
the Insurance Institute for Highway Safety (IIHS) argued that NHTSA's
approach to restricting downweighting to only those vehicles was correct.
    For this NPRM, NHTSA, with EPA, has revisited every one of its cost
and effectiveness estimates for individual technologies. Many of the
estimates used in the MY 2011 final rule have been validated, while
some have changed, notably the estimates for turbocharging and
downsizing, diesels, and hybrids. Overall, the individual technology
costs are lower for purposes of this NPRM than in the MY 2011 final
rule due to the Indirect Cost Markup methodology developed by EPA for
this rulemaking, which results in a lower markup than the 1.5 Retail
Price Equivalent (RPE) markup previously used. The considerable
majority of estimates for individual technology effectiveness were
validated; changes largely resulted from the redefinition of certain
electrification-related technologies and mild hybrids.
    Additionally, NHTSA is now applying downweighting/material
substitution to vehicles below 5,000 lbs GVWR, albeit in a way that, we
believe, mitigates the safety concerns to some extent. These issues are
explained in more detail in Section IV.C.2 below, in the draft joint
TSD, and in NHTSA's PRIA.
    With regard to the President's request that NHTSA consider, ``to
the extent feasible, the forthcoming report by the National Academy of
Sciences mandated under section 107 of EISA,'' we note that it was not
feasible to consider this report for purposes of this NPRM because it
is not scheduled to be completed until Fall 2009. However, NHTSA
intends to make it available in the rulemaking docket as soon as the
agency receives it, and will consider it for the final rule.
    Did commenters agree with NHTSA's economic assumptions?
    In the previous rulemaking, NHTSA primarily received comments
regarding four particular economic assumptions. Regarding fuel prices,
many commenters supported NHTSA's use of the AEO 2008 Reference Case,
while many commenters also argued, given high pump prices in summer
2008, that NHTSA should use at least the AEO High Price Case or
possibly a higher estimate. Regarding the discount rate, some
commenters supported NHTSA's use of 7 percent, while others argued that
NHTSA should use no higher than 3 percent. Regarding the magnitude of
the rebound effect, some commenters supported NHTSA's use of a 15
percent rebound effect, while some called for a higher number and some
called for numbers as low as zero percent. And finally, for the social
cost of carbon, some commenters supported NHTSA's use of a domestic
value and stated that the value should be $7/ton or lower, while other
commenters argued that NHTSA should use a global value much higher than
$7/ton, although there was little consensus as to what precise number.
    For this NPRM, NHTSA, with EPA, has revisited every one of its
economic assumptions. Many of the assumptions used in the MY 2011 final
rule have been validated, while some have changed. For fuel prices,
NHTSA used the AEO High Price Case in the MY 2011 final rule, but
stated that its decision was based on its expectation that the
Reference Case would soon be revised to reflect higher estimates of
future fuel prices. EIA did, in fact, revise the Reference Case upward
in AEO 2009 to levels higher than the 2008 High Price Case, and NHTSA
has therefore elected to use the Reference Case for this NPRM. For the
discount rate, NHTSA is continuing to conduct and present the results
of analyses using both a 3 percent and a 7 percent rate, as is EPA in
its analysis. For the rebound effect, NHTSA took a fresh look at the
recent literature and developed new estimates for the rebound effect,
and has used a value of 10 percent in its analysis. And for the social
cost of carbon, based on the results of an interagency effort to
develop an estimate that can be used by all government agencies in
rulemakings that affect climate change, NHTSA has conducted analyses
for this NPRM using a range of values from $5 to $56/ton, representing
global SCC values. These issues are explained in Section II above, in
more detail in Section IV.C.3 below, in the joint TSD, and in NHTSA's PRIA.
    Did commenters agree with NHTSA's analytical tools?
    In the previous rulemaking, although some commenters generally
supported NHTSA's use of the CAFE modeling system developed by DOT's
Volpe National Transportation Systems Center (Volpe Center), other
commenters expressed concerns regarding the modeling system, the ways
in which the system was applied, and accessibility of the system and
its inputs and outputs.
    Technical concerns regarding the model itself centered on the fact
that it does not apply a direct and explicit representation of the
physical processes connecting the engineering characteristics of a
given vehicle to that vehicle's fuel economy. As NHTSA explained in its
March 2009 Federal Register notice establishing final MY 2011 CAFE
standards, full vehicle simulation could useful in developing model
inputs, but not, at least in the foreseeable future, in performing
forward-looking analysis of the future fleet.\430\ Having again
reconsidered this issue, NHTSA again concludes that with proper care in
developing model inputs, the Volpe model is as ``physics-based'' as is
practical or necessary for CAFE analysis.
---------------------------------------------------------------------------

    \430\ 74 FR 14371-72 (Mar. 30, 2009).
---------------------------------------------------------------------------

    Some commenters also questioned the model's structural assumptions
about manufacturers' compliance strategies. NHTSA has reconsidered this
question with respect to the potential for systematic underestimation
or overestimation of compliance costs. As a result, the Volpe model has
been modified to account for manufacturers' ability to engage in
``multi-year planning,'' adding more technology than necessary for
compliance in an early model year when a vehicle model is being
redesigned in order to carry that technology forward and facilitate
compliance in later model years. This major change to the Volpe model
tends to produce greater costs (and benefits) in earlier model years in
order to reduce costs in later model years.
    Some commenters also questioned the model's use of externally-
specified ``phase-in caps'' to constrain the speed at which
technologies can practicably be adopted. NHTSA has reconsidered these
inputs in light of the fact that the model also assumes that most
technologies can only be practicably applied during a vehicle redesign
or (in some cases) freshening, and tentatively concludes that these
inputs can be significantly relaxed. The analysis supporting today's
proposal therefore relies almost exclusively on the redesign- and
refresh-related constraints to produce practicable estimates of
potential technology adoption rates. We are seeking comment on this
change to the model's inputs, and note that further changes to these
inputs would impact our analysis.
    Commenters had many other concerns regarding inputs to the model,
such as economic inputs and technology-related estimates. Commenters often (and

[[Page 49637]]

particularly in relation to the agency's estimate of the social value
of avoided CO₂ emissions) mistakenly attributed these
concerns to the model itself. In again reviewing commenters' concerns
regarding NHTSA's analysis, the agency has carefully differentiated
between (1) the model, (2) inputs to the model, and (3) ways in which
the model is applied. We encourage commenters to do the same in
reviewing the analysis supporting today's proposal.
    Finally, some commenters expressed concern regarding the model's
transparency. However, as NHTSA explained in in the MY 2011 final rule,
these concerns appeared to have been mistakenly applied to the model
itself, as the actual lack of transparency related only to the agency's
use of manufacturers' product plans, which formed the basis for inputs
to the model.\431\ The agency had previously made publicly available
the model, source code (i.e., computer programming instructions), model
documentation, and sample input files. To make the model more easily
accessible to the public, the agency began (in March 2009) placing all
of this information on NHTSA's Web site.\432\ In connection with
today's proposal, the agency is placing the updated model, code, and
documentation on the Web site, along with inputs and outputs for
agency's current analysis. Among those inputs are those defining the
agency's baseline estimates of the MYs 2012-2016 U.S. market for
passenger cars and light trucks, as these inputs do not, for today's
proposal, make use of manufacturers' confidential product plans.
---------------------------------------------------------------------------

    \431\ 74 FR 14372 (Mar. 30, 2009).
    \432\ See http://www.nhtsa.dot.gov (click on ``Fuel Economy,'' then
``Related Links--CAFE Compliance and Effects Modeling System (Volpe Model)'')
---------------------------------------------------------------------------

