Part II

 
CONTENT

Federal Register: March 30, 2009 (Volume 74, Number 59)

Rules and Regulations

Page 14195-14456

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

DOCID:fr30mr09-12

Page 14195

Part II

Department of Transportation

National Highway Traffic Safety Administration

49 CFR Parts 523, 531, 533, et al.

Average Fuel Economy Standards Passenger Cars and Light Trucks Model

Year 2011; Final Rule

Page 14196

DEPARTMENT OF TRANSPORTATION

National Highway Traffic Safety Administration 49 CFR Parts 523, 531, 533, 534, 536 and 537

Docket No. NHTSA-2009-0062

RIN 2127-AK29

Average Fuel Economy Standards Passenger Cars and Light Trucks

Model Year 2011

AGENCY: National Highway Traffic Safety Administration (NHTSA),

Department of Transportation (DOT).

ACTION: Final rule; record of decision.

SUMMARY: The future of this country's economy, security, and environment are linked to one key challenge: energy. To reduce fuel consumption, NHTSA has been issuing Corporate Average Fuel Economy

(CAFE) standards since the late 1970's under the Energy Policy and

Conservation Act (EPCA). However, the principal effects of these standards are broader than their statutory purpose. Reducing fuel consumption conserves petroleum, a non-renewable energy source, saves consumers money, and promotes energy independence and security by reducing dependence on foreign oil. It also directly reduces the motor vehicle tailpipe emissions of carbon dioxide (CO2), which is the principal greenhouse gas emitted by motor vehicles.

The Energy Independence and Security Act (EISA) amended EPCA by mandating that the model year (MY) 2011-2020 CAFE standards be set sufficiently high to ensure that the industry-wide average of all new passenger cars and light trucks, combined, is not less than 35 miles per gallon by MY 2020. This is a minimum requirement, as NHTSA must set standards at the maximum feasible level in each model year. NHTSA will determine, based on all of the relevant circumstances, whether that additional requirement calls for establishing standards that reach the 35 mpg goal earlier than MY 2020.

NHTSA published a proposal in May 2008 to begin implementing EISA by establishing CAFE standards for MYs 2011-2015. A draft final rule for those model years was completed, but not issued.

In the context of his calls for the development of new national policies to prompt sustained domestic and international actions to address the closely intertwined issues of energy independence, energy security and climate change, the President issued a memorandum on

January 26, 2009, requesting NHTSA to divide its rulemaking into two parts. First, he requested the agency to issue a final rule adopting

CAFE standards for MY 2011 only. Given the substantial time and analytical effort involved in developing CAFE standards and the limited amount of time before the statutory deadline of March 30, 2009 for establishing the MY 2011 standards, the agency has necessarily based this one year final rule almost wholly on the information available to it and the analysis performed by it in support of the draft final rule completed last fall.

Second, 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 National Academy of Sciences, mandated under section 107 of EISA, assessing existing and potential automotive technologies and costs that can practicably be used to improve fuel economy. The deferral of action on standards for the later model years provides the agency with an opportunity to review its approach to CAFE standard setting, including its methodologies, economic and technological inputs and decisionmaking criteria, so as to ensure that it will produce standards that contribute, to the maximum extent possible within the limits of EPCA/EISA, to meeting the energy and environmental challenges and goals outlined by the President.

NHTSA estimates that the MY 2011 standards will raise the industry- wide combined average to 27.3 mpg, save 887 million gallons of fuel over the lifetime of the MY 2011 cars and light trucks, and reduce

CO2emissions by 8.3 million metric tons during that period.

DATES: This final rule is effective May 29, 2009.

Petitions for reconsideration must be received by May 14, 2009.

ADDRESSES: Petitions for reconsideration must be submitted to:

Administrator, National Highway Traffic Safety Administration, 1200 New

Jersey Avenue, SE., Washington, DC 20590.

FOR FURTHER INFORMATION CONTACT: For policy and technical issues: Ms.

Julie Abraham or Mr. Peter Feather, Office of Rulemaking, National

Highway Traffic Safety Administration, 1200 New Jersey Avenue, SE.,

Washington, DC 20590. Telephone: Ms. Abraham (202) 366-1455; Mr.

Feather (202) 366-0846.

For legal issues: Mr. Stephen Wood or Ms. Rebecca Yoon, Office of the Chief Counsel, National Highway Traffic Safety Administration, 1200

New Jersey Avenue, SE., Washington, DC 20590. Telephone: (202) 366- 2992.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Executive overview

A. The President's January 26, 2009 Memorandum on CAFE Standards for Model Years 2011 and Beyond 1. Rulemaking Background 2. Requests in the President's Memorandum

(a) CAFE Standards for Model Year 2011

(b) CAFE Standards for Model Years 2012 and Beyond 3. Implementing the President's Memorandum

B. Energy Independence and Security Act of 2007

C. Notice of Proposed Rulemaking for MYs 2011-2015 and Request for New Product Plans 1. Key Economic Values for Benefits Computations and Standard

Setting 2. Standards

(a) Classification of Vehicles

(b) Stringency

(c) Benefits and Costs

(i) Benefits

(ii) Costs

(d) Effect of Flexibilities on Benefits and Costs 3. Credits 4. Preemption

D. Brief Summary of Public Comments on the NPRM

E. New Information Received or Developed by NHTSA Between the

NPRM and Final Rule 1. New Manufacturer Product Plans 2. Revised Assessment of Technology Effectiveness and Costs 3. Final Environmental Impact Statement

F. Final Rule for MY 2011 1. Introduction 2. Key Economic Values for Benefits Computations 3. Standards

(a) Classification

(b) Stringency

(c) Benefits and Costs

(i) Benefits

(ii) Costs

(d) Flexibilities 4. Credits 5. Preemption

II. Background

A. Role of Fuel Economy Improvements in Promoting Energy

Independence, Energy Security, and a Low Carbon Economy

B. Contributions of Fuel Economy Improvements to CO2

Tailpipe Emission Reductions Since 1975

C. Chronology of Events Since the National Academy of Sciences

Called for Reforming and Increasing CAFE Standards 1. National Academy of Sciences Issues Report on Future of CAFE

Program (February 2002)

(a) Significantly Increasing CAFE Standards Without Making Them

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Attribute-Based Would Adversely Affect Safety

(b) Climate Change and Other Externalities Justify Increasing the CAFE Standards 2. NHTSA Issues Final Rule Establishing Attribute-Based CAFE

Standards for MY 2008-2011 Light Trucks (March 2006) 3. Supreme Court Issues Decision in Massachusetts v. EPA (April 2007) 4. NHTSA and EPA Coordinate on Development of Rulemaking

Proposals (Summer-Fall 2007) 5. Ninth Circuit Issues Decision Re Final Rule for MY 2008-2011

Light Trucks (November 2007) 6. Congress Enacts Energy Security and Independence Act of 2007

(December 2007) 7. NHTSA Proposes CAFE Standards for MYs 2011-2015 and Requests

New Product Plans for Those Years (April 2008) 8. NHTSA Contracts With ICF International To Conduct Climate

Modeling and Other Analyses in Support of Draft and Final

Environmental Impact Statements (May 2008) 9. Manufacturers Submit New Product Plans (June 2008) 10. NHTSA Contracts With Ricardo To Aid in Assessing Public

Comments On Cost and Effectiveness of Fuel Saving Technologies (June 2008) 11. Ninth Circuit Revises Its Decision Re Final Rule for MY 2008-2011 Light Trucks (August 2008) 12. NHTSA Releases Final Environmental Impact Statement (October 2008) 13. Office of Information and Regulatory Affairs Completes

Review of a Draft MY 2011-2015 Final Rule (November 2008) 14. Department of Treasury Extends Loans to General Motors and

Chrysler (December 2008) 15. Department of Transportation Decides Not To Issue MY 2011- 2015 Final Rule (January 2009) 16. The President Requests NHTSA To Issue Final Rule for MY 2011

Only (January 2009) 17. General Motors and Chrysler Submit Restructuring Reports to

Department of Treasury (February 2009)

D. Energy Policy and Conservation Act, as Amended 1. Vehicles Subject to Standards for Automobiles 2. Mandate To Set Standards for Automobiles 3. Attribute-Based Standards 4. Factors Considered in the Setting of Standards

(a) Factors That Must Be Considered

(i) Technological Feasibility

(ii) Economic Practicability

(iii) The Effect of Other Motor Vehicle Standards of the

Government on Fuel Economy

(iv) The Need of the United States To Conserve Energy 1. Fuel Prices and the Value of Saving Fuel 2. Petroleum Consumption and Import Externalities 3. Air Pollutant Emissions

(v) Other Factors--Safety

(b) Factors That Cannot Be Considered

(c) Weighing and Balancing of Factors 5. Consultation in Setting Standards 6. Test Procedures for Measuring Fuel Economy 7. Enforcement and Compliance Flexibility

III. The Anticipated Vehicles in the MY 2011 Fleets and NHTSA's

Baseline Market Forecast

A. Why does NHTSA establish a baseline market forecast?

B. How does NHTSA develop the baseline market forecast? 1. NHTSA first asks manufacturers for updated product plan data

(a) Why does NHTSA use manufacturer product plans to develop the baseline?

(b) What product plan data did NHTSA use in the NPRM?

(c) What product plan data did NHTSA receive for the final rule?

(d) How is the product plan data received for the final rule different from what the agency used in the NPRM analysis, and how does it impact the baseline? 2. Once NHTSA has the product plans, how does it develop the baseline? 3. How does NHTSA's market forecast reflect current market conditions?

IV. Fuel Economy-Improving Technologies

A. NHTSA Analyzes What Technologies Can Be Applied Beyond Those in the Manufacturers' Product Plans

B How NHTSA Decides Which Technologies To Include 1. How NHTSA Did This Historically, and How for the NPRM 2. NHTSA's Contract With Ricardo for the Final Rule

C. What technology assumptions has NHTSA used for the final rule? 1. How do NHTSA's technology assumptions in the final rule differ from those used in the NPRM? 2. How are the technologies applied in the model? 3. Technology Application Decision Trees 4. Division of Vehicles Into Subclasses Based on Technology

Applicability, Cost and Effectiveness 5. How did NHTSA develop technology cost and effectiveness estimates for the final rule? 6. Learning Curves 7. Technology Synergies 8. How does NHTSA use full vehicle simulation? 9. Refresh and Redesign Schedule 10. Phase-In Caps

D. Specific Technologies Considered for Application and NHTSA's

Estimates of Their Incremental Costs and Effectiveness 1. What data sources did NHTSA evaluate? 2. Individual Technology Descriptions and Cost/Effectiveness

Estimates

(a) Gasoline Engine Technologies

(i) Overview

(ii) Low Friction Lubricants (LUB)

(iii) Engine Friction Reduction (EFR)

(iv) Variable Valve Timing (VVT) 1. Intake Cam Phasing (ICP) 2. Coupled Cam Phasing (CCPS and CCPO) 3. Dual Cam Phasing (DCP)

(v) Discrete Variable Valve Lift (DVVLS, DVVLD, DVVLO)

(vi) Continuously Variable Valve Lift (CVVL)

(vii) Cylinder Deactivation (DEACS, DEACD, DEACO)

(viii) Conversion to Double Overhead Camshaft Engine With Dual

Cam Phasing (CDOHC)

(ix) Stoichiometric Gasoline Direct Injection (SGDI)

(x) Combustion Restart (CBRST)

(xi) Turbocharging and Downsizing (TRBDS)

(xii) Cooled Exhaust Gas Recirculation Boost (EGRB)

(b) Diesel Engine Technologies

(i) Diesel Engine With Lean NOXTrap (LNT) Catalyst

After-Treatment

(ii) Diesel Engine With Selective Catalytic Reduction (SCR)

After-Treatment

(c) Transmission Technologies

(i) Improved Transmission Controls and Externals (IATC)

(ii) Automatic 6-, 7- and 8-Speed Transmissions (NAUTO)

(iii) Dual Clutch Transmissions/Automated Manual Transmissions

(DCTAM)

(iv) Continuously Variable Transmission (CVT)

(v) 6-Speed Manual Transmissions (6MAN)

(d) Hybrid and Electrification/Accessory Technologies

(i) Overview

(ii) Hybrid System Sizing and Cost Estimating Methodology

(iii) Electrical Power Steering (EPS)

(iv) Improved Accessories (IACC)

(v) 12V Micro Hybrid (MHEV)

(vi) High Voltage/Improved Alternator (HVIA)

(vii) Integrated Starter Generator (ISG)

(viii) Power Split Hybrid

(ix) 2-Mode Hybrid

(x) Plug-In Hybrid

(e) Vehicle Technologies

(i) Material Substitution (MS1, MS2, MS5)

(ii) Low Drag Brakes (LDB)

(iii) Low Rolling Resistance Tires (ROLL)

(iv) Front or Secondary Axle Disconnect for Four-Wheel Drive

Systems (SAX)

(v) Aerodynamic Drag Reduction (AERO)

(f) Technologies Considered But Not Included in the Final Rule

Analysis

(i) Camless Valve Actuation

(ii) Lean-Burn Gasoline Direct Injection Technology

(iii) Homogeneous Charge Compression Ignition

(iv) Electric Assist Turbocharging

E. Cost and Effectiveness Tables

V. Economic Assumptions Used in NHTSA's Analysis

A. Introduction: How NHTSA Uses the Economic Assumptions in Its

Analysis

B. What economic assumptions does NHTSA use in its analysis? 1. Determining Retail Price Equivalent 2. Potential Opportunity Costs of Improved Fuel Economy 3. The On-Road Fuel Economy `Gap' 4. Fuel Prices and the Value of Saving Fuel 5. Consumer Valuation of Fuel Economy and Payback Period 6. Vehicle Survival and Use Assumptions 7. Growth in Total Vehicle Use 8. Accounting for the Rebound Effect of Higher Fuel Economy 9. Benefits From Increased Vehicle Use 10. Added Costs From Congestion, Crashes, and Noise

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11. Petroleum Consumption and Import Externalities 12. Air Pollutant Emissions

(a) Impacts on Criteria Pollutant Emissions

(b) Reductions in CO2Emissions

(c) Economic Value of Reductions in CO2Emissions 13. The Value of Increased Driving Range 14. Discounting Future Benefits and Costs 15. Accounting for Uncertainty in Benefits and Costs

VI. How NHTSA Sets the CAFE Standards

A. Which attributes does NHTSA use to determine the standards?

B. Which mathematical function does NHTSA use to set the standards?

C. What other types of standards did commenters propose?

D. How does NHTSA fit the curve and estimate the stringency that maximizes net benefits to society?

E. Why has NHTSA used the Volpe model to support its analysis?

VII. Determining the Appropriate Level of the Standards

A. Analyzing the Preferred Alternative

B. Alternative Levels of Stringency Considered for Establishment as the Maximum Feasible Level of Average Fuel Economy

C. EPCA Provisions Relevant to the Selection of the Final

Standards 1. 35 in 2020 2. Annual Ratable Increase 3. Maximum Feasibility and the Four Underlying EPCA

Considerations

(a) Technological Feasibility

(b) Economic Practicability

(c) Effect of Other Motor Vehicle Standards of the Government on

Fuel Economy

(d) Need of the United States To Conserve Energy

(i) Consumer Cost

(ii) National Balance of Payments

(iii) Environmental Implications

(iv) Foreign Policy Considerations 4. Comparison of Alternatives 5. Other Considerations Under EPCA

(a) Safety

(b) AMFA Credits

(c) Flexibility Mechanisms: Credits, Fines

D. Analysis of Environmental Consequences in Selecting the Final

Standards

E. Picking the Final Standards 1. Eliminating the Alternatives Facially Inconsistent With EPCA

(a) No-Action Alternative

(b) Technology Exhaustion Alternative 2. Choosing Among the Remaining Alternatives

(a) Difficulty and Importance of Achieving a Reasonable

Balancing of the Factors

(b) The Correct Balancing of the Factors for Setting the MY 2011

Standards Is To Maximize Societal Net Benefits

VIII. Safety

A. Summary of NHTSA's Approach in This Final Rule

B. Background 1. NHTSA's Early Studies 2. The 2002 National Academy of Sciences Study 3. NHTSA's updated 2003 Study 4. Summary of Studies Prior to This Rulemaking

B. Response to Comments in This Rulemaking on Safety and Vehicle

Weight 1. Views of Other Government Agencies 2. Comments From Other Parties

C. Comments on Other Issues Related to Safety 1. Vehicle Compatibility Design Issues 2. Whether Manufacturers Downweight in Response to Increased

CAFE Stringency 3. Whether Flat Standards Are More or Less Harmful to Safety

Than Footprint-Based Standards 4. Whether NHTSA Should Set Identical Targets for Passenger Cars and Light Trucks for Safety Reasons 5. Whether NHTSA Should Have Considered the 2002 NAS Report

Dissent in Deciding Not To Apply Material Substitution for Vehicles

Under 5,000 Pounds

IX. The Final Fuel Economy Standards for MY 2011

A. Final Passenger Car Standard

B. Final Light Truck Standard

C. Energy and Environmental Backstop

D. Combined Fleet Performance

E. Costs and Benefits of Final Standards 1. Benefits 2. Costs

F. Environmental Impacts of Final Standards

X. Other Fuel Economy Standards Required by EISA

XI. Vehicle Classification

A. Summary of Comments

B. Response to Comments 1. This Rule Substantially Tightens NHTSA's Vehicle

Classification Definitions

(a) Under Sec. 523.5(b), Only Vehicles That Actually Have 4WD

Will Be Classified as 4WD Vehicles

(b) The Final Rule Amends Sec. 523.5(a)(4) To Prevent Gaming

That Might Jeopardize Fuel Savings Created by NHTSA's Clarified

Position on 2WD Vehicles 2. Especially as Tightened by This Rule, NHTSA's Classification

Definitions Are More Difficult to Game Than Commenters Suggest 3. Additional Changes in NHTSA's Classification Definitions

Would Not Result in Greater Fuel Savings and Lower CO2

Emissions 4. The Vehicle Classification Definitions Embodied in This Final

Rule Are Consistent With NHTSA's Statutory Authority and Respond to the Ninth Circuit's Opinion

XII. Flexibility Mechanisms and Enforcement

A. NHTSA's Request for Comment Regarding Whether the Agency

Should Consider Raising the Civil Penalty for CAFE Non-Compliance

B. CAFE Credits

C. Extension and Phasing Out of Flexible-Fuel Incentive Program

XIII. Test Procedure for Measuring Wheelbase and Track Width and

Calculating Footprint

A. Test Procedure Execution

B. Measured Value Tolerances

C. Administrative and Editorial Issues

XIV. Sensitivity and Monte Carlo Analysis

XV. NHTSA's Record of Decision

XVI. Regulatory Notices and Analyses

A. Executive Order 12866 and DOT Regulatory Policies and

Procedures

B. National Environmental Policy Act 1. Clean Air Act (CAA) 2. National Historic Preservation Act (NHPA) 3. Executive Order 12898 (Environmental Justice) 4. Fish and Wildlife Conservation Act (FWCA) 5. Coastal Zone Management Act (CZMA) 6. Endangered Species Act (ESA) 7. Floodplain Management (Executive Order 11988 & DOT Order 5650.2) 8. Preservation of the Nation's Wetlands (Executive Order 11990

& DOT Order 5660.1a) 9. Migratory Bird Treaty Act (MBTA), Bald and Golden Eagle

Protection Act (BGEPA), Executive Order 13186 10. Department of Transportation Act (Section 4(f))

C. Regulatory Flexibility Act

D. Executive Order 13132 (Federalism)

E. Executive Order 12988 (Civil Justice Reform)

F. Unfunded Mandates Reform Act

G. Paperwork Reduction Act

H. Regulation Identifier Number (RIN)

J. Executive Order 13045

K. National Technology Transfer and Advancement Act

L. Executive Order 13211

M. Department of Energy Review

N. Privacy Act

XVII. Regulatory Text

I. Executive Overview

A. The President's January 26, 2009 Memorandum on CAFE Standards for

Model Years 2011 and Beyond 1. Rulemaking Background

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 FR 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 cleared the rule as consistent with the Order.\1\ However, issuance of the final rule was held in abeyance. On January 7, 2009,

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the Department of Transportation announced that the final rule would not be issued, saying:

\1\ Record of OIRA's action can be found at http:// www.reginfo.gov/public/do/eoHistReviewSearch (last visited March 8, 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.\2\

\2\ The statement can be found at http://www.dot.gov/affairs/ dot0109.htm (last accessed February 11, 2009).

2. 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 \3\ 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.

\3\ Currently, the National Highway Traffic Safety

Administration does not have an Administrator. Ronald L. Medford is the Acting Deputy Administrator.

(a) 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. As part of that final rule, the President requested that NHTSA consider whether any provisions regarding preemption are consistent with the EISA, the Supreme Court's decision in Massachusetts v. EPA and other relevant provisions of law and the policies underlying them.

(b) 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 further consider whether any provisions regarding preemption are appropriate under applicable law and policy. 3. 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 will develop CAFE standards for MY 2012 and beyond only after collecting new information, conducting a careful review of technical and economic inputs and assumptions, and standard setting methodology, and completing new analyses.

For MY 2011, however, time limitations precluded the adoption of this approach. As noted above, EPCA requires that standards for that model year be established by the end of March of this year. Thus, immediate decisions had to be made about the establishment of the MY 2011 standards. There was insufficient time between the issuance of the

President's memorandum in late January and the end of March to revisit and, if and as appropriate, revise the extensive and complex analysis in any substantively significant way. This is particularly so given the requirement under EPCA to consult with the Environmental Protection

Agency and the Department of Energy on these complicated and important technical matters. Decisions regarding those matters potentially affect not just NHTSA's CAFE rulemaking, but also programs of other departments and agencies. Accordingly, the methodologies, economic and technological inputs and decisionmaking criteria used in this rule are necessarily largely those developed by NHTSA in the fall of 2008.

In looking ahead to the next CAFE rulemaking, the agency emphasizes that while the methodologies, economic and technological inputs and decisionmaking criteria used in this rule were well-supported choices for the purposes of the MY 2011 rulemaking, they were not the only reasonable choices that the agency could have made for that purpose.

Many of the key aspects of this rulemaking reflect decisions among several reasonable alternatives. The choices made in the context of last fall may or may not be the choices that will be made in the context of the follow-on rulemaking.

The deferral of action on the CAFE standards for the years after MY 2011 provides the agency with an opportunity to review its approach to

CAFE standard setting, including its methodologies, economic and technological inputs, and decisionmaking criteria. It is reasonable to anticipate that this process may lead to changes, given the further review and analysis that will be conducted pursuant to the President's request, and given the steady and potentially substantial evolution in technical and policy factors relevant to the next CAFE rulemaking.

These factors include, but are not limited to, energy and climate change needs and policy choices regarding goals and approaches to achieving them, developments in domestic legislation and international negotiations regarding those goals and approaches, the financial health of the industry, technologies for reducing fuel consumption, fuel prices, and climate change science and damage valuation.

The goal of the review and re-evaluation will be to ensure that the approach used for MY 2012 and thereafter produces 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 will seek 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 are committed to ensuring that the CAFE program for beyond MY 2011 is based on the best scientific, technical, and economic information available, and that such information is developed in close coordination with other federal agencies and our stakeholders, including the states and the vehicle manufacturers.

We will also re-examine EPCA, as amended by EISA, to consider whether additional opportunities exist for achieving the President's goals. For example, EPCA authorizes, within relatively narrow limits and subject to making specified findings, for increasing the amount of civil penalties

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for violating the CAFE standards.\4\ Further, while EPCA prohibits updating the test procedures used for measuring passenger car fuel economy, it places no such limitation on the test procedures for light trucks.\5\ 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 fuel consumption and tailpipe emissions of

CO2.

\4\ Under 49 U.S.C. 32904(c), EPA must ``use the same procedures for passenger automobiles the Administrator used for model year 1975

(weighted 55 percent urban cycle and 45 percent highway cycle), or procedures that give comparable results.''

\5\ 49 U.S.C. 32912(c).

In response to the President's request that NHTSA consider whether any provisions regarding preemption are consistent with EISA, the

Supreme Court's decision in Massachusetts v. EPA and other relevant provisions of law and the policies underlying them, NHTSA has decided not to include any provisions addressing preemption in the Code of

Federal Regulations at this time. The agency will re-examine the issue of preemption in the content of its forthcoming rulemaking to establish

Corporate Average Fuel Economy standards for 2012 and later model years.

B. Energy Independence and Security Act of 2007

The mandates in the Energy Independence and Security Act of 2007

(EISA) \6\ for reducing fuel consumption by motor vehicles and expanding the production of renewable fuels represent major steps forward in promoting energy independence and security and in addressing climate change risks by reducing CO2emissions. EISA requires the first statutory increase in fuel economy standards for passenger automobiles (referred to below as ``passenger cars'') since those standards were originally mandated in 1975. It also includes an important reform--switching to ``attribute-based standards.'' This switch will help to ensure that increased fuel efficiency does not come at the expense of automotive safety.

\6\ Public Law 110-140, 121 Stat. 1492 (Dec. 18, 2007).

More specifically, EISA made a number of important changes to EPCA.

EISA:

Establishes a statutory mandate to establish passenger car standards for each model year at the maximum feasible level and eliminates the old statutory default standard of 27.5 mpg for passenger cars and the provision giving us discretion to amend that default standard. Thus, given that there will no longer be a default standard, the agency must act affirmatively to establish a new passenger car standard for each model year.

Retains the requirement to establish separate standards for passenger cars and light trucks and to set them at the maximum feasible level, but sets forth special requirements for the MY 2011- 2020 standards.

The standards must increase ratably each year and, at a minimum, be set sufficiently high to ensure that the average fuel economy of the combined industry-wide fleet of all new passenger cars and light trucks sold in the United States during MY 2020 is at least 35 mpg.\7\

\7\ Although NHTSA previously established an attribute-based standard for MY 2011 light trucks in its 2006 final rule, EISA mandates a new rulemaking, reflecting new statutory considerations and a new administrative record, and consistent with EPCA as amended by EISA, to establish the standard for those light trucks.

Mandates the reforming of CAFE standards for passenger cars by requiring that all CAFE standards be based on one or more vehicle attributes related to fuel economy (like size or weight). Fuel economy targets are set for individual vehicles and increase as the attribute decreases and vice versa. For example, size-based (i.e., size-indexed) standards assign higher fuel economy targets to smaller vehicles and lower ones to larger vehicles. Use of this approach helps to ensure that the improvements in fuel economy do not come at the expense of safety. NHTSA pioneered that approach in its last rulemaking on CAFE standards for light trucks.

Requires that for each model year, beginning with MY 2011, each manufacturer's domestically-manufactured passenger car fleet must achieve a measured average fuel economy that is not less than 92 percent of the average fuel economy of the combined industry-wide fleet of domestic and non-domestic passenger cars sold in the United States in that model year.

Limits to five the number of model years for which standards can be established in a single rulemaking.

Provides greater flexibility for automobile manufacturers by (a) increasing from three to five the number of years that a manufacturer can carry forward the compliance credits it earns by exceeding CAFE standards, (b) allowing a manufacturer to transfer the credits it has earned from one of its compliance categories of automobiles to another class, and (c) authorizing the trading of credits between manufacturers.

C. Notice of Proposed Rulemaking for MYs 2011-2015 and Request for New

Product Plans 1. Key Economic Values for Benefits Computations and Standard Setting

NHTSA's analysis of the proposed and alternative CAFE standards in the Notice of Proposed Rulemaking (NPRM) \8\ relied on a range of information, economic estimates, and input parameters. These economic assumptions play a role in the determination of the level of the standards, with some having greater impacts than others. The cost of technologies, the price of gasoline, and discount rate used for discounting future benefits had the greatest influence over the level of the standards. In order of impact, the full list of the economic assumptions is as follows: (1) Technology cost; (2) fuel prices; (3) discount rate; (4) oil import externalities; (5) rebound effect; (6) criteria air pollutant damage costs; (7) carbon costs. The table below shows the NPRM assumptions on which the agency received the most extensive public comment.

\8\ 73 FR 24352, May 2, 2008. In a separate notice published on the same day, the agency requested automobile manufacturers to submit new product plans for MYs 2011-15. 73 FR 24190.

\9\ Although Table V-3 Economic Values for Benefits Computations in the NPRM indicated that all of the values in that table were 2006$, several values were actually in 2005$. Thus, the monopsony component, which was shown in that table as $0.176, should have been shown as $0.182. Likewise, the price shock component should have been $0.113, instead of $0.109. The sum of those two values should have been $0.295, not $0.285.

Table I-1--NPRM Key Economic Values for Benefits Computations (2006$)

\9\

Fuel Prices (average retail gasoline price per gallon, 2011-

$2.34 30).........................................................

Discount Rate Applied to Future Benefits.....................

7%

Economic Costs of Oil Imports ($/gallon):

``Monopsony'' Component..................................

$0.182

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Price Shock Component....................................

$0.113

Military Security Component.............................. .........

Total Economic Costs.................................

$0.295

Emission Damage Costs:

Carbon Dioxide ($/metric ton)............................

$7.00

Annual Increase in CO2 Damage Cost.......................

2.4%

2. Standards

(a) Classification of Vehicles

In the NPRM, the agency classified the vehicles subject to the proposed standards as passenger cars or as light trucks in the same way that the vehicles had been traditionally classified under the CAFE program. In particular, sport utility vehicles (SUVs), mini-vans and pickup trucks were classified as light trucks. However, the agency raised the possibility of reclassifying many of the two-wheel drive

SUVs as passenger cars for the purposes of the final rule.

(b) Stringency

We proposed setting separate attribute-based fuel economy standards for passenger cars and light trucks consistent with the size-based approach that NHTSA used in establishing the light truck standards for

MY 2008-2011 light trucks.

Compared to the April 2006 final rule that established those attribute-based standards, the NPRM more thoroughly evaluated the value of the costs and benefits of setting CAFE standards. This was important because assumptions regarding projected gasoline prices, along with assumptions about the value of reducing the negative externalities

(economic and environmental) from producing and consuming fuel, were based on changed economic, environmental, and energy security conditions. These environmental externalities include, among other things, an estimation of the value of reducing tailpipe emissions of

CO2.\10\

\10\ The externalities included in our analysis do not, however, include those associated with the reduction of the other GHG emitted by automobiles, i.e., methane (CH4), nitrous oxide

(N2O), and hydroflurocarbons (HFCs). Actual air conditioner operation is not included in the test procedures used to obtain both (1) emission rates for purposes of determining compliance with EPA criteria pollutant emission standards and (2) fuel economy values for purposes of determining compliance with

NHTSA CAFE standards, although air conditioner operation is included in ``supplemental'' federal test procedures used to determine compliance with corresponding and separate EPA criteria pollutant emission standards. As noted above, EPCA precludes basing passenger car standards on those other test procedures, but places no such limit on the test procedures used as the basis for light truck standards.