    How should NHTSA develop and fit the target curves?
    In the previous rulemaking, many commenters expressed concern about
the steepness of the proposed curves for passenger cars, which occurred
because of the way in which NHTSA fit the curves to the data. The more
steep a curve is, the more rapidly mpg targets decrease as footprint increases.
    For this NPRM, NHTSA reconsidered how to address this concern and
decided to propose curves that are based on a constrained linear
function rather than a constrained logistic function, that are
considerably less steep than the curves proposed in the previous
rulemaking. This issue is discussed in greater detail in Section IV.C.5
below, in the joint TSD, and in NHTSA's PRIA.
    Should NHTSA set additional ``backstop'' standards besides the one
established by Congress?
    In the previous rulemaking, several commenters argued that NHTSA
must establish absolute backstop standards for imported passenger cars
and light trucks, in addition to the one for domestically-manufactured
passenger cars required by EISA. NHTSA examined its statutory authority
and concluded that only a backstop for domestic passenger cars was
permissible under the statute.
    For this NPRM, NHTSA has re-examined its authority, and while the
agency still tentatively concludes that Congress' intent is clear from
the text of the statute, we recognize commenters' concerns that
attribute-based standards may not absolutely guarantee the level of
fuel savings currently anticipated if market forces cause manufacturers
to build larger vehicles in MYs 2012-2016. Thus, we seek comment on
this issue, which is discussed in greater detail below in Section IV.C.5.
    Should NHTSA classify more vehicles as passenger cars rather than
as light trucks?
    In the previous rulemaking, many commenters agreed with NHTSA's
decision to move many 2WD SUVs from the light truck to the passenger
car fleet, but some commenters argued that NHTSA should go further and
reclassify more light trucks as passenger cars.
    For this NPRM, NHTSA has reconsidered its vehicle classification
system and has not included in the proposed regulatory text any changes
to that system. However, NHTSA seeks comment on whether any changes
should be adopted for that time period or whether changes, if any,
should be deferred to MY 2017 and beyond. Classification issues are
addressed in greater detail in Section IV.H below.
5. Summary of the Proposed MY 2012-2016 CAFE Standards
    NHTSA is proposing CAFE standards that are, like the standards
NHTSA promulgated in March 2009 for MY 2011, expressed as mathematical
functions depending on vehicle footprint. Footprint is one measure of
vehicle size, and is determined by multiplying the vehicle's wheelbase
by the vehicle's average track width.\433\ Under the proposed CAFE
standards, each light vehicle model produced for sale in the United
States would have a fuel economy target. The CAFE levels that must be
met by the fleet of each manufacturer would be determined by computing
the sales-weighted harmonic average of the targets applicable to each
of the manufacturer's passenger cars and light trucks. These targets,
the mathematical form and coefficients of which are presented later in
today's notice, appear as follows when the values of the targets are
plotted versus vehicle footprint:
---------------------------------------------------------------------------

    \433\ See 49 CFR 523.2 for the exact definition of ``footprint.''

---------------------------------------------------------------------------

[[Page 49638]]
[GRAPHIC] [TIFF OMITTED] TP28SE09.023
[[Page 49639]]
[GRAPHIC] [TIFF OMITTED] TP28SE09.024

    Under these proposed footprint-based CAFE standards, the CAFE
levels required of individual manufacturers depend, as noted above, on
the mix of vehicles sold. It is important to note that NHTSA's CAFE
standards and EPA's GHG standards will both be in effect, and each will
lead to increases in average fuel economy and CO₂ emissions
reductions. The two agencies' standards together comprise the National
Program, and this discussion of costs and benefits of NHTSA's CAFE
standards does not change the fact that both the CAFE and GHG
standards, jointly, are the source of the benefits and costs of the
National Program.
    Based on the forecast developed for this NPRM of the MYs 2012-2016
vehicle fleet, NHTSA estimates that the targets shown above would
result in the following average required CAFE levels:

                  Table IV.A.5-1--Average Required Fuel Economy (mpg) Under Proposed Standards
----------------------------------------------------------------------------------------------------------------
                                                     2012         2013         2014         2015         2016
----------------------------------------------------------------------------------------------------------------
Passenger Cars.................................         33.6         34.4         35.2         36.4         38.0
Light Trucks...................................         25.0         25.6         26.2         27.1         28.3
                                                ----------------------------------------------------------------
    Combined...................................         29.8         30.6         31.4         32.6         34.1
----------------------------------------------------------------------------------------------------------------

    For the reader's reference, these miles per gallon would be
equivalent to the following gallons per 100 miles for passenger cars
and light trucks:

----------------------------------------------------------------------------------------------------------------
                                                     2012         2013         2014         2015         2016
----------------------------------------------------------------------------------------------------------------
Passenger Cars.................................       2.9762        2.907       2.8409       2.7473       2.6316
Light Trucks...................................          4.0       3.9063       3.8168       3.8168       3.5336
----------------------------------------------------------------------------------------------------------------

    NHTSA estimates that average achieved fuel economy levels will
correspondingly increase through MY 2016, but that manufacturers will,
on average, undercomply \434\ in some model

[[Page 49640]]

years and overcomply \435\ in others, reaching a combined average fuel
economy of 33.7 mpg in MY 2016.\436\ Table IV.A.5-1 is the estimated
required fuel economy for the proposed CAFE standards while Table
IV.A.5-2 includes the effects of some manufacturers' payment of CAFE
fines. In addition, Section IV.G.4 below contains an analysis of the
achieved levels (and projected fuel savings, costs, and benefits) when
the use of FFV credits is also assumed.
---------------------------------------------------------------------------

    \434\ In NHTSA's analysis, ``undercompliance'' is mitigated
either through use of FFV credits, use of existing or ``banked''
credits, or through fine payment. Because NHTSA cannot consider
availability of credits in setting standards, the estimated achieved
CAFE levels presented here do not account for their use. In
contrast, because NHTSA is not prohibited from considering fine
payment, the estimated achieved CAFE levels presented here include
the assumption that BMW, Daimler (i.e., Mercedes), Porsche, and,
Tata (i.e., Jaguar and Rover) will only apply technology up to the
point that it would be less expensive to pay civil penalties.
    \435\ In NHTSA's analysis, ``overcompliance'' occurs through
multi-year planning: manufacturers apply some ``extra'' technology
in early model years (e.g., MY 2014) in order to carry that
technology forward and thereby facilitate compliance in later model
years (e.g., MY 2016)
    \436\ Consistent with EPCA, NHTSA has not accounted for
manufacturers' ability to earn CAFE credits for selling FFVs, carry
credits forward and back between model years, and transfer credits
between the passenger car and light truck fleets.

                  Table IV.A.5-2--Average Achieved Fuel Economy (mpg) Under Proposed Standards
----------------------------------------------------------------------------------------------------------------
                                                     2012         2013         2014         2015         2016
----------------------------------------------------------------------------------------------------------------
Passenger Cars.................................         32.9         34.2         35.2         36.5         37.6
Light Trucks...................................         24.9         25.7         26.5         27.4         28.1
                                                ----------------------------------------------------------------
    Combined...................................         29.3         30.5         31.5         32.7         33.7
----------------------------------------------------------------------------------------------------------------

    For the reader's reference, these miles per gallon would be
equivalent to the following gallons per 100 miles for passenger cars
and light trucks:

----------------------------------------------------------------------------------------------------------------
                                                     2012         2013         2014         2015         2016
----------------------------------------------------------------------------------------------------------------
Passenger Cars.................................       3.0438       2.9267       2.8398       2.7434       2.6623
Light Trucks...................................       4.0241       3.8952       3.7713       3.6495       3.5604
----------------------------------------------------------------------------------------------------------------

    NHTSA estimates that these fuel economy increases will lead to fuel
savings totaling 61.6 billion gallons during the useful lives of
vehicles sold in MYs 2012-2016:

                      Table IV.A.5-3--Fuel Saved (Billion Gallons) Under Proposed Standards
----------------------------------------------------------------------------------------------------------------
                                        2012         2013         2014         2015         2016        Total
----------------------------------------------------------------------------------------------------------------
Passenger Cars....................          2.5          5.3          7.5          9.4         11.4         36.0
Light Trucks......................          1.8          3.7          5.4          6.8          7.8         25.6
                                   -----------------------------------------------------------------------------
    Combined......................          4.3          9.1         12.9         16.1         19.2         61.6
----------------------------------------------------------------------------------------------------------------

    The agency also estimates that these new CAFE standards will lead
to corresponding reductions of CO₂ emissions totaling 656
million metric tons (mmt) during the useful lives of vehicles sold in
MYs 2012-2016:

                 Table IV.A.5-4--Avoided Carbon Dioxide Emissions (mmt) Under Proposed Standards
----------------------------------------------------------------------------------------------------------------
                                        2012         2013         2014         2015         2016        Total
----------------------------------------------------------------------------------------------------------------
Passenger Cars....................           25           56           79           99          121          381
Light Trucks......................           19           40           58           73           85          275
                                   -----------------------------------------------------------------------------
    Combined......................           44           96          137          173          206          656
----------------------------------------------------------------------------------------------------------------

    The agency estimates that these fuel economy increases would
produce other benefits (e.g., reduced time spent refueling), as well as
some disbenefits (e.g., increase traffic congestion) caused by drivers'
tendency to increase travel when the cost of driving declines (as it
does when fuel economy increases). The agency has estimated the total
monetary value to society of these benefits and disbenefits, and
estimates that the proposed standards will produce significant benefits
to society. NHTSA estimates that, in present value terms, these
benefits would total $200 billion over the useful lives of vehicles
sold during MYs 2012-2016:

               Table IV.A.5-5--Present Value of Benefits ($Billion) Under Proposed CAFE Standards
----------------------------------------------------------------------------------------------------------------
                                        2012         2013         2014         2015         2016        Total
----------------------------------------------------------------------------------------------------------------
Passenger Cars....................          7.6         17.0         24.4         31.2         38.7        119.1

[[Page 49641]]

Light Trucks......................          5.5         11.6         17.3         22.2         26.0         82.6
                                   -----------------------------------------------------------------------------
    Combined......................         13.1         28.7         41.8         53.4         64.7        201.7
----------------------------------------------------------------------------------------------------------------

    NHTSA attributes most of these benefits--about $157 billion, as
noted above--to reductions in fuel consumption, valuing fuel (for
societal purposes) at future pretax prices in the Energy Information
Administration's (EIA's) reference case forecast from Annual Energy
Outlook (AEO) 2009. The Preliminary Regulatory Impact Analysis (PRIA)
accompanying today's proposed rule presents a detailed analysis of
specific benefits of the proposed rule.