In light of EISA and the need to balance the statutory considerations in a way that reflects the current need of the nation to conserve energy, including the current assessment of climate change risks, the agency revisited the various assumptions used to determine the level of the standards. Specifically, the agency used higher gasoline prices and higher estimates for energy security values ($0.29 per gallon instead of $0.09 per gallon). The agency also monetized carbon dioxide (at $7.00/ton), which it did not do in the previous rulemaking, and expanded the list of technologies it used in assessing the capability of manufacturers to improve fuel economy. In addition, the agency used cost estimates that reflect economies of scale and estimated ``learning''-driven reductions in the cost of technologies as well as quicker penetration rates for advanced technologies.

The agency could not set out the exact level of CAFE that each manufacturer would be 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 could, however, project what the industry-wide level of average fuel economy would be 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. Adjacent to each average fuel economy figure in the NPRM was the estimated associated level of tailpipe emissions of

CO2that would be achieved.\11\

\11\ Given the contributions made by CAFE standards to addressing not only energy independence and security, but also to reducing tailpipe emissions of CO2, fleet performance was stated in the above discussion both in terms of fuel economy and the associated reductions in tailpipe emissions of CO2since the CAFE standards would have the practical effect of limiting those emissions approximately to the indicated levels during the official

CAFE test procedures established by EPA. The relationship between fuel consumption and carbon dioxide emissions is discussed ubiquitously, such as at www.fueleconomy.gov, a fuel economy-related web site managed by DOE and EPA (see http://www.fueleconomy.gov/feg/ contentIncludes/co2_inc.htm, which provides a rounded value of 20 pounds of CO2per gallon of gasoline). (Last accessed

March 8, 2009.) The CO2emission rates shown were based on gasoline characteristics. Because diesel fuel contains more carbon (per gallon) than gasoline, the presence of diesel engines in the fleet--which NHTSA expects to increase in response to the proposed CAFE standards--will cause the actual CO2 emission rate corresponding to any given CAFE level to be slightly higher than shown here. (The agency projected that 4 percent of the

MY 2015 passenger car fleet and 10 percent of the MY 2015 light truck fleet would have diesel engines.) Conversely (and hypothetically), applying the same CO2emission standard to both gasoline and diesel vehicles would discourage manufacturers from improving diesel engines, which show considerable promise as a means to improve fuel economy.

For passenger cars:

MY 2011: 31.2 mpg (285 g/mi of tailpipe emissions of CO2)

MY 2012: 32.8 mpg (271 g/mi of tailpipe emissions of CO2)

MY 2013: 34.0 mpg (261 g/mi of tailpipe emissions of CO2)

MY 2014: 34.8 mpg (255 g/mi of tailpipe emissions of CO2)

MY 2015: 35.7 mpg (249 g/mi of tailpipe emissions of CO2)

For light trucks:

MY 2011: 25.0 mpg (355 g/mi of tailpipe emissions of CO2)

MY 2012: 26.4 mpg (337 g/mi of tailpipe emissions of CO2)

MY 2013: 27.8 mpg (320 g/mi of tailpipe emissions of CO2)

MY 2014: 28.2 mpg (315 g/mi of tailpipe emissions of CO2)

MY 2015: 28.6 mpg (310 g/mi of tailpipe emissions of CO2)

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

MY 2011: 27.8 mpg (2.5 mpg increase above MY 2010; 320 g/mi

CO2)

MY 2012: 29.2 mpg (1.4 mpg increase above MY 2011; 304 g/mi

CO2)

MY 2013: 30.5 mpg (1.3 mpg increase above MY 2012; 291 g/mi

CO2)

MY 2014: 31.0 mpg (0.5 mpg increase above MY 2013; 287 g/mi

CO2)

MY 2015: 31.6 mpg (0.6 mpg increase above MY 2014; 281 g/mi

CO2)

The annual average increase during this five year period was approximately

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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.

(c) Benefits and Costs

(i) Benefits

We estimated that the proposed standards for the five-year period would save approximately 54.7 billion gallons of fuel (18.7 billion gallons for passenger cars and 36 billion gallons for light trucks) and reduce tailpipe CO2emissions by 521 million metric tons

(178 million metric tons for passenger cars and 343 million metric tons for light trucks) over the lifetime of the vehicles sold during those model years, compared to the fuel use and emissions reductions that would occur if the standards remained at the adjusted baseline (i.e., the higher of manufacturer's plans and the manufacturer's required level of average fuel economy for MY 2010).

We estimated that the value of the total benefits of the proposed standards would be approximately $88 billion ($31 billion for passenger cars and $57 billion for light trucks) over the lifetime of the vehicles sold during those model years.

(ii) Costs

The total costs for manufacturers to comply with the standards for the five-year period would be approximately $47 billion ($16 billion for passenger cars and $31 for light trucks) compared to the costs they would incur if the standards remained at the adjusted baseline.

(d) Effect of Flexibilities on Benefits and Costs

The above benefit and cost estimates did not reflect the availability and use of flexibility mechanisms, such as compliance credits and credit trading, because EPCA prohibits NHTSA from considering the effects of those mechanisms in setting CAFE standards.

However, the agency noted that, in reality, manufacturers were likely to rely to some extent on flexibility mechanisms provided by EPCA and would thereby reduce the cost of complying with the proposed standards to a meaningful extent. 3. Credits

NHTSA also proposed a new Part 536 on trading and transferring

``credits'' earned for exceeding applicable CAFE standards.\12\ Under the proposed Part 536, credit holders (including, but not limited to, manufacturers) would have credit accounts with NHTSA, and would 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. Traded credits would 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 developed several regulatory restrictions on trading and transferring to facilitate Congress' intent in this regard.

\12\ 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 in 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.

4. Preemption

In the proposal, the agency continued its discussion, conducted in a series of rulemaking proposals and final rules spanning a six-year period, of the issue of preemption of state regulations regulating tailpipe emissions of GHGs, especially carbon dioxide.

D. Brief Summary of Public Comments on the NPRM

Standard stringency: Automobile manufacturers argued that the standards, especially those for light trucks in the early years, should be lower. Environmental and consumer groups and states wanted higher standards throughout the five-year period.

Footprint attribute: Commenters generally supported the agency's choice of footprint as an attribute, although several urged consideration of additional attributes and a few argued for different attributes.

Setting standards at levels at which net benefits are projected to be maximized (optimized standards) vs. using other decision-making formulae: A consumer group urged setting standards at the optimized + 50% alternative level, while some environmental groups favored setting them at levels at which total benefits equal total costs. Manufacturers contended that the optimized approach does not assure economic practicability, especially for manufacturers needing to borrow at high interest rates to finance design changes. A manufacturer association and other commenters said agency did not assess the ability of the manufacturers to raise the capital necessary to develop and implement sufficient technologies.

Front-loading/ratable increase: Some commenters, especially the manufacturers, argued that the statutory requirement for ``ratable'' increases in standards means that the increases must be proportional or at least must not be disproportionately large or small in relation to one another. They did not discuss how that requirement is to be read together with either the statutory requirement to set standards for each model year at the level that is the maximum feasible level for that model year, or the separate statutory requirement for the overall fleet to achieve at least 35 mpg.

Key economic and other assumptions affecting stringency--

Technology costs and effectiveness--The manufacturers said that NHTSA underestimated the costs. A manufacturer association submitted a study by Sierra Research challenging the cost and effectiveness estimates developed by NHTSA and EPA for the NPRM.

Fuel prices--A manufacturer association and dealer associations said that Energy Information Administration's (EIA) reference case should be used. Environmental and consumer groups, states and some members of Congress said NHTSA should use at least the

EIA high price case. The EIA Administrator stated at a June 2008

Congressional hearing that the then current prices were at or above

EIA's high case and that he would use that case in the CAFE rulemaking.

Discount rate--The manufacturers said the rate should be at least 7%, while environmental and consumer groups and states said it should not be greater than 3 percent.

Military costs--Many commenters argued that NHTSA should place a value other than zero on military security externalities.

Social cost of carbon--Some commenters said the domestic value of reducing CO2emissions should be lower than the

NPRM value of $7; environmental and consumer groups and states said it should be much higher. The former tended to favor a value reflecting damage to the U.S. only, while the latter favored a global value.

Weight reduction--States and environmental and consumer groups said that NHTSA should consider downweighting for vehicles under 5,000 lbs; an insurance safety research group supported the proposal not to consider that.

Rate of application of advanced technologies (diesels and hybrids):

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Manufacturers argued that NHTSA was overly optimistic; environmental/ consumer groups and states argued that NHTSA relied too much on manufacturer product plans and should require manufacturers to improve fuel economy more quickly.

Fitting of standard curve to data: A manufacturer association and two manufacturers questioned the empirical and technical bases for the shape of the curves.

Steepness of car standard curve: The two manufacturer associations and several environmental groups said that the proposed car curves were too steep: manufacturers did so because of impracticability; environmental groups, because of what they saw as an incentive to increase vehicle size.

Backstop standard: Environmental and consumer groups argued that

NHTSA must establish absolute backstop standards for all vehicles.

Manufacturers argued that anti-backsliding features of the attribute- based standards function as a backstop.

``SUV loophole'': In general, manufacturers agreed with the agency's decision to reclassify 2 WD SUVs from the light truck fleet to the passenger car fleet, as long as this change would take effect after

MY 2010. Environmental and consumer groups argued that the classification system should be further revised to address ``gaming'' and did not address the agency's justification for the proposed revisions.

Credits: Manufacturers argued that earned carry forward/back credits, as long as they were not acquired by transfer or trade, should be available to meet the minimum standard for domestic cars.

Manufacturers also requested flexibility to manage their own credit shortfalls, instead of having the agency automatically decide upon and implement plans for them. One manufacturer asked that the new statutory provision giving credits a 5 year life be applied to all existing credits, instead of only those credits earned in model year 2009 or thereafter.

Impact on small/limited-line manufacturers: Small/limited-line manufacturers argued that the proposed standards impact them more than full-line manufacturers, and requested either that the car standards be set based on the plans of all car manufacturers, instead of just the seven largest, or that some alternative form of standard be set for them.

Preemption: Manufacturers argued that the effects of state regulation of CO2emissions are ``related to'' the regulation of fuel economy within the meaning of section 32919(a) of

EPCA; environmental and consumer groups and states argued that the purpose of regulating CO2emissions may overlap with, but is different from the purpose of regulating fuel economy

E. New Information Received or Developed by NHTSA Between the NPRM and

Final Rule

There were a number of changes after the NPRM that made possible analytical improvements for the final rule. These changes also caused the CAFE levels, fuel savings, and CO2emissions that are attributable to each alternative and scenario examined for this final rule to differ from those presented in the NPRM. 1. New Manufacturer Product Plans

As discussed in the NPRM, the agency requested new product plans from manufacturers to aid in determining appropriate standards for the final rule. The product plans submitted in May 2007 naturally did not take into consideration the later passage of EISA and its minimum 35 mpg combined fleet requirement by 2020. In addition, during that time, the fuel prices rose substantially.

The new product plans submitted in the summer of 2008 in response to the NPRM reflect those new realities in a couple of ways. First, companies provided product plans that reflected the manufacturers' implementation of some of the cost-effective technologies that the agency had projected in the NPRM. This increased the baseline against which the fuel saving from the standards are calculated. As a result, some of the savings and CO2emission reductions that were attributed in the NPRM to the rulemaking action are now attributed to actions taken ``independently by the manufacturers, as reflected in the improved product plans. Second, the size of the overall fleet had declined from the time of the NPRM to the final rule, resulting in fewer vehicle miles traveled. 2. Revised Assessment of Technology Effectiveness and Costs

With the aid of an expert consulting firm, NHTSA revised the technology assumptions in the NPRM based on comments and new information received during the comment period and used those revised assumptions for analyzing alternatives and scenarios for the Final

Environmental Impact Assessment (FEIS) and final rule. In several cases, the agency concluded on the basis of analysis of that additional information that the costs in the NPRM and Draft EIS were underestimated and benefits overestimated, and in most cases, these estimates were not well differentiated by vehicle class. The agency also revised its phase-in schedule of the technologies to account more fully for needed lead time. 3. Final Environmental Impact Statement

With the aid of an expert consulting firm, the agency completed a final environmental impact statement (FEIS), the first FEIS prepared by a federal agency to examine climate change issues comprehensively.\13\

The FEIS examines the climate change and other environmental effects of the changes in emissions of greenhouse gases and criteria air pollutants resulting from a wide variety of alternative standards. For this purpose, the agency relied extensively on the 2007 reports of the

Intergovernmental Panel on Climate Change and contracted with ICF

International to perform climate modeling. That impact statement also carefully assesses the cumulative impacts of past, present and future

CAFE rulemakings.

\13\ The Final Environmental Impact Statement can be found on the NHTSA website at http://www.nhtsa.gov/staticfiles/DOT/NHTSA/

Rulemaking/Rules/Associated%20Files/CAFE%20FEIS.pdf (last accessed

March 8, 2009).

F. Final Rule for MY 2011 1. Introduction

As discussed above, and at length later in this rule, NHTSA's review and analysis of comments on its proposal have 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 has revised its forecast of the future light vehicle market.

NHTSA has changed the methods and inputs it uses to represent the applicability, availability, cost, and effectiveness of future fuel-saving technologies.

NHTSA has based its fuel price forecast on the AEO 2008

High Case price scenario instead of the AEO 2008 Reference Case.

NHTSA has reduced mileage accumulation estimates (i.e., vehicle miles traveled) to levels consistent with this increased fuel price forecast.

NHTSA has applied increased estimates for the value of oil import externalities.

NHTSA has now included all manufacturers--not just the largest

Page 14204

seven--in the process used to fit the curve and estimate the stringency at which societal net benefits are maximized.

NHTSA has 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.

NHTSA has now 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.

NHTSA recognizes that, when considered in isolation, some of the above changes might, on an ``intuitive'' basis, be expected to result in higher average required fuel economy levels. For example, setting aside other changes, the increase in estimated fuel prices and oil import externalities might be expected to result in higher average fuel economy requirements. On the other hand, again setting aside other changes, the updated characterization of fuel-saving technologies, the reassignment of over one million vehicles to the passenger car fleet, the reduction in mileage accumulation, and the inclusion of all manufacturers in the standard setting process might intuitively be expected to result in lower average fuel economy requirements.

However, there are theoretical reasons for which even such isolated expectations might not be met. For example, if a change in inputs caused societal net benefits to increase equally at all stringencies, the level of stringency that maximized societal net benefits would remain unchanged, although it would produce greater net benefits after the change in inputs. Further, some of the changes listed above are interdependent, making it difficult, if not impossible, to isolate the effect attributable to every change. For example, NHTSA applied the reduced mileage accumulation, which reduces the benefits of adding technology, in conjunction with applying increased fuel prices, which increase the benefits of adding technology.

There is no obvious way to determine reliably the net effect of all these (and other) changes short of applying all of the revised values to the model and looking at the results. We devote a good deal of the preamble discussion to these changes and their net implications for the standards in this rule.

The final rule reflects the combined effect of all of these changes, as well as minor changes not listed above. 2. Key Economic Values for Benefits Computations

NHTSA's analysis of the final standards and alternative CAFE standards for MYs 2011 relied on an expanded range of information and revised economic estimates and input parameters. These economic assumptions played a role in the determination of the level of the standards, with some having greater impacts than others. The agency, following discussions with other agencies of the U.S. government, updated its estimate of the global value of the social cost of carbon

(i.e., the value of reducing CO2emissions) and developed a domestic value, as well as updated its estimates for other externalities based on comments and updated information received during the comment period. Specifically, the final standards are based the following revised economic assumptions:

Table I-2--Final Rule Key Economic Values for Benefits Computations

(2007$)

Fuel Prices (average retail gasoline price per gallon, 2011-

$3.33 30)........................................................

Discount Rates Applied to Future Benefits:

Reductions in CO2 Emissions.............................

3%

Other Benefits..........................................

7%

Economic Costs of Oil Imports ($/gallon):

``Monopsony'' Component................................

$0.27

Price Shock Component...................................

$0.12

Military Security Component............................. ..........

Total Economic Costs................................

$0.39

Emission Damage Costs:

Carbon Dioxide ($/metric ton):

(U.S. domestic value)............................... 14 $2.00

(Mean global value from Tol (2008)).................

$33.00

(One standard deviation above mean global value)....

$80.00

Annual Increase in CO2 Damage Cost......................

2.4%

3. Standards

(a) Classification

In the NPRM, the two-wheel drive sport-utility vehicles (2WD SUVs) were classified in the same way they were classified by their manufacturers in their May 2007 product plans. For the purposes of this final rule, however, they were reclassified in accordance with the discussion in the NPRM of the proper classification of those vehicles.

This resulted in the shifting of over one million two-wheel drive vehicles from the truck fleet to the car fleet. This shift had the effect of lowering the average fuel economy for cars due to the inclusion of vehicles previously categorized as trucks, and lowered average fuel economy for trucks because the truck category now has a larger proportion of heavier trucks. Following our careful consideration of the public comments on that discussion, we reaffirm the reasoning and conclusions of that discussion.

\14\ Derived from NHTSA's $33 per metric ton estimate of the global value of reducing CO2emissions.

(b) Stringency

This final rule establishes footprint-based fuel economy standards for MY 2011 passenger cars and light trucks.

Each vehicle manufacturer's required level of CAFE is 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. Size is defined by vehicle footprint. 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

Page 14205

manufacturers, regardless of differences in their overall fleet mix.

Compliance will 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 standards were developed with the aid of a computer model

(known as the ``Volpe Model''). NHTSA uses the Volpe model as a tool to inform its consideration of potential CAFE standards for MY 2011. The

Volpe model requires the following types of information as inputs: (1)

A forecast of the future vehicle market, (2) estimates of the availability, applicability, and incremental effectiveness and cost of fuel-saving technologies, (3) estimates of vehicle survival and mileage accumulation patterns, the rebound effect, future fuel prices, the social cost of carbon, and many other economic factors, (4) fuel characteristics and vehicular emissions rates, and (5) coefficients defining the shape and level of CAFE curves to be examined. These inputs are selected by the agency based on best available information and data.

The agency analyzed seven regulatory alternatives, one of which maximizes net benefits within the limits of available information and is known as the ``optimized standards.'' The optimized standards are set at levels, such that, considering all of the manufacturers together, no other alternative is estimated to produce greater net benefits to society. Those net benefits reflect the difference between

(1) the present value of all monetized benefits of the standards, and

(2) the total costs of all technologies applied in response to the standards. Many of the other alternative standards exceed the level at which the estimated net benefits are maximized, including one alternative in which standards are set at a level at which total costs equal total benefits and another alternative set at a level of maximum technology application without regard to cost. For each alternative, the model estimates the costs associated with additional technology utilization, as well as accompanying changes in travel demand, fuel consumption, fuel outlays, emissions, and economic externalities related to petroleum consumption and other factors. These comprehensive analyses, which also included scenarios with different economic input assumptions as presented in the Final Environmental Impact Statement

(FEIS) and the Final Regulatory Impact Analysis (FRIA), informed and contributed to the agency's consideration of the ``need of the United

States to conserve energy,'' as well as the other statutory factors in 49 U.S.C. 32902(f), and safety impacts. In addition, they informed the agency's consideration of environmental impacts under NEPA. The agency identified the optimized standards as its preferred alternative in the

FEIS.

NHTSA considered the results of analyses conducted on alternative standards for MY 2011 by the Volpe model and analyses conducted outside of the Volpe model, including analysis of the impacts of emissions of carbon dioxide and criteria pollutants, and analysis of which technologies are available now and which will not be available until the longer term, and analysis of the extent to which changes in vehicle prices and fuel economy might affect vehicle production and sales.

Further, NHTSA considered whether it could expedite the entry of any technologies into the market through these standards. Using all of this information, the agency considered the governing statutory factors, along with environmental issues and other relevant societal issues such as safety, and is promulgating the maximum feasible standards based on its best judgment on how to balance these factors.

Upon a considered analysis of all information available, including all information submitted to NHTSA in comments, the agency is adopting the ``optimized standard'' alternative as the final standards for MY 2011.\15\ We note that we used the Volpe Model in the last two light truck rulemakings and that we adopted ``optimized standards'' in the last light truck rulemaking. We believe that use of the Volpe model is a valid and objective way to establish attribute-based standards under

EPCA. Further, 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 helps to assure the marketability of the manufacturers' vehicles and thus economic practicability of the standards.

\15\ 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.

Providing this assurance assumes increased importance in view of current and anticipated conditions in the industry in particular and the economy in general. As has been widely reported in the public domain throughout this rulemaking, and as shown in public comments, the national and global economies raise serious concerns. Even before those recent developments, the automobile manufacturers were already facing substantial difficulties. Together, these problems have made NHTSA's economic practicability analysis particularly important and challenging in this rulemaking.

The agency cannot set out the exact level of CAFE that each manufacturer will 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. The agency can, however, project 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. Adjacent to each average fuel economy figure is the estimated associated level of tailpipe emissions of CO2that will be achieved.\16\

\16\ See supra note 6.

MY 2011 passenger cars: 30.2 mpg (294 g/mi of tailpipe emissions of

CO2)

MY 2011 light trucks: 24.1 mpg (369 g/mi of tailpipe emissions of

CO2)

The combined industry-wide average fuel economy (in miles per gallon, or mpg) levels (in grams per mile, or g/mi) for both cars and light trucks, if each manufacturer just met its obligations under the

``optimized'' standards, will be as follows:

MY 2011: 27.3 mpg (2.0 mpg increase above MY 2010; 326 g/mi

CO2)

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 \17\ for that model year, whichever is higher. This requirement results in the following alternative minimum standard (not attribute- based) for domestic passenger cars:

\17\ Those numbers set out several paragraphs above.

MY 2011: 27.8 mpg (320 g/mi of tailpipe emissions of CO2)

(c) Benefits and Costs

(i) Benefits

We estimate that the MY 2011 standards will save approximately 887 million gallons of fuel and reduce tailpipe emissions of CO2 by 8.3 million metric tons.

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For passenger cars, the standards will save approximately 463 million gallons of fuel and reduce tailpipe CO2emissions by 4.3 million metric tons over the lifetime of the MY 2011 passenger cars, compared to the fuel savings and emissions reductions that would occur if the standards remained at the adjusted baseline (i.e., the higher of manufacturer's plans and the manufacturer's required level of average fuel economy for MY 2010). The value of the total benefits of the passenger car standards are estimated to be slight over $1 billion

\18\ over the lifetime of the MY 2011 cars. This estimate of societal benefits includes direct impacts from lower fuel consumption as well as externalities and also reflects offsetting societal costs resulting from the rebound effect.

\18\ The slightly over $1 billion estimate is based on a 7 percent discount rate for valuing future impacts.

We estimate that the standards for light trucks will save approximately 424 million gallons of fuel and prevent the tailpipe emission of 4.0 million metric tons of CO2over the lifetime of the light trucks sold during those model years, compared to the fuel savings and emissions reductions that would occur if the standards remained at the adjusted baseline. The value of the total benefits of the light truck standards will be approximately $921 million \19\ over the lifetime of the MY 2011 light trucks. This estimate of societal benefits includes direct impacts from lower fuel consumption as well as externalities and also reflects offsetting societal costs resulting from the rebound effect.

\19\ The $921 million estimate is based on a 7 percent discount rate for valuing future impacts.

(ii) Costs

NHTSA estimates that, as a result of the final standards for MY 2011, manufacturers will incur costs of approximately $1.460 billion for additional fuel-saving technologies, compared to the costs they would incur if the standards remained at MY 2010 levels.

For passenger cars, we estimate that manufacturers will incur costs of approximately $595 million for additional fuel-saving technologies, compared to the costs they would incur if the standards remained at MY 2010 levels. Our estimate is that the resulting vehicle price increases to buyers of MY 2011 passenger cars will be recovered or paid back \20\ in additional fuel savings in an average of 4.4 years (53 months), assuming fuel prices ranging from $2.95 per gallon in 2011 to $3.62 per gallon in 2030.\21\

\20\ See Section V.B.5 below for discussion of payback period.

\21\ The fuel prices (shown here in 2007 dollars) used to calculate the length of the payback period are those projected

(Annual Energy Outlook 2008) by the Energy Information

Administration over the life of the MY 2011 light trucks, not current fuel prices.

The agency further estimates that, in response to the final standards for MY 2011 light trucks, manufacturers will incur costs of approximately $865 million for additional fuel-saving technologies, compared to the costs they would incur if the standards remained at MY 2010 levels. We estimate that the resulting vehicle price increases to buyers of MY 2011 light trucks will be paid back in additional fuel savings in an average of 7.7 years (92 months), assuming the same fuel prices as mentioned above.

(d) Flexibilities

Manufacturers are likely to rely extensively on flexibility mechanisms provided by EPCA (as described in Section XII) and will thereby reduce the costs (and benefits) of complying with the standards to a meaningful extent. However, the benefit and compliance cost estimates used by the agency in determining the maximum feasible level of the CAFE standards and shown above assume that manufacturers will rely solely on the installation of fuel economy technology to achieve compliance with the standards. The estimates do not reflect the availability and use of flexibility mechanisms, such as compliance credits and credit trading. The reason for this is because EPCA prohibits NHTSA from considering the effects of those mechanisms in setting CAFE standards. EPCA has precluded consideration of the FFV adjustments ever since it was amended to provide for those adjustments.

The prohibition against considering compliance credits was added by

EISA. 4. Credits

NHTSA is also adopting a new Part 536 on use of ``credits'' earned for exceeding applicable CAFE standards. Part 536 will implement 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.\22\ Since its 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. Additional information on Part 536 is available in Section XII below.

\22\ 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.

5. Preemption

As noted above, NHTSA has decided not to include any preemption provisions in the regulatory text at this time and will re-examine the issue of preemption in the context of the rulemaking for MY 2012 and later years.

II. Background

A. Role of Fuel Economy Improvements in Promoting Energy Independence,

Energy Security, and a Low Carbon Economy

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.\23\ Most recently,

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the United Nations Environment Programme, International Energy Agency,

International Transport Forum and FIA Foundation released a report \24\ in March 2009 calling for a 50 percent increase in fuel economy in response to predictions by the IEA that fuel consumption and

CO2emissions from the global light duty fleet will otherwise roughly double between 2000 and 2050.

\23\ 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 March 8, 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 March 7, 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 March 7, 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 March 7, 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 February 17, 2009);

Robert Socolow, Roberta Hotinski, Jeffery B. Greenblatt, and

Stephen Pacala, ``Solving The Climate Problem: Technologies

Available to Curb CO2Emissions,'' 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 March 7, 2009).

\24\ ``50BY50 Global Fuel Economy Initiative, Making Cars 50%

More Fuel Efficient by 2050 Worldwide,'' Available at: http:// www.fiafoundation.org/50by50/Documents/50BY50_report.pdf (last accessed March 7, 2009).

The significance accorded improving fuel economy reflects several factors. The emission of CO2from the tailpipes of cars and light trucks is one of the largest sources of U.S. CO2 emissions.\25\

\25\ EPA Inventory of U.S. Greenhouse Gas Emissions and Sinks: 1990-2006 (April 2008), pp. ES-4, ES-8, and 2-24.

Further, using vehicle technology to improve fuel economy, thereby reducing tailpipe emissions of CO2, is one of the three main measures of reducing those tailpipe emissions of CO2.\26\

The two other measures for reducing the tailpipe emissions of

CO2are switching to vehicle fuels with lower carbon content and changing driver behavior, i.e., inducing people to drive less.

\26\ 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 March 7, 2009).

In order to reduce the amount of tailpipe emissions of

CO2per mile, either the amount of fuel consumed per mile must be reduced or lower carbon intensive fuels must be used. 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 no current or anticipated control technology for CO2. Thus, the technologies for reducing tailpipe emissions of CO2are the technologies that reduce fuel consumption and thereby reduce CO2emissions as well, as well as the technologies for accommodating the use of alternative fuels. Consequently, substantially reducing fuel use through using automotive technology to improve fuel economy is indispensable if automobile manufacturers are to make substantial and continuing progress in reducing those emissions.

The relationship between improving fuel economy and reducing

CO2tailpipe emissions is a very direct and close one.

CO2is 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 CO2it emits in traveling that distance.\27\ Since the amount of CO2emissions 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 CO2emissions per mile. Thus, requiring improvements in fuel economy necessarily has the effect of requiring reductions in tailpipe emissions of CO2 emissions.

\27\ 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. p. 287.

This can be seen in the graph \28\ and table below. The graph shows how the amount of CO2emitted by a vehicle per year varies according to the vehicle's fuel economy. The table shows the limit that a CAFE standard would indirectly place on tailpipe CO2 emissions. To take the first value of fuel economy from the table below as an example, a standard of 21.0 mpg would indirectly place substantially the same limit on tailpipe CO2emissions as a tailpipe CO2emission standard of 423.2 g/mi of

CO2, and vice versa.\29\

\28\ The graph is the same as the one shown on Reduce Climate

Change, a Web page maintained by the Department of Energy and

Environmental Protection Agency. Available at: http:// www.fueleconomy.gov/feg/climate.shtml (last accessed March 8, 2009).

\29\ To the extent that manufacturers comply with a CAFE standard with diesel automobiles instead of gasoline ones, the level of CO2tailpipe emissions would be higher. As noted above, the agency projects that 4 percent of the MY 2015 passenger car fleet and 10 percent of the MY 2015 light truck fleet will have diesel engines. The CO2tailpipe emissions of a diesel powered passenger car are 15 percent per mile higher than those of a comparable gasoline powered-passenger car achieving the same mpg.

Page 14208

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The relationship between improving fuel economy and reducing tailpipe emissions of CO2is so strong that EPA determines fuel economy by the simple expedient of measuring the amount of

CO2emitted 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 \30\ to calculate the amount of fuel that had to be consumed per mile in order to produce that amount of CO2.

Finally, EPA converts that fuel figure into a miles-per-gallon figure.

\30\ This is the method that EPA uses to determine compliance with NHTSA's CAFE standards.

Page 14209

B. Contribution of Fuel Economy Improvements to CO2Tailpipe

Emission Reductions Since 1975

The need to take action to reduce GHG emissions, e.g., motor vehicle tailpipe emissions of CO2, in order to forestall and even mitigate climate change is well recognized.\31\ Less well recognized are two related facts.

\31\ IPCC (2007): Climate Change 2007: Mitigation of Climate

Change. Contribution of Working Group III to the Fourth Assessment

Report of the Intergovernmental Panel on Climate Change [B. Metz, O.

Davidson, P. Bosch, R. Dave, and L. Meyer (eds.)]. Cambridge

University Press, Cambridge, United Kingdom and New York, NY, USA.

First, improving fuel economy is the only method available to motor vehicle manufacturers for making substantial and continuing reductions in the CO2tailpipe emissions of motor vehicles and thus must be the core element of any effort to achieve those reductions.

Second, the significant improvements in fuel economy since 1975, due to the CAFE standards and other market conditions as well, have directly caused reductions in the rate of CO2tailpipe emissions per vehicle.