------------------------------------------------------------------------
                                   Amount               $ Value
------------------------------------------------------------------------
Fuel savings................  61.6 billion     $158.0 billion.
                               gallons.
CO2 emissions reductions....  656 million      $16.4 billion.
                               metric tons
                               (mmt).
------------------------------------------------------------------------

    NHTSA estimates that the necessary increases in technology
application will involve considerable monetary outlays, totaling $62.5
billion in incremental outlays (i.e., beyond those attributable to the
MY 2011 standards) by new vehicle purchasers during MYs 2012-2016:

                Table IV.A.5-6--Incremental Technology Outlays ($b) Under Proposed CAFE Standards
----------------------------------------------------------------------------------------------------------------
                                        2012         2013         2014         2015         2016        Total
----------------------------------------------------------------------------------------------------------------
Passenger Cars....................          4.1          6.5          8.4          9.9         11.8         40.8
Light Trucks......................          1.5          2.8          4.0          5.2          5.9         19.4
                                   -----------------------------------------------------------------------------
    Combined......................          5.7          9.3         12.5         15.1         17.6         60.2
----------------------------------------------------------------------------------------------------------------

    Corresponding to these outlays and, to a much lesser extent, civil
penalties that some companies are expected to pay for noncompliance,
the agency estimates that the proposed standards would lead to
increases in average new vehicle prices, ranging from $476 per vehicle
in MY 2012 to $1,091 per vehicle in MY 2016:

      Table IV.A.5-7--Incremental Increases in Average New Vehicle Prices ($) Under Proposed CAFE Standards
----------------------------------------------------------------------------------------------------------------
                                                     2012         2013         2014         2015         2016
----------------------------------------------------------------------------------------------------------------
Passenger Cars.................................          591          735          877          979        1,127
Light Trucks...................................          283          460          678          882        1,020
----------------------------------------------------------------------------------------------------------------
    Combined...................................          476          635          806          945        1,091
----------------------------------------------------------------------------------------------------------------

    Tables IV.A.5-8 and IV.A.5-9 below present itemized costs and
benefits for a 3 percent and a 7 percent discount rate, respectively,
for the combined fleet (passenger cars and light trucks) in each model
year and for all model years combined. Numbers in parentheses represent
negative values.

      Table IV.A.5-8--Itemized Cost and Benefit Estimates for the Combined Vehicle Fleet, 3% Discount Rate
----------------------------------------------------------------------------------------------------------------
                                  2012          2013          2014          2015          2016          Total
----------------------------------------------------------------------------------------------------------------
Costs:
    Technology Costs........       $5,695        $9,295       $12,454       $15,080       $17,633       $60,157
Benefits:
    Lifetime Fuel                 $10,197       $22,396       $32,715       $41,880       $50,823      $158,012
     Expenditures...........
    Consumer Surplus from            $751        $1,643        $2,389        $3,029        $3,639       $11,451
     Additional Driving.....
    Refueling Time Value....         $776        $1,551        $2,198        $2,749        $3,277       $10,550
    Petroleum Market                 $559        $1,194        $1,700        $2,129        $2,538        $8,121
     Externalities..........
    Congestion Costs........        ($460)        ($934)      ($1,332)      ($1,657)      ($1,991)      ($6,376)
    Noise Costs.............          ($7)         ($14)         ($21)         ($26)         ($31)         ($99)
    Crash Costs.............        ($217)        ($437)        ($625)        ($776)        ($930)      ($2,985)
    CO2.....................       $1,028        $2,287        $3,382        $4,376        $5,372       $16,446
    CO......................           $0            $0            $0            $0            $0            $0
    VOC.....................          $41           $80          $108          $131          $156          $518
    NOX.....................          $82          $132          $155          $174          $200          $744
    PM......................         $220          $438          $621          $771          $904        $2,956

[[Page 49642]]

    SOX.....................         $161          $345          $490          $613          $731        $2,341
                             -----------------------------------------------------------------------------------
        Total...............      $13,132       $28,680       $41,781       $53,394       $64,687      $201,676
                             ===================================================================================
            Net Benefits....       $7,044       $18,759       $27,090       $34,710       $41,386      $128,992
----------------------------------------------------------------------------------------------------------------


      Table IV.A.5-9--Itemized Cost and Benefit Estimates for the Combined Vehicle Fleet, 7% Discount Rate
----------------------------------------------------------------------------------------------------------------
                                  2012          2013          2014          2015          2016          Total
----------------------------------------------------------------------------------------------------------------
Costs:
    Technology Costs........       $5,695        $9,295       $12,454       $15,080       $17,633       $60,157
Benefits:
    Lifetime Fuel                  $7,991       $17,671       $25,900       $33,264       $40,478      $125,305
     Expenditures...........
    Consumer Surplus from            $590        $1,301        $1,896        $2,412        $2,904        $9,102
     Additional Driving.....
    Refueling Time Value....         $624        $1,249        $1,770        $2,215        $2,642        $8,500
    Petroleum Market                 $448          $960        $1,367        $1,712        $2,043        $6,531
     Externalities..........
    Congestion Costs........        ($371)        ($753)      ($1,074)      ($1,335)      ($1,606)      ($5,138)
    Noise Costs.............          ($6)         ($12)         ($16)         ($21)         ($24)         ($80)
    Crash Costs.............        ($173)        ($352)        ($503)        ($626)        ($749)      ($2,403)
    CO2.....................         $797        $1,781        $2,634        $3,410        $4,189       $12,813
    CO......................           $0            $0            $0            $0            $0            $0
    VOC.....................          $33           $65           $87          $106          $125          $416
    NOX.....................          $60           $99          $120          $135          $156          $570
    PM......................         $170          $344          $492          $613          $721        $2,339
    SOX.....................         $129          $278          $394          $493          $588        $1,882
                             -----------------------------------------------------------------------------------
        Total...............      $10,292       $22,631       $33,066       $42,380       $51,468      $159,837
                             ===================================================================================
            Net Benefits....       $4,281       $12,832       $18,818       $24,414       $29,293       $89,638
----------------------------------------------------------------------------------------------------------------

    Neither EPCA nor EISA requires that NHTSA conduct a cost-benefit
analysis in determining average fuel economy standards, but too,
neither precludes its use.\437\ EPCA does require that NHTSA consider
economic practicability among other factors, and NHTSA has concluded,
as discussed elsewhere herein, that the standards it proposes today are
economically practicable. Further validating and supporting its
conclusion that the standards it proposes today are reasonable, a
comparison of the standards' costs and benefits shows that the
standards' estimated benefits far outweigh its estimated costs. Based
on the figures reported above, NHTSA estimates that the total benefits
of today's proposed standards would be more three times the magnitude
of the corresponding costs, such that the proposed standards would
produce net benefits of nearly $138 billion over the useful lives of
vehicles sold during MYs 2012-2016.
---------------------------------------------------------------------------

    \437\ Center for Biological Diversity v. NHTSA, 508 F.3d 508
(9th Cir. 2007) (rejecting argument that EPCA precludes the use of a
marginal cost-benefit analysis that attempted to weigh all of the
social benefits (i.e., externalities as well as direct benefits to
consumers) of improved fuel savings in determining the stringency of
the CAFE standards). See also Entergy Corp. v. Riverkeeper, Inc.,
129 S.Ct. 1498, 1508 (2009) (``[U]nder Chevron, that an agency is
not required to [conduct a cost-benefit analysis] does not mean that
an agency is not permitted to do so.'')
---------------------------------------------------------------------------

B. Background

1. Chronology of Events Since the National Academy of Sciences Called
for Reforming and Increasing CAFE Standards
a. National Academy of Sciences Issues Report on Future of CAFE Program
(February 2002)
i. Significantly Increasing CAFE Standards Without Making Them
Attribute-Based Would Adversely Affect Safety
    In the 2002 congressionally-mandated report entitled
``Effectiveness and Impact of Corporate Average Fuel Economy (CAFE)
Standards,'' \438\ a committee of the National Academy of Sciences
(NAS) (``2002 NAS Report'') concluded that the then-existing form of
passenger car and light truck CAFE standards permitted vehicle
manufacturers to comply in part by downweighting and even downsizing
their vehicles and that these actions had led to additional fatalities.
The committee explained that this safety problem arose because, at that
time, the CAFE standards were not attributed-based and thus subjected
all passenger cars to the same fuel economy target and all light trucks
to the same target, regardless of their weight, size, or load-carrying
capacity.\439\ The committee said that this experience suggests that
consideration should be given to developing a new system of fuel
economy targets that reflects differences in such vehicle attributes.
Without a thoughtful restructuring of the program, there would be the
trade-offs that must be made if CAFE standards were increased by any
significant amount.\440\
---------------------------------------------------------------------------

    \438\ National Research Council, ``Effectiveness and Impact of
Corporate Average Fuel Economy (CAFE) Standards,'' National Academy
Press, Washington, DC (2002). Available at http://www.nap.edu/
openbook.php?isbn=0309076013  (last accessed August 9, 2009). The
conference committee report for the Department of Transportation and
Related Agencies Appropriations Act for FY 2001 (Pub. L. 106-346)
directed NHTSA to fund a study by NAS to evaluate the effectiveness
and impacts of CAFE standards (H. Rep. No. 106-940, p. 117-118). In
response to the direction from Congress, NAS published this lengthy report.
    \439\ NHTSA formerly used this approach for CAFE standards. EISA
prohibits its use after MY 2010.
    \440\ NAS, p. 9.
---------------------------------------------------------------------------

    In response to these conclusions, NHTSA issued attribute-based CAFE
standards for light trucks and sought legislative authority to issue
attribute-based CAFE standards for passenger cars before undertaking to
raise the car

[[Page 49643]]

standards. Congress went a step further in enacting EISA, not only
authorizing the issuance of attribute-based standards, but also
mandating them.
ii. Climate Change and Other Externalities Justify Increasing the CAFE Standards
    The NAS committee said that there are two compelling concerns that
justify a government-mandated increase in fuel economy, both relating
to externalities. The first and most important concern, it argued, is
the accumulation in the atmosphere of greenhouse gases, principally
carbon dioxide.\441\
---------------------------------------------------------------------------

    \441\ NAS, pp. 2, 13, and 83.
---------------------------------------------------------------------------

    A second concern is that petroleum imports have been steadily
rising because of the nation's increasing demand for gasoline without a
corresponding increase in domestic supply. The high cost of oil imports
poses two risks: Downward pressure on the strength of the dollar (which
drives up the cost of goods that Americans import) and an increase in
U.S. vulnerability to macroeconomic shocks that cost the economy
considerable real output.
    To determine how much the fuel economy standards should be
increased, the committee urged that all social benefits be considered.
That is, it urged not only that the dollar value of the saved fuel be
considered, but also that the dollar value to society of the resulting
reductions in greenhouse gas emissions and in dependence on imported
oil should be calculated and considered. The committee said that if it
is possible to assign dollar values to these favorable effects, it
becomes possible to make at least crude comparisons between the
socially beneficial effects of measures to improve fuel economy on the
one hand, and the costs (both out-of-pocket and more subtle) on the other.
iii. Reforming the CAFE Program Could Address Inequity Arising From the
CAFE Structure
    The 2002 NAS report expressed concerns about increasing the
standards under the CAFE program as currently structured. While raising
CAFE standards under the existing structure would reduce fuel
consumption, doing so under alternative structures ``could accomplish
the same end at lower cost, provide more flexibility to manufacturers,
or address inequities arising from the present'' structure.\442\
---------------------------------------------------------------------------

    \442\ NAS, pp. 4-5 (Finding 10).
---------------------------------------------------------------------------

    To address those structural problems, the report suggested various
possible reforms. The report found that the ``CAFE program might be
improved significantly by converting it to a system in which fuel
targets depend on vehicle attributes.''\443\ The report noted further
that under an attribute-based approach, the required CAFE levels could
vary among the manufacturers based on the distribution of their product
mix. NAS stated that targets could vary among passenger cars and among
trucks, based on some attribute of these vehicles such as weight, size,
or load-carrying capacity. The report explained that a particular
manufacturer's average target for passenger cars or for trucks would
depend upon the fractions of vehicles it sold with particular levels of
these attributes.\444\
---------------------------------------------------------------------------

    \443\ NAS, p. 5 (Finding 12).
    \444\ NAS, p. 87.
---------------------------------------------------------------------------

2. NHTSA Issues Final Rule Establishing Attribute-Based CAFE Standards
for MY 2008-2011 Light Trucks (March 2006)
    The 2006 final rule reformed the structure of the CAFE program for
light trucks by introducing an attribute-based approach and using that
approach to establish higher CAFE standards for MY 2008-2011 light
trucks.\445\ Reforming the CAFE program enables it to achieve larger fuel
savings, while enhancing safety and preventing adverse economic consequences.
---------------------------------------------------------------------------

    \445\ 71 FR 17566 (Apr. 6, 2006).
---------------------------------------------------------------------------

    As noted above, under Reformed CAFE, fuel economy standards were
restructured so that they are based on a vehicle attribute, a measure
of vehicle size called ``footprint.'' It is the product of multiplying
a vehicle's wheelbase by its track width. A target level of fuel
economy was established for each increment in footprint (0.1 ft\2\).
Trucks with smaller footprints have higher fuel economy targets;
conversely, larger ones have lower targets. A particular manufacturer's
compliance obligation for a model year is calculated as the harmonic
average of the fuel economy targets for the manufacturer's vehicles,
weighted by the distribution of the manufacturer's production volumes
among the footprint increments. Thus, each manufacturer is required to
comply with a single overall average fuel economy level for each model
year of production.
    Compared to Unreformed (non-attributed-based) CAFE, Reformed CAFE
enhances overall fuel savings while providing vehicle manufacturers
with the flexibility they need to respond to changing market
conditions. Reformed CAFE also provides a more equitable regulatory
framework by creating a level playing field for manufacturers,
regardless of whether they are full-line or limited-line manufacturers.
We were particularly encouraged that Reformed CAFE will confer no
compliance advantage if vehicle makers choose to downsize some of their
fleet as a CAFE compliance strategy, thereby reducing the adverse
safety risks associated with the Unreformed CAFE program.
3. Ninth Circuit Issues Decision re Final Rule for MY 2008-2011 Light
Trucks (November 2007)
    On November 15, 2007, the United States Court of Appeals for the
Ninth Circuit issued its decision in Center for Biological Diversity v.
NHTSA,\446\ the challenge to the MY 2008-11 light truck CAFE rule. The
court held that EPCA permits, but does not require, the use of a
marginal cost-benefit analysis. The court specifically emphasized
NHTSA's discretion to decide how to balance the statutory factors--as
long as that balancing does not undermine the fundamental statutory
purpose of energy conservation.
---------------------------------------------------------------------------

    \446\ 508 F.3d 508.
---------------------------------------------------------------------------

    However, the Court found that NHTSA had been arbitrary and
capricious in the following respects:
    • NHTSA's decision that it could not monetize the benefit of
reducing CO₂ emissions for the purpose of conducting its
marginal benefit-cost analysis;
    • NHTSA's lack, in the Court's view, of a reasoned
explanation for its decision not to establish a ``backstop'' (i.e., a
fixed minimum CAFE standard applicable to manufacturers);
    • NHTSA's lack, again in the Court's view, of a reasoned
explanation for its decision not to revise the regulatory definitions
for the passenger car and light truck categories of automobiles so that
some vehicles currently classified as light trucks are instead
classified as passenger cars;
    • NHTSA's decision not to subject most medium- and heavy-
duty pickups and most medium- and heavy-duty cargo vans (i.e., those
between 8,500 and 10,000 pounds gross vehicle weight rating (GVWR,) to
the CAFE standards;
    • NHTSA's decision to prepare and publish an Environmental
Assessment (EA) and making a finding of no significant impact
notwithstanding what the Court found to be an insufficiently broad
range of alternatives, insufficient analysis of the climate change
effects of the CO₂ emissions, and limited assessment of
cumulative impacts in its EA under the National Environmental Policy
Act (NEPA).
    The Court did not vacate the standards, but instead said it would
remand the rule to NHTSA to

[[Page 49644]]

promulgate new standards consistent with its opinion ``as expeditiously
as possible and for the earliest model year practicable.\447\ Under the
decision, the standards established by the April 2006 final rule would
remain in effect unless and until amended by NHTSA. In addition, it
directed the agency to prepare an Environmental Impact Statement.
---------------------------------------------------------------------------

    \447\ The deadline in EPCA for issuing a final rule
establishing, for the first time, a CAFE standard for a model year
is 18 months before the beginning of that model year. 49 U.S.C.
32902(g)(2). The same deadline applies to issuing a final rule
amending an existing CAFE standard so as to increase its stringency.
Given that the agency has long regarded October 1 as the beginning
of a model year, the statutory deadline for increasing the MY 2009
standard was March 30, 2007, and the deadline for increasing the MY
2010 standard is March 30, 2008. Thus, the only model year for which
there was sufficient time at the time of the Court's decision to
gather all of the necessary information, conduct the necessary
analyses and complete a rulemaking was MY 2011. As noted earlier in
this notice, however, EISA requires that a new standard be
established for that model year.
---------------------------------------------------------------------------

4. Congress Enacts Energy Security and Independence Act of 2007
(December 2007)
    As noted above in Section I.B., EISA significantly changed the
provisions of EPCA governing the establishment of future CAFE
standards. These changes made it necessary for NHTSA to pause in its
efforts so that it could assess the implications of the amendments made
by EISA and then, as required, revise some aspects of the proposals it
had been developing (e.g., the model years covered and credit issues).
5. NHTSA Proposes CAFE Standards for MYs 2011-2015 (April 2008)
    The agency cannot set out the exact level of CAFE that each
manufacturer would have been required to meet for each model year under
the passenger car or light truck standards since the levels would
depend on information that would not be available until the end of each
of the model years, i.e., the final actual production figures for each
of those years. The agency can, however, project what the industry-wide
level of average fuel economy would have been for passenger cars and
for light trucks if each manufacturer produced its expected mix of
automobiles and just met its obligations under the proposed
``optimized'' standards for each model year.