In 1975, passenger cars manufactured for sale in the U.S. averaged only 15.8 mpg (562.5 grams of CO2per mile or 562.5 g/mi of

CO2). By 2007, the average fuel economy of new passenger cars had increased to 31.3 mpg, causing the emission of CO2 to fall to 283.9 g/mi.\32\ Similarly, in 1975, light trucks produced for sale in the U.S. averaged 13.7 mpg (648.7 g/mi of CO2).

By 2007, the average fuel economy of new light trucks had risen to 23.1 mpg, causing emission of CO2to fall to 384.7 g/mi.

\32\ These figures are not real world fuel economy figures. They are based on the laboratory figures fuel economy test procedures used for the CAFE program. Real world fuel economy figures would be less (and CO2emission figures higher).

GRAPHIC

TIFF OMITTED TR30MR09.001

Page 14210

If fuel economy had not increased above the 1975 level, cars and light trucks would have emitted an additional 11 billion metric tons of

CO2into the atmosphere between 1975 and 2005. That is nearly the equivalent of emissions from all U.S. fossil fuel combustion for two years (2004 and 2005). The figure below shows the amount of

CO2emissions avoided due to increases in fuel economy.

BILLING CODE 4910-59-P

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Page 14211

BILLING CODE 4910-59-C

Some commenters on the NPRM argued that some of improvements in fuel economy, and thus some of the reductions in CO2, shown in that figure would have occurred in the absence of any CAFE standards. We agree. Similarly, and to the same extent, some of the improvements in fuel economy and accompanying reductions in

CO2that would occur under a regulation directly regulating

CO2would occur in the absence of any such regulation. We note that no published research has isolated the contribution of CAFE standards themselves to historical increases in fuel economy from those of the many other factors that can affect fuel economy.

C. Chronology of Events Since the National Academy of Sciences Called for Reforming and Increasing CAFE Standards 1. National Academy of Sciences Issues Report on Future of CAFE Program

(February 2002)

(a) 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,'' \33\ 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.\34\ 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.

\33\ 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 March 8, 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.

\34\ NHTSA formerly used this approach for CAFE standards. EISA prohibits its use after MY 2010.

Looking to the future, the committee made a critical distinction between possible ways of improving fuel economy and the ways likely to be chosen for doing so. It said that while it was technically feasible and potentially economically practicable for manufacturers to improve fuel economy without reducing vehicle weight or size and, therefore, without significantly affecting the safety of motor vehicle travel, the actual strategies chosen by manufacturers to improve fuel economy would depend on a variety of factors. In the committee's judgment, the extensive downweighting and downsizing that occurred after fuel economy requirements were established in the 1970s suggested that the likelihood of a similar response to further increases in fuel economy requirements must be considered seriously. Any reduction in vehicle size and weight would have safety implications.

The committee said, ``to the extent that the size and weight of the fleet have been constrained by CAFE requirements * * * those requirements have caused more injuries and fatalities on the road than would otherwise have occurred.'' \35\ Specifically, it noted: ``the downweighting and downsizing that occurred in the late 1970s and early 1980s, some of which was due to CAFE standards, probably resulted in an additional 1300 to 2600 traffic fatalities in 1993.'' \36\

\35\ NAS, p. 29.

\36\ NAS, p. 3 (Finding 2).

The committee cautioned that the safety effects of future downsizing and downweighting were likely to be hidden by the generally increasing safety of the light-duty vehicle fleet.\37\ It said that some might argue that this improving safety picture means that there is room to improve fuel economy without adverse safety consequences; however, such an approach would not achieve the goal of avoiding the adverse safety consequences of fuel economy increases. Rather, the safety penalty imposed by increased fuel economy (if weight reduction were used as one of the fuel economy improving measures) would be more difficult to identify in light of the continuing improvement in vehicle safety. NAS said that although it anticipated that these safety innovations would improve the safety of vehicles of all sizes, that fact did not mean downsizing to achieve fuel economy improvements would not have any safety costs. If two vehicles of the same size were modified, one both by downsizing it and adding the safety innovations and the other solely by adding safety innovations, the latter vehicle would in all likelihood be safer.

\37\ Two of the 12 members of the committee dissented from the majority's safety analysis and conclusions.

The committee concluded that if an increase in fuel economy were implemented pursuant to standards that were structured so as to encourage either downsizing or the increased production of smaller vehicles, some additional traffic fatalities would be expected. It said that the larger and faster the required increases, the more likely adverse impacts. 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.\38\

\38\ 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 standards. Congress went a step further in enacting EISA, not only authorizing the issuance of attribute-based standards, but also mandating them.

(b) Climate Change and Other Externalities Justify Increasing the CAFE

Standards

The 2002 NAS report also concluded that the CAFE standards have increased fuel economy, which in turn has reduced dependence on imported oil, improved the nation's terms of trade, and reduced emissions of carbon dioxide, (a principal GHG), relative to what they otherwise would have been. If fuel economy had not improved, gasoline consumption (and crude oil imports) in 2002 would have been about 2.8 million barrels per day (mmbd) greater than it was then.\39\ As noted above, reducing fuel consumption in vehicles also reduces carbon dioxide emissions. If the nation were using 2.8 mmbd more gasoline in 2002, carbon emissions would have been more than 100 million metric tons of carbon (mmtc) higher. Thus, improvements in light-duty vehicle

(4 wheeled motor vehicles under 10,000 pounds gross vehicle weight rating) fuel economy reduced overall U.S. emissions by about 7 percent as of 2002.\40\

\39\ NAS, pp. 3 and 20.

\40\ NAS, p. 20.

The report concluded that technologies exist that could significantly reduce fuel consumption by passenger cars and light trucks further within 15 years (i.e., by about 2017), while maintaining vehicle size,

Page 14212

weight, utility and performance.\41\ Given their lower fuel economy, light duty trucks were said to offer the greatest potential for reducing fuel consumption.\42\ The report also noted that vehicle development cycles--as well as future economic, regulatory, safety and consumer preferences--would influence the extent to which these technologies could lead to increased fuel economy in the U.S. market.

\41\ NAS, p. 3 (Finding 5).

\42\ NAS, p. 4 (Finding 5).

To assess the economic trade-offs associated with the introduction of existing and emerging technologies to improve fuel economy, the NAS conducted what it called a ``cost-efficient analysis'' based on the direct benefits (value of saved fuel) to the consumer--``that is, the committee identified packages of existing and emerging technologies that could be introduced over the next 10 to 15 years that would improve fuel economy up to the point where further increases in fuel economy would not be reimbursed by fuel savings.'' \43\

\43\ NAS, pp. 4 (Finding 6) and 64).

The committee emphasized that it is critically important to be clear about the reasons for considering improved fuel economy. While it said that the dollar value of the saved fuel would be the largest portion of the potential benefits, the committee noted that there is theoretically insufficient reason for the government to issue higher standards just to obtain those direct benefits since consumers have a wide variety of opportunities to buy a fuel-efficient vehicle.\44\

\44\ NAS, pp. 8-9.

The 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.\45\

\45\ 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. The committee chose a value of about $0.30/gal of gasoline for the externalities associated with the combined impacts of fuel consumption on greenhouse gas emissions and on world oil market conditions.\46\

\46\ NAS, pp. 4 and 85-86.

The 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.\47\

\47\ 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.'' \48\ 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.\49\

\48\ NAS, p. 5 (Finding 12).

\49\ 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.\50\ Reforming the CAFE program enables it to achieve larger fuel savings, while enhancing safety and preventing adverse economic consequences.

\50\ 71 FR 17566; April 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.

The approach for determining the fuel economy targets was to set them just below the level where the increased cost of technologies that could be adopted by manufacturers to improve fuel economy would first outweigh the added benefits that would result from those technologies.

These targets translate into required levels of average fuel economy that are technologically feasible because manufacturers can achieve them using technologies that are or will become available. Those levels also reflect the need of the nation to reduce energy consumption because they reflect the economic value of the savings in resources, as well as of the reductions in economic and environmental externalities that result from producing and using less fuel.

We carefully balanced the estimates costs of the rule with the estimated benefits of reducing energy consumption. 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

Page 14213

some of their fleet as a CAFE compliance strategy, thereby reducing the adverse safety risks associated with the Unreformed CAFE program. 3. Supreme Court Issues Decision in Massachusetts v. EPA (April 2007)

On April 2, 2007, the U.S. Supreme Court issued its opinion in

Massachusetts v. EPA,\51\ 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.\52\ The Court ruled that the state of Massachusetts had standing to sue EPA because it had already lost an amount of land and stood to lose more due to global warming-induced increases in sea level; that some portion of this harm was traceable to the absence of a regulation issued by EPA requiring reductions in GHG emissions

(CO2emissions, most notably) by motor vehicles; and that

EPA's issuance of such a regulation would reduce the risk of further harm to Massachusetts.\53\ On the merits, the Court ruled that greenhouse gases are ``pollutants'' under the Clean Air Act 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.

\51\ 127 S.Ct. 1438 (2007).

\52\ 68 FR 52922, September 8, 2003.

\53\ As noted above, a CAFE standard and its mathematically equivalent CO2tailpipe emission standard would each have the same effect on those emissions and thus on the risk of further harm except to the extent, as noted in a footnote above, diesel engines are used to comply with the CAFE standards.

The Court considered EPCA briefly, stating

T hat DOT sets mileage standards in no way licenses EPA to shirk its environmental responsibilities. EPA has been charged with protecting the public's ``health'' and ``welfare,'' 42 U.S.C. 7521(a)(1), a statutory obligation wholly independent of DOT's mandate to promote energy efficiency. See Energy Policy and

Conservation Act, Sec. 2(5), 89 Stat. 874, 42 U.S.C. 6201(5). The two obligations may overlap, but there is no reason to think the two agencies cannot both administer their obligations and yet avoid inconsistency. 127 S.Ct. at 1462.

The Supreme Court did not address or define the nature or extent of the overlap or explore the types of benefits considered in establishing the levels of the CAFE standards. Further, the Court did not address the express preemption provision in EPCA. 4. NHTSA and EPA Coordinate on Development of Rulemaking Proposals

(Summer-Fall 2007)

In the wake of the Supreme Court's decision, on May 14, 2007,

President Bush responded to the Supreme Court's opinion, stating

* * * I'm directing the EPA and the Departments of Transportation,

Energy, and Agriculture to take the first steps toward regulations that would cut gasoline consumption and greenhouse gas emissions from motor vehicles * * *

On May 14, 2007, President Bush issued Executive Order 13432, which announces

i t is the policy of the United States to ensure the coordinated and effective exercise of the authorities of the President and the heads of the Department of Transportation, the Department of Energy, and the Environmental Protection Agency to protect the environment with respect to greenhouse gas emissions from motor vehicles, nonroad vehicles, and nonroad engines, in a manner consistent with sound science, analysis of benefits and costs, public safety, and economic growth.

The Executive Order goes on to require coordination among the agencies when taking action to directly regulate (or substantially and predictably affect) greenhouse gas emissions from motor vehicles, nonroad vehicles, and use of motor vehicle fuels. Such action is to be undertaken jointly ``to the maximum extent permitted by law and determined by the head of the agency to be practicable.''

Consistent with these directives, NHTSA and EPA took the first steps toward regulations that would cut gasoline consumption and greenhouse gas emissions from motor vehicles pursuant to Presidential directive. NHTSA and EPA staff jointly assessed which technologies would be available and their effectiveness and cost. They also jointly assessed the key economic and other assumptions affecting the stringency of future standards. Finally, they worked together in updating and further improving the Volpe model that had been used to help determine the stringency of the MY 2008-2011 light truck CAFE standards. Much of the work between NHTSA and EPA staff was reflected in rulemaking proposals being developed by NHTSA prior to the enactment of EISA and was substantially retained when NHTSA revised its proposals to be consistent with that legislation. Ultimately, the NPRM published by the agency in May and today's final rule are based on NHTSA's assessments of how they meet EPCA, as amended by EISA. 5. 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,\54\ the challenge to the MY 2008-11 light truck CAFE rule. The

Court rejected the petitioners' 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.

\54\ 508 F.3d 508.

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 CO2emissions for the purpose of conducting its marginal benefit-cost analysis based on its view that the value of the benefit of CO2emission reductions resulting from fuel consumption reductions was too uncertain to permit the agency to determine a value for those emission reductions; \55\

\55\ As noted above in the preamble, the agency has developed a value for those reductions and used it in the analyses underlying the standards adopted in this final rule. For further discussion, see Section V of this preamble.

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); \56\

\56\ EISA's requirement that standards be based on one or more vehicle attributes appears to preclude the specification of such a backstop standard for the latter two categories of automobiles. For further discussion, see Section VI of this preamble.

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; \57\

\57\ In this final rule, NHTSA has moved 1.4 million 2 wheel drive SUVs from the light truck class to the passenger car class. It re-examined the legislative history of the statutory definitions of

``automobile'' and ``passenger automobile'' and the term

``nonpassenger automobile'' and analyzed the impact of that moving any vehicles out of the nonpassenger automobile (light truck) category into the passenger automobile (passenger car) category would have the level of standards for both groups of automobiles.

For further discussion, see Section XI of this preamble.

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

Page 14214

rating (GVWR,) to the CAFE standards; \58\

\58\ EISA removed these vehicles from the statutory definition of ``automobile'' and mandated the establishment of CAFE standards for them following the completion of reports by the National Academy of Sciences and NHTSA.

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 CO2emissions, and limited assessment of cumulative impacts in its EA under the National Environmental Policy

Act (NEPA).\59\

\59\ On February 6, 2008, the Government petitioned for en banc rehearing by the 9th Circuit on the limited issue of whether it was appropriate for the panel, having held that the agency insufficiently explored the environmental implications of the MY 2008-11 rulemaking in its EA, to order the agency to prepare an EIS rather than simply remanding the matter to the agency for further analysis. The Court subsequently modified its order as described below.

The Court did not vacate the standards, but instead said it would remand the rule to NHTSA to promulgate new standards consistent with its opinion ``as expeditiously as possible and for the earliest model year practicable.\60\ 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.

\60\ 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. This rulemaking was conducted pursuant to that requirement.

As of the date of the issuance of this final rule, the Court has not yet issued its mandate in this case. 6. 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). 7. NHTSA Proposes CAFE Standards for MYs 2011-2015 and Requests New

Product Plans for Those Years (April 2008) \61\

\61\ A description of the NPRM appears in section I.C of this preamble.

8. NHTSA Contracts With ICF International To Conduct Climate Modeling and Other Analyses in Support of Draft and Final Environmental Impact

Statements (May 2008)

NHTSA contracted with ICF International (ICF) to support it in conducting its environmental analyses and preparing the draft and final environmental impact statements. ICF provides consulting services and technology solutions in energy, climate change, environment, transportation, social programs, health, defense, and emergency management. 9. Manufacturers Submit New Product Plans (June 2008)

These product plans identify which vehicle models manufacturers intend to build and which technologies the manufacturers intend to apply and when to their vehicles. NHTSA began its analysis of the MY 2011 CAFE standards with the product plans and used them to establish a baseline, which is then used to evaluate different potential levels of future CAFE stringency. 10. NHTSA Contracts With Ricardo To Aid in Assessing Public Comments on

Cost and Effectiveness of Fuel Saving Technologies (June 2008)

NHTSA received numerous public comments on the types of potential fuel saving technologies that we discussed in the NPRM, their costs and effectiveness in improving fuel economy, and in which model year and to which vehicles they may be applied. To aid the agency in analyzing and responding to these comments, and to ensure that the analysis for the final rule is thorough and robust, NHTSA contracted with Ricardo, a highly reputable and neutral source of outside expertise in the areas of powertrain and vehicle technologies. NHTSA chose Ricardo because of its extensive experience and expertise in working with both government and industry on fuel economy-improving technology issues. 11. 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.\62\

\62\ See CBD v. NHTSA, 538 F.3d 1172 (9th Cir. 2008).

12. 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.\63\ 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.

\63\ 73 FR 61859.

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 CO2concentrations; 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

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estimated impacts of NHTSA's implementation of the CAFE program through

MY 2010 and NHTSA's future CAFE rulemaking for MYs 2016-2020.

NHTSA intends to review all analyses for model years after MY 2011 in connection with the rulemaking for MY 2012 and thereafter, consistent with the President's Memorandum of January 26, 2009. 13. Office of Information and Regulatory Affairs Completes Review of a

Draft MY 2011-2015 Final Rule (November 2008)

The Office of Information and Regulatory Affairs of the Office of

Management and Budget completed review of the rule under Executive

Order 12866, Regulatory Planning and Review, on November 14, 2008.\64\

\64\ http://www.reginfo.gov/public/do/eoHistReviewSearch (last visited March 8, 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.''

14. Department of Treasury Extends Loans to General Motors and Chrysler

(December 2008)

The Department of the Treasury established the Automotive Industry

Financing Program ``to prevent a significant disruption of the American automotive industry that poses a systemic risk to financial market stability and will have a negative effect on the real economy of the

United States.'' \65\ Under that program, initial loans were made to

General Motors and Chrysler.

\65\ http://www.treasury.gov/initiatives/eesa/program- descriptions/aifp.shtml (last visited March 8, 2009).

15. 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. 16. 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 National Academy of Sciences assessing automotive technologies that can practicably be used to improve fuel economy. 17. General Motors and Chrysler Submit Restructuring Reports to

Department of the Treasury (February 2009)

The reports were required under the terms of the loans made available to these companies in December to assist the domestic auto industry in becoming financially viable.

D. Energy Policy and Conservation Act, as Amended

EPCA, which was enacted in 1975, mandates a motor vehicle fuel economy regulatory program to meet the various facets of the need to conserve energy, including ones having environmental and foreign policy implications. EPCA allocates the responsibility for implementing the program between NHTSA and EPA as follows: NHTSA sets CAFE standards for passenger cars and light trucks; EPA establishes the procedures for testing, test vehicles, collects and analyzes manufacturers' data, and calculates the average fuel economy of each manufacturer's passenger cars and light trucks; and NHTSA enforces the standards based on EPA's calculations.

We have summarized below EPCA, as amended by EISA. 1. Vehicles Subject to Standards for Automobiles

With two exceptions specified in EPCA, all four-wheeled motor vehicles with a gross vehicle weight rating of 10,000 pounds or less will be subject to the CAFE standards, beginning with MY 2011. The exceptions will be work trucks \66\ and multi-stage vehicles. Work trucks are defined as vehicles that are:

\66\ While EISA excluded work trucks from ``automobiles,'' it did not exclude them from regulation under EPCA. As amended by EISA,

EPCA requires that work trucks be subjected to average fuel economy standards (49 U.S.C. 32902(b)(1)(C)), but only after first the

National Academy of Sciences completes a study and then NHTSA completes a follow-on study. Congress thus recognized and made allowances for the practical difficulties that led NHTSA to decline to include work trucks in its final rule for MY 2008-11 light trucks.

--Rated at between 8,500 and 10,000 pounds gross vehicle weight; and

--Are not a medium-duty passenger vehicle (as defined in section 86.1803-01 of title 40, Code of Federal Regulations, as in effect on the date of the enactment of the Ten-in-Ten Fuel Economy Act).\67\

\67\ 49 U.S.C. 32902(a)(19).

Medium-duty passenger vehicles (MDPV) include 8,500 to 10,000 lb. GVWR sport utility vehicles (SUVs), short bed pick-up trucks, and passenger vans, but exclude pickup trucks with longer beds and cargo vans rated at between 8,500 and 10,000 lb. GVWR. It is those excluded pickup trucks and cargo vans that are work trucks. ``Multi-stage vehicle'' includes any vehicle manufactured in different stages by 2 or more manufacturers, if no intermediate or final-stage manufacturer of that vehicle manufactures more than 10,000 multi-stage vehicles per year.\68\

\68\ 49 U.S.C. 32902(a)(3).

Under EPCA, as it existed before EISA, the agency had discretion whether to regulate vehicles with a GVWR between 6,000 lb and 10,000

GVWR. It could regulate the fuel economy of vehicles with a GVWR within that range under CAFE if it determined that (1) standards were feasible for these vehicles, and (2) either (a) that these vehicles were used for the same purpose as vehicles rated at not more than 6,000 lbs.

GVWR, or (b) that their regulation would result in significant energy conservation.

EISA eliminated the need for administrative determinations in order to subject vehicles between 6,000 and 10,000 lb. GVWR to the CAFE standards for automobiles. Congress did so by making the determination itself that all vehicles within that GVWR range should be included, with the exceptions noted above. 2. Mandate To Set Standards for Automobiles

For each future model year, EPCA requires that the agency establish standards for all new automobiles at the maximum feasible levels for that model year. EISA made no change in this requirement. A manufacturer's individual passenger cars and light trucks are not required to meet a particular fuel economy level. Instead, EPCA requires that the average fuel economy of a manufacturer's fleet of passenger cars (or light trucks) in a particular model year must meet the standard for those automobiles for that model year.

For MYs 2011-2020 and for MYs 2021-2030, EPCA specifies additional requirements regarding standard setting. Each of those requirements and the maximum feasible requirement must be interpreted in the context of the other requirements. For MYs 2011-2020, separate standards for passenger cars and for light trucks must be set at high enough levels to ensure that the CAFE of the industry-wide combined fleet of new passenger cars and light trucks for MY 2020 is not less than 35 mpg.

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In light of the evident confusion of some commenters about the 35 mpg requirement, we want to emphasize that that figure is not the CAFE level that any individual manufacturer's combined CAFE will be required to meet. The 35 mpg requirement applies solely to the agency's standard setting and concerns the required combined effect that the separate MY 2020 standards for passenger cars and light trucks must achieve with respect to the single fleet containing the MY 2020 passenger cars and light trucks of all manufacturers. That single industry-wide fleet must have a CAFE of at least 35 mpg. If that requirement were exactly met, we anticipate that manufacturers with relatively larger proportions of smaller automobiles would be required to achieve combined CAFEs greater than 35 mpg, while manufacturers with relatively largely proportions of larger automobiles would be required to achieve combined CAFEs that might in that year be somewhat below 35 mpg. EISA does not specify precisely how compliance with this minimum requirement is to be ensured or how or when the CAFE of the industry-wide combined fleet for MY 2020 is to be calculated for purposes of determining the agency's compliance.

If the current gap between passenger car CAFE and light truck CAFE persists, the standard for MY 2020 passenger cars would likely, as a practical matter, need to be set high enough to ensure that the industry-wide level of average fuel economy for passenger cars is not less than 40 mpg in order for the CAFE of the combined industry-wide fleet to reach 35 mpg,. The standard for MY 2020 light trucks could be somewhat below 35 mpg. Again, these are the levels of stringency necessary to meet the minimum requirement of an industry-wide combined average of at least 35 mpg in MY 2020. Reaching 35 mpg earlier than MY 2020 would require even higher car and light truck standards in MY 2020. In addition, the CAFE of each manufacturer's fleet of domestic passenger cars must meet a sliding, absolute minimum level in each model year: 27.5 mpg or 92 percent of the projected CAFE of the industry-wide fleet of new domestic and non-domestic passenger cars for that model year.

The standards for passenger cars and those for light trucks must increase ratably each year. We interpret this requirement, in combination with the requirement to set the standards for each model year at the level determined to be the maximum feasible level for that model year, to mean that the annual increases should not be disproportionately large or small in relation to each other.

EPCA, as it existed before EISA, required that light truck standards be set at the maximum feasible level for each model year, but simply specified a default standard of 27.5 mpg for passenger cars for

MY 1985 and thereafter. It permitted, but did not require that NHTSA establish a higher or lower standard for passenger cars if the agency found that the maximum feasible level of fuel economy is higher or lower than 27.5 mpg. Henceforth, the agency must establish a standard for each model year at the maximum feasible level. 3. Attribute-Based Standards

The standards for passenger cars and light trucks must be based on one or more vehicle attributes, like size or weight, that correlate with fuel economy and must be expressed in terms of a mathematical function. Fuel economy targets are set for individual vehicles and increase as the attribute decreases and vice versa. For example, size- based (i.e., size-indexed) standards assign higher fuel economy targets to smaller (and generally, but not necessarily lighter) vehicles and lower ones to larger (and generally, but not necessarily heavier) vehicles. The fleet wide average fuel economy that a particular manufacturer must achieve depends on the size mix of its fleet, i.e., the proportion of the fleet that is small-, medium- or large-sized.

This approach can be used to require virtually all manufacturers to increase significantly the fuel economy of a broad range of both passenger cars and light trucks. Further, this approach can do so without creating an incentive for manufacturers to make small vehicles smaller or large vehicles larger, with attendant implications for safety. 4. Factors Considered in the Setting of Standards

In determining the maximum feasible level of average fuel economy for a model year, EPCA requires that the agency consider 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. EPCA does not define these terms or specify what weight to give each concern in balancing them; thus, NHTSA defines them and determines the appropriate weighting based on the circumstances in each CAFE standard rulemaking.

(a) Factors That Must Be Considered

(i) Technological Feasibility

``Technological feasibility'' refers to whether a particular method of improving fuel economy can be available for commercial application in the model year for which a standard is being established. Thus, the agency is not limited in a CAFE rulemaking to technology that is already being commercially applied at that time.

(ii) Economic Practicability

``Economic practicability'' refers to whether a standard is one

``within the financial capability of the industry, but not so stringent as to'' lead to ``adverse economic consequences, such as a significant loss of jobs or the unreasonable elimination of consumer choice.'' \69\

In an attempt to ensure the economic practicability of attribute based standards, the agency considers a variety of factors, including the annual rate at which manufacturers can increase the percentage of its fleet that has a particular type of fuel saving technology, and cost to consumers. Since consumer acceptability is an element of economic practicability, the agency, in this rule, has limited its consideration of fuel saving technologies to be added to vehicles to those that provide benefits that match their costs. The agency believes this approach is reasonable for the MY 2011 standards in view of the facts before it at this time. The agency is aware, however, that facts relating to a variety of key issues in CAFE rulemaking are steadily evolving and will review its balancing of these factors in light of the facts before it in the next rulemaking proceeding.

\69\ 67 FR 77015, 77021; December 16, 2002.

At the same time, the law does not preclude a CAFE standard that poses considerable challenges to any individual manufacturer. The

Conference Report for EPCA, as enacted in 1975, makes clear, and the case law affirms, ``(A) determination of maximum feasible average fuel economy should not be keyed to the single manufacturer which might have the most difficulty achieving a given level of average fuel economy.''

\70\ Instead, the agency is compelled ``to weigh the benefits to the nation of a higher fuel economy standard against the difficulties of individual automobile manufacturers.'' Id. The law permits CAFE standards exceeding the projected capability of any particular manufacturer as long as the standard is economically practicable for the industry as a whole. Thus, while

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a particular CAFE standard may pose difficulties for one manufacturer, it may also present opportunities for another. The CAFE program is not necessarily intended to maintain the competitive positioning of each particular company. Rather, it is intended to enhance fuel economy of the vehicle fleet on American roads, while protecting motor vehicle safety and being mindful of the risk of harm to the overall United

States economy.

\70\ CEI-I, 793 F.2d 1322, 1352 (D.C. Cir. 1986).

(iii) The Effect of Other Motor Vehicle Standards of the Government on

Fuel Economy

``The effect of other motor vehicle standards of the Government on fuel economy'' means, according to the agency's longstanding view,

``the unavoidable adverse effects on fuel economy of compliance with emission, safety, noise, or damageability standards.'' \71\ The purpose of this provision was to ensure that any adverse effects of other standards on fuel economy were taken into consideration in connection with the fuel economy standards. The concern about adverse effects is evident in a 1974 report, entitled ``Potential for Motor Vehicle Fuel

Economy Improvement,'' prepared and submitted to Congress by the

Department of Transportation and Environmental Protection Agency.\72\

That report noted that the weight added by safety standards would reduce, and one set of emissions standards might temporarily reduce, the level of achievable fuel economy.\73\ The same concern can also be found in the congressional committee reports on the bills that became

EPCA.\74\

\71\ 42 FR 63184, 63188; Dec. 15, 1977. See also 42 FR 33534, 33537; June 30, 1977.

\72\ This report was prepared in compliance with Section 10 of the Energy Supply and Environmental Coordination Act of 1974, Public

Law 93-319.

\73\ See pages 6-8 and 91-93.

\74\ See page 22 of Senate Report 94-179, pages 88 and 90 of

House Report 94-340, and pages 155-7 of the Conference Report,

Senate Report 94-516.

In the case of emission standards, this includes standards adopted by the Federal government and can include standards adopted by the

States as well, since in certain circumstances the Clean Air Act allows

States to adopt and enforce State standards different from the Federal ones.

(iv) The Need of the United States To Conserve Energy

``The need of the United States to conserve energy'' means ``the consumer cost, national balance of payments, environmental, and foreign policy implications of our need for large quantities of petroleum, especially imported petroleum.'' \75\ Environmental implications principally include reductions in emissions of criteria pollutants and carbon dioxide. A prime example of foreign policy implications are energy independence and security concerns.

\75\ 42 FR 63184, 63188 (1977).

1. Fuel Prices and the Value of Saving Fuel

Projected future fuel prices are a critical input into the preliminary economic analysis of alternative CAFE standards, because they determine the value of fuel savings both to new vehicle buyers and to society. In this rule, NHTSA relies on fuel price projections from the U.S. Energy Information Administration's (EIA) Annual Energy

Outlook (AEO) for this analysis. 2. Petroleum Consumption and Import Externalities

U.S. consumption and imports of petroleum products impose costs on the domestic economy that are not reflected in the market price for crude petroleum, or in the prices paid by consumers of petroleum products such as gasoline. These costs include (1) higher prices for petroleum products resulting from the effect of U.S. oil import demand on the world oil price; (2) the risk of disruptions to the U.S. economy caused by sudden reductions in the supply of imported oil to the U.S.; and (3) expenses for maintaining a U.S. military presence to secure imported oil supplies from unstable regions, and for maintaining the strategic petroleum reserve (SPR) to cushion against resulting price increases. Higher U.S. imports of crude oil or refined petroleum products increase the magnitude of these external economic costs, thus increasing the true economic cost of supplying transportation fuels above the resource costs of producing them. Conversely, reducing U.S. imports of crude petroleum or refined fuels or reducing fuel consumption can reduce these external costs. 3. Air Pollutant Emissions

While reductions in domestic fuel refining and distribution that result from lower fuel consumption will reduce U.S. emissions of various pollutants, additional vehicle use associated with the rebound effect from higher fuel economy will increase emissions of these pollutants. Thus, the net effect of stricter CAFE standards on emissions of each pollutant depends on the relative magnitudes of its reduced emissions in fuel refining and distribution, and increases in its emissions from vehicle use.

Fuel savings from stricter CAFE standards also result in lower emissions of CO2, the main greenhouse gas emitted as a result of refining, distribution, and use of transportation fuels.

Lower fuel consumption reduces carbon dioxide emissions directly, because the primary source of transportation-related CO2 emissions is fuel combustion in internal combustion engines.