------------------------------------------------------------------------
                                                 Passenger      Light
                                                  cars mpg    trucks mpg
------------------------------------------------------------------------
MY 2011.......................................         31.2         25.0
MY 2012.......................................         32.8         26.4
MY 2013.......................................         34.0         27.8
MY 2014.......................................         34.8         28.2
MY 2015.......................................         35.7         28.6
------------------------------------------------------------------------

    The combined industry-wide average fuel economy (in miles per
gallon, or mpg) levels for both cars and light trucks, if each
manufacturer just met its obligations under the proposed ``optimized''
standards for each model year, would have been as follows:

------------------------------------------------------------------------
                                                               Combined
                                                                 mpg
------------------------------------------------------------------------
MY 2011....................................................         27.8
MY 2012....................................................         29.2
MY 2013....................................................         30.5
MY 2014....................................................         31.0
MY 2015....................................................         31.6
------------------------------------------------------------------------

    The annual average increase during this five year period would have
been approximately 4.5 percent. Due to the uneven distribution of new
model introductions during this period and to the fact that significant
technological changes could be most readily made in conjunction with
those introductions, the annual percentage increases were greater in
the early years in this period.
6. Ninth Circuit Revises its Decision re Final Rule for MY 2008-2011
Light Trucks (August 2008)
    In response to the Government petition for rehearing, the Ninth
Circuit modified its decision by replacing its direction to prepare an
EIS with a direction to prepare either a new EA or, if necessary, an
EIS.\448\
---------------------------------------------------------------------------

    \448\ See CBD v. NHTSA, 538 F.3d 1172 (9th Cir. 2008).
---------------------------------------------------------------------------

7. NHTSA Releases Final Environmental Impact Statement (October 2008)
    On October 17, 2008, EPA published a notice announcing the
availability of NHTSA's final environmental impact statement (FEIS) for
this rulemaking.\449\ Throughout the FEIS, NHTSA relied extensively on
findings of the United Nations Intergovernmental Panel on Climate
Change (IPCC) and the U.S. Climate Change Science Program (USCCSP). In
particular, the agency relied heavily on the most recent, thoroughly
peer-reviewed, and credible assessments of global climate change and
its impact on the United States: the IPCC Fourth Assessment Report
Working Group I4 and II5 Reports, and reports by the USCCSP that
include Scientific Assessments of the Effects of Global Climate Change
on the United States and Synthesis and Assessment Products.
---------------------------------------------------------------------------

    \449\ 73 FR 61859 (Oct. 18, 2008).
---------------------------------------------------------------------------

    In the FEIS, NHTSA compared the environmental impacts of its
preferred alternative and those of reasonable alternatives. It
considered direct, indirect, and cumulative impacts and describes these
impacts to inform the decisionmaker and the public of the environmental
impacts of the various alternatives.
    Among other potential impacts, NHTSA analyzed the direct and
indirect impacts related to fuel and energy use, emissions, including
carbon dioxide and its effects on temperature and climate change, air
quality, natural resources, and the human environment. Specifically,
the FEIS used a climate model to estimate and report on four direct and
indirect effects of climate change, driven by alternative scenarios of
GHG emissions, including:
    1. Changes in CO₂ concentrations;
    2. Changes in global mean surface temperature;
    3. Changes in regional temperature and precipitation; and
    4. Changes in sea level.
    NHTSA also considered the cumulative impacts of the proposed
standards for MY 2011-2015 passenger cars and light trucks, together
with estimated impacts of NHTSA's implementation of the CAFE program
through MY 2010 and NHTSA's future CAFE rulemaking for MYs 2016-2020.
8. Department of Transportation Decides not to Issue MY 2011-2015 Final
Rule (January 2009)
    On January 7, 2009, the Department of Transportation announced that
the Bush Administration would not issue the final rule, notwithstanding
the Office of Information and Regulatory Affairs' completion of review
of the rule under Executive Order 12866, Regulatory Planning and
Review, on November 14, 2008.\450\
---------------------------------------------------------------------------

    \450\ The statement can be found at http://www.dot.gov/affairs/
dot0109.htm (last accessed August 9, 2009).
---------------------------------------------------------------------------

9. The President Requests NHTSA to Issue Final Rule for MY 2011 Only
(January 2009)
    As explained above, in his memorandum of January 26, 2009, the
President requested the agency to issue a final rule adopting CAFE
standards for MY 2011 only. Further, the President requested NHTSA to
establish standards for MY 2012 and later after considering the
appropriate legal factors, the comments filed in response to the May
2008 proposal, the relevant technological and scientific
considerations, and, to the extent feasible, a forthcoming report by the

[[Page 49645]]

National Academy of Sciences assessing automotive technologies that can
practicably be used to improve fuel economy.
10. NHTSA Issues Final Rule for MY 2011 (March 2009)
a. Introduction
    NHTSA's review and analysis of comments on its proposal led the
agency to make many changes to its methods for analyzing potential MY
2011 CAFE standards, as well as to the data and other information to
which the agency has applied these methods. The following are some of
the more prominent changes:
    • After receiving, reviewing, and integrating updated
product plans from vehicle manufacturers, NHTSA revised its forecast of
the future light vehicle market.
    • NHTSA changed the methods and inputs it used to represent
the applicability, availability, cost, and effectiveness of future
fuel-saving technologies.
    • NHTSA based its fuel price forecast on the AEO 2008 High
Case price scenario instead of the AEO 2008 Reference Case.
    • NHTSA reduced mileage accumulation estimates (i.e.,
vehicle miles traveled) to levels consistent with this increased fuel
price forecast.
    • NHTSA applied increased estimates for the value of oil
import externalities.
    • NHTSA included all manufacturers--not just the largest
seven--in the process used to fit the curve and estimate the stringency
at which societal net benefits are maximized.
    • NHTSA tightened its application of the definition of
``nonpassenger automobiles,'' causing a reassigning of over one million
vehicles from the light truck fleet to the passenger car fleet, and
lowering the average fuel economy for cars due to the inclusion of
vehicles previously categorized as trucks, as well as the average fuel
economy for trucks because the truck category then had a larger
proportion of heavier trucks.
    • NHTSA fitted the shape of the curve based on
``exhaustion'' of available technologies instead of on manufacturer-
level optimization of CAFE levels.
    These changes affected both the shape and stringency of the
attribute-based standards. Taken together, the last three of the above
changes reduced the steepness of the curves defining fuel economy
targets for passenger cars, and also less significantly reduced the
steepness of the light truck curves.
b. Standards
    The final rule established footprint-based fuel economy standards
for MY 2011 passenger cars and light trucks, where each vehicle
manufacturer's required level of CAFE was based on target levels of
average fuel economy set for vehicles of different sizes and on the
distribution of that manufacturer's vehicles among those sizes. The
curves defining the performance target at each footprint reflect the
technological and economic capabilities of the industry. The target for
each footprint is the same for all manufacturers, regardless of
differences in their overall fleet mix. Compliance would be determined
by comparing a manufacturer's harmonically averaged fleet fuel economy
levels in a model year with a required fuel economy level calculated
using the manufacturer's actual production levels and the targets for
each footprint of the vehicles that it produces.
    The agency analyzed seven regulatory alternatives, one of which
maximizes net benefits within the limits of available information and
was known at the time as the ``optimized standards.'' The optimized
standards were set at levels, such that, considering all of the
manufacturers together, no other alternative is estimated to produce
greater net benefits to society. Upon a considered analysis of all
information available, including all information submitted to NHTSA in
comments, the agency adopted the ``optimized standard'' alternative as
the final standards for MY 2011.\451\ By limiting the standards to
levels that can be achieved using technologies each of which are
estimated to provide benefits that at least equal its costs, the net
benefit maximization approach helped, at the time, to assure the
marketability of the manufacturers' vehicles and thus economic
practicability of the standards. Providing this assurance assumed
increased importance in view of current and anticipated conditions in
the industry in particular and the economy in general. As was widely
reported in the public domain throughout that rulemaking, and as shown
in public comments, the national and global economies raised serious
concerns. Even before those recent developments, the automobile
manufacturers were already facing substantial difficulties. Together,
these problems made NHTSA's economic practicability analysis
particularly important and challenging in that rulemaking.
---------------------------------------------------------------------------

    \451\ The agency notes, for NEPA purposes, that the ``optimized
standard'' alternative adopted as the final standards corresponds to
the ``Optimized Mid-2'' scenario described in Section 2.2.2 of the FEIS.
---------------------------------------------------------------------------

    The agency could not set out the exact level of CAFE that each
manufacturer would be required to meet for MY 2011 under the passenger
car or light truck standards because the levels will depend on
information that will not be available until the end of that model
year, i.e., the final actual production figures for that year. However,
the following levels were projected for what the industry-wide level of
average fuel economy will be for passenger cars and for light trucks if
each manufacturer produced its expected mix of automobiles and just met
its obligations under the ``optimized'' standards.