The agency has considered environmental issues, both within the context of EPCA and the National Environmental Policy Act, in making decisions about the setting of standards from the earliest days of the

CAFE program. As courts of appeal have noted in three decisions stretching over the last 20 years,\76\ the agency defined the ``need of the Nation to conserve energy'' in the late 1970s as including ``the consumer cost, national balance of payments, environmental, and foreign policy implications of our need for large quantities of petroleum, especially imported petroleum.'' \77\ Pursuant to that view, the agency declined in the past to include diesel engines in determining the maximum feasible level of average fuel economy for passenger cars and for light trucks because particulate emissions from diesels were then both a source of concern and unregulated.\78\

\76\ Center for Auto Safety v. NHTSA, 793 F.2d 1322, 1325 n. 12

(D.C. Cir. 1986); Public Citizen v. NHTSA, 848 F.2d 256, 262-3 n. 27

(D.C. Cir. 1988) (noting that ``NHTSA itself has interpreted the factors it must consider in setting CAFE standards as including environmental effects''); and Center for Biological Diversity v.

NHTSA, 508 F.3d 508, 529 (9th Cir. 2007).

\77\ 42 FR 63,184, 63,188 (Dec. 15, 1977) (emphasis added).

\78\ For example, the final rules establishing CAFE standards for MY 1981-84 passenger cars, 42 FR 33533, 33540-1 and 33551; June 30, 1977, and for MY 1983-85 light trucks, 45 FR 81593, 81597;

December 11, 1980.

In the late 1980s, NHTSA cited concerns about climate change as one of its reasons for limiting the extent of its reduction of the CAFE standard for MY 1989 passenger cars \79\ and for declining to reduce the standard for MY 1990 passenger cars.\80\

\79\ 53 FR 39275, 39302; October 6, 1988.

\80\ 54 FR 21985,

Since then, DOT has considered the indirect benefits of reducing tailpipe carbon dioxide emissions in its fuel economy rulemakings pursuant to the statutory requirement to consider the nation's need to conserve energy by reducing consumption. In this rulemaking, consistent with the Ninth Circuit's decision and its observations about the potential effect of changing information about climate change on the

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balancing of the EPCA factors and aided by the 2007 reports of the

United Nations Intergovernmental Panel on Climate Change \81\ and other information, NHTSA has monetized the reductions in tailpipe emissions of CO2that will result from the CAFE standards and is adopting CAFE standards for MY 2011 at levels that reflect an estimated value of those reductions in CO2as well as the value of other benefits of those standards. In setting these CAFE standards,

NHTSA also considered environmental impacts under NEPA, 42 U.S.C. 4321- 4347.

\81\ The IPCC 2007 reports can be found at http://www.ipcc.ch/.

(Last accessed March 8, 2009.)

(v) Other Factors--Safety

In addition, the agency historically has considered the potential for adverse safety consequences when deciding upon a maximum feasible level. This practice is recognized approvingly in case law.\82\

\82\ See, e.g., Center for Auto Safety v. NHTSA (CAS), 793 F. 2d 1322 (D.C. Cir. 1986) (Administrator's consideration of market demand as component of economic practicability found to be reasonable); Public Citizen 848 F.2d 256 (Congress established broad guidelines in the fuel economy statute; agency's decision to set lower standard was a reasonable accommodation of conflicting policies). As the United Staets Court of Appeals pointed out in upholding NHTSA's exercise of judgment in setting the 1987-1989 passenger car standards, ``NHTSA has always examined the safety consequences of the CAFE standards in its overall consideration of relevant factors since its earliest rulemaking under the CAFE program.'' Competitive Enterprise Institute v. NHTSA (CEI I), 901

F.2d 107, 120 at n.11 (D.C. Cir. 1990).

(b) Factors That Cannot be Considered

EPCA provides that in determining the level at which it should set

CAFE standards for a particular model year, NHTSA may not consider the ability of manufacturers to take advantage of several EPCA provisions that facilitate compliance with the CAFE standards and thereby reduce the costs of compliance.\83\ As noted below in Section XII, manufacturers can earn compliance credits by exceeding the CAFE standards and then use those credits to achieve compliance in years in which their measured average fuel economy falls below the standards.

Manufacturers can also increase their CAFE levels through MY 2019 by producing alternative fuel vehicles. EPCA provides an incentive for producing these vehicles by specifying that their fuel economy is to be determined using a special calculation procedure that results in those vehicles being assigned a high fuel economy level.

\83\ 49 U.S.C. 32902(h).

(c) Weighing and Balancing of Factors

EPCA did not define the factors or specify the relative weight to be given the factors in weighing and balancing them. Instead, EPCA gave broad guidelines within which the agency is to exercise discretion in determining what level of stringency is the maximum feasible level of stringency. Thus, the agency has substantial discretion in defining and weighing the terms and accommodating conflicting priorities consistent with the purposes of EPCA. 5. Consultation in Setting Standards

EPCA provides that NHTSA is to consult with the Department of

Energy (DOE) and Environmental Protection Agency prior to prescribing

CAFE standards. It specifies further that NHTSA is to provide DOE with an opportunity to provide written comments on draft proposed and final

CAFE standards.\84\

\84\ In addition, Executive Order No. 13432 provides that a

Federal agency undertaking a regulatory action that can reasonably be expected to regulate emissions directly, or to substantially and predictably affect emissions, of greenhouse gases from motor vehicles, shall act jointly and consistently with other agencies to the extent possible and to consider the views of other agencies regarding such action.

6. Test Procedures for Measuring Fuel Economy

EPA's fuel economy test procedures specify equations for calculating fuel economy. These equations are based on the carbon balance technique which allows fuel economy to be determined from measurement of exhaust emissions. As noted above, this technique relies upon the premise that the quantity of carbon in a vehicle's exhaust gas is equal to the quantity of carbon consumed by the engine as fuel.

After measuring the amount of CO2emitted from the tailpipe of a test vehicle, as well as the amount of carbon in hydrocarbon (HC) and carbon monoxide (CO), EPA then uses the carbon content of the test fuel to calculate the amount of fuel that had to be consumed per mile in order for the vehicle to produce that amount of carbon containing emissions.\85\ Finally, EPA converts that fuel figure into a miles-per-gallon figure.

\85\ Under the procedures established by EPA, compliance with the CAFE standards is based on the rates of emission of

CO2, CO, and hydrocarbons from covered vehicles, but primarily on the emission rates of CO2. In the measurement and calculation of a given vehicle model's fuel economy for purposes of determining a manufacturer's compliance with federal fuel economy standards, the role of CO2is approximately 100 times greater than the combined role of the other two relevant carbon exhaust gases. Given that the amount of CO2, CO, and hydrocarbons emitted by a vehicle varies directly with the amount of fuel it consumes, EPA can reliably and accurately convert the amount of those gases emitted by that vehicle into the miles per gallon achieved by that vehicle.

7. Enforcement and Compliance Flexibility

EPA is responsible for measuring automobile manufacturers' CAFE so that NHTSA can determine compliance with the CAFE standards. In making these measurements for passenger cars, EPA is required by EPCA \86\ to use the EPA test procedures in place as of 1975 (or procedures that give comparable results), which are the city and highway tests of today, with adjustments for procedural changes that have occurred since 1975. EPA uses similar procedures for light trucks, although, as noted above, EPCA does not require it to do so.

\86\ 49 U.S.C. 32904(c).

When NHTSA finds that a manufacturer is not in compliance, it notifies the manufacturer. Surplus credits generated from the five previous years can be used to make up the deficit. The amount of credit earned is determined by multiplying the number of tenths of a mpg by which a manufacturer exceeds a standard for a particular category of automobiles by the total volume of automobiles of that category manufactured by the manufacturer for a given model year. If there are no (or not enough) credits available, then the manufacturer can either pay the fine, or submit a carry back plan to the agency. A carry back plan describes what the manufacturer plans to do in the following three model years to earn enough credits to make up for the deficit. NHTSA must examine and determine whether to approve the plan.

In the event that a manufacturer does not comply with a CAFE standard, even after the consideration of credits, EPCA provides for the assessing of civil penalties, unless, as provided below, the manufacturer has earned credits for exceeding a standard in an earlier year or expects to earn credits in a later year. The Act specifies a precise formula for determining the amount of civil penalties for such a noncompliance. The penalty, as adjusted for inflation by law, is

$5.50 for each tenth of a mpg that a manufacturer's average fuel economy falls short of the standard for a given model year multiplied by the total volume of those vehicles in the affected fleet (i.e., import or domestic passenger car, or light truck), manufactured for that model year. The amount of the penalty may not be reduced except under the unusual or extreme circumstances specified in the statute.

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Unlike the National Traffic and Motor Vehicle Safety Act, EPCA does not provide for recall and remedy in the event of a noncompliance. The presence of recall and remedy provisions \87\ in the Safety Act and their absence in EPCA is believed to arise from the difference in the application of the safety standards and CAFE standards. A safety standard applies to individual vehicles; that is, each vehicle must possess the requisite equipment or feature which must provide the requisite type and level of performance. If a vehicle does not, it is noncompliant. Typically, a vehicle does not entirely lack an item or equipment or feature. Instead, the equipment or features fails to perform adequately. Recalling the vehicle to repair or replace the noncompliant equipment or feature can usually be readily accomplished.

\87\ 49 U.S.C. 30120, Remedies for defects and noncompliance.

In contrast, a CAFE standard applies to a manufacturer's entire fleet for a model year. It does not require that a particular individual vehicle be equipped with any particular equipment or feature or meet a particular level of fuel economy. It does require that the manufacturer's fleet, as a whole, comply. Further, although under the attribute-based approach to setting CAFE standards fuel economy targets are established for individual vehicles based on their footprints, the vehicles are not required to comply with those targets. However, as a practical matter, if a manufacturer chooses to design some vehicles so that fall below their target levels of fuel economy, it will need to design other vehicles so that exceed their targets if the manufacturer's overall fleet average is to meet the applicable standard.

Thus, under EPCA, there is no such thing as a noncompliant vehicle, only a noncompliant fleet. No particular vehicle in a noncompliant fleet is any more, or less, noncompliant than any other vehicle in the fleet.

III. The Anticipated Vehicles in the MY 2011 Fleets and NHTSA's

Baseline Market Forecast

NHTSA has a long-standing practice of analyzing regulatory options in fuel economy rulemakings based on the best available information, including information regarding the future vehicle market and future fuel economy technologies. The passenger cars and light trucks currently sold in the United States, and which are anticipated to be sold in MY 2011, are highly varied and satisfy a wide range of consumer needs. From the two-seater Mercedes Benz Smart (produced by Daimler) to the Ford F-150 pickup truck, from the Honda CR-V to the Chrysler Town and Country to the GMC Savana, American consumers have a great number of vehicle options to accommodate their needs and preferences.

Automobile manufacturers generally attempt to plan their motor vehicle production several years in advance. When a new vehicle is introduced, it is the product of several years of design, testing, product-specific tooling investment, and regulatory certification. In order to minimize costs, manufacturers generally attempt to place large automotive parts supply contracts years in advance. Manufacturers must therefore attempt to predict the types, characteristics, and quantities of vehicles that consumers will wish to purchase a few years hence.

These plans include what is currently known about the salability and marketability of these future vehicles, and hence consider the future state of prices facing the consumer, including that of gasoline. These plans also contain not only the specific vehicle models which manufacturers intend to build and their planned annual production, but also information about specific design features and configurations as well as the fuel-efficient technologies they are planning to incorporate in these vehicles. Manufacturer's plans rapidly become embodied in special tooling and production configurations in factories and advance orders for component parts. NHTSA requests, and manufacturers provide, product plan information to the agency during rulemaking. NHTSA begins its analysis with the submitted product plans and uses them to establish a baseline, which is used to analyze varying levels of future CAFE standards.

In anticipation of the analysis to support today's final rule,

NHTSA issued a request in May 2008 that manufacturers provide the agency with updated product plans, as well as estimates of the availability, effectiveness, and cost of fuel-saving technologies.\88\

Considering its past experiences integrating manufacturers' product plans, reviewing the content of those plans, and seeking clarification and appropriate correction of those plans, the agency provided manufacturers with updated tools to facilitate manufacturers' quality control efforts. NHTSA also tripled the number of agency engineers assigned to reviewing manufacturers' plans.

\88\ See 73 FR 24910 (May 2, 2008) for NHTSA's most recent request for comments, which accompanied the NPRM.

A. Why does NHTSA establish a baseline market forecast?

NHTSA begins its analysis by establishing the baseline market forecast. This forecast represents the fleet that the agency believes would exist in the absence of fuel economy standards for MY 2011. A forecast is necessary because the standards will apply to a future fleet which does not yet exist and therefore must be predicted in order to estimate the costs and benefits of CAFE standards, as well as regulatory alternatives as required by OMB and DOT.

B. How does NHTSA develop the baseline market forecast? 1. NHTSA First Asks Manufacturers for Updated Product Plan Data

NHTSA relies on product plans from manufacturers to help the agency determine the composition of the future fleets. The product plan information is provided in response to NHTSA's request for information from the manufacturers, and responds to very detailed questions about vehicle model characteristics that influence fuel economy.\89\ The baseline market forecast that NHTSA uses in its analysis is based significantly on this confidential product plan information. Individual manufacturers are better able than any other entity to anticipate what mix of products they are likely to sell in the future. In this rulemaking as in prior rulemakings, some commenters requested that

NHTSA make product plan information public to allow members of the public to comment more fully on the baseline developed by the agency.

For example, the Attorneys General commented that ``the agency should provide sufficient summaries or aggregations of this information or make special arrangements so that interested parties such as the state

Attorneys General can view this confidential information under a confidentiality agreement.''

\89\ Id.

NHTSA cannot make public the entire contents of the product plans.

The submitted product plans contain confidential business information, which the agency is prohibited by federal law from disclosing; \90\ making

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this information publicly available would cause competitive harm to manufacturers. See 5 U.S.C. 552(b)(4); 18 U.S.C. 1905; 49 U.S.C. 30167(a); 49 CFR part 512; Critical Mass Energy Project v. Nuclear

Regulatory Comm'n, 975 F.2d 871 (D.C. Cir. 1992). In its publicly available rulemaking documents the agency does, however, provide aggregated information compiled from individual manufacturer submissions regarding its forecasts of the future vehicle market in such a way that confidential business information is not disclosed.

This aggregated information, such as appears below and in the accompanying Regulatory Impact Analysis (RIA), includes vehicle fleet size and composition (passenger cars versus light trucks), overall fuel economy baseline and major technology applications and design trends.

\90\ NHTSA grants confidentiality to manufacturers' future specific product plans under 49 CFR Part 512. Once NHTSA has granted a manufacturer's claim of confidentiality, NHTSA may not release the covered information except in certain circumstances listed in Sec. 512.23, none of which include increasing the ability of the public to comment on rulemakings employing the confidential information, unless the manufacturers consent to the disclosure.

(a) Why does NHTSA use manufacturer product plans to develop the baseline?

In order to analyze potential new CAFE standards in a way that tries to simulate how manufacturers could comply with them, NHTSA develops a forecast of the future vehicle market on a model-by-model, engine-by-engine, and transmission-by-transmission basis, such that each defined vehicle model refers to a separately-defined engine and a separately-defined transmission. For the 2011 model year covered by this final rule, the light vehicle (passenger car and light truck) market forecast included almost 1,400 vehicle models, 400 specific engines, and 300 specific transmissions. NHTSA believes that this level of detail in the representation of the vehicle market is important both to an accurate analysis of manufacturer-specific costs and to the analysis of attribute-based CAFE standards. Because CAFE standards apply to the average fuel economy performance of each manufacturer's fleets of cars and light trucks, the impact of potential standards on individual manufacturers is effectively estimated through analysis of manufacturers' planned fleets. NHTSA has used this level of detail in

CAFE analysis throughout the history of the program. Furthermore, because required CAFE levels under an attribute-based CAFE standard depend on manufacturers' fleet composition, the stringency of an attribute-based standard is effectively predicted by performing analysis at this level of detail.

EPCA does not require NHTSA to use manufacturers' product plans in order to develop a baseline for purposes of analyzing potential new

CAFE standards. The agency could use exclusively non-confidential information to develop a market forecast at the same level of detail as mentioned above, and has done exactly so for purposes of analytical development and testing, and to represent manufacturers that have not provided product plans to NHTSA. However, as discussed above, the agency believes that one of the most valuable sources of information about future product mix projections is the product plan information provided by individual manufacturers, because individual manufacturers are in a unique position to anticipate what mix of products they are likely to sell in the future.

Manufacturers generally support NHTSA's use of product plan data in developing the baseline. Other commenters such as CFA and Public

Citizen, in contrast, stated that the product plans relied upon in the

NPRM are outdated because they were developed before EISA was enacted, and that the agency should develop its own projections of the vehicle fleets, which could be made public, instead of relying on confidential industry plans, which could bias the standards in favor of the industry. CFA suggested that NHTSA's analysis was based on only ``a very thin body of knowledge about the veracity, relevance and predictive value of auto manufacturer product plans, recent changes in fuel economy and the practices of automakers in adopting fuel economy technologies.'' Public Citizen stated that because the product plans are confidential, ``This significantly biases the standards in favor of industry by shutting the public out of the process,'' and that

``Consumers must essentially trust that NHTSA has set standards in their interest using information provided by industry.'' Public Citizen argued that ``In the past, * * * NHTSA has done its own research and evaluation of these factors which was more transparent.''

NHTSA's analysis of product plan data is much more rigorous than commenters suggest. NHTSA engineers carefully examine the information submitted by manufacturers, and upon discovering what appear to be errors or inconsistencies, request and receive manufacturers' explanations and, as appropriate, corrections. For example, the agency's analysis in preparation for the final rule revealed systematic errors in plans submitted by two major manufacturers, both of which resubmitted their plans with corrections.\91\ In addition, the agency found that two manufacturers inappropriately planned to have some 2- wheel drive sport-utility vehicles (2WD SUVs) classified as light trucks, even though the agency explained in the NPRM that, for enforcement purposes, it planned to classify such vehicles as passenger cars, and other manufacturers submitted product plans consistent with the agency's intentions. As discussed below and in Section IX, NHTSA performed its analysis with these vehicles reassigned to the passenger car fleet.

\91\ Specifically, one manufacturer had submitted data with a structure that had inadvertently been misaligned, such that many vehicle models were incorrectly identified as using engines applicable to other vehicle models (e.g., a vehicle known to use an inline 4-cylinder engine might have been identified as using a V-8 engines). Another manufacturer had submitted vehicle dimensional estimates based on an incorrect SAE measurement procedure.

NHTSA also disagrees with Public Citizen's suggestion that the agency's use of product plans precludes public participation in the rulemaking process. As discussed, analysis of confidential product plans has long been a core feature of developing the CAFE standards, and the agency is fully transparent in providing aggregated information about the plans as well as detailed information about the agency's technology and economic assumptions and the process the agency undertakes to evaluate and set the standards.

NHTSA could potentially conduct rulemaking analysis as Public

Citizen suggests using exclusively public information, (including commercially available information). Indeed, the agency has done exactly so for purposes of development and testing, and to develop forecasts of fleets likely to be produced by manufacturers that have not responded to the agency's request for product plans. However, the agency currently believes that an analysis based exclusively on publicly- and commercially-available information would be less accurate--in terms of its representation of the future light vehicle market--than an analysis based in large measure on product plan data.

Most publicly available information about vehicles and vehicle technologies concerns the current fleet, not potential future fleets.

In many cases, manufacturers are prepared to provide far more detail in confidential submissions then they are prepared to provide in public.

This detail may include the manufacturer's expectation of sales for particular future models; which technologies are being applied to particular vehicles; and the manufacturer's expectation of fuel

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economy for future vehicles. This information is typically considered business confidential by the manufacturer, but is helpful in more accurately ascertaining both the baseline technology level and fuel economy of manufacturer's future sales as well as the extent of opportunities for improving fuel economy.

NHTSA notes that manufacturers' public statements about future vehicles have been very optimistic recently with regard to fuel economy-enhancing technologies, and NHTSA takes these statements into account when evaluating the submitted product plans. When manufacturer statements about future vehicles differ substantially from the submitted product plans, NHTSA generally contacts the manufacturer to determine the reason for the discrepancy. However, manufacturers frequently make announcements regarding vehicles or technologies they hope to produce in the future. Often, they are conditional statements and plans, and whether they reach the point of commercialization depends greatly on how circumstances, including public acceptance, evolve. Thus, for purposes of analyzing the MY 2011 CAFE standards, the agency currently concludes that information manufacturers provide confidentially to NHTSA is more reliable than the information appearing in public sources such as press reports and speeches by manufacturers' employees, especially given the short time period between the submission of this information in 2008 and when manufacturers will begin building their MY 2011 vehicles.

Nevertheless, EPCA does not require NHTSA to use manufacturers' confidential business information when evaluating the maximum feasible levels for new CAFE standards. The agency will base its analysis for future rulemakings on information--public, commercially-available, or confidential--it considers most accurate.

NHTSA recognizes that automobile manufacturers are facing a period of uncertainty with respect to demand for their products that is without parallel. Recent swings in prices for fuel have altered demand patterns, while commodity prices have impacted costs of production.

Concurrently, turmoil in the credit markets and recent upswings in unemployment also affect the vehicle market. The short and long term implications of such volatility for future sales will not be known for some time. In light of such conditions, reliance on product plans in this rulemaking helps to align the analysis with the best available information.

NHTSA further recognizes that, in connection with their recent requests for federal assistance, some manufacturers made statements in

December 2008 regarding future technologies and fuel economy levels, and that some of these statements indicated plans to achieve CAFE levels considerably higher than reflected in the product plans submitted to NHTSA in mid-2008.\92\ The information provided in these submissions to Congress reflects a level of detail much less than NHTSA typically receives in the confidential product plan submissions, so it is difficult for NHTSA to determine whether these manufacturer statements and submissions reflect the same underlying assumptions as manufacturers' mid-2008 product plans.

\92\ Available on the Internet at http:// financialservices.house.gov/autostabilization.html (last accessed

February 15, 2009).

More recently, in mid-February, Chrysler and General Motors submitted restructuring plans to the U.S. Department of the Treasury to support those companies' requests for federal loans. Like the information these companies provided in December, these plans do not contain complete and detailed forecasts of the volume and characteristics of specific vehicle models Chrysler and General Motors plan to produce. However, the restructuring plans do contain specific information regarding the CAFE levels that these manufacturers expect to achieve.

Chrysler's plan shows that, during MYs 2008-2015, Chrysler plans to exceed required CAFE levels in some model years and to apply credits it earns in doing so toward shortfalls in other model years.\93\ The charts in Chrysler's plans specifically reference the ``Dec 2008 Draft

Rule'' (presumably, the final standards NHTSA submitted to OMB in

November 2008), and indicate that Chrysler appears to believe that attribute-based CAFE standards for those model years will result in required CAFE levels for Chrysler similar to those originally estimated by NHTSA for MYs 2011-2015 based on the product plan information that

Chrysler submitted to NHTSA in July 2008.

\93\ Chrysler's submission to the Treasury Department, p. 117.

Available at http://www.treasury.gov/initiatives/eesa/agreements/ auto-reports/ChryslerRestructuringPlan.pdf, (last accessed Feb. 19, 2009).

GM's plan states that GM ``is committed to meeting or exceeding all

Federal fuel economy standards in the 2010-2015 model years'', and shows the CAFE levels that GM plans to achieve in those model years, assuming ``full usage of all credit flexibilities under the CAFE program.'' \94\ However, GM's plan does not show the CAFE levels expected to be required of GM under new attribute-based CAFE standards, and it is unclear from GM's plan how specific changes (since July 2008) in the company's plans relate to its planned CAFE levels. For example, while GM's restructuring plan refers to plans to increase hybrid vehicle offerings, the plan does not include production forecasts needed to understand how those offerings affect GM's planned CAFE levels.

\94\ GM's submission to the Treasury Department, p. 21.

Available at, http://www.treasury.gov/initiatives/eesa/agreements/ auto-reports/GMRestructuringPlan.pdf (last accessed Feb. 19, 2009).

Considering the context for and generality of the Chrysler and GM restructuring plans, and the lack of such plans from other manufacturers, and notwithstanding the considerable uncertainties currently surrounding the future market for light vehicles, NHTSA believes that its market forecast for MY 2011, as informed by product plans submitted to the agency in mid-2008, remains the most useful available point of reference for the establishment of MY 2011 standards, and the evaluation of the costs and benefits of these new standards.

(b) What product plan data did NHTSA use in the NPRM?

For the NPRM, NHTSA received product plan information from

Chrysler, Ford, GM, Honda, Nissan, Mitsubishi, Porsche and Toyota covering multiple model years. The agency did not receive any product plan information from BMW, Ferrari, Hyundai, Mercedes (Daimler) or VW.

However, only Chrysler and Mitsubishi provided us with product plans that showed differing production quantities, vehicle introductions, vehicle redesign/refresh changes, without any carryover production quantities through MY 2015. For the other companies that provided data, the agency carried over production quantities for their vehicles, allowing for growth, starting with the year after their product plan data showed changes in production quantities or showed the introduction or redesign/refresh of vehicles.

Product plan information was provided through MY 2013 by Ford and

Toyota, thus the first year that the agency carried over production quantities for those companies was MY 2014. Product plan information was provided through MY 2012 for GM and Nissan, thus the first year that the agency carried over production quantities for those companies was MY 2013. Product plan information was

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provided by Honda through MY 2008. Honda asked the agency to carry over those plans and also provided data for the last redesign of a vehicle and asked the agency to carry them forward. Product plan information was provided through MY 2008 for Porsche, thus the first year that the agency carried over production quantities for Porsche was MY 2009.

Because Hyundai was one of the seven largest vehicle manufacturers, and thus factored explicitly into the optimization process, and NHTSA desired to conduct this process using the best and most complete forecast of the future vehicle market, NHTSA used Hyundai's mid-year 2007 data contained in the agency's CAFE database to establish the baseline models and production quantities for their vehicles.\95\ For the other manufacturers that did not submit product plans, NHTSA used the 2005 information from the database, the latest complete data set that NHTSA had available for use.

\95\ Manufacturers must submit pre- and mid-model year CAFE reports to the agency as part of the CAFE compliance process under 49 CFR part 537.

As mentioned above, NHTSA received comments that the product plans it relied upon in the NPRM were out of date and not reflective of recent announcements from manufacturers regarding new products. CFA referred to NHTSA's discussion in the NPRM of the relative completion of various manufacturers' product plans to argue that the product plans were incomplete and inaccurate. Public Citizen argued that the product plans were out of date. The Attorneys General and NRDC argued that

NHTSA should update the product plans, the baseline, and the technology inputs to the Volpe model in light of recent manufacturer statements about their intent to introduce advanced technologies, such as plug-in hybrid vehicles, in the near future.

In response, as noted above, NHTSA published a request for comments seeking updated information from manufacturers regarding their future product plans in a companion notice to the NPRM. In examining the updated product plans received in response to the request for information, and as discussed more fully below, NHTSA has determined that the product plans for MY 2011 provided incorporate these announcements and reflect changes to planned product introduction by manufacturers in response to the recent market shift towards more fuel- efficient vehicles, particularly the shift towards increased production of smaller cars.

(c) What product plan data did NHTSA receive for the final rule?

For the final rule, NHTSA received product plan information from

Chrysler, Ford (Ford's product plans included separate plans for Jaguar and Land Rover vehicles, both of which are now owned by Tata Motors and are thus attributed to that company in the final rule), GM, Honda,

Hyundai, Mitsubishi, Nissan, Porsche, Subaru, and Toyota, covering multiple model years. The agency did not receive product plan information from BMW, Daimler (Mercedes), Ferrari, Suzuki or VW.

Chrysler, Ford, Hyundai and Mitsubishi provided us with product plans that showed changes in production quantities, vehicle introductions, and vehicle redesigns/refreshes changes, without any carryover production quantities through MY 2015. For the other companies that provided data, the agency was careful to carry over production quantities for their vehicles, allowing for growth, starting with the year after their product plan data showed changes in production quantities or showed the introduction or redesign/refresh of vehicles.

Further, NHTSA used the pre-model year 2008 CAFE reports as the basis for the future MY 2011 product plans and filled in gaps in the data (e.g., engine specifications, wheelbase, track width, etc.) for those manufacturers with information gathered from the Web sites of the individual manufacturers and from general automotive Web sites such as

Edmunds.com, Cars.com, and Wards.com.

(d) How is the product plan data received for the final rule different from what the agency used in the NPRM analysis, and how does it impact the baseline?

Informed by the overall fleet size and market share estimates applied by the agency (and discussed below), manufacturers' plans changed considerably between 2007 and 2008. NHTSA's forecast, based on the Energy Information Administration's (EIA's) Annual Energy Outlook

(AEO) 2008, of the total number of light vehicles likely to be sold during MY 2011 through MY 2015 dropped from 85 to 83 million vehicles-- about 16.5 million vehicles annually.\96\ Also, due in part to the reclassification of roughly 1.4 million 2WD SUVs, the share of MY 2011 vehicles expected to be classified as light trucks fell from 49 percent in NHTSA's 2007 market forecast to 42 percent in the agency's current forecast.

\96\ NHTSA recognizes that domestic vehicle sales are currently well below this rate. However, as discussed below, the agency considers this an aspect (like gasoline prices near $2 per gallon) of the current economy, and not an indicator of the longer-term prospect for light vehicle sales in the U.S. Just as the agency currently expects fuel prices to return to high levels, it expects vehicle sales to rise well above today's rate.

The latter of the above changes is reflected in the baseline distribution of vehicle models with respect to fuel economy and footprint. Figures III-1 and III-2 show passenger car and light truck 2011 models, respectively, in the 2007 plans. Figures III-3 and III-4 show passenger car and light truck models, respectively, in the 2008 plans. A comparison of Figures III-1 and III-3 shows that the number of passenger cars models with footprints between roughly 41 and 52 square feet has increased considerably, and that the number of passenger car models with relatively high fuel economy levels (e.g., above 35 mpg) has increased. Conversely, a comparison of Figures III-2 and III-3 shows less pronounced differences between the 2007 and 2008 plans, although the number of small light truck models decreased (due to reclassification).

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NHTSA's expectations regarding manufacturers' market shares (the basis for which is discussed below) have also changed since 2007. These changes are reflected below in Table III-1, which shows the agency's 2007 and 2008 sales forecasts for passenger cars and light trucks.\97\

\97\ 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.

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Additionally, for some advanced technologies, the updated product plans submitted by manufacturers for the final rule include higher quantities in MY 2011 and beyond than the older product plans used for the NPRM had indicated. These changes are consistent with most manufacturers' indications that their product planning was informed by expectations that fuel prices considerably higher than those in EIA's

AEO 2008 reference case forecast would prevail during the first half of the next decade. Most recently, the restructuring plans submitted by

General Motors and Chrysler offer additional information on changes to product plans, albeit at an aggregate level, that are deemed necessary to achieve ``operational and functional viability.''

Manufacturers' most recently submitted detailed plans (i.e., those submitted to NHTSA in July 2008) show significant application of the following engine technologies in MY 2011 (percent of the entire fleet having that technology is shown in the parentheses): Intake cam phasing

(34 percent), dual cam phasing (35 percent), stoichiometric gasoline direction injection (11 percent), and turbocharging and engine downsizing (6 percent). Regarding transmission technologies, manufacturers' plans show significant application of the following technologies by MY 2011: 6-, 7-, or 8-speed automatic transmissions (27 percent), and strong hybrids (4 percent). Manufacturers' plans also show significant application of electric power steering (3 percent) and integrated starter/generators (34 percent) by MY 2011.