------------------------------------------------------------------------
                                                 Passenger      Light
                                                  cars mpg    trucks mpg
------------------------------------------------------------------------
MY 2011.......................................         30.2         24.1
------------------------------------------------------------------------

    The combined industry-wide average fuel economy (in miles per
gallon, or mpg) levels for both cars and light trucks, if each
manufacturer just met its obligations under the ``optimized''
standards, were projected as follows:

------------------------------------------------------------------------
                                                                 mpg
                                                  Combined     increase
                                                    mpg       over prior
                                                                 year
------------------------------------------------------------------------
MY 2011.......................................         27.3          2.0
------------------------------------------------------------------------

    In addition, per EISA, each manufacturer's domestic passenger fleet
is required in MY 2011 to achieve 27.5 mpg or 92 percent of the CAFE of
the industry-wide combined fleet of domestic and non-domestic passenger
cars \452\ for that model year, whichever is higher. This requirement
resulted in the following projected alternative minimum standard (not
attribute-based) for domestic passenger cars:
---------------------------------------------------------------------------

    \452\ Those numbers set out several paragraphs above.

------------------------------------------------------------------------
                                                               Domestic
                                                              passenger
                                                               cars mpg
------------------------------------------------------------------------
MY 2011....................................................         27.8
------------------------------------------------------------------------

c. Credits
    NHTSA also adopted a new Part 536 on use of ``credits'' earned for
exceeding applicable CAFE standards. Part 536 implements the provisions
in EISA authorizing NHTSA to establish by regulation a credit trading
program and directing it to establish by regulation a credit transfer
program.\453\ Since its

[[Page 49646]]

enactment, EPCA has permitted manufacturers to earn credits for
exceeding the standards and to apply those credits to compliance
obligations in years other than the model year in which it was earned.
EISA extended the ``carry-forward'' period to five model years, and
left the ``carry-back'' period at three model years. Under Part 536,
credit holders (including, but not limited to, manufacturers) will have
credit accounts with NHTSA, and will be able to hold credits, apply
them to compliance with CAFE standards, transfer them to another
``compliance category'' for application to compliance there, or trade
them. A credit may also be cancelled before its expiry date, if the
credit holder so chooses. Traded and transferred credits will be
subject to an ``adjustment factor'' to ensure total oil savings are
preserved, as required by EISA. EISA also prohibits credits earned
before MY 2011 from being transferred, so NHTSA has developed several
regulatory restrictions on trading and transferring to facilitate
Congress' intent in this regard.
---------------------------------------------------------------------------

    \453\ Congress required that DOT establish a credit
``transferring'' regulation, to allow individual manufacturers to
move credits from one of their fleets to another (e.g., using a
credit earned for exceeding the light truck standard for compliance
with the domestic passenger car standard). Congress allowed DOT to
establish a credit ``trading'' regulation, so that credits may be
bought and sold between manufacturers and other parties.
---------------------------------------------------------------------------

11. Energy Policy and Conservation Act, as Amended by the Energy
Independence and Security Act
    NHTSA's statutory authority and obligations under the Energy Policy
and Conservation Act of 1975 (EPCA), as amended by the Energy
Independence and Security Act of 2007 (EISA), is discussed at length
above in Section I.B.1.

C. Development and Feasibility of the Proposed Standards

1. How Was the Baseline Vehicle Fleet Developed?
a. Why Do the Agencies Establish a Baseline Vehicle Fleet?
    In order to determine what levels of stringency are feasible in
future model years, the agencies must project what vehicles will exist
in those model years, and then evaluate what technologies can feasibly
be applied to those vehicles in order to raise their fuel economy and
lower their CO₂ emissions. The agencies therefore establish
a baseline vehicle fleet representing those vehicles, based on the best
available information. Each agency then developed a separate reference
fleet, accounting (via their respective models) for the effect that the
MY 2011 CAFE standards have on the baseline fleet. This reference fleet
is then used for comparisons of technologies' incremental cost and
effectiveness, as well as the other relevant comparisons in the rule.
b. What Data Did the Agencies Use To Construct the Baseline, and How
Did They Do So?
    As explained in the Technical Support Document (TSD) prepared
jointly by NHTSA and EPA, both agencies used a baseline vehicle fleet
constructed beginning with EPA fuel economy certification data for the
2008 model year, the most recent for which final data is currently
available from manufacturers. This data was used as the source for MY
2008 production volumes and some vehicle engineering characteristics,
such fuel economy ratings, engine sizes, numbers of cylinders, and
transmission types.
    Some information important for analyzing new CAFE standards is not
contained in the EPA fuel economy certification data. EPA staff
estimated vehicle wheelbase and track widths using data from
Motortrend.com and Edmunds.com. This information is necessary for
estimating vehicle footprint, which is required for the analysis of
footprint-based standards. Considerable additional information
regarding vehicle engineering characteristics is also important for
estimating the potential to add new technologies in response to new
CAFE standards. In general, such information helps to avoid ``adding''
technologies to vehicles that already have the same or a more advanced
technology. Examples include valvetrain configuration (e.g., OHV, SOHC,
DOHC), presence of cylinder deactivation, and fuel delivery (e.g.,
MPFI, SIDI). To the extent that such engineering characteristics were
not available in certification data, EPA staff relied on data published
by Ward's Automotive, supplementing this with information from Internet
sites such as Motortrend.com and Edmunds.com. NHTSA staff also added
some more detailed engineering characteristics (e.g, type of variable
valve timing) using data available from ALLDATA[reg] Online. Combined
with the certification data, all of this information yielded a MY 2008
baseline vehicle fleet.
    After the baseline was created the next step was to project the
sales volumes for 2011-2016 model years. EPA used projected car and
truck volumes for this period from Energy Information Administration's
(EIA's) 2009 Annual Energy Outlook (AEO).\454\ However, AEO projects
sales only at the car and truck level, not at the manufacturer and
model-specific level, which are needed in order to estimate the effects
new standards will have on individual manufacturers. Therefore, EPA
purchased data from CSM-Worldwide and used their projections of the
number of vehicles of each type predicted to be sold by manufacturers
in 2011-2015.\455\ This provided the year-by-year percentages of cars
and trucks sold by each manufacturer as well as the percentages of each
vehicle segment. Although it was, therefore, necessary to assume the
same manufacturer and segment shares in 2016 as in 2015, 2016 estimates
from CSM should be available for the final rule. Using these
percentages normalized to the AEO projected volumes then provided the
manufacturer-specific market share and model-specific sales for model
years 2011-2016.
---------------------------------------------------------------------------

    \454\ Available at http://www.eia.doe.gov/oiaf/aeo/index.html.
The agencies have also used fuel price forecasts from AEO2009. Both
agencies regard AEO a credible source not only of such forecasts,
but also of many underlying forecasts, including forecasts of the
size the future light vehicle market.
    \455\ EPA also considered other sources of similar information,
such as J.D. Powers, and concluded that CSM was better able to
provide forecasts at the requisite level of detail for most of the
model years of interest.
---------------------------------------------------------------------------

    The processes for constructing the MY 2008 baseline vehicle fleet
and subsequently adjusting sales volumes to construct the MY 2011-2016
baseline vehicle fleet are presented in detail in Chapter 1 of the
draft Joint Technical Support Document accompanying today's notice.
c. How Is This Different From NHTSA's Historical Approach and Why is
This Approach Preferable?
    As discussed above in Section II.B.3, NHTSA has historically based
its analysis of potential new CAFE standards on detailed product plans
the agency has requested from manufacturers planning to produce light
vehicles for sale in the United States. In contrast, the current market
forecast is based primarily on information sources which are all either
in the public domain or available commercially. There are advantages to
this approach, namely transparency and the potential to reduce some
errors due to manufacturers' misunderstanding of NHTSA's request for
information. There are also disadvantages, namely that the current
market forecast does not represent certain changes likely to occur in
the future vehicle fleet as opposed to the MY 2008 vehicle fleet, such
as vehicles being discontinued and newly introduced. On balance,
however, the agencies have carefully considered these