Though not applicable to today's rulemaking, and while updated product plans may reflect different rates of technology application, manufacturers' July 2008 plans also indicated expectations that the use of some of these and other technologies would continue to increase after MY 2011. For example, manufacturers' product plans indicated at the time that use of stoichiometric gasoline direction injection would increase from 11 percent of the fleet in MY 2011 to 15 percent of the fleet in MY 2015, and that use of turbocharging and engine downsizing would increase from 6 percent of the fleet in MY 2011 to 13 percent of the fleet in MY 2015. These plans further indicated that use of dual cam phasing, combustion restart, and integrated starter/generators would increase to 49 percent, 10 percent, and 49 percent, respectively, by MY 2015.

The restructuring plans Chrysler and GM submitted to the Department of the Treasury in February 2009 both indicate intentions to increase the rate of technology adoption and alter the mix towards higher numbers of flexible fuel, alternative fuel and electric vehicles.

Chrysler's restructuring plan shows plans to introduce three new electric or hybrid-electric vehicle models in MYs 2010-2011, and an additional seven such models during MYs 2012-2015.\98\ As mentioned above, Chrysler's restructuring plan is clearly informed by and responsive to NHTSA's 2008 draft final standards for MYs 2011-2015.

Though less clear in terms of specific requirements to the company,

GM's restructuring plan also appears to be responsive to those MYs 2011-2015 standards. GM's restructuring plan indicates that in MY 2012, the company plans greater deployment of 2-step variable valve timing, new 4-cylinder gasoline engines, dry dual clutch transmissions, ``Gen 2'' strong hybrids, extended range electric vehicles, and possibly compressed natural gas.\99\ The plan further indicates that in MY 2015,

GM expects to introduce ``Gen 3'' hybrids, lean-burn homogeneous charge compression ignition (HCCI) gasoline engines, and fuel cell vehicles.

\98\ Chrysler, p. 135.

\99\ GM, p. 21.

Manufacturers' July 2008 product plans also show increasing numbers of mid-size ladder-frame SUVs being planned for redesign as unibody

SUVs/crossover vehicles. Additionally, some ladder-frame SUVs and mid- size pickup

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trucks are planned to be discontinued altogether and replaced with totally new products that have unibody construction. Some of the trend for mid-size SUVs being replaced by unibody vehicles is already visible in the marketplace and reflected in NHTSA's forecast of the MY 2011 light vehicle market.

Concerning engine trends, the manufacturers' plans show a significant amount of engine downsizing. This downsizing is of two major types: first, replacing existing engines with smaller displacement engines while keeping the same number of cylinders per engine; second, replacing existing engines with engines having a smaller number of cylinders (e.g., 6-cylinder engines instead of 8- cylinder engines and 4-cylinder engines instead of 6-cylinder engines).

The plans indicate that for many of the engines being downsized, the replacement engines have some form of advanced valve actuation (e.g., variable valve lift) combined with other technologies, such as engine friction reduction or direct injection. When such changes occur the replacement engines appear to provide higher fuel economy, with maximum power and torque similar to the engines they are replacing. It is not clear from manufacturers' product plans whether and, if so, how vehicle prices and other performance measures (e.g., launch, gradeability) will be affected.

When engines are planned to be replaced with fewer-cylinder engines

(e.g., smaller V6 engines instead of large V8 engines), the plans show some of these engines having some form of advanced valve actuation, combined with direct injection and turbocharging. Some of these engines also have combustion restart. These engines also provide maximum power and torque similar to the engines they are replacing while delivering higher fuel economy, although impacts on price and performance measures are also uncertain.

For some selected technologies, Table III-2 compares MY 2011 penetration rates in manufacturers' product plans from the 2007 plans to those from the 2008 plans. This comparison reveals both increases and decreases in planned technology application for MY 2011, including a doubling in the planned production of hybrid electric vehicles (here, including only ``strong'' hybrids such as power-split hybrids and plug- in hybrids). Because this comparison is limited to MY 2011, it does not evidence manufacturers' plans--discussed above--to redesign many vehicles in MY 2012 (and later years) and, in doing so, to increase further the use of some fuel-saving technologies. This also holds true for the GM and Chrysler restructuring plans, which describe limits to attaining anticipated MY 2011 targets, in particular for GM trucks in that year, but at the same time differ markedly in terms of the estimates of the total number of vehicles sold. Information on the impact of penetration rates is of course conditioned on sales volumes, which vary for MY 2011 from 11.1 million for Chrysler to 14.3 million for GM. While information regarding these later technology improvements was provided to NHTSA, it did not form the basis for the establishment of the MY 2011 CAFE standards.

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Manufacturers have also, in 2008, indicated plans to sell more dual-fuel or flexible-fuel vehicles (FFVs) than indicated in the plans they submitted to NHTSA in 2007. 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.\100\ However, NHTSA is precluded from ``taking credit'' for the compliance flexibility by accounting for manufacturers' ability to earn and use credits in determining what standards would be ``maximum feasible.''\101\ 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 14 percent for the NPRM and 17 percent for the final rule.

\100\ See 49 U.S.C. 32905 and 32906.

\101\ 49 U.S.C. 32902(h).

Consistent with these expected trends toward wider application of fuel-saving technologies, the product plan data indicates that almost all manufacturers expect to produce a more efficient fleet than they had planned to produce in 2007. However, because manufacturers' product plans also reflect simultaneous changes in fleet mix and other vehicle characteristics, the relationship between increased technology utilization and

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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. As a result, NHTSA's baseline market forecast shows industry-wide average fuel economy levels somewhat higher than shown in the NPRM. Average fuel economy for MY 2011 is 26.0 mpg in the NPRM baseline forecast, and 26.5 mpg in the final rule.

These changes are shown in greater detail below in Table III-3a, which shows manufacturer-specific CAFE levels (not counting CAFE credits that some manufacturers expect to earn by producing flexible fuel vehicles) planned in 2007 for passenger cars and light trucks.

Table III-3b shows the combined averages of these planned CAFE levels.

Tables III-4a and III-4b show corresponding information from manufacturers' 2008 plans. These tables demonstrate that, with very few exceptions, manufacturers are planning to increase overall average fuel economy beyond the levels shown in the plans they submitted in 2007. In addition, according to the restructuring plans submitted to the

Treasury Department, GM states that it will reach average fleet fuel economy of 32.5 mpg for passenger vehicles and 23.6 mpg for trucks in

MY 2011, compared to the 30.3 and 21.4 reported in Table III-4a, below.\102\ Also, Chrysler's restructuring plan states that the company plans to accelerate its utilization of more fuel-efficient power trains, for example, to improve fuel efficiency on a remixed product line. In addition, Chrysler plans, according to the restructuring, to offer flexible fuel capability in half of its light trucks by 2012.

\102\ Unlike the values shown in Table III-4a, the average fuel economy levels shown in GM's restructuring plan reflect ``full usage of all credit flexibilities under the CAFE program.'' It is not clear how much of the difference between Table III-4a and GM's

February 2009 estimates is accounted for by such flexibilities.

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Tables III-5 through III-7 summarize other changes in manufacturers' product plans between those submitted to NHTSA in 2007

(for the NPRM) and 2008 (for the final rule). These tables present average vehicle footprint, curb weight, and power-to-weight ratios for each of the seven largest manufacturers, and for the overall industry.

The tables do not identify manufacturers by name, and do not present them in the same sequence.

Table III-5 shows that manufacturers' latest plans reflect a very slight (less than 0.1 square feet) increase in overall average passenger vehicle size, and suggests that manufacturers currently plan to sell larger trucks than they reported previously. However, these planned increases are, in the aggregate, attributable to the reassignment of vehicles from the light truck to the passenger car fleet. The average planned footprint among all planned passenger cars and light trucks remained unchanged.

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Table III-6 shows that manufacturers' latest plans reflect a small increase in overall average vehicle weight. However, for both the passenger car and light truck fleets, the reassignment of some light trucks to the passenger car fleet caused the average curb weight for both fleets to increase, even though doing so did not (and, of course, could not) change the overall average curb weight. Without these reassignments, the average curb weights of the passenger car and light truck fleets would have dropped by about 5 and 35 pounds, respectively.\103\

\103\ Notwithstanding the reassignment of some vehicles to the passenger car fleet, manufacturers' July 2008 product plans also indicated shifts in the mix of passenger cars and light trucks, such that overall average curb weight increased despite these small decreases in average passenger car and average light truck curb weight.

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Table III-7 shows that manufacturers' latest plans reflect a small increase (about 1.7 percent) in overall average performance, and suggests that increases will mostly occur in the light truck fleet.

Considering that this 3.5 percent increase in light truck performance is accompanied by a 2.7 percent increase in light truck curb weight, this suggests that (1) the vehicles being reassigned to the passenger car fleet are among the less powerful (per pound) of the vehicles previously assigned to the light truck fleet and (2) manufacturers are planning to install somewhat more powerful engines in many light trucks than previously reported to NHTSA. This trend is detectable by analysis of the detailed product plans, and is appears to be corroborated by the reported change in intended product mix that GM and Chrysler state in their restructuring plans.

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These overall trends mask the fact that manufacturers' plans did not all change in the same ways. In terms of planned average footprint, changes in manufacturers' plans ranged from a 4 percent decrease to a 5 percent increase. In terms of planned average curb weight and power-to- weight ratio, these ranges covered -4 percent to 3 percent and -5 percent to 15 percent, respectively.

NHTSA recognizes that some manufacturers' plans to increase vehicle performance reflect an intention to apply some fuel-saving technologies in ways that do not hold performance and utility constant, and therefore do not achieve the same fuel economy increases that NHTSA would assume when estimating the effect of adding these technologies for the sole purpose of complying with CAFE standards. This continues what has long been standard practice in the industry. Vehicle performance, amenities, and utility have been generally increasing for more than a century, in response to consumer demand. Manufacturers have applied innumerable technological advances during that time, and although they have achieved significant fuel economy gains, they have not applied these technological advances for the sole purpose of increasing fuel economy. When applying a given technology to a given vehicle, a manufacturer does so in a way that balances multiple vehicle characteristics, including fuel economy. For example, while a manufacturer might make both a gasoline and diesel version of a given sedan, the diesel version might offer more weight-increasing amenities

(e.g., luxury seating) and significantly better performance (e.g., torque). In this case, the diesel version would have greater value to the consumer, and would thus command a higher price.

The Union of Concerned Scientists (UCS) and some other commenters suggested that manufacturers' product plans, and NHTSA's use of these plans, may have at least the appearance of wrongdoing.\104\ Such comments cite a ``lack of transparency'' ultimately traceable to the fact that the submitted product plans contain confidential business information, which the agency is prohibited by federal law from disclosing, as discussed above. However, NHTSA believes these perceptions may also arise because UCS and others realize that manufacturers often use technology to increase performance (and other vehicle characteristics), not just to increase fuel economy, and thus may assign a fuel economy ``effectiveness'' to a technology in their product plans that is lower than if the technology was used solely to increase fuel economy. If so, NHTSA rejects the notion that for manufacturers to do so constitutes any

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form of ``wrongdoing.'' Manufacturers compete in a marketplace that reflects the values that consumers place on vehicle amenities, performance, and utility, as well as fuel economy.

\104\ See, e.g., UCS, p. 14.

When NHTSA estimates the cost and effect of adding technologies in response to CAFE standards, the agency is treating these technologies as being applied solely for that purpose; therefore, the agency's analysis reflects an attempt to hold amenities, performance, and utility constant. Thus, NHTSA's analysis estimates means by which manufacturers could comply with CAFE standards. Manufacturers, however, determine how they actually will comply. As an example, if a manufacturer plans to apply technologies in ways that increase vehicle performance in addition to increasing fuel economy, NHTSA would have to find a way of accounting for the value that those performance increases represent. While the manufacturers seeking federal funds have reported plans to alter their product mix in favor of smaller, more fuel- efficient vehicles, it is too soon to tell to what extent consumers will adapt to such a product mix for MY 2011 (which may, to a large extent, depend on fuel prices), or whether the rest of the industry will follow or instead decide to serve the market for larger performance vehicles left behind by GM and Chrysler.

Expected model years in which each vehicle model will be redesigned or freshened constitute another important aspect of NHTSA's market forecast. As discussed in Section IV, NHTSA's analysis supporting today's rulemaking times the addition of most technologies to coincide with either a vehicle redesign or a vehicle freshening. Product plans submitted to NHTSA preceding both the NPRM and the final rule contained manufacturers' estimates of vehicle redesign and freshening schedules.

However, as discussed in Section IV, NHTSA estimated that in the future, most vehicles would be redesigned on a five-year schedule, with vehicle freshening (i.e., refresh) occurring every two to three years after a redesign. After applying these estimates, the shares of manufacturers' passenger car and light truck estimated to be redesigned in MY 2011 were as summarized below for the seven largest manufacturers. Table III-8 shows the percentages of each manufacturer's fleets expected to be redesigned in MY 2011 from the market forecast used by NHTSA in the analysis documented in the NPRM. To protect confidential information, manufacturers are not identified by name.

Table III-9 presents corresponding estimates from the analysis supporting today's final rule. To further protect confidential information, the numbering of individual manufacturers is different from that shown in Table III-8.

GRAPHIC

TIFF OMITTED TR30MR09.014

We continue, therefore, to estimate that manufacturers' redesigns will not be uniformly distributed across model years. This is in keeping with standard industry practices, and reflects what manufacturers actually do-NHTSA has observed that manufacturers in fact do redesign more vehicles in some years than in others. NHTSA staff have closely examined manufacturers' planned redesign schedules, contacting some manufacturers for clarification of some plans, and confirmed that these plans remain unevenly distributed over time. For example, although Table 9 shows that NHTSA expects Company 2 to redesign 34 percent of its passenger car models in MY 2011, current information indicates that this company will then redesign only (a different) 10 percent of its passenger cars in MY 2012. Similarly, although Table 9 shows that NHTSA expects four of the largest seven light truck manufacturers to redesign virtually no light truck models in MY 2011, current information also indicates that these four manufacturers will redesign 21-49 percent of their light trucks in MY 2012. GM and Chrysler's recent restructuring plans lend support to these observations. Chrysler described its planned entries of new vehicles (its ``launch cadence'') in

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its plan, and there is clear phasing, with MY 2011 experiencing many new introductions and some later years having none.\105\

\105\ Chrysler plan, p. 135.

NHTSA understands that a manufacturer may choose to time the application of technologies to coincide with planned redesigns, and elect in one model year to apply more technology than needed to meet its required CAFE level in that year. However, NHTSA has decided not to attempt to represent this type of manufacturer response to the MY 2011

CAFE standards because it is not relevant for the current rulemaking.\106\ NHTSA will consider this issue further in future rulemaking analyses.

\106\ Additionally, although the agency will reconsider this issue in future rulemakings, at this time the agency is not confident that it has the statutory authority to base its determination of the maximum feasible CAFE standard in a given model year on manufacturers' ability to over-comply during prior model years in which more vehicles were redesigned.

2. Once NHTSA has the product plans, how does it develop the baseline?

In all cases, manufacturers' sales volumes were normalized to produce passenger car and light truck fleets which reflected each manufacturers' MY 2008 market shares within the aggregate vehicle sales volume forecast in EIA's 2008 Annual Energy Outlook. NHTSA does this in order to develop a market forecast that is realistic in terms of both its overall size as well as manufacturers' relative market shares. The product mix for each manufacturer that submitted product plans was preserved and, in the case of those than did not submit plans, the product mix used was the same as indicated in their pre-model year 2008

CAFE data. As was discussed earlier, the manufacturers themselves are uncertain about future aggregate sales volumes. Although the market is facing a downturn of unprecedented magnitude, NHTSA currently expects that pent-up demand (driven, for example, by the continued use and eventual scrappage of existing vehicles) and an eventual economic recovery will, over time, bring sales back to more historic levels.

CBD commented that this method of establishing the baseline fleet

``has illegally constrained [NHTSA's] analysis by locking [NHTSA] into the assumption that a manufacturer's fleet mix need not, and will not, change in response to'' increasing consumer demand for vehicles with improved fuel economy. Whether NHTSA should incorporate market shifts in its modeling has been a theme in comments for the past several CAFE rulemakings. Comments with regard to market shift tend to address two different issues. First, commenters request that NHTSA assume a higher fuel economy baseline than manufacturer product plans indicate, due to market shifts occurring because consumers demand higher fuel economy even without CAFE standards. The Mercatus Center, for example, raised this point in comments to the NPRM. Second, commenters suggest that

NHTSA should incorporate the market shifts that result due to CAFE regulation, as manufacturers adjust vehicle prices and fuel economy levels, and consumers respond to those changes. The Alliance recommended that NHTSA use NERA's nested logit model, for example, since it attempts to account for ``actual consumer demand behavior'' to address this issue.

NHTSA agrees in principle that some kind of ``market shift'' model could provide useful information regarding the possible effects of potential new CAFE standards, and has researched how to integrate such a model into its stringency analysis. NHTSA recognizes that the product plans on which the agency relies to determine CAFE stringency represent a snapshot, and are subject to change in response to consumer demand, whether driven by CAFE or by extrinsic factors. Although NHTSA has now spent several years considering how to incorporate market shifts into its analysis of potential CAFE standards, the agency has still not been able to develop credible coefficients specifying such a model, and we have therefore continued to refrain in the final rule from integrating a market share model into the Volpe model.\107\ However, manufacturer product plans for MY 2011 do already, at a minimum, reflect whatever market shifts the manufacturers believe will occur in the absence of regulations. Additionally, the agency conducts a separate analysis of potential changes in manufacturers' overall sales volumes. NHTSA will continue to consider ways in which to incorporate market shift modeling into its analysis for future rulemakings. Recent upheavals in the economy, including historically quick run-ups in gasoline prices followed by as dramatic declines, greatly affect consumer demand for vehicles. Econometric models such as nested logit are necessarily calibrated on historic data and thus, while offering a consistent method for describing the future, are constrained to reflect behavior based on past reactions to events. The release of the restructuring plans for GM and Chrysler are cases in point. They show considerable alterations in product plans, including reduction of planned sales volumes and nameplates, along with introduction of new models and accelerated adoption of technology, that appear to reflect a break with historical trends.

\107\ NHTSA is aware that Resources for the Future (RFF) has drafted a report regarding its examination of consumer behavior modeling. Although a market share model, as currently envisioned by

NHTSA, would also need to address manufacturer behavior (in particular, regarding pricing), NHTSA will consider RFF's work in evaluating future changes to NHTSA's analytical methods. NHTSA has met with EPA and RFF staff to discuss the status of RFF's efforts, and will consider any results RFF is able to develop.

Thus, the baseline fleet for MY 2011, or the baseline market forecast, consists of the vehicles present in the normalized and completed product plans, before NHTSA applies technologies to them.

Manufacturers typically provide product plans not only for the years covered by a CAFE rulemaking, but also for prior years--so, for purposes of this rulemaking, NHTSA has product plans from many manufacturers beginning with MY 2008. As discussed above, NHTSA uses the baseline market forecast as a way of gauging what manufacturer fuel economy levels would exist in the absence of new CAFE standards. In order to provide a point of reference for estimating the costs and benefits of new standards, NHTSA assumes that, without new standards, the fuel economy standards would remain at the level of the MY 2010 standards.\108\ However, the baseline market forecast, which again, is based on the product plans, does not show all manufacturers in compliance with the MY 2010 standards. This results from manufacturers' ability to use compliance flexibilities, like credits (AMFA and otherwise) and fines, to meet the standards, which NHTSA is statutorily prohibited from considering in setting the standards.

\108\ As a point of reference for analysis, we note that assuming that CAFE standards remain at 2010 levels is different from assuming that manufacturer fuel economy levels remains at their 2010 levels. As a legal matter under EISA, after MY 2011, if NHTSA does not set standards for a model year, there are no standards for that model year. However, as a practical matter, it is reasonable to assume that manufacturers would proceed as if the previous year's standard carried over, rather than changing their vehicles and allowing fuel economy to fall without limit.

In order to ensure that our analysis does not incorporate such flexibilities and thus result in double-counting of costs that were evaluated in the previous rulemaking, NHTSA must adjust the baseline market forecast upwards. For manufacturers whose

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product plans show fuel economy levels below the MY 2010 standards,

NHTSA adjusts them upwards by adding technology to the manufacturer's fleet in order to get the manufacturer into compliance without use of credits or payment of fines. For manufacturers whose product plans meet or exceed the MY 2010 standards, NHTSA incorporates them as-is. NHTSA develops an adjusted baseline because the costs and benefits of reaching the MY 2010 standards were already accounted for in prior rulemakings, just as the costs and benefits of reaching the MY 2011 standards are accounted for in the current rulemaking. To avoid double- counting the costs to manufacturers or the benefits to society required to meet the MY 2010 standards, NHTSA develops this adjusted baseline, which the agency then uses in analyzing the MY 2011 standards.

The Alliance commented that NHTSA should use an ``actual'' baseline instead of a ``projected'' baseline. The Alliance stated that ``NHTSA assumes that manufacturers were going to increase fuel economy significantly in numerous ways apart from a congressional or agency mandate to do so,'' and argued that ``by failing to consider the price increases needed to reach its `projected baseline,' NHTSA underestimates the increase in vehicle prices by about $260 per vehicle for cars and $920 per vehicle for trucks on average.''

As explained, NHTSA would be double-counting to incorporate the costs of meeting the MY 2010 standards in the cost/benefit analysis for the current rulemaking. NHTSA discusses these costs, however, in the

FRIA in Chapter I. 3. How does NHTSA's market forecast reflect current market conditions?

NHTSA's market forecast for MY 2011, which is based significantly on confidential product plans provided to the agency by vehicle manufacturers, reflects the agency's best judgment at the time it was developed. Manufacturers submitted plans during the summer of 2008. In preceding months, the industry had begun to show signs of stress, and the agency believes manufacturers' revised plans submitted after the

NPRM were informed by this. NHTSA is well aware that market conditions have deteriorated since late summer, just as the agency is aware that gasoline prices have fallen considerably in recent months.

The agency notes, as mentioned above, that manufacturers' product plans were submitted along with manufacturers' indications that these plans were generally informed by expectations that relatively high fuel prices would prevail in the future. Although NHTSA did not request that manufacturers provide comprehensive and detailed forecasts of the world economy, including markets for credit and petroleum, the agency believes that manufacturers anticipated that, at least from MY 2011 forward, the economic environment would look much less dire than more recent events would suggest. The agency believes these expectations were consistent with those embodied in the high price scenario in EIA's

AEO 2008, upon which the agency has based the fuel prices and total light vehicle market size used in the analysis supporting today's final rule.

NHTSA is cautiously hopeful that market conditions will rebound, and our market forecast remains consistent with that expectation. The recent restructuring plans submitted by Chrysler and GM, while diverging in absolute terms with respect to sales volumes, also anticipate significant sales growth by the middle part of the decade.

In any event, were NHTSA to adopt more pessimistic expectations, those expectations would need to be reflected in other economic forecasts--in particular of petroleum prices. Were NHTSA to apply economic estimates that assume credit markets remain very constricted during MY 2011, it should, for internal consistency, apply considerably reduced estimates of the overall number of light vehicles sold in the U.S., and potentially lower estimates of gasoline and diesel fuel prices during the lifetimes of the vehicles covered by the standards.

NHTSA has concluded that the forecasts it has applied in its current rulemaking for MY 2011 reflect the best internally consistent information available. The agency will, of course, update these forecasts in future rulemakings, and will base its analysis in those rulemakings on information--public, commercially-available, or confidential--that it considers most indicative of the fleets that manufacturers are likely to produce in future model years

IV. Fuel Economy-Improving Technologies

As explained above, pursuant to the President's January 26, 2009 memorandum, this final rule establishes passenger car and light truck

CAFE standards for one year, MY 2011. Although this final rule establishes standards for that year alone, the agency undertook a comprehensive analysis of fuel economy-improving technologies with a time horizon similar to the one considered in the 2002 National Academy of Sciences (NAS) CAFE report. Like NAS, the agency considered technologies that are readily available, well known and could be incorporated into vehicles once production decisions are made (these are referred to as ``production intent'' technologies). Other technologies considered, called ``emerging'', are beyond the research phase and under development, but are not widely used at this time. The agency did not consider technologies in the research stage because their costs and/or performance are not presently well known.

The agency has elected to include the full analysis in this final rule for several reasons. First, it supplements the analysis of fuel saving technology released by the 2002 NAS study. Second, it places in meaningful context the portion of the analysis that relates directly to

MY 2011, showing which technologies are not available for that year and why. The agency typically evaluates technologies within a time context spanning more than a single model year, even if the rulemaking itself addresses only a single year as in the current rulemaking, because when manufacturers add technologies to vehicle models in order to meet CAFE standards, they tend to phase them in over several model years, consistent with vehicle redesign and refresh schedules, supplier contract procedures, the need for testing and validation of new technologies, and so forth. Consequently, although the final rule establishes standards for MY 2011 only, NHTSA believes that including the entire technology analysis will increase public understanding of the agency's estimates for MY 2011 of technology costs, effectiveness, and availability, as well as manufacturer vehicle freshening and redesign cycles.

With that in mind, the following section details the cost and effectiveness estimates completed for technologies in the production intent or emerging technology phase timeline. The estimates are drawn from an analysis conducted in the summer of 2008. It relied as much as possible on published studies and confidential product plan data submitted by manufacturers on July 1, 2008 in response to the agency's

NPRM request for comments published May 2, 2008. The analysis was conducted by engineers from DOT and Ricardo, an international consulting firm that specializes in automotive engineering consulting

(discussed below). The engineering team used all data available at that time, along with their expert opinion to derive cost and effectiveness estimates for technologies

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either in production or in the emerging stage of production for purposes of this rulemaking.

The agency believes that the resulting estimates are the best available for MY 2011, given the information that existed at the time.

NHTSA recognizes, however, that the analysis of and public debate over the cost and effectiveness of the various fuel saving technologies is an ongoing one. It recognizes too that aspects of its technology analysis will likely require updating or otherwise merit revision for the next CAFE rulemaking. As time progresses, new research occurs, new studies become available and product plan information changes. As with all CAFE rulemakings and pursuant to the President's memorandum, the agency will take a fresh look at all of its technology-related assumptions for the purpose of future rulemakings.

A. NHTSA Analyzes What Technologies Can Be Applied Beyond Those in the

Manufacturers' Product Plans

One of the key statutory factors that NHTSA must consider in setting maximum feasible CAFE standards for each model year is the availability and feasibility of fuel saving technologies. When manufacturers submit their product plans to NHTSA, they identify the technologies they are planning for each vehicle model in each model year. They also provide their assessments of the costs and effectiveness of those fuel saving technologies. The agency uses the manufacturers' product plan data to ascertain the ``baseline'' capabilities and average fuel economy of each manufacturer. Given the agency's need to consider economic practicability in determining how quickly additional fuel saving technologies can be added to the manufacturers' vehicle planned fleets, the agency researches and develops, based on the best available information and data, its own list of technologies that it believes will be ready for implementation during the model years covered by the rulemaking. This includes developing estimates of the costs and effectiveness of each technology and lead time needs. The resultant technology assumptions form an input into the Volpe model. The model simulates how manufacturers can comply with a given CAFE level by adding technologies beyond those they planned in a systematic, efficient and reproducible manner. The following sections describe NHTSA's fuel-saving technology assumptions and methodology for estimating them, and their applicability to MY 2011 vehicles.

B. How NHTSA Decides Which Technologies to Include 1. How NHTSA Did This Historically, and How for the NPRM

In the agency's last two CAFE rulemakings, which established light truck CAFE standards for MYs 2005-2007 and MYs 2008-2011, NHTSA relied on the 2002 National Academy of Sciences' report, ``Effectiveness and

Impact of Corporate Average Fuel Economy Standards'' \109\ (``the 2002

NAS Report'') for estimating potential fuel economy effectiveness values and associated retail costs of applying combinations of technologies in 10 classes of production vehicles. The NAS study was commissioned by the agency, at the direction of Congress, in order to provide independent and peer reviewed estimates of cost and effectiveness numbers. The NAS list was determined by a panel of experts formed by the National Academy of Sciences, and was then peer- reviewed by individuals chosen for their diverse perspectives and technical expertise in accordance with procedures approved by the

Report Review Committee of the National Research.

\109\ 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 October 11, 2008).

In the NPRM for the MY 2011-2015 CAFE standards, NHTSA explained that there has been substantial advancement in fuel-saving automotive technologies since the publication of the 2002 NAS Report. New technologies, i.e., ones that were not assessed in the NAS report, have appeared in the market place or are expected to appear in the timeframe of the proposed rulemaking. Also, new studies have been conducted and reports issued by several other organizations providing new or different information regarding the fuel economy technologies that will be available and their costs and effectiveness values. To aid the agency in assessing these developments, NHTSA contracted with the NAS to update the fuel economy section, Chapter 3, of the 2002 NAS Report.

However, as NHTSA explained, the NAS update was not available in time for this rulemaking.

Accordingly, NHTSA worked with EPA staff to update the technology assumptions, and used the results as a basis for its NPRM. EPA staff published a related report and submitted it to the NAS committee.\110\

\110\ EPA Staff Technical Report: Cost and Effectiveness

Estimates of Technologies Used to Reduce Light-Duty Vehicle Carbon

Dioxide Emissions, EPA 420-R-08-008, March 2008.

2. NHTSA's Contract with Ricardo for the Final Rule

NHTSA specifically sought comment on the estimates, which it had developed jointly with EPA, of the availability, applicability, cost, and effectiveness of fuel-saving technologies, and the order in which the technologies were applied. See 73 FR 24352, 24367. To aid the agency in analyzing those comments and increasing the accuracy, clarity and transparency of its technology assumptions and methodologies employed in developing them, it hired an international consulting firm,

Ricardo, which specializes in automotive engineering consulting.

Ricardo, which describes itself as an eco-innovation technology company, is a leading independent provider of technology, product innovation, engineering solutions, software and strategic consulting.

Its skill base includes the state-of-the-art in low emissions and fuel- efficient powertrain and vehicle technology. Its customers include government agencies here and abroad and the world's automotive, transport and new-energy industries.\111\ For example, it has provided technical consulting on low CO2strategies to the UK

Department for Transport (DfT).\112\ Additionally, in December 2007,

Ricardo completed an important study for EPA titled ``A Study of

Potential Effectiveness of Carbon Dioxide Reducing Vehicle

Technologies.'' \113\

\111\ More information about Ricardo's work is available at their Web site, http://www.ricardo.com (last accessed September 20, 2008). Its 2007 Annual Report provides a comprehensive view of some of its current work. See http://www.ricardo.com/investors/download/ annualreport2007.pdf (last accessed September 22, 2008).

\112\ Ricardo UK Ltd., ``Understanding manufacturers' responses to policy measures to incentivise fuel efficiency,'' Oct. 5, 2007.

Available at http://www.dft.gov.uk/consultations/closed/ co2emissions/ricardoreport.pdf (last accessed Oct. 4, 2008).

\113\ A slightly updated (June 2008) version of Ricardo's study for EPA is available on EPA's Web site, at http://www.epa.gov/otaq/ technology/420r08004a.pdf (last accessed September 20, 2008).

Ricardo's role was as a technical advisor to NHTSA staff. In this capacity, Ricardo helped NHTSA undertake a comprehensive review of the

NPRM technology assumptions and all comments received on those assumptions, based on both old and new public and confidential manufacturer information. NHTSA and Ricardo staff reviewed and compared comments on the availability and applicability of technologies, and the logical progression between them. NHTSA also reviewed and compared the methodologies used for determining

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the costs and effectiveness of the technologies as well as the specific estimates provided. Relying on the technical expertise of Ricardo and taking into consideration all the information available, NHTSA revised its estimates of the availability and applicability of many technologies, and revised its estimate of the order in which the technologies were applied and how they are differentiated by vehicle class, as well as the costs and effectiveness estimates and used the revised numbers in analyzing alternative levels of stringency.

While NHTSA sought Ricardo's expertise and relied significantly on their assistance as a neutral expert in developing its technical assumptions, it retained responsibility for the final estimates. The agency believes that the representation of technologies for MY 2011-- that is, estimates of the availability, applicability, cost, and effectiveness of fuel-saving technologies, and the order in which the technologies were applied--used in this rulemaking is more accurate than that used in the NPRM, and is the best available for purposes of this rulemaking.

C. What Technology Assumptions has NHTSA Used for the Final Rule? 1. How do NHTSA's technology assumptions in the final rule differ from those used in the NPRM?

This final rule uses the same basic framework as the NPRM. However,

NHTSA made several changes to its technology assumptions based on comments and information received during the rulemaking. As in the NPRM and the MY 2008-2011 light truck rule, the agency relied on the Volpe model CAFE Compliance and Effects Modeling System which was developed by the Department of Transportation's Volpe National Transportation

Systems Center (Volpe Center) to apply technologies. The model, known as the Volpe model, is the primary tool the agency has used in conducting a ``compliance analysis'' of various CAFE stringencies. The

Volpe model relied on the same types of technology related inputs as in previous rules, including market data files, technology cost and effectiveness estimates by vehicle classification, technology synergies, phase-in rates, learning curve adjustments, and technology decision trees.

Regarding the decision trees, both the structure of the trees and ordering of the technologies were revised. The decision trees have been expanded so that NHTSA is better able to track the incremental and net/ cumulative cost and effectiveness of each technology, which substantially improves the ``accounting'' of costs and effectiveness for the final rule.\114\ The revised decision trees also have improved integration, accuracy, and technology representations.

\114\ In addition to the (simplified) decision trees, as published in this document, NHTSA also utilized ``expanded'' decision trees in the final rule analysis. Expanded decision trees graphically represent each unique path, considering the branch points available to the Volpe model, which can be utilized for applying fuel saving technologies. For instance, the engine decision tree shown in this document has 20 boxes representing engine technologies, whereas the expanded engine decision tree requires a total of 45 boxes to accurately represent all available application variants. Expanded decision trees presented a significant improvement, compared to the NPRM analysis, in the overall assessment and tracking of applied technologies since they allowed

NHTSA staff to accurately view and assess both the incremental and the accumulated, or net cost and effectiveness at any stage of technology application in a decision tree. Because of the large format of the expanded decision trees, they could not be included in the Federal Register, so NHTSA refers the reader to Docket No.

NHTSA-2008-0177. Expanded decision trees for the engine, electrification/transmission/hybridization, and the vehicle technologies (three separate decision trees) were developed for each of the 12 vehicle technology application classes (the vehicle subclasses discussed in Section IV.D.4) and the three expanded decision trees for the Large Car subclass have been placed in the docket as an example for the reader's information.

In revising the decision trees, NHTSA updated, combined, split and/ or renamed technologies. Several technologies were added, while others were deleted. The three technologies that were deleted because they do not appear in either public or confidential data and are primarily in the research phase of development are: Camless Valve Actuation, Lean-

Burn Gasoline Direct-Injection and Homogenous Charge Compression

Ignition.\115\ NHTSA also added three advanced technologies based on confidential manufacturer submissions which showed these technologies as being emerging and currently under development. These technologies are: Combustion Restart, Exhaust Gas Recirculation Boost, and Plug-in

Hybrids.

\115\ We note that GM included lean burn HCCI in its restructuring plans submitted to Congress, but the restructuring plans were submitted too late for the agency to consider them in its technology analysis, among other reasons. GM Restructuring Plan, p. 22.

The Volpe model was modified to allow a non-linear phase-in rate across the five model years, rather than a constant phase-in rate as was used in the NPRM and in previous rules. Most technology applications have tighter phase-in caps in the early years to provide for additional lead time.

In the NPRM, NHTSA applied volume-based learning factors to technology costs for the first time. These learning factors were developed using the parameters of learning threshold, learning rate

(decremented over two cycles), and the initial (unlearned) cost. In the

NPRM, NHTSA applied a learning rate discount of 20 percent each time a technology was projected for use on 25,000 vehicles per manufacturer, which was the threshold volume for learning rate discounts. The discounts were only taken twice, at 25,000 and 50,000 vehicles. A technology was viewed as being fully learned out at 100,000 units.

The agency also reconsidered volume-based learning factors and made significant revisions. First, the volume learning is now applied on an industry basis as opposed to a manufacturer basis. This takes into account the fact that the automobile industry shares best practices and that manufacturers learn from that sharing to produce their vehicles at lower costs. For the final rule, the revised learning threshold is set to 300,000 vehicles per year by the automobile industry. This number was developed based on comments indicating that many of the publicly available technology cost estimates are based on production quantities of 900,000 to 1.5 million vehicles by at least 3 manufacturers. The agency notes, however, that none of the technologies applied in MY 2011 receive volume-based learning, due to the time frame applicable.

For the technologies applied in the final rule, a time-based learning factor was used in response to public comments from Ford and others. This learning factor was not applied in the NPRM. Time-based learning is applied to widely available, high volume, stable and mature technologies typically purchased under negotiated multi-year contractual agreement with suppliers. This type of an agreement is typical of most supplier-provided fuel saving technologies. With time- based learning, the initial cost of a technology is reduced by a fixed amount in its second and subsequent year of availability. A fixed rate 3 percent year-over-year cost reduction is applied up to a maximum of 12 percent cost reduction.

In the NPRM NHTSA divided vehicles into ten subclasses based on technology applicability: four for cars and six for trucks. NHTSA assigned passenger cars into one of the following subclasses:

Subcompact, Compact, Midsize, or Large Car. NHTSA assigned light trucks into one of the following subclasses: Minivan, Small SUV, Medium SUV,

Large SUV, Small Pickup

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Truck, or Large Pickup Truck. In its 2008 NPRM for MY 2011-2015, NHTSA included some differentiation in cost and effectiveness numbers between the various classes to account for differences in technology costs and effectiveness that are observed when technologies are applied on to different classes and subclasses of vehicles.

For the final rule, NHTSA, working with Ricardo, increased the accuracy of its technology assumptions by reexamining the subclasses developed for the purpose of modeling technology application. For passenger cars, NHTSA divided vehicles into eight subclasses based on technology applicability by creating a performance class under each of the four subclasses. For trucks, NHTSA established four subclasses, including a minivan subclass, and small, midsize and large SUV/Pickup/

Van subclasses. NHTSA also provided more differentiation in the costs and effectiveness values by vehicle subclass. The agency found it important to make that differentiation because the agency estimated that some technologies would have different implications for large vehicles than for smaller vehicles.

In summary, the revisions to NHTSA's methodology for technology application and cost and effectiveness estimates are designed to respond to comments, many of which focused on various inaccuracies and lack of clarity in the NPRM. NHTSA believes that the methodology for the final rule, as compared to the NPRM methodology, is much clearer, more accurate, and more representative of likely manufacturer behavior, although, of course, manufacturers are free to respond to the CAFE standards with whatever application of technology they choose. The revised technology related assumptions help substantially ensure the technological feasibility and economic practicability of the MY 2011

CAFE standards promulgated in this final rule. 2. How are the technologies applied in the model?

For the final rule, as in the NPRM, NHTSA made significant use of the CAFE Volpe model as discussed above. The NPRM contained a detailed discussion of the Volpe model and specifically stated its two primary objectives as (1) identifying technologies that manufacturers could apply in order to comply with a specified CAFE standard, and (2) calculating the cost and effects of manufacturers' technology applications. The NPRM also discussed other modeling systems and approaches that NHTSA considered to accomplish these same objectives, and also discusses why ultimately the agency chose to use the Volpe model (see 79 FR 24352, 24391). However, having done so for this final rule does not limit the agency's ability to use another approach for future CAFE rulemakings, and NHTSA will continue to consider other methods for estimating the costs and effects of adding technologies to manufacturers' future fleets.

The Volpe model relies on several inputs and data files to conduct the compliance analysis, and each of these are discussed in detail in the NPRM. Many of these inputs contain economic and environmental data required for the full CAFE analysis. However, for the purposes of applying technologies, the subject of this section, the Volpe model primarily uses three data files, one that contains data on the vehicles being manufactured, one that identifies the appropriate stage within the vehicle's life-cycle for the technology to be applied, and one that contains data/parameters regarding the available technologies the model can apply. These inputs are discussed below.

The Volpe model begins with an ``initial state'' of the domestic vehicle market, which in this case is the market for passenger cars and light trucks to be sold during the period covered by the final rule.

The vehicle market is defined on a model, engine, and transmission basis, such that each defined vehicle model refers to a separately- defined engine and a separately-defined transmission. For the final rule, this represented roughly 5,500 cars and trucks, 700 engines, and 600 transmissions. The information, which is stored in a file called the ``vehicle market forecast,'' is informed significantly by product plans provided to NHTSA by vehicle manufacturers.\116\ However, the

Volpe model does not require that the market forecast be based on confidential product plans, and the model is often tested using input files developed using only publicly- and commercially-available information. Also, as discussed in Section III above, EPCA does not require NHTSA to use manufacturers' confidential product plans as a basis for setting future CAFE standards, and the agency will continue to base its market forecasts on whatever it determines is the best available information, whether from public, commercially-available, or confidential sources.

\116\ The market forecast is developed by NHTSA using the product plan information provided to the agency by individual vehicle manufacturers in response to NHTSA's requests. The submitted product plans contain confidential business information (CBI), which the agency is prohibited by federal law from disclosing.

In addition to containing data about each vehicle, engine, and transmission, this file contains information for each technology under consideration as it pertains to the specific vehicle (whether the vehicle is equipped with it or not), the model year the vehicle is undergoing redesign, and information about the vehicle's subclass for purposes of technology application.

The market forecast file provides NHTSA the ability to identify, on a technology by technology basis, which technologies may already be present (manufactured) on a particular vehicle, engine, or transmission, or which technologies are not applicable (due to technical considerations) to a particular vehicle, engine, or transmission. These identifications are made on a model-by-model, engine-by-engine, and transmission-by-transmission basis. For example, if Manufacturer X advises NHTSA that Vehicle Y will be manufactured with Technology Z, then for this vehicle Technology Z will be shown as used. Or alternatively, NHTSA might conclude based on its own assessment that for a given four cylinder engine, Manufacturer A cannot utilize a particular Technology C due to an engineering issue that prohibits it. In this case, NHTSA would, in the market forecast file, indicate that Technology C should not be applied to this particular engine (i.e., is unavailable). Since multiple vehicle models may be equipped with this engine, this may affect multiple models. In using this aspect of the market forecast file, NHTSA ensures the Volpe model only applies technologies in an appropriate manner, since before any application of a technology can occur, the model checks the market forecast to see if it is either already present or unavailable.

Manufacturers typically plan vehicle changes to coincide with certain stages of a vehicle's life cycle that are appropriate for the change, or in this case the technology being applied. For instance, some technologies (e.g., those that require significant revision) are nearly always applied only when the vehicle is expected to be redesigned. Other technologies can be applied only when the vehicle is expected to be refreshed or redesigned and some others can be applied at any time, regardless of whether a refresh or redesign event is conducted. Accordingly, the model will only apply a technology at the particular point deemed suitable. These constraints are intended to produce results consistent with manufacturers' product planning practices. For each technology under consideration,

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NHTSA stipulates whether it can be applied any time, at refresh/ redesign, or only at redesign. The data forms another input to the

Volpe model, as discussed in detail below, called the Technology

Refresh and Redesign Application table (Table IV-6). Each manufacturer identifies its planned redesign model year for each of its vehicles, and this data is also stored in the market forecast file. Vehicle redesign/refresh assumptions are discussed in Section IV.C.9 below.

As discussed in Section IV.C.4 on vehicle subclasses below, NHTSA assigns one of 12 subclasses to each vehicle manufactured in the rulemaking period. The vehicle subclass data is used for the purposes of technology application. Each vehicle's class is stored in the market forecast file. When conducting a compliance analysis, if the Volpe model seeks to apply technology to a particular vehicle, it checks the market forecast to see if the technology is available and if the refresh/redesign criteria are met. If these conditions are satisfied, the model determines the vehicle's subclass, which it then uses to reference another input called the technology input file.

In the technology input file, NHTSA has developed a separate set of technology data variables for each of the twelve vehicle subclasses.

Each set of variables is referred to as an ``input sheet,'' so for example, the subcompact input sheet holds the technology data that is appropriate for the subcompact subclass. Each input sheet contains a list of technologies available for members of the particular vehicle subclass. The following items are provided for each technology: a brief description, its abbreviation, the decision tree with which it is associated, the (first) year in which it is available, the upper and lower cost and effectiveness (fuel consumption reduction) estimates, the learning type and rate, the cost basis, its applicability, and the phase-in values.

The input sheets are another method NHTSA uses to determine how to properly apply, or in some cases constrain, a technology's application, as well as to establish the costs and fuel consumption changes that occur as it is applied. Examples of how technologies are applied (or constrained) include the ``Applicability'' variable: if it is set to

``TRUE,'' then the technology can be applied to all members of the vehicle subclass (a value of ``FALSE'' would prevent the Volpe model from applying the technology to any member). Another example would be the ``Year Available'' variable, which if set to ``2012'' means the model can apply it to MY 2012 and later members, but cannot apply the technology to MY 2011 models. The ``Learning Type'' and ``Learning

Rate'' define reductions in technology costs, if any are appropriate, that the Volpe model may apply under certain conditions, as discussed in the Learning Curve section below. ``Phase-in Values'' are intended to address the various constraints that limit a manufacturer's ability to apply technologies within a short period of time. For phase-ins, once the model applies a given technology to a percentage of a given manufacturers' fleet up to a specified phase-in cap, the model then ceases to apply it further instead applying other technologies. Phase- in caps are also discussed below in Section IV.C.10.

Perhaps the most important data contained in the input sheets are the cost and effectiveness information associated with each technology.

One important concept to understand about the cost and effectiveness values is that they are ``incremental'' in nature, meaning that the estimates are ``referenced'' to some prior technology state in the decision tree in which the applied technology is represented, typically the preceding technology. Therefore, when considering values shown in the input sheet, the reader must understand that in all but a few cases they cannot fully deduce the accumulated or ``NET'' cost and effectiveness, referenced back to the base condition (i.e., start of the decision tree), without performing a more detailed analysis. The method for conducting this analysis, and a brief example of how it is done, is discussed in the Decision Tree section below. For the final rule, to help readers better understand Volpe model net or accumulated costs and fuel consumption reductions, NHTSA has published net values to key technology locations on the decision trees (e.g., to diesel engine conversion, or a strong hybrid). See the Tables showing

Approximate Net Technology Costs and Approximate Net Technology

Effectiveness, located in Section IV.E below. The tables have been produced for each of the four vehicle subclasses in the passenger car, performance passenger car, and light truck vehicle groups.

The incremental costs of some technologies are dependent on certain factors specific to the vehicle to which they are applied. For instance, when the Material Substitution technology is applied, the cost of application is based on a cost per unit weight reduction, in dollars per pound, since the weight removed is a percentage of the curb weight of the vehicle (which differs from one vehicle to the next).

Similarly, some engine technologies need to be calculated on a cost per cylinder basis, or a cost per configuration basis (i.e., a cost per bank basis, so that a V-configured engine would cost twice as much as an in-line, single bank engine). For each technology, the input sheet also contains a Cost Basis variable which indicates whether the costs need to be adjusted in this manner. This functionality, some of which is new for the final rule, allows NHTSA to estimate more accurately the costs of technology application, since in the NPRM the vehicles in a subclass were assumed to have common cylinder counts and configurations

(thus the costs were underestimated for some vehicles and overestimated for others).

Lastly for the technology input file, the term ``synergy'' as it applies to the Volpe modeling process refers to the condition that occurs when two or more technologies are applied to a vehicle and their effects interact with each other, resulting in a different net effect than the combination of the individual technologies. The term synergy usually connotes a positive interaction (e.g., 1 + 1 is more than 2), but as used here it also includes negative interactions (e.g., 1 + 1 is less than 2). Synergies are discussed in greater detail below in

Section IV.C.7, and the values for the synergy factors NHTSA used in the final rule are stored in the technology input file.

In some cases more than one decision tree path can lead to a subsequently applied technology. For example, the power split hybrid technology can be reached from one of two prior transmission technologies (CVT or DCTAM). Accordingly the incremental cost and effectiveness for applying the technology may vary depending on the path and the modifications made in the prior technology. To ensure accurate tracking of net costs and effectiveness, the Volpe model utilizes path correction factors, as discussed further in the decision tree discussion below. This functionality is an improvement to the final rule, and the specific factors used are stored in the technology input sheets. A copy of the final rule input sheets, titled ``2011- 2015--LV--CAFE--FinalRuleInputSheets20081019.pdf,'' can be obtained from the final rule docket.

One additional concept to understand about how the Volpe model functions is called an ``engineering constraint,'' a programmatic method of controlling technology application that is independent of those discussed above. NHTSA has determined that some technologies are only suitable or

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unsuitable when certain vehicle, engine, or transmission conditions exist. For example, secondary axle disconnect is only suitable for 4WD vehicles, and cylinder deactivation is unsuitable for any engine with fewer than 6 cylinders, while material substitution is only available for vehicles with curb weights greater than 5,000 pounds. Additionally, in response to comments received, an engineering constraint was added for purposes of the final rule to prevent the cylinder deactivation technology from being applied to vehicles equipped with manual transmissions, due primarily to driveability and NVH concerns documented by the commenter. Where appropriate and required, NHTSA has utilized engineering constraints to ensure accurate application of the fuel saving technologies. 3. Technology Application Decision Trees

Several changes were made to the Volpe model between the analysis reported in the NPRM and the final rule. This section will discuss two of those changes: First, the updates to the set of technologies; and second, the updates to the logical sequence for progressing through these technologies, which NHTSA describes as ``decision trees.''

As discussed above, the set of technologies considered by the agency has evolved since the NPRM. The set of technologies now included in the Volpe model is shown below in Table IV-1, with abbreviations used by the model to refer to each technology in the interest of brevity. Section IV.D below explains each technology in much greater detail, including definitions and cost and effectiveness values.

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As in the NPRM, each technology is assigned to one of the five following categories based on the system it affects or impacts: engine, transmission, electrification/accessory, hybrid or vehicle. Each of these categories has its own decision tree that the Volpe model uses to apply technologies sequentially during the compliance analysis. The decision trees were designed and configured to allow the Volpe model to apply technologies in a cost-effective, logical order that also considers ease of implementation. For example, effective software or control logic changes are implemented before replacing a component or system with a completely redesigned one, which is typically a much more expensive option.

Each technology within the decision trees has an incremental cost and an incremental effectiveness estimate associated with it, and the estimates are specific to a particular vehicle subclass (see the tables provided below in Section IV.D). Each technology's

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incremental estimate takes into account its position in the decision tree path. If a technology is located further down the decision tree, the estimates for the costs and effectiveness values attributed to that technology are influenced by the incremental estimates of costs and effectiveness values for prior technology applications. In essence, this approach accounts for ``in-path'' effectiveness synergies and cost effects that occur between the technologies in the same path. When comparing cost and effectiveness estimates from various sources and those provided by commenters, it is vital that the estimates are evaluated in the proper context, especially as concerns their likely position in the decision trees and other technologies that may be present or missing. Not all estimates provided by commenters can be considered an ``apples-to-apples'' comparison with those used by the

Volpe model, since in some cases the order of application, or included technology content, is inconsistent with that assumed in the decision tree.

For the final rule, significant revisions have been made to the sequence of technology applications within the decision trees, and in some cases the paths themselves have been modified and additional paths have been added. The additional paths allow for a more accurate application of technology, insofar as the model now considers the existing configuration of the vehicle when applying technology. In this analysis, single overhead camshaft (SOHC), dual overhead camshaft

(DOHC) and overhead valve (OHV) configured engines now have separate paths that allow for unique path-dependent versions of certain engine technologies. Thus, the cylinder deactivation technology (DEAC) now consists of three unique versions that depend on whether the engine being evaluated is an SOHC, DOHC or OHV design; these technologies are designated by the abbreviations DEACS, DEACD and DEACO, respectively, to designate which engine path they are located on. Similarly the last letter for the Coupled Cam Phasing (CCP) and Discrete Variable Valve

Lift (DVVL) abbreviations are used to identify which path the technology is applicable to.

Use of separate valvetrain paths and unique path-dependent technology variations also ensures that the incremental cost and effectiveness estimates properly account for technology effects so as not to ``double-count.'' For example, in the SOHC path, the incremental effectiveness estimate for DVVLS assumes that some pumping loss reductions have already been accomplished by the preceding technology,

CCPS, which reduces or diminishes the effectiveness estimate for DVVLS because part of the efficiency gain associated with the reduction of the pumping loss mechanism has already occurred. Commenters pointed out several instances in the NPRM where double-counting appeared to have occurred, and the accounting approach used in the final rule resolves these concerns.

In reviewing NPRM comments, NHTSA noted several questions regarding the retention of previously applied technologies when more advanced technologies (i.e., those further down the decision tree) were applied.

In response, NHTSA has clarified the final rule discussions on this issue. In both the NPRM and final rule, as appropriate and feasible, previously-applied technologies are retained in combination with the new technology being applied, but this is not always the case. For instance, one exception to this would be the application of diesel technology, where the entire engine is assumed to be replaced, so gasoline engine technologies cannot carry over. This exception for diesels, along with a few other technologies, is documented below in the detailed discussion of changes to each decision tree and corresponding technologies.

As the Volpe model steps through the decision trees and applies technologies, it accumulates total or ``NET'' cost and effectiveness values. Net costs are accumulated using an additive approach while net effectiveness estimates are accumulated multiplicatively. To help readers better understand the accumulation process, and in response to comments expressing confusion on this subject, the following examples demonstrate how the Volpe model calculates net values.

Accumulation of net cost is explained first as this is the simpler process. This example uses the Electrification/Accessory decision tree sequentially applying the EPS, IACC, MHEV, HVIA and ISG technologies to a subcompact vehicle using the cost and effectiveness estimates from its input sheet. As seen in Table IV-2 below, the input sheet cost estimates have a lower and upper value which may be the same or a different value (i.e., a single value or a range) as shown in columns two and three. The Volpe model first averages the values (column 4), and then sums the average values to calculate the net cost of applying each technology (column 5). Accordingly, the net cost to apply the MHEV technology for example would be ($112.50 + $192.00 + $372.00 =

$676.50). Net costs are calculated in a similar manner for all the decision trees.

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The same decision tree, technologies, and vehicle are used for the example demonstrating the model's net effectiveness calculation. Table

IV-3 below shows average incremental effectiveness estimates in column two; this value is calculated in the same manner as the cost estimates above (average of lower and upper value taken from the input sheet). To calculate the change in fuel consumption due to application of the EPS technology with incremental effectiveness of 1.5 percent (or 0.015 in decimal form, column 3), when applied multiplicatively, means that the vehicle's current fuel consumption `X' would be reduced by a factor of

(1-0.015) = 0.985,\117\ or mathematically 0.985*X. To represent the changed fuel consumption in the normal fashion (as a percentage change), this value is subtracted from 1 (or 100%) to show the net effectiveness in column 5.

\117\ A decrease in fuel consumption (FC) means the fuel economy

(FE) will be increased since fuel consumption and economy are related by the equation FC = 1/FE.

As the IACC technology is applied, the vehicle's fuel consumption is already reduced to 0.985 of its original value. Therefore the reduction for an additional incremental 1.5 percent results in a new fuel consumption value of 0.9702, or a net 2.98 percent effectiveness, as shown in the table. Net effectiveness is calculated in a similar manner for the all decision trees. It should be noted that all incremental effectiveness estimates were derived with this multiplicative approach in mind; calculating the net effectiveness using an additive approach will yield a different and incorrect net effectiveness.

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To improve the accuracy of accumulating net cost and effectiveness estimates for the final rule, ``path-dependent corrections'' were employed. The NPRM analysis had the potential to either overestimate or underestimate net cost and effectiveness depending on which decision tree path the Volpe model followed when applying the technologies. For example, if in the NPRM analysis a diesel technology was applied to a vehicle that followed the OHV path, the net cost and effectiveness could be different from the net estimates for a vehicle that followed the OHC path even though the intention was to have the same net cost and effectiveness. In order to correct this issue, the final rule analysis has added path-dependent correction tables to the input sheets. The model uses these tables to correct net cost and effectiveness estimate differences that occur when multiple paths lead into a single technology that is intended to have the same net cost and effectiveness no matter which path was followed.\118\ Path-dependent corrections were used when applying cylinder deactivation (on the DOHC path), turbocharging and downsizing, diesel and strong hybrids. This is essentially an accounting issue and the path-dependent corrections are meant to remedy the accuracy issues reported in the NPRM comment responses.

\118\ The correction tables are used for path deviations within the same decision tree. However, there is one exception to this rule, specifically that the tables are used to keep the model from double-counting cost and effectiveness estimates when both the CBRST and MHEV are applied to the same vehicle. Both technologies try to accomplish the same goal of reducing fuel consumption, by limiting idle time, but through different means. If either of these technologies exists on a vehicle and the Volpe model applies the other, the correction tables are used to remove the cost and effectiveness estimates for CBRST, thus ensuring that double- counting does not occur.

The following paragraphs explain, in greater detail, the revisions to the decision trees and technologies from the NPRM to the final rule.

Revisions were made in response to comments received and pursuant to

NHTSA's analysis, and were made to improve the accuracy of the Volpe compliance analysis, or to correct other concerns from the NPRM analysis.

Engine Technology Decision Tree

Figure IV-1 below shows the final rule decision tree for the engine technology category. For the final rule, NHTSA removed camless valve actuation (CVA), lean-burn GDI (LBDI), and homogenous charge compression ignition (HCCI) from the decision trees because these technologies were determined to be still in the research phase of development. NHTSA did not receive any new information or comments that suggested these technologies are under development, so NHTSA removed them from the decision trees. At the top of the engine decision tree

Low Friction Lubricants (LUB) and Engine Friction Reduction (EFR) technologies are retained as utilized in the NPRM.

As stated above, SOHC, DOHC and OHV engines have separate paths, whereas as the NPRM only made the distinction between OHC and OHV engines. The separation of SOHC and DOHC engines allowed the model to more accurately apply unique path-dependent valvetrain technologies including variations of Variable Valve Timing (VVT), Variable Valve

Lift (VVL) and cylinder deactivation that are tailored to either SOHC or DOHC engines. This separation also allowed for a more accurate method of accounting for net cost and effectiveness

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compared to the NPRM. For both the SOHC and DOHC paths, VVL technologies were moved upstream of cylinder deactivation in response to comments from the Alliance, additional confidential manufacturer comments and submitted product plan trends, and NHTSA's analysis.

Confidential comments stated that applying cylinder deactivation to an

OHC engine is more complex and expensive than applying it to an OHV engine. The Alliance additionally stated that cylinder deactivation is very application-dependent, and is more effective when applied to vehicles with high power-to-weight ratios. Taking in account the application-specific nature of cylinder deactivation and the fact the

VVL technologies are more suitable to a broader range of applications,

NHTSA moved VVL technologies ``upstream'' of cylinder deactivation on the SOHC and DOHC to more accurately represent how a manufacturer might apply these technologies.

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On the OHV path, the ordering of cylinder deactivation (DEACO) then

Coupled Cam Phasing (CCPO), which is opposite the order of the SOHC and

DOHC paths, was retained as defined in the NPRM. This ordering depicts most accurately how manufacturers would actually implement these technologies and was reflected in the submitted product plans for OHV engines, which are largely used on trucks with high power-to-weight ratios. After the application of CCPO on the OHV decision tree, the model chooses between Discrete Variable Valve Lift (DVVLO) and the conversion to a dual overhead camshaft engine (CDOHC). This conversion now includes Dual Cam Phasing (DCP) instead of Continuously Variable

Valve Lift (CVVL) because it is assumed that DCP, with its higher application rates, would more likely be

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applied than CVVL, with its lower application rates.

At this stage, and similar to the NPRM, the decision tree paths all converge into Stoichiometric Gasoline Direct Injection (SGDI). All previously applied technologies are retained with the assumption that

SGDI is applied in addition to the pre-existing engine technologies.

After SGDI, a newly defined technology, Combustion Restart (CBRST), has been added.

The ``branch point'' after CBRST has been limited to two paths instead of the three paths in NPRM. This is due to the removal of HCCI from the final rule decision trees. The final rule engine decision tree allowed the model to apply either Turbocharging and Downsizing (TRBDS) or the conversion to diesel (DSLC). TRBDS is considered to be a completely new engine that has been converted to DOHC, if not already converted, with only LUB, EFR, DCP, SGDI and CBRST applied.

The conversion to diesel is also considered to be a completely new engine that replaces the gasoline engine (although it carries over the

LUB and EFR technologies). If the model chooses to follow the TRBDS path, the next technology that can be applied is another newly-added technology, EGR Boost (EGRB). After EGRB, the model is allowed to then convert the engine to diesel (DSLT). It should be noted that the path- dependent variations of diesel, (DSLC) and (DSLT), result in the exact same technology. The net cost and effectiveness estimates are the same for both but DSLT's incremental cost and effectiveness estimates are slightly lower to account for the TRBDS and EGRB technologies that have already been applied.

Electrification/Accessory Technology Decision Tree

This path, shown in Figure IV-2, was named simply ``Accessory

Technology'' in the NPRM. Electric Power Steering (EPS) is now the first technology in this decision tree, since it is a primary enabler for both mild and strong hybrids. Improved Accessories (IACC) has been redefined to include only an intelligent cooling system and follows EPS

(in the NPRM, IACC was the first technology in the tree). The 42-volt

Electrical System (42V) technology has been removed because it is no longer viewed as the voltage of choice by manufactures and is being replaced by higher voltage systems. Micro-Hybrid (MHEV), which follows

IACC, has been added as a 12-volt stop/start system to replace

Integrated Starter/Generator with Idle-Off (ISGO), which was on the

``Transmission/Hybrid Technology'' decision tree in the NPRM. Higher

Voltage/Improved Alternator (HVIA), a higher efficiency alternator that can incorporate higher voltages (greater than 42V) follows MHEV.