[[Page 49647]]

advantages and disadvantages of using a market forecast derived from
public and commercial sources rather than from manufacturers' product
plans, and conclude that the advantages outweigh the disadvantages.
    Nevertheless, the agencies are hopeful that manufacturers will, in
the future, agree to make public their plans regarding model years that
are very near, such as MY 2010 or perhaps MY 2011, so that this
information can be incorporated into an analysis that is available for
public review and comment. In any event, because NHTSA and EPA are
releasing market inputs used in the agencies' respective analyses,
manufacturers, suppliers, and other automobile industry observers and
participants can submit comments on how these inputs should be revised,
as can all other reviewers. More information on the advantages and
disadvantages of the current approach and the agencies' decision to
follow it is available in Section II.B.3.
d. How Is This Baseline Different Quantitatively From the Baseline That
NHTSA Used for the MY 2011 (March 2009) Final Rule?
    As discussed above, the current baseline was developed from
adjusted MY 2008 compliance data and covers MYs 2011-2016, while the
baseline that NHTSA used for the MY 2011 CAFE rule was developed from
confidential manufacturer product plans for MY 2011. This section
describes, for the reader's comparison, some of the differences between
the current baseline and the MY 2011 CAFE rule baseline.
    Estimated vehicle sales:
    The sales forecasts, based on the Energy Information
Administration's (EIA's) Annual Energy Outlook 2009 (AEO 2009), used in
the current baseline indicate that the total number of light vehicles
expected to be sold during MYs 2011-2015 is 77 million, or about 15.4
million vehicles annually. NHTSA's MY 2011 final rule forecast, based
on AEO 2008, of the total number of light vehicles likely to be sold
during MY 2011 through MY 2015 was 83 million, or about 16.6 million
vehicles annually. Light trucks are expected to make up 40 percent of
the MY 2011 baseline market forecast in the current baseline, compared
to 42 percent of the baseline market forecast in the MY 2011 final
rule. These changes in both the overall size of the light vehicle
market and the relative market shares of passenger cars and light
trucks reflect changes in the economic forecast underlying AEO, and
changes in AEO's forecast of future fuel prices.
    The figures below attempt to demonstrate graphically the difference
between the variation of fuel economy with footprint for passenger cars
under the current baseline and MY 2011 final rule, and for light trucks
under the current baseline and MY 2011 final rule, respectively.
Figures IV.C.1-1 and 1-2 show the variation of fuel economy with
footprint for passenger car models in the current baseline and in the
MY 2011 final rule, while Figures IV.C.1-3 and 1-4 show the variation
of fuel economy with footprint for light truck models in the current
baseline and in the MY 2011 final rule. However, it is difficult to
draw meaningful conclusions by comparing figures from the current
baseline with those of the MY 2011 final rule. In the current baseline
the number of make/models, and their associated fuel economy and
footprint, are fixed and do not vary over time--this is why the number
of data points in the current baseline figures appears smaller as
compared to the number of data points in the MY 2011 final rule
baseline. In contrast, the baseline fleet used in the MY 2011 final
rule varies over time as vehicles (with different fuel economy and
footprint characteristics) are added to and dropped from the product mix.
[GRAPHIC] [TIFF OMITTED] TP28SE09.025

[[Page 49648]]
[GRAPHIC] [TIFF OMITTED] TP28SE09.026
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[[Page 49649]]
[GRAPHIC] [TIFF OMITTED] TP28SE09.028

    Estimated manufacturer market shares:
    NHTSA's expectations regarding manufacturers' market shares (the
basis for which is discussed below) have also changed since the MY 2011
final rule. These changes are reflected below in Table IV.C.1-1, which
shows the agency's sales forecasts for passenger cars and light trucks
under the current baseline and the MY 2011 final rule.\456\
---------------------------------------------------------------------------

    \456\ As explained below, although NHTSA normalized each
manufacturer's overall market share to produce a realistically-sized
fleet, the product mix for each manufacturer that submitted product
plans was preserved. The agency has reviewed manufacturers' product
plans in detail, and understands that manufacturers do not sell the
same mix of vehicles in every model year.

                                         Table IV.C.1-1--Sales Forecasts
                              [Production for U.S. sale in MY 2011, thousand units]
----------------------------------------------------------------------------------------------------------------
                                                                 Current baseline          MY 2011 final rule
                       Manufacturer                        -----------------------------------------------------
                                                             Passenger   Nonpassenger   Passenger   Nonpassenger
----------------------------------------------------------------------------------------------------------------
Chrysler..................................................          194           403          707         1,216
Ford......................................................        1,230           944        1,615         1,144
General Motors............................................        1,156         1,314        1,700         1,844
Honda.....................................................          996           571        1,250           470
Hyundai...................................................          570           127          655           221
Kia \457\.................................................          302            98
Nissan....................................................          794           421          789           479
Toyota....................................................        1,474         1,059        1,405         1,094
Other Asian...............................................          631           212          441           191
European..................................................          888           399          724           190
                                                           -----------------------------------------------------
    Total.................................................        8,235         5,547        9,286         6,849
----------------------------------------------------------------------------------------------------------------

    Dual-fueled vehicles:
---------------------------------------------------------------------------

    \457\ Kia is not listed in the table for the MY 2011 final rule
because it was considered as part of Hyundai for purposes of that
analysis (i.e., Hyundai-Kia).
---------------------------------------------------------------------------

    Manufacturers have also, during and since MY 2008, indicated plans
to sell more dual-fueled or flexible-fuel vehicles (FFVs) in MY 2011 than

[[Page 49650]]

indicated in the current baseline of adjusted MY 2008 compliance data.
FFVs create a potential market for alternatives to petroleum-based
gasoline and diesel fuel. For purposes of determining compliance with
CAFE standards, the fuel economy of a FFV is, subject to limitations,
adjusted upward to account for this potential.\458\ However, NHTSA is
precluded from ``taking credit'' for the compliance flexibility by
accounting for manufacturers' ability to earn and use credits in
setting the level of the standards.''\459\ Some manufacturers plan to
produce a considerably greater share of FFVs than can earn full credit
under EPCA. The projected average FFV share of the market in MY 2011 is
6 percent for the current baseline, versus 17 percent for the MY 2011 final rule.
---------------------------------------------------------------------------

    \458\ See 49 U.S.C. 32905 and 32906.
    \459\ 49 U.S.C. 32902(h).
---------------------------------------------------------------------------

    Estimated achieved fuel economy levels:
    Because manufacturers' product plans also reflect simultaneous
changes in fleet mix and other vehicle characteristics, the
relationship between increased technology utilization and increased
fuel economy cannot be isolated with any certainty. To do so would
require an apples-to-apples ``counterfactual'' fleet of vehicles that
are, except for technology and fuel economy, identical--for example, in
terms of fleet mix and vehicle performance and utility. The current
baseline market forecast shows industry-wide average fuel economy
levels somewhat higher in MY 2011 than shown in the MY 2011 final rule.
Under the current baseline, average fuel economy for MY 2011 is 26.7
mpg, versus 26.5 mpg under the baseline in the MY 2011 final rule.
    These differences are shown in greater detail below in Table
IV.C.1-2, which shows manufacturer-specific CAFE levels (not counting
FFV credits that some manufacturers expect to earn) from the current
baseline versus the MY 2011 final rule baseline (from manufacturers'
2008 product plans) for passenger cars and light trucks. Table IV.C.1-3
shows the combined averages of these planned CAFE levels in the
respective baseline fleets. These tables demonstrate that, while the
difference at the industry level is not so large, there are significant
differences in CAFE at the manufacturer level between the current
baseline and the MY 2011 final rule baseline. For example, while Honda
and Hyundai are essentially the same under both, Toyota and Nissan show
increased combined CAFE levels under the current baseline (by 2.4 and
0.8 mpg respectively), while Chrysler, Ford, and GM show decreased
combined CAFE levels under the current baseline (by 1.1, 1.8, and 1.0
mpg, respectively) relative to the MY 2011 final rule baseline.