Integrated Starter Generator Hybrid (ISG) replaced IMA/ISAD/BSG Hybrid

(which was also on the Transmission/Hybrid Technology decision tree in the NPRM) as a higher voltage hybrid system with limited regenerative capability. ISG takes into account all the previously applied

Electrification/Accessory technologies and is the final step necessary in order to convert the vehicle to a (full) strong hybrid. All

Electrification/Accessory technologies can be applied to both automatic and manual transmission vehicles.

Transmission Technology Decision Tree

This decision tree, shown in Figure IV-2, contains two paths: one for automatic transmissions and one for manual transmissions. On the automatic path, the Aggressive Shift Logic (ASL) and Early Torque

Converter Lockup (TORQ) technologies from the NPRM have been combined into an Improved Auto Trans Controls/Externals (IATC) technology, as both these technologies typically include only software or calibration- related transmission modifications. This technology was moved to the top of the decision tree since it was deemed to be easier and less expensive to implement than a major redesign of the existing transmission. The 5-Speed Automatic Transmission (5SP) technology from the NPRM has been deleted due to several factors. First, the updated decision tree logic seeks to optimize the current hardware as an initial step, instead of applying an expensive redesign technology.

Second, NHTSA determined an industry trend of 4-speed automatics going directly to 6-speed automatics, as reflected in the submitted product plans. And finally, confidential manufacturer comments indicated that in some cases 5-speed transmissions offered little or no fuel economy improvement over 4-speed transmissions (primarily due to higher internal mechanical and hydraulic losses, and increased rotating mass), making the technology less attractive from a cost and effectiveness perspective. In the final rule, both 4-speed and 5-speed automatic transmissions get the IATC technology applied first, before progressing through the rest of the transmission decision tree.

After IATC the decision tree splits into a ``Unibody only'' and

``Unibody or Ladder Frame'' paths, which is identical to the NRPM version of the decision tree. Both of these paths represent a conversion to new and fully optimized designs. The Unibody only path contains the Continuously Variable Transmission (CVT) technology, while the Unibody or Ladder Frame path has the 6-Speed Automatic Transmission

(6SP) technology being replaced by 6/7/8-Speed Automatic Transmission with Improved Internals (NAUTO). The NAUTO technology represents a new generation of automatics with lower internal losses from gears and hydraulic systems.

The NPRM technology ``Automated Manual Transmission (AMT)'' has been renamed Dual Clutch Transmission/Automated Manual Transmission

(DCTAM) to more accurately reflect the true intent of this technology to be a Dual Clutch Transmission (DCT). The NPRM's use of the abbreviation ``AMT'' was confusing to many commenters, including the

Alliance, BorgWarner, Chrysler, Ford and General Motors, and appeared to indicate that the NPRM analysis applied true automated manual transmissions, which exhibit a torque interrupt characteristic that many in the industry feel will not be customer acceptable. DCT does not have the torque interrupt concern. The technology DCTAM for the final rule assumes the use of a DCT type transmission only.

The manual transmission path only has one technology application, like the NPRM. However, the technology being applied has been defined as conversion to a 6-Speed Manual with Improved Internals (6MAN) instead of a conversion to a 6/7/8-Speed Manual Transmission as defined in the NRPM. Extremely limited use of manual transmissions with more than 6 speeds is indicated in the updated product plans, so NHTSA believes this is a more accurate option for replacing a 4 or 5-speed manual transmission.

Hybrid Technology Decision Tree

The strong hybrid options, 2-Mode (2MHEV) and Power Split (PSHEV), are no longer sequential as defined in the NPRM's Transmission/Hybrid decision tree. For the final rule, the model only applies strong hybrid technologies when both the Electrification/Accessory and Transmission

(automatic transmissions only) technologies have been fully added to the vehicle, as seen in Figure IV-2. The final rule analysis and logic ensures that the model does not double-count the cost and effectiveness estimates for previously applied technologies that are included (e.g.,

EPS) or replaced (e.g., transmission) by strong hybrid systems, which is responsive to General Motors' comment

Continued on page 14245

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

]

pp. 14245-14294

Average Fuel Economy Standards Passenger Cars and Light Trucks

Model Year 2011

Continued from page 14244

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stating that the NPRM analysis had the potential to double-count effectiveness estimates when applying strong hybrids. For the final rule analysis, when the Volpe model applies strong hybrids it now takes into account that some of the fuel consumption reductions have already been accounted for when technologies like EPS or IACC have been previously applied. Once all the Electrification/Accessory and

Transmission technologies have been applied, the model is allowed to choose between the application of 2MHEV, PSHEV and the newly added

Plug-in Hybrid Vehicle (PHEV). The NPRM decision tree required the

Volpe model to step through 2MHEV in order to apply PSHEV. This updated final rule decision tree is a more realistic representation of how manufacturers might apply strong hybrids, and allows the Volpe model to choose the strong hybrid that is most appropriate for each vehicle based on its vehicle subclass or the most cost-effective technology application. The PHEV technology was added to the decision tree in the final rule based upon information in the public domain and submitted product plans showing that limited quantities of these vehicles will be available from some manufacturers in this timeframe.

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Vehicle Technology Decision Tree

Material Substitution (MS1), (MS2), and (MS5) are now located on dedicated material substitution path in the Vehicle Technology Decision

Tree, shown in Figure IV-3. Low Rolling Resistance Tires (ROLL), Low

Drag Brakes (LDB) and Secondary Axle Disconnect (SAX) now reside as a separate path, due to the relocation of material substitution technologies. Secondary Axle Disconnect has been redefined for the final rule to apply to 4WD vehicles only to more accurately reflect feasible applications of this technology. Aerodynamic Drag Reduction

(AERO) remains a separate tree, and is now a 10 percent reduction for both car and truck classes (excluding performance cars, which are exempt).

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Applicability, Cost and Effectiveness

In assessing the feasibility of technologies under consideration, the agency evaluated whether each of these technologies could be implemented on all types and sizes of vehicles and whether some differentiation is necessary with respect to the potential to apply certain technologies to certain types and sizes of vehicles, and with respect to the cost incurred and fuel consumption achieved when doing so. The 2002 NAS Report differentiated technology application using ten vehicle classes (4 cars classes and 6 truck classes, including subcompact cars, compact cars, midsize cars, large cars, small SUVs, midsize SUVs, large SUVs, small pickups, large pickups, and minivans), but did not determine how cost and effectiveness values differ from

``class'' to ``class.'' NAS's purpose in separating vehicles into these

``classes'' was to create groups of ``like'' vehicles, i.e., vehicles similar in size, powertrain configuration, weight, and consumer use, and for which similar technologies are applicable. This vehicle differentiation is done solely for the purpose of applying technologies to vehicles and assessing their incremental costs and effectiveness, and should not be confused with, the regulatory classifications pursuant to 49 CFR part 523 discussed in Chapter XI.

The Volpe model, which NHTSA has used to perform analysis supporting today's notice, divides the vehicle fleet into subclasses based on model inputs, and applies subclass-specific estimates, also from model inputs, of the applicability, cost, and effectiveness of each fuel-saving technology. Therefore, the model's estimates of the cost to improve the fuel economy of each vehicle model depend upon the subclass to which the vehicle model is assigned.

In its MY 2005-2007 and MY 2008-2011 light truck CAFE standards as well as NPRM, NHTSA performed analysis using the same vehicle classes defined by NAS in its 2002 Report. In its 2008 NPRM for MY 2011-2015,

NHTSA included some differentiation in cost and effectiveness numbers between the various classes to account for differences in technology costs and effectiveness that are observed when technologies are applied on to different classes and subclasses of vehicles. The agency found it important to make that differentiation because the agency estimated that, for example, engine turbocharging and downsizing would have different implications for large vehicles than for smaller vehicles.

For the final rule, NHTSA, working with Ricardo, increased the accuracy of its technology assumptions by reexaming the subclasses developed for the purpose of modeling technology application and by providing more differentiation in the costs and effectiveness values by vehicle subclass.

In the request for comments accompanying the NPRM, NHTSA asked manufacturers to identify the style of each vehicles model they submit in their product plans from eight possible groupings (convertible, coupe, hatchback, pickup, sedan, sport utility, van, or wagon) or sixteen possible market segments (cargo van, compact car, large car, large pickup, large station wagon, midsize car, midsize station wagon, mini-compact, minivan, passenger van, small pickup, small station wagon, special purpose, sport utility truck, subcompact car, and two- seat car). NHTSA also requested that manufacturers identify many specific characteristics relevant to each vehicle model, such as the number of cylinders of the vehicle's engine and other engine, transmission and vehicle characteristics. This information was evaluated by NHTSA staff, entered in NHTSA's market data file, and used by NHTSA to assess how to divide the vehicles into subclasses for purposes of differentiating the applicability, effectiveness, and cost of available technologies.

In response to the NPRM, the Alliance commented that NHTSA's classification approach is not robust enough. With regard to subclasses of cars, the Alliance stated that NHTSA did not distinguish high- performance and sports cars which cannot accommodate certain technologies without changing the purpose and configuration of the vehicle. With regard to subclasses of trucks, the Alliance argued that

SUVs were not adequately distinguished by size. The Alliance further stated the classification used by Sierra Research in

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its report to distinguish groups of like vehicles for technology application purposes was more realistic and representative of differences in market segments than NHTSA's classification. The

Alliance suggested that NHTSA consider the classes identified by Sierra

Research in the final rule.

NHTSA is not adopting Sierra's approach to classification for the following reasons. First, Sierra's classification scheme is too dependent on vehicle characteristics for which NHTSA often did not receive complete information from manufacturers. For example, although

NHTSA requested that manufacturers provide estimates of the aerodynamic drag coefficient of each vehicle model planned for MY2011-2015, the agency received no estimates for many vehicles. NHTSA believes manufacturers are too far from production on many vehicles to confidently provide such estimates. Second, Sierra's classification scheme is, for NHTSA's purposes, excessively fine-grained. Sierra's analysis relied on 25 subclasses in total, 13 for cars and 12 for trucks. While their report provided tables comparing their classes to those of NHTSA's and cited product examples for each class, it did not provide a reason for why this detailed differentiation would significantly improve the outcome. NHTSA's review of the Sierra report did not reveal many differences in technology-application between these subclasses. In addition, the agency does not believe that the effort required by the agency to create a more detailed yet more complex modeling structure based on 25 subclasses would result in significant improvement in the accuracy of the results. Sierra may have found this additional differentiation important for the full vehicle simulation approach that the Alliance claimed should be used throughout NHTSA's analysis. However, as discussed below, NHTSA has concluded that this approach is neither necessary nor practical for CAFE analysis.

The agency agrees with the Alliance, however, that some refinement in the classification approach used by NHTSA in the NPRM is merited in order to ensure the practicability of technologies being added. The agency also believes that the limited differentiation in costs and effectiveness values by vehicle class needs to be expanded in order to better account for fuel savings and costs.

For the final rule, NHTSA first reexamined the Volpe model technology output files from the NPRM to identify where and why technologies may have been inappropriately applied by the model. Where this reexamination revealed logical errors, the Volpe model was revised accordingly. However, the review revealed that most of the observed inaccuracies resulted from the manner in which vehicles were assigned to subclasses for the purpose of technology applications. NHTSA also reviewed the confidential vehicle level information received from manufacturers, how manufacturers classified their vehicles by style or market segment groupings requested by NHTSA and the specific engine, transmission and other vehicle characteristics identified by the manufacturers for each vehicle model. This conclusion was among those that led NHTSA to assign more staff to perform quality control when reviewing and integrating manufacturers' product plans.

In order to improve the accuracy of technology application modeling, NHTSA examined at the car and truck segments separately.

First, for the car segment, NHTSA plotted the footprint distribution of vehicles in the product plans and divided that distribution into four equivalent footprint range segments. The footprint ranges were named

Subcompact, Compact, Midsize, and Large classes in ascending order.

Cars were then assigned to one of these classes based on their specific footprint size. Vehicles in each range were then manually reviewed by

NHTSA staff to evaluate and confirm that they represented a fairly reasonable homogeneity of size, weight, powertrains, consumer use, etc.

However, as the Alliance pointed out, some vehicles in each group were sports or high-performance models. Since different technologies and cost and effectiveness estimates are appropriate for these vehicles,

NHTSA created a performance subclass within each car class to maximize the accuracy of technology application. To determine which cars would be assigned to the performance subclasses, NHTSA graphed (in ascending rank order) the power-to-weight ratio for each vehicle in a class. An example of the Compact subclass plot is shown below. The subpopulation was then manually reviewed by NHTSA staff to determine an appropriate transition point between ``performance'' and ``non-performance'' models within each class.

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A total of eight classes (including performance subclasses) were identified for the car segment: Subcompact, Subcompact Performance,

Compact, Compact Performance, Midsize, Midsize Performance, Large,

Large Performance. In total, the number of cars that were ultimately assigned to a performance subclass was less than 10 percent. The table below shows the difference in the classification between the NPRM and

Final Rule and provides examples of the types of vehicles assigned to each.

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For light trucks, in reviewing the updated manufacturer product plans and in reconsidering how to divide trucks into classes and subclasses based on technology applicability, NHTSA found less of a distinction between SUVs and pickup trucks than appeared to exist in earlier rulemakings. Manufacturers appear to be planning fewer ladder- frame and more unibody pickups, and many pickups will share common powertrains with SUVs. Consequently, NHTSA condensed the classes available to trucks, such that SUVs and pickups are no longer divided.

Recognizing structural differences between various types of ``Vans,''

NHTSA revisited how it assigned the different types of ``Vans.''

Instead of merging minivans, cargo vans, utility and multi-passenger type vans under the same class, as it did for the NPRM and in previous rules, NHTSA formed a separate minivan class, because minivans (e.g., the Honda Odyssey) are expected to remain closer in terms of structural and other engineering characteristics than vans (e.g., Ford's E-

Series--also known as Econoline--vans) intended for more passengers and/or heavier cargo.

The remaining vehicles (other vans, pickups, and SUVs) were then segregated into three footprint ranges and assigned a class of Small

Truck/SUV, Midsize Truck/SUV, and Large Truck/SUV based on their footprints. NHTSA staff then manually reviewed each population for inconsistent vehicles based on engine cylinder count, weight (curb and/ or gross), or intended usage, since these are important considerations for technology application, and reassigned vehicles to classes as appropriate. This system produced four truck segment classes--minivans and small, medium, and large SUVs/Pickups/Vans. The table below shows the difference in the classification between the NPRM and Final Rule.

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Based on a close review of detailed output from the Volpe model,

NHTSA has concluded that its revised classification for purposes of technology applicability substantially improves the overall accuracy of the results as compared to the system employed in the NPRM. The new method uses footprint as a first indicator for both the car and truck segments, and all are then manually reviewed for the types of technologies applicable to them and revised by NHTSA to ensure that they have been properly assigned. The addition of the performance subclasses in the car segment and the condensing of classes in the truck segment further refine the system. The new method increases the accuracy of technology application without overly complicating the

Volpe modeling process, and the revisions address comments received in response to the NPRM. 5. How did NHTSA develop technology cost and effectiveness estimates for the final rule?

In the NPRM, NHTSA employed technology cost and effectiveness estimates developed in consultation with EPA. They represented NHTSA and EPA staff's best assessment of the costs for each technology considered based on the available public and confidential information and data sources that the agencies had back in 2007 when the rulemaking was initiated. EPA also published a report and submitted it to the NRC committee on fuel economy of light-duty vehicles.\119\

\119\ EPA Staff Technical Report: Cost and Effectiveness

Estimates of Technologies Used to Reduce Light-Duty Vehicle Carbon

Dioxide Emissions. EPA420-R-08-008, March 2008.

Public comments on the NPRM's technology cost estimates generally fell into four categories: (1) That costs are underestimated because

NHTSA did not account for all changes/costs required to apply a technology or because although NHTSA correctly identified all the changes required, it did not cost those changes appropriately; (2) that costs are underestimated because the Retail Price Equivalent (RPE) factors have been applied incorrectly to technologies; (3) that costs are either over- or underestimated because learning curves have been applied incorrectly to technologies; and (4) that cost assumptions are overly simplified as applied to the full range of fleet vehicles and do not properly account for the differences in cost impacts across vehicle and engine types (e.g., technologies applied to a sub-compact car will be unique to those same technologies applied to a large SUV). Many commenters also stated that they found it difficult to understand how

NHTSA and EPA had derived the cost estimates. In addition to commenting on NHTSA's methodology, many commenters, particularly manufacturers, also submitted their own cost estimates for each technology and requested that NHTSA consider them for the final rule.

As explained above, NHTSA contracted with Ricardo to aid the agency in analyzing the comments on the technology assumptions used in the

NPRM, and relied considerably on Ricardo's expertise in developing the final technology cost and effectiveness estimates based on that analysis. For every technology included in NHTSA's analysis of technology costs and effectiveness, Ricardo and NHTSA engineers reviewed the comments thoroughly and exercised their expertise in assessing the merits of the comments, and in resolving the differences and determining which estimates should be used for the final rule.

For each technology, NHTSA relied on Ricardo's experience with

``bill of materials'' (BOM) costing. Some commenters criticized NHTSA for not using a BOM as the basis for its cost analysis. The 2008 Martec report,\120\ which updated the Martec report on which the 2004 NESCCAF study was based, was submitted by auto industry commenters to NHTSA's

NPRM docket for the agency's consideration. This report provides cost estimates developed on a ``bill of materials'' basis and methodology.

NHTSA, with Ricardo's assistance, reviewed the ``bill of materials'' methodology in the Martec report and found it to be, compared to the methodology used in the NPRM, a more defensible and transparent basis for evaluating the costs of applicable technologies.

\120\ Martec, ``Variable Costs of Fuel Economy Technologies,''

June 1, 2008.

A bill of materials in a general sense is a list of components that make up a system--in this case, an item of fuel economy-improving technology. In

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order to determine what a system costs, one of the first steps is to determine its components and what they cost. In cases in which it was not practicable for the agency and Ricardo to estimate the cost of each component on a BOM basis because there was a shift to a more advanced technology and or because of difficulty in accounting for the sum of costs of all added components less the sum of costs of all deleted components (e.g., in the transition from a gas engine to a diesel engine), incremental costs were estimated to be those of the entire new technology platform (in this example, the diesel engine) less those of the entire old technology platform (in this example, the gas engine).

This ``net difference'' process was only used where developing a ground-up description of all component changes necessitated by the incremental technology was deemed to be impracticable.

With that framework in mind, Ricardo and NHTSA engineers proceeded with reviewing cost information for each major component of each technology. They compared the multiple sources available in the docket and assessed their validity. While NHTSA and Ricardo engineers relied considerably on the 2008 Martec Report for costing contents of some technologies, they did not do so for all. When relevant publicly available information and data sets, including the 2008 Martec report, were determined to be incomplete or non-existent, NHTSA looked to prior published data, including the NPRM, or to values provided to NHTSA by commenters familiar with the material costs of the described technologies.

Generally, whenever cost information for a technology component existed in a non-confidential and publicly available report submitted to the NPRM docket and that information agreed with Ricardo's independent review of cost estimates based on Ricardo's historical institutional knowledge, Ricardo and NHTSA cited that information.

Ricardo and NHTSA were able to take that approach frequently, as is evident in the explanation of the cost figures of each technology. When that approach was not possible, but there was confidential manufacturer data that had been submitted to NHTSA in response to the NPRM, and those costs were consistent with Ricardo's independently-reviewed cost estimates, NHTSA and Ricardo cited those data. When multiple confidential data sources differed greatly and conflicted with the

Martec valuation or when the technical assumptions described by NHTSA for purposes of this rulemaking did not match exactly with the content costed by either Martec or other commenters, NHTSA and Ricardo engineers used component-level data to build up a partial cost, substituting Ricardo's institutional knowledge for the remaining gaps in component level data.

Occasionally, NHTSA and Ricardo found that some cost information submitted by the public was either not very clearly described or revealed a lack of knowledge on the part of the commenter about NHTSA's methodology. In those cases, and in cases for which no cost data

(either public or confidential) was available, NHTSA worked with

Ricardo either to confirm the estimates it used in the NPRM, or to revise and update them.

In several cases, values described in the NPRM were simply adjusted from 2006 dollars to 2007 dollars, using a ratio of GDP values for the associated calendar years.\121\ In many instances, an RPE factor of 1.5 was determined to have been omitted from the cost estimates provided in the NPRM, so NHTSA applied the multiplier where necessary to calculate the price to the consumer.

\121\ NHTSA examined the use of the CPI multiplier instead of

GDP for adjusting these dollar values, but found the difference to be exceedingly small--only $0.14 over $100.

Finally, in response to comments stating that cost estimates for individual technologies should be varied, based on the type and size of vehicle to which they are applied, NHTSA worked with Ricardo to account for that. Additionally, application of some technologies might be more or less expensive, depending on content (e.g., with or without a noise attenuation package), for particular vehicles. In these cases, NHTSA and Ricardo described a range of costs for this technology, and referred to sources that indicate the appropriate boundaries of that range.

The agency notes that several technologies considered in the final rule have been updated with substantially different cost estimates relative to those costs described in the NPRM. For example, RPE estimates for turbocharging and downsizing (TRBDS), diesel technologies

(DSLT) and hybrid technologies (like ISG) are much higher than the costs cited in the NPRM for those technologies. This is due in large part to the updated cost estimates of the 2008 Martec Report and others, referenced in the final rule, which reflect the dramatic rise of global costs for raw materials associated with the above technologies since the 2004 Martec report and other prior referenced cost estimates were conducted. The NPRM costs were not updated to reflect that rise in commodities prices. As described in the 2008

Martec Report, advanced battery technologies with substantial copper, nickel or lithium content, and engine technologies employing high temperature steels or catalysts with considerable platinum group metals usage, have experienced tremendous inflation of raw material prices since the cost studies referenced in the NPRM were conducted. As of the time the sources were developed, prices of nickel, platinum, lithium, copper, dysprosium and rhodium had demonstrated cost inflation amounting to between 300 and 750 percent of global prices at the time of the original NESCCAF study \122\ and this is reflected in the higher costs described in the 2008 Martec report, and thus in the final rule.

NHTSA is aware that commodity prices, like those for steel and platinum group metals described above, have dropped over the last several months. However, there is little information in the record to determine how prices of components used in MY 2011 could be impacted by the prices of metals and other commodities over the last few years. It is not clear whether the prices of components built and used in MY 2011 are more likely to reflect the high price of commodities in the years prior to 2008, the current low prices of commodities, the prices of commodities closer to MY 2011, or some mixture of these. The agency notes, though, as mentioned above, that manufacturers' product plans were submitted along with manufacturers' indications that these plans were generally informed by expectations that relatively high commodity prices would prevail in the future. Therefore, in the expectation that economic conditions will improve by MY 2011, the agency relies on the commodity prices reflected in, for example, the 2008 Martec report.

However, the agency further notes that these decisions are limited to the MY 2011 rulemaking. We intend to monitor commodity prices carefully and will adjust affected technology costs as appropriate in future rulemakings.

\122\ 2008 Martec report, at 13-20.

Some commenters referenced the price differential between vehicles with advanced technologies and more standard versions as evidence of those advanced technologies' costs, and argued that NHTSA should consider these price differentials in its cost estimation process. In response, NHTSA believes that the ``bottom-up, material cost based'' cost estimation methodology employed for the final rule is preferable to estimating costs based

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on manufacturer price differentials between versions of vehicle models.

Wherever possible, technologies were costed based on the estimation of variable material cost impacts to vehicle manufacturers at a fixed point in time (in 2007 dollar terms) for a prescribed set of component changes anticipated to be required in implementing the technology on a particular platform (e.g., wastegate turbo, increased high nickel alloyed exhaust manifolds, air charge cooler, etc. for TRBDS). The content assumptions are modified or scaled to account for differences across the range of vehicle sizes and functional requirements and associated material cost impacts are adjusted to account for the revised content. The material cost impacts to the vehicle manufacturers are then summed and converted to retail price equivalent impacts by multiplying by 1.5 to account for fixed costs and other overheads incurred in the implementation of new vehicle technologies but not contained in the variable material price impacts to the manufacturers.

In employing this methodology, NHTSA relied on information provided to NHTSA by the suppliers and vehicle manufacturers themselves. Though this estimation process relies on often confidential data and employs a simplifying assumption in relating all variable material costs to retail impacts through the use of a consistent 1.5 RPE, the methodology is preferable to a ``top-down, retail price based'' methodology as might be used by comparing retail price differences of vehicles with different technologies. The ``bottom-up'' approach offers the benefits of providing a consistent and reasonable assessment of true, total costs for all technologies independent of geographic, or strategic pricing policies by vehicle manufacturers that could result in selling products at sub-standard or even negative margins. For many vehicle manufacturers, contribution to corporate profit varies dramatically across vehicle segment. Given that vehicle pricing is often decoupled from true costs and will vary with sales cycle, product maturity, geography, vehicle class, and marque, a ``top-down'' approach, while offering improved data transparency, is inherently limited in providing a consistent means of cost estimation. As such, NHTSA has adopted the described ``bottom-up'' cost estimation approach and has attempted to mitigate transparency issues with a reliance on Martec 2008 (where in agreement with other provided cost data), because it provides a detailed description of the costed content. Fundamentally, NHTSA believes that a ``bottom-up'' cost estimation methodology with a common

RPE adjustment factor offers an intuitive, consistent process across all technologies, whether mature or otherwise, that avoids the pitfalls of reliance on significantly more variable and volatile pricing policies.

Regarding estimates for technology effectiveness, NHTSA, working with Ricardo, also reexamined its NPRM estimates and those in the EPA

Staff Technical Report,\123\ which largely mirrored NHTSA's NPRM estimates. We compared these estimates to estimates provided in comments, reports and confidential data received in response to our

NPRM. Comments on the NPRM's effectiveness estimates generally fell into three categories: (1) That NHTSA did not account sufficiently for fuel economy or performance impacts because it used the Volpe model approach rather than full vehicle simulation; (2) that the synergy values used did not properly account for technology interactions; and

(3) that NHTSA made errors when using estimates provided by manufacturers. In addition to commenting on NHTSA's methodology, many commenters, particularly manufacturers, also submitted their own fuel consumption reduction estimates for each technology and requested that

NHTSA consider them for the final rule. NHTSA addresses comments relating to vehicle simulation in Section IV.C.8 and synergies in

Section IV.C.7, but the section below describes NHTSA's process for developing effectiveness estimates for the final rule, which addresses the comments regarding NHTSA's use of estimates submitted by manufacturers.

\123\ EPA Staff Technical Report: Cost and Effectiveness

Estimates of Technologies Used to Reduce Light-Duty Vehicle Carbon

Dioxide Emissions. EPA420-R-08-008, March 2008.

For each technology, NHTSA also relied on Ricardo's experience with

``bill of materials'' (BOM) technology descriptions. Some commenters argued that the same BOM used as the basis for the cost analysis could and should be used to define the technologies being studied for effectiveness. In fact, Ricardo's methodology for cost and effectiveness estimates for this rule was to define a vehicle class- specific BOM or BOMs, depending upon the number of variants possible within a class and within a decision tree. These BOMs were defined for the baseline configuration for each class and then for each incremental step in the decision tree. Use of a consistently-defined BOM is very important to estimating the impacts of technologies accurately, as it helps to ensure that technologies are not applied to baseline vehicles that already contain the technology (with the exception of items that are not well-defined such as aerodynamic drag reduction, reduced rolling resistance tires, weight reduction, and engine friction reduction.)

In defining these BOMs, Ricardo relied on its experience working with industry over many years and its recent experience preparing the

December 2007 study for EPA. Ricardo built on its vehicle simulation work for EPA to help NHTSA evaluate appropriate effectiveness values for individual fuel-saving technologies. In considering the comments,

NHTSA and Ricardo evaluated the 10 ``vehicle subclasses'' used in the

NPRM for applicability of technologies and determined that the cost and effectiveness estimates could be more accurate by revising the

``vehicle subclasses'' as described above so that they better represented the parameters of the vehicles they included. This, in turn, enabled NHTSA and Ricardo to distinguish more clearly the differences in fuel consumption reduction occurring when a technology is added to different vehicles.

Then, with the BOM framework applied to more precisely-defined vehicle subclasses, NHTSA and Ricardo engineers reviewed effectiveness information from multiple sources for each technology. Together, they compared the multiple sources available in the docket and assessed their validity, taking care to ensure that common BOM definitions and other vehicle attributes such as performance, refinement, and drivability were not compromised.

Generally, whenever relevant effectiveness information for a technology component existed in a non-confidential and publicly- available report submitted to the NPRM docket, and that information agreed with Ricardo's independent review of estimates based on

Ricardo's historical institutional knowledge, NHTSA and Ricardo cited that information. NHTSA and Ricardo were able to take that approach frequently, as is evident in the explanation of the effectiveness for each technology. When that approach was not possible, but there was confidential manufacturer data that had been submitted to NHTSA in response to the NPRM, and those values were consistent with Ricardo's independently-reviewed estimates, NHTSA and Ricardo cited those data.

When multiple confidential data sources differed greatly or when the technical assumptions described by NHTSA for purposes of this rulemaking

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did not match the content included in Ricardo's study for EPA or in other comments, NHTSA and Ricardo engineers relied on Ricardo's experience and an understanding of the maximum theoretical losses that could be eliminated by particular technologies to build up an effectiveness estimate, substituting Ricardo's institutional knowledge for the remaining gaps in data.

Occasionally, NHTSA and Ricardo found that some fuel consumption reduction information submitted by the public was either not very clearly described or revealed a lack of knowledge on the part of the commenter about NHTSA's methodology. In those cases, and in cases for which no effectiveness data (either public or confidential) was available, NHTSA worked with Ricardo either to confirm the estimates it used in the NPRM, or to revise and enhance them. In other cases, the commenters appeared unsure how to evaluate the data from the NPRM, and so NHTSA and Ricardo provided more detailed explanations on the process used or the components involved.

In response to comments stating that estimates for individual technologies should be varied based on the type and size of vehicle to which they are applied, NHTSA worked with Ricardo to account for those differences mostly through the refined vehicle subclass definitions.

However, even after making these adjustments, there are still some classes that require spanning different engine architectures and performance thresholds. Just as the application of some technologies might be more or less expensive, depending on content (e.g., with or without a noise attenuation package), particular vehicle technologies may have more or less impact between classes where maintaining equivalent performance led to a reduced effectiveness. In these cases,

NHTSA and Ricardo described a range of effectiveness values for this technology, and referred to sources that indicate the appropriate boundaries of that range.