  Table IV.C.1-2--Current Baseline Planned CAFE Levels in MY 2011 Versus MY 2011 Final Rule Planned Cafe Levels
                                          [Passenger and nonpassenger]
----------------------------------------------------------------------------------------------------------------
                                                              Current baseline CAFE       MY 2011 planned CAFE
                                                                      levels                     levels
                       Manufacturer                        -----------------------------------------------------
                                                             Passenger   Nonpassenger   Passenger   Nonpassenger
----------------------------------------------------------------------------------------------------------------
BMW.......................................................         27.2          23.1         27.0          23.0
Chrysler..................................................         28.4          21.8         28.2          23.1
Ford......................................................         28.2          20.5         29.3          22.5
Subaru....................................................         29.1          25.6         28.6          28.6
General Motors............................................         28.5          20.9         30.3          21.4
Honda.....................................................         33.8          25.3         32.3          25.2
Hyundai...................................................         31.5          24.3         31.7          26.0
Tata......................................................         24.6          19.5         24.7          23.9
Kia \460\.................................................         31.7          23.7  ...........  ............
Mazda \461\...............................................         31.0          26.7  ...........  ............
Daimler...................................................         27.3          21.0         25.2          20.6
Mitsubishi................................................         30.0          23.8         29.3          26.7
Nissan....................................................         31.9          21.5         31.3          21.4
Porsche...................................................         26.2          20.0         27.2          20.0
Ferrari \462\.............................................  ...........  ............         16.2  ............
Maserati \463\............................................  ...........  ............         18.2  ............
Suzuki....................................................         30.5          23.3         28.7          24.0
Toyota....................................................         35.4          24.8         33.2          22.7
Volkswagen................................................         28.6          20.2         28.5          20.1
                                                           -----------------------------------------------------
    Total/Average.........................................         30.8          22.3         30.4          22.6
----------------------------------------------------------------------------------------------------------------

[[Page 49651]]
    
---------------------------------------------------------------------------

    \460\ Again, Kia is not listed in the table for the MY 2011
final rule because it was considered as part of Hyundai for purposes
of that analysis (i.e., Hyundai-Kia).
    \461\ Mazda is not listed in the table for the MY 2011 final
rule because it was considered as part of Ford for purposes of that analysis.
    \462\ EPA did not include Ferrari in the current baseline based
on the conclusion that including them would not impact the results,
and therefore Ferrari is not listed in the table for the current baseline.
    \463\ EPA did not include Maserati in the current baseline based
on the conclusion that including them would not impact the results,
and therefore Maserati is not listed in the table for the current baseline.

 Table IV.C.1-3--Current Baseline Planned CAFE Levels in MY 2011 Versus
            MY 2011 Final Rule Planned CAFE Levels (Combined)
------------------------------------------------------------------------
                                                               MY 2011
                 Manufacturer                     Current     final rule
                                                  baseline     baseline
------------------------------------------------------------------------
BMW...........................................         25.6         26.0
Chrysler......................................         23.6         24.7
Ford..........................................         24.2         26.0
Subaru........................................         27.5         28.6
General Motors................................         23.9         24.9
Honda.........................................         30.1         30.0
Hyundai.......................................         29.9         30.0
Tata..........................................         21.1         24.4
Kia...........................................         29.3  ...........
Mazda.........................................         30.2  ...........
Daimler.......................................         24.7         23.6
Mitsubishi....................................         29.1         29.1
Nissan........................................         27.3         26.6
Porsche.......................................         23.2         22.0
Ferrari.......................................  ...........         16.2
Maserati......................................  ...........         18.2
Suzuki........................................         28.6         27.8
Toyota........................................         30.0         27.6
Volkswagen....................................         26.2         27.1
                                               -------------------------
    Total/Average.............................         26.7         26.5
------------------------------------------------------------------------

    Tables IV.C.1-4 through 1-6 summarize other differences between the
current baseline and manufacturers' product plans submitted to NHTSA in
2008 for the MY 2011 final rule. These tables present average vehicle
footprint, curb weight, and power-to-weight ratios for each
manufacturer represented in the current baseline and of the seven
largest manufacturers represented in the product plan data, and for the
overall industry. The tables containing product plan data do not
identify manufacturers by name, and do not present them in the same sequence.
    Tables IV.C.1-4a and 1-4b show that the current baseline reflects a
slight decrease in overall average passenger vehicle size relative to
the manufacturers' plans. This is a reflection of the market segment
shifts underlying the sales forecasts of the current baseline.

   Table IV.C.1-4a--Current Baseline Average MY 2011 Vehicle Footprint
                              [Square Feet]
------------------------------------------------------------------------
           Manufacturer                 PC           LT          Avg.
------------------------------------------------------------------------
BMW..............................         45.4         49.7         46.9
Chrysler.........................         46.4         54.0         51.5
Ford.............................         46.2         57.9         51.3
Subaru...........................         43.1         46.3         44.4
General Motors...................         46.2         59.6         53.4
Honda............................         44.3         49.4         46.2
Hyundai..........................         44.7         48.8         45.5
Tata.............................         50.3         48.0         48.8
Kia..............................         45.2         51.6         46.7
Mazda............................         44.3         46.9         44.7
Daimler..........................         46.6         53.3         49.0
Mitsubishi.......................         43.8         46.4         44.1
Nissan...........................         45.2         55.4         48.8
Porsche..........................         38.6         51.0         43.6
Suzuki...........................         41.0         47.2         42.3
Toyota...........................         44.0         51.1         47.0
Volkswagen.......................         43.4         52.6         45.4
                                  --------------------------------------
    Industry Average.............         45.0         54.4         48.8
------------------------------------------------------------------------


   Table IV.C.1-4b--MY 2011 Final Rule Average Planned MY 2011 Vehicle
                                Footprint
                              [Square Feet]
------------------------------------------------------------------------
                                        PC           LT          Avg.
------------------------------------------------------------------------
Manufacturer 1...................         46.7         58.5         52.8
Manufacturer 2...................         46.0          5.4         47.1
Manufacturer 3...................         44.9         52.8         48.4
Manufacturer 4...................         45.4         55.8         49.3
Manufacturer 5...................         45.2         57.5         50.3
Manufacturer 6...................         48.5         54.7         52.4
Manufacturer 7...................         45.1         49.9         46.4
                                  --------------------------------------
    Industry Average.............         45.6         55.1         49.7
------------------------------------------------------------------------

[[Page 49652]]

    Tables IV.C.1-5a and 1-5b show that the current baseline reflects a
decrease in overall average vehicle weight relative to the
manufacturers' plans. As above, this is most likely a reflection of the
market segment shifts underlying the sales forecasts of the current baseline.

  Table IV.C.1-5a--Current Baseline Average MY 2011 Vehicle Curb Weight
                                [Pounds]
------------------------------------------------------------------------
           Manufacturer                 PC           LT          Avg.
------------------------------------------------------------------------
BMW..............................        3,535        4,612        3,900
Chrysler.........................        3,498        4,506        4,178
Ford.............................        3,516        4,596        3,985
Subaru...........................        3,155        3,801        3,435
General Motors...................        3,495        5,030        4,311
Honda............................        3,021        4,064        3,401
Hyundai..........................        3,135        4,080        3,307
Tata.............................        3,906        5,198        4,717
Kia..............................        3,034        4,057        3,284
Mazda............................        3,236        3,744        3,316
Daimler..........................        3,450        5,123        4,045
Mitsubishi.......................        3,238        3,851        3,312
Nissan...........................        3,242        4,535        3,690
Porsche..........................        3,159        4,907        3,874
Suzuki...........................        2,870        3,843        3,080
Toyota...........................        3,112        4,186        3,561
Volkswagen.......................        3,479        5,673        3,959
                                  --------------------------------------
    Industry Average.............        3,280        4,538        3,786
------------------------------------------------------------------------


Table IV.C.1-5b--MY 2011 Final Rule Average Planned MY 2011 Vehicle Curb
                                 Weight
                                [Pounds]
------------------------------------------------------------------------
                                        PC           LT          Avg.
------------------------------------------------------------------------
Manufacturer 1...................        3,197        4,329        3,692
Manufacturer 2...................        3,691        4,754        4,363
Manufacturer 3...................        3,293        4,038        3,481
Manufacturer 4...................        3,254        4,191        3,510
Manufacturer 5...................        3,547        5,188        4,401
Manufacturer 6...................        3,314        4,641        3,815
Manufacturer 7...................        3,345        4,599        3,865
                                  --------------------------------------
    Industry Average.............        3,380        4,687        3,935
------------------------------------------------------------------------

    Tables IV.C.1-6a and IV.C.1-6b show that the current baseline
reflects a decrease in average performance relative to that of the
manufacturers' product plans. This decreased performance is most likely
a reflection of the market segment shifts underlying the sales
forecasts of the current baseline, that is, an assumed shift away from
higher performance vehicles.

   Table IV.C.1-6a--Current Baseline Average MY 2011 Vehicle Power-to-
                              Weight Ratio
                                 [hp/lb]
------------------------------------------------------------------------
           Manufacturer                 PC           LT          Avg.
------------------------------------------------------------------------
BMW..............................        0.072        0.061        0.068
Chrysler.........................        0.055        0.052        0.053
Ford.............................        0.058        0.053        0.056
Subaru...........................        0.062        0.057        0.059
General Motors...................        0.056        0.056        0.056
Honda............................        0.057        0.054        0.056
Hyundai..........................        0.051        0.055        0.052
Tata.............................        0.077        0.057        0.064
Kia..............................        0.050        0.056        0.051
Mazda............................        0.051        0.053        0.052
Daimler..........................        0.066        0.056        0.062
Mitsubishi.......................        0.053        0.056        0.053
Nissan...........................        0.058        0.057        0.058
Porsche..........................        0.105        0.073        0.092
Suzuki...........................        0.049        0.062        0.052
Toyota...........................        0.052        0.062        0.056
Volkswagen.......................        0.058        0.052        0.056
                                  --------------------------------------

[[Continued on page 49653]]
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