With Ricardo's assistance, the technology cost and effectiveness estimates for the final rule were developed consistently, using this systematic approach. While NHTSA still believes that the ideal estimates for the final rule would be those that have been through a peer-reviewed process such as that used for the 2002 NAS Report, and will continue to work with NAS, as required by EISA, to update the technology cost and effectiveness estimates for subsequent CAFE rulemakings, this approach, combined with the BOM methodology for cost and effectiveness, expanded number and types of vehicle subclasses and the changes to the synergistic effects described below, not only help to address the concerns raised by commenters, but also represent a considerable improvement in terms of accuracy and transparency over the approach used to develop the cost and effectiveness estimates in the

NPRM. 6. Learning Curves

As explained in the NPRM, historically NHTSA did not explicitly account for the cost reductions a manufacturer might realize through learning achieved from experience in actually applying a technology.

However, based on its work with EPA, in the NPRM NHTSA employed a learning factor for certain newer, emerging technologies. The

``learning curve'' describes the reduction in unit incremental production costs as a function of accumulated production volume and small redesigns that reduce costs. The NPRM implemented technology learning curves by using three parameters: (1) The initial production volume that must be reached before cost reductions begin to be realized

(referred to as ``threshold volume''); (2) the percent reduction in average unit cost that results from each successive doubling of cumulative production volume (usually referred to as the ``learning rate''); and (3) the initial cost of the technology. The majority of technologies considered in the NPRM did not have learning cost reductions applied to them.

NHTSA assumed that learning-based reductions in technology costs occur at the point that a manufacturer applies the given technology to the first 25,000 cars or trucks, and are repeated a second time as it produces another 25,000 cars or trucks for the second learning step.\124\ NHTSA explained that the volumes chosen represented the agency's best estimate for where learning would occur, and that they were better suited to NHTSA's analysis than using a single number for the learning curve factor, because each manufacturer would implement technologies at its own pace in the rule, rather than assuming that all manufacturers implement identical technology at the same time.

\124\ NHTSA treated car and truck volumes separately for determining those sales volumes.

NHTSA further assumed that after having produced 25,000 cars or trucks with a specific part or system, sufficient learning will have taken place such that costs will be lower by 20 percent for some technologies and 10 percent for others. For those technologies, NHTSA additionally assumed that another cost reduction would be realized after another 25,000 units. If a technology was already in widespread use (e.g., on the order of several million units per year) or expected to be so by the MY 2011-2012 time frame, NHTSA assumed that the technology was ``learned out,'' and that no more cost reductions were available for additional volume increases. If a technology was not estimated to be available until later in the rulemaking period at that time, like MY 2014-2015, NHTSA did not apply learning for those technologies until those model years. Most of the technologies for which learning was applied after MY 2014 were adopted from the 2004

NESCCAF study, which was completed by Martec. Whenever source data, like the 2004 NESCCAF study, indicated that manufacturer cost reduction from future learning would occur, NHTSA took that information into account.

Comments received regarding NHTSA's approach to technology cost reductions due to manufacturer learning generally disagreed with the agency's method. The Alliance, AIAM, Honda, GM, and Chrysler all commented that NHTSA had substantially overestimated, and essentially

``double-counted,'' learning effects by applying learning reductions to component costs, specifically Martec estimates, which were already at high volume. The Alliance submitted the 2008 Martec Report, which stated that NHTSA had ``misstated'' Martec's approach to cost reductions due to learning in the NPRM. As Martec explained,

Martec did not ask suppliers to quote prices that would be valid for three years, and Martec did not receive cost reductions from suppliers for some components in years two and three. Rather, industry respondents were asked to establish mature component pricing on a forward basis given the following conditions: At least three (3) manufacturers demanding 500,000 units per year and at least three (3) globally-capable suppliers available to supply the needs of each manufacturer.

In no case did Martec ask industry respondents to provide low volume, launch or transition costs for fuel consumption/

CO2reducing technologies. Martec specifically designed the economic parameters in order to capture the effects of learning which is a reality in the low margin, high capital cost, high volume, highly competitive global automotive industry. Applying additional reductions attributable to ``learning'' based on 25,000 unit improvements in cumulative volume after production launch (as described on pages 118-125 of the NHTSA NPRM) on top of Martec's mature costs is an error. Martec's costs are based on 1.5-2.0 equivalent modules of powertrain capacity (500,000 units/year) so 25,000 unit

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incremental changes in cumulative production, as defined by NHTSA, will have no effect on costs.

The 2008 Martec Report also stated that current industry practice consists of using competitive bidding based on long-term, high-volume contracts that are negotiated before technology implementation decisions are made. Martec stated that this practice considers the effects of volume, learning, and capital depreciation. Martec also indicated that most of the technologies evaluated in the study are in high volume production in the global automotive industry today, and thus this forms a solid basis from which to estimate future costs.

Honda also commented on NHTSA's 25,000 unit (per manufacturer per year) volume threshold stating that, in their experience, costs were only likely to decrease due to learning at volumes exceeding about 300,000 units per year per manufacturer. GM agreed, stating that suppliers do not respond to, change processes, or change contract terms for relatively small volume changes like NHTSA's 25,000 unit increment, thus volume changes of this magnitude have no effect on component pricing. GM also commented that its learning cycles are based on time, not volume, and agreed with Martec's assessment that contracts with suppliers typically specify volumes and costs over a period, which are usually equal to a product life cycle, a 4- to 5-year period.

Ford commented that base costs in the automotive industry are determined by a target setting process, where manufacturers develop pricing with suppliers for a set period, and manufacturers receive cost reductions from the suppliers due to learning as time passes, apparently at a set amount year over year for several years. Ford also commented that NHTSA's approach to learning curves had not accounted for current economic factors, like increases in commodity and energy prices, and cited the example of costs of batteries for hybrids and

PHEVs which Ford stated ``are not likely to depend solely on experience learned, but, to a large extent, on the additional energy and material costs they incur relative to the vehicles without the new technology.''

Ford commented that NHTSA should account for these costs, and the factor of declining vehicle sales, in its learning curve approach.

BorgWarner, a components supplier, commented that learning-related costs savings are valid for technologies that ``start at low volume''

(commenter's emphasis). BorgWarner argued, however, that NHTSA's assumed learning curve would not apply to the technologies it supplies to manufacturers,\125\ since these components are well-developed and in high volume use already, and are thus already ``learned out.''

BorgWarner further commented that an increase in demand could in fact lead to higher prices if demand for raw materials exceeded supply.

\125\ BorgWarner manufacturers and supplies turbochargers, dual clutch transmissions, variable valve timing systems, diesel engine components (EGR and starting), aggressive shift logic and early torque convertor lockup systems.

UCS, in contrast, commented that NHTSA had not accounted for enough cost reductions due to learning. UCS stated that NHTSA should have provided ``source data'' for manufacturer-specific learning curves, and argued that NHTSA's approach was ``fundamentally flawed'' for two primary reasons: First, because NHTSA had not considered the fact that manufacturers engage in joint ventures to develop new technologies, and second, because manufacturers may also learn from one another ``through the standard practice of tearing down competitors' products.'' UCS argued that NHTSA's learning-based cost reductions should account for these methods of learning. UCS further stated that NHTSA should not

``treat[] car and truck sales volumes separately when estimating learning curves'' because there may be much overlap in terms of technology application, especially for vehicles like crossovers which may be either cars or trucks. UCS concluded that NHTSA should use EPA's suggested learning factor of 20 percent, citing EPA's Staff Technical

Report.

Public Citizen agreed that NHTSA should account for economies of scale, but argued that NHTSA should not have relied on initial cost estimates from industry, which the commenter stated were ``often overestimated.'' Public Citizen cited a 1997 briefing paper by the

Economic Policy Institute in support of this point, and argued that compliance cost estimates were often much lower than actual costs.

Public Citizen concluded that NHTSA's use of learning curve factors

``impedes transparency'' in NHTSA's analysis.

Agency response: Based on the comments received and on its work with Ricardo, NHTSA has revised its approach to accounting for technology cost reductions due to manufacturer learning. The method of learning used in the NPRM has been retained, but the threshold volume has been revised and is now calculated on an industry-wide production basis. However, learning of this type, which NHTSA now refers to as

``volume-based'' learning, is not applicable to any technologies for MY 2011. Additionally, NHTSA has adopted a fixed rate, year-over-year

(YOY) cost reduction for widely-available, high-volume, mature technologies, in response to comments from Ford and others. NHTSA refers to this type cost reduction as ``time-based'' learning. For each technology, if learning is applicable, only one type of learning would be applied, either volume-based or time-based (i.e., the types are independent of each other). These revisions are discussed below.

For volume-based learning, NHTSA considered comments from UCS and decided to revise the method used to calculate the threshold volume from a per-manufacturer to an industry-wide production volume basis.

NHTSA agreed with UCS' comment that cars and trucks may share common components--this is true across many makes and models which share common engines, transmissions, accessory systems, and mild or strong hybrid systems, all of which can potentially utilize the technologies under consideration. These systems are often manufactured by suppliers who contract with multiple OEMs, all of whom benefit (in the form of cost reductions for the technology) from the supplier's learning. The 2008 Martec Report and the BorgWarner comments additionally both indicated that when manufacturers demand components in high volumes, suppliers are able to pass on learning-based savings to all manufacturers with whom they contract. Thus, it made sense to NHTSA to revise its method of determining whether the threshold volume has been achieved from an annual per-manufacturer to an annual industry-wide production volume basis.

NHTSA also changed the threshold volume for volume-based learning from 25,000 to 300,000 units. The 2008 Martec Report and comments from multiple manufacturers indicated that 25,000 units was far too small a production volume to affect component costs. In response, NHTSA began with the Martec estimate that technologies were fully learned-out at 1.5 million units of production (which met the production needs of three manufacturers, according to that report). NHTSA then applied two cycles of learning in a reverse direction to determine what the proper threshold volume would be for these conditions. One cycle would be applied at 750,000 units (1.5 million divided by 2, which would represent the second volume doubling) and one at 375,000 units (750,000 divided by 2, which would represent the first volume doubling).

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NHTSA thus estimated that the Martec analysis would suggest a threshold volume of 375,000 units. However, the agency notes that Martec stated that it chose the 1.5 million units number specifically because Martec knew it was well beyond the point where learning is a factor, which means that 1.5 million was beyond the cusp of the learning threshold.

NHTSA therefore concluded that 375,000 units should represent the upper bound for the threshold volume for Martec's analysis.

Having determined this, NHTSA sought to establish a lower bound for the threshold volume. The 2008 Martec report indicated that production efficiencies are maximized at 250,000-350,000 units (which averages to 300,000 units), and that manufacturers consequently target this range when planning and developing manufacturing operations. Honda also cited this production volume. Thus, for three manufacturers, the annual volume requirement would be 900,000 units.\126\ NHTSA concluded this could also represent high volume where learned costs could be available, and considered it as a lower bound estimate. With the upper and lower values established, and given that Martec specifically indicated that 1.5 million did not represent the cusp of the learning threshold, NHTSA chose the mid-point of 1.2 million units as the best estimate of annual industry volumes where learned costs would be experienced. For proper forward learning, this would mean the first learning cycle would occur at 300,000 and the second at 600,000.

Accordingly NHTSA has established the threshold volume for the final rule at 300,000 industry units per year.

\126\ An industry volume of 900,000 would imply a threshold volume of 225,000 units according to NHTSA's analysis. This is still nine times the value used at the NPRM.

Having established the threshold volume, NHTSA next considered which technologies to apply volume learning to. Comments confirmed that

NHTSA had been correct in the NPRM to assume that learning would be applicable to low-volume, emerging technologies that could benefit from economies of scale, so NHTSA consulted confidential product plans to determine the volumes of technologies to be applied by manufacturers during the rulemaking period. If the product plans indicated that the technologies would be in high-volume use (i.e., above 600,000 units produced annually for cars and trucks by all manufacturers) at the beginning of its first year of availability, then volume-based learning was not considered applicable, since at this volume the technology would be available at learned cost. If the volume was below 600,000 units annually, then NHTSA also looked at the Volpe model's application of the technology. If the model applied more than 600,000 units within the first year of availability, NHTSA did not apply volume-based learning. If neither manufacturers nor the model applied more than 600,000 units within the first year, then volume learning was applied to the technology.

Based on this analysis, NHTSA determined that volume-based learning would be applicable to three technologies for purposes of the final rule: integrated starter generator, 2-mode hybrid, and plug-in hybrid.

For these three technologies, and where the agency's initial cost estimates reflected full learning, NHTSA reverse-learned the cost by dividing the estimate by the learning rate twice to properly offset the learned cost estimate. NHTSA used a 20 percent learning rate in the

NPRM for these technologies, and concluded that that rate was still applicable for the final rule. This learning rate was validated using manufacturer-submitted current and forecast cost data for advanced- battery hybrid vehicle technology, and accepted industry forecasts for

U.S. sales volumes of these same vehicles. This limited study indicated that cost efficiencies were approximately 20 percent for a doubling of

U.S. market annual sales of a particular advanced battery technology, and the learning rate was thus used as a proxy for other advanced vehicle technologies.

Commenters also indicated that learning-related cost reductions could occur not only as a result of production volume changes, but also as a function of time. For example, Ford stated that technology cost reductions were negotiated as part of the contractual agreement to purchase components from suppliers, a target-setting process which Ford described as common in the automotive industry. In this arrangement suppliers agree to reduce costs on a fixed percentage year over year according to negotiated terms. GM described a cost reduction process that occurs over the course of a product life cycle, typically no less than 4-5 years, where costs are reduced as production experience increases. GM stated that its cost reductions included engineering, manufacturing, investment, and material costs, and were also defined through supplier contracts that anticipate volume and costs over the whole period. The components involved are assumed to be high volume, mature technologies being used in current vehicle production. These are the types of components that would typically be subject to ``cost- down'' \127\ efforts that target savings through small, incremental design, manufacturing, assembly, and material changes on a recurring or periodic basis.

\127\ Cost-down efforts are a common practice in competitive manufacturing environments like the automotive industry.

In response to these comments, NHTSA has adopted this approach as an additional type of learning related cost reduction, referring to it as ``time-based'' learning. For purposes of the final rule, time-based learning is applied to high-volume, mature technologies likely to be purchased by OEMs on a long-term contractual basis. This would include most of the fuel-saving technologies under consideration, except those where volume-based learning is applied, or those where components might consist of commodity materials, such as oil or rubber, where pricing fluctuations prevent long-term or fixed value contracts. NHTSA has used a 3 percent reduction rate for time-based learning, based on confidential manufacturer information and NHTSA's understanding of current industry practice. Thus, if time-based learning is deemed applicable, then in year two of a technology's application, and in each subsequent year (if any), the initial cost is reduced by 3 percent.

This approach is responsive to comments about compliance costs estimation, and improves the accuracy of projecting future costs compared to the NPRM.

With regard to the comments from UCS, NHTSA recognizes that joint- venture collaboration and competitor tear-downs are methods used by manufacturers for designing and developing new products and components, but notes that these methods are used prior to the manufacturing stage, and thus are not considered manufacturing costs. NHTSA has received no specific manufacturer learning curve-related data, and thus has no

``source data'' to disclose. NHTSA continues to use a 20 percent learning factor for volume-based learning, which is consistent with

EPA's learning factor recommended by UCS for NHTSA's use.

With regard to the comments from Public Citizen, although NHTSA reviewed the paper cited by the commenter, the agency found its analysis largely irrelevant to NHTSA's estimation of cost reduction factors due to automobile manufacturer learning, and thus declines to adopt its findings.

Table IV-4 below shows the applicability and type of learning applied in the final rule.

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BILLING CODE 4910-59-C 7. Technology Synergies

When two or more technologies are added to a particular vehicle model to improve its fuel efficiency, the resultant fuel consumption reduction may sometimes be higher or lower than the product of the individual effectiveness values for those items.\128\ This may

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occur because one or more technologies applied to the same vehicle partially address the same source or sources of engine, drivetrain or vehicle losses. Alternately, this effect may be seen when one technology shifts the engine operating points, and therefore increases or reduces the fuel consumption reduction achieved by another technology or set of technologies. The difference between the observed fuel consumption reduction associated with a set of technologies and the product of the individual effectiveness values in that set is referred to for purposes of this rulemaking as a ``synergy.'' Synergies may be positive (increased fuel consumption reduction compared to the product of the individual effects) or negative (decreased fuel consumption reduction).

\128\ More specifically, the products of the differences between one and the technology-specific levels of effectiveness in reducing fuel consumption. For example, not accounting for interactions, if technologies A and B are estimated to reduce fuel consumption by 10%

(i.e., 0.1) and 20% (i.e., 0.2) respectively, the ``product of the individual effectiveness values'' would be 1-0.1 times 1-0.2, or 0.9 times 0.8, which equals 0.72, corresponding to a combined effectiveness of 28% rather than the 30% obtained by adding 10% to 20%. The ``synergy factors'' discussed in this section further adjust these multiplicatively combined effectiveness values.

For the NPRM, the Volpe model was modified to estimate the interactions of technologies using estimates of incremental synergies associated with a number of technology pairs identified by NHTSA. The use of discrete technology pair incremental synergies is similar to that in DOE's National Energy Modeling System (NEMS).\129\ Inputs to the Volpe model incorporate NEMS-identified pairs, as well as additional pairs for the final rule from the set of technologies considered in the Volpe model. However, to maintain an approach that was consistent with the technology sequencing developed by NHTSA, new incremental synergy estimates for all pairs were obtained from a first- order ``lumped parameter'' analysis tool created by EPA.\130\

\129\ U.S. Department of Energy, Energy Information

Administration, Transportation Sector Module of the National Energy

Modeling System: Model Documentation 2007, May 2007, Washington, DC,

DOE/EIAM070(2007), at 29-30. Available at http://tonto.eia.doe.gov/ ftproot/modeldoc/m070(2007).pdf (last accessed Oct. 24, 2008).

\130\ EPA Staff Technical Report: Cost and Effectiveness

Estimates of Technologies Used to Reduce Light-duty Vehicle Carbon

Dioxide Emissions; EPA420-R-08-008, March 2008.

The lumped parameter tool is a spreadsheet model that represents energy consumption in terms of average performance over the fuel economy test procedure, rather than explicitly analyzing specific drive cycles. The tool begins with an apportionment of fuel consumption across several loss mechanisms and accounts for the average extent to which different technologies affect these loss mechanisms using estimates of engine, drivetrain and vehicle characteristics that are averaged over the EPA fuel economy drive cycle. Results of this analysis were generally consistent with those of full-scale vehicle simulation modeling performed by Ricardo, Inc. However, regardless of a generally consistent set of results for the vehicle class and set of technologies studied, the lumped parameter tool is not a full vehicle simulation and cannot replicate the physics of such a simulation.

Many comments were received that stated this and pointed to errors in the synergies listed in the NPRM being in some cases inaccurate or even directionally incorrect. NHTSA recognizes that the estimated synergies applied for the NPRM were not all correct, and has reevaluated all estimated synergies applied in the analysis supporting today's final rule. In response to commenters calling for NHTSA to use full vehicle simulation, either in the first instance or as a check on the synergy factors that NHTSA developed, the agency has concluded that the vehicle simulation analyses conducted previously by Ricardo provide a sufficient point of reference, especially considering the time constraints for establishing the final rule. NHTSA did, however, improve the predictive capability of the lumped parameter tool.

The lumped parameter tool was first updated with the new list of technologies and their associated effectiveness values. Second, NHTSA conducted a more rigorous qualitative analysis of the technologies for which a competition for losses would be expected, which led to a much larger list of synergy pairings than was present in the NRPM. The types of losses that were analyzed were tractive effort, transmission/ drivetrain, engine mechanical friction, engine pumping, engine indicated (combustion) efficiency and accessory (see Table IV-5). As can be seen from Table IV-5, engine mechanical friction, pumping and accessory losses are improved by various technologies from engine, transmission, electrification and hybrid decision trees and must be accounted for within the model with a synergy value. The updated lumped parameter model was then re-run to develop new synergy estimates for the expanded list of pairings. That list is shown in Tables IV-6a-d.

The agency notes that synergies that occur within a decision tree are already addressed within the incremental values assigned and therefore do not require a synergy pair to address. For example, all engine technologies take into account incremental synergy factors of preceding engine technologies, and all transmission technologies take into account incremental synergy factors of preceding transmission technologies. These factors are expressed in the fuel consumption improvement factors in the input files used by the Volpe model.

For applying incremental synergy factors in separate path technologies, the Volpe model uses an input table (see Tables IV-6a-d) which lists technology pairings and incremental synergy factors associated with those pairings, most of which are between engine technologies and transmission/electrification/hybrid technologies. When a technology is applied to a vehicle by the Volpe model, all instances of that technology in the incremental synergy table which match technologies already applied to the vehicle (either pre-existing or previously applied by the Volpe model) are summed and applied to the fuel consumption improvement factor of the technology being applied.

Synergies for the strong hybrid technology fuel consumption reductions are included in the incremental value for the specific hybrid technology block since the model applies technologies in the order of the most effectiveness for least cost and also applies all available electrification and transmission technologies before applying strong hybrid technologies.

As another possible alternative to using synergy factors, NHTSA has also considered modifying the Volpe model to apply inputs--for each vehicle model--specifying the share of total fuel consumption attributable to each of several energy loss mechanisms. The agency has determined that this approach, discussed in greater detail below, cannot be implemented at this time because the requisite information is not available.

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BILLING CODE 4910-59-C 8. How does NHTSA use full vehicle simulation?

For regulatory purposes, the fuel economy of any given vehicle is determined by placing the vehicle on a chassis dynamometer (akin to a large treadmill that puts the vehicle's wheels in contact with one or more rollers, rather than with a belt stretched between rollers) in a controlled

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environment, driving the vehicle over a specific driving cycle (in which driving speed is specified for each second of operation), measuring the amount of carbon dioxide emitted from the vehicle's tailpipe, and calculating fuel consumption based on the density and carbon content of the fuel.

One means of determining the effectiveness of a given technology as applied to a given vehicle model would be to measure the vehicle's fuel economy on a chassis dynamometer, install the new technology, and then re-measure the vehicle's fuel economy. However, most technologies cannot simply be ``swapped out,'' and even for those that can, simply doing so without additional engineering work may change other vehicle characteristics (e.g., ride, handling, performance, etc.), producing an

``apples to oranges'' comparison.

Some technologies can also be more narrowly characterized through bench or engine dynamometer (i.e., in which the engine drives a generator that is, in turn, used to apply a controlled load to the engine) testing. For example, engine dynamometer testing could be used to evaluate the brake-specific fuel consumption (e.g., grams per kilowatt-hour) of a given engine before and after replacing the engine oil with a less viscous oil. However, such testing does not provide a direct measure of overall vehicle fuel economy or changes in overall vehicle fuel economy.

For a vehicle that does not yet exist, as in NHTSA's analysis of

CAFE standards applicable to future model years, even physical testing can provide only an estimate of the vehicle's eventual fuel economy.

Among the alternatives to physical testing, automotive engineers involved in vehicle design make use of computer-based analysis tools, including a powerful class of tools commonly referred to as ``full vehicle simulation.'' Given highly detailed inputs regarding vehicle engineering characteristics, full vehicle simulation provides a means of estimating vehicle fuel consumption over a given drive cycle, based on the explicit representation of the physical laws governing vehicle propulsion and dynamics. Some vehicle simulation tools also incorporate combustion simulation tools that represent the combustion cycle in terms of governing physical and chemical processes. Although these tools are computationally intensive and required a great deal of input data, they provide engineers involved in vehicle development and design with an alternative that can be considerably faster and less expensive than physical experimentation and testing.

Properly executed, methods such as physical testing and full vehicle simulation can provide reasonably (though not absolutely) certain estimates of the vehicle fuel economy of specific vehicles to be produced in the future. However, when analyzing potential CAFE standards, NHTSA is not actually designing specific vehicles. The agency is considering implications of new standards that will apply to the average performance of manufacturers' entire production lines. For this type of analysis, precision in the estimation of the fuel economy of individual vehicle models is not essential; although it is important that the agency avoid systematic upward or downward bias, uncertainty at the level of individual models is mitigated by the fact that compliance with CAFE standards is based on average fleet performance.

As discussed above, the Volpe Model, which the agency has used to perform the analysis supporting today's final rule, applies an incrementally multiplicative approach to estimating the fuel savings achieved through the progressive addition of fuel-saving technologies.

NAS' use of the same approach in its 2002 report was, at the time and henceforth, criticized by a small number of observers as being prone to systematic overestimation of available fuel savings. This assertion was based on the fact that, among the technologies present on any given vehicle, more than one may address the same energy loss mechanism

(notably, pumping losses on throttled engines). Once all energy losses of a given type are eliminated, even theoretical improvements attributable to that loss mechanism are no longer available.

The most direct critique of NAS' methods appeared in a 2002 SAE paper by four General Motors researchers (Patton, et al.), who compared some of NAS' calculations to fuel consumption estimates obtained through vehicle testing and simulation, and concluded that, as increasing numbers of technologies were applied, NAS' estimates became increasingly subject to overestimation of available fuel consumption reductions.\131\

\131\ Patton, K.J., et al., General Motors Corporation,

``Aggregating Technologies for Reduced Fuel Consumption: A Review of the Technical Content in the 2002 National Research Council Report on CAFE'', 2002-01-0628, Society of Automotive Engineers, Inc., 2002.

In response to such concerns, which had also been raised as the NAS committee performed its analysis, the NAS report concluded that vehicle simulation performed for the committee indicated that the report's incremental fuel savings estimates were ``quite reasonable'' for the less aggressive two of the three product development paths it evaluated. The report did, however, conclude that uncertainty increased with consideration of more technologies, especially under the more aggressive ``path 3'' evaluated by the committee. The report did not, however, mention any directional bias to this uncertainty.\132\

\132\ NRC (2002), op. cit., p. 151.

Notwithstanding this prior response to concerns about the possible overestimation of available fuel savings, and considering that analyses supporting the development of the NPRM, the Volpe model applies

``synergy factors'' that adjust fuel savings calculations when some pairs of technologies are applied to the same vehicle, as discussed above in Section IV.C.7. These factors reduce uncertainty and the potential for positive or negative biases in the Volpe model's estimates of the effects of technologies.

As an alternative to estimating fuel consumption through incremental multiplication and the application of ``synergy'' factors to address technology interactions, NHTSA considered basing its analysis of fuel economy standards on full vehicle simulation at every step. However, considering the nature of CAFE analysis (in particular, the analysis of fleets projected to be sold in the future by each manufacturer), as well as the quantity and availability of information required to perform vehicle simulation, the agency explained that it believed detailed simulation when analyzing the entire fleet of future vehicles is neither necessary nor feasible. Still, when estimating synergies between technologies, the agency did make use of vehicle simulation studies, as discussed above. The agency has also done so when re-estimating synergies before performing the analysis supporting today's final rule.

NHTSA also considered estimating changes in fuel consumption by explicitly accounting for each of several energy loss mechanisms--that is, physical mechanisms to which the consumption of (chemical) energy in fuel may be attributed. This approach would be similar to that proposed in 2002 by Patton et al. The agency invited comment on this approach, requested that manufacturers submit product plans disaggregating fuel consumption into each of nine loss mechanisms, and sought estimates of the extent to which fuel-saving technologies affect each of these loss mechanisms.

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In response to the NPRM, the Alliance presented a detailed analysis by Sierra Research, which used a modified version of VEHSIM (a vehicle simulation tool) to estimate the fuel consumption resulting from the application of various vehicle technologies to 25 vehicle categories intended to represent the fleet. The Alliance commented that this simulation-based approach is more accurate than that applied by NHTSA, and indicated that Sierra's ability to perform this analysis demonstrates that NHTSA should be able to do the same.

General Motors also raised questions regarding the multiplicative approach to fuel consumption estimation NHTSA has implemented using the

Volpe model. GM indicated that the Volpe model should be enhanced with modifications to ``take into account the basic physics of vehicles.''

\133\ Although GM's comments did not explicitly mention vehicle simulation, GM did express full support for the Alliance's comments.

\133\ GM comments at 2, Docket No. NHTSA-2008-0089-0162.

The California Air Resources Board (CARB) presented comparisons of different simulation studies, commenting that these demonstrate that the VEHSIM model used by Sierra Research ``cannot accurately simulate vehicles that use advanced technologies such as variable valve timing and lift and advanced transmissions.'' \134\ CARB also questioned

Sierra Research's simulation capabilities and suggested that, in support of actual product development, manufacturers neither contract with Sierra Research for such services nor make use of VEHSIM. CARB further commented that both AVL (which performed simulation studies for

CARB's evaluation of potential greenhouse gas standards) and Ricardo

(which has recently performed simulation studies and related analysis for both EPA and NHTSA) provide such services to manufacturers.\135\

\134\ CARB comments at 5, Docket No. NHTSA-2008-0089-0173. In developing potential greenhouse gas (GHG) emissions standards for light vehicles, CARB made significant use of vehicle simulation results presented in ``Reducing Greenhouse Gas Emissions from Light-

Duty Motor Vehicles'', which was published in 2004 by the Northeast

States Center for a Clean Air Future (NESCCAF). As NHTSA discussed in the NPRM, CARB's and NESCCAF's approach, which effectively reduces each manufacturer's fleet to five ``representative'' vehicles and two average vehicle weights, is too limited for purposes of CAFE analysis.

\135\ California Air Resources Board, ``Air Resources Board

Staff Comments on Sierra and Martec NRC Presentations'', p. 2.

However, the Alliance and GM have criticized technical aspects of the AVL and Ricardo vehicle simulation studies mentioned by CARB.

Regarding the AVL vehicle simulations CARB utilized, GM raised concerns that, among other things, some of AVL's simulations assumed the use of premium-grade gasoline, and some effectively assume vehicle performance and utility would be compromised.\136\ Similarly, the Alliance raised concerns that some of the simulations performed by Ricardo for EPA assumed the use of premium fuel, and that many of the simulations assumed vehicle performance would be reduced.\137\ The Alliance also indicated that the five vehicles analyzed by Ricardo for EPA were not representative of all vehicles in the fleet, leading to overstatement of the degree of improvement potentially available to vehicles that already use technologies not present in the vehicles examined by EPA.

The Alliance further argued that the report did not reveal sufficient detail regarding important simulation details (related, e.g., to cylinder deactivation), that it failed to account for some parasitic and accessory loads, and that EPA directed Ricardo to unrealistically assume universal improvements in aerodynamics, tire efficiency, and powertrain friction.\138\

\136\ Testimony of Kenneth Patton (GM); Testimony of Kevin

McMahon (Martec); Plaintiffs' Proposed Findings of Fact, June 15, 2007, pp. 103 -113.

\137\ Alliance of Automobile Manufacturers, ``Detailed Technical

Comments on Ricardo `Study of Potential Effectiveness of Carbon

Dioxide Reducing Vehicle Technologies' Report'', March 6, 2008.

\138\ For the reader's reference, Ricardo's study for EPA was based on specific EPA-defined requirements, such as performing full vehicle simulations of 26 different technology packages on the EPA- specified 5 baseline vehicles. Thus, to the extent that Ricardo's numbers do not reflect specific differences in technology effectiveness by vehicle model, in conducting the analysis for

NHTSA's final rule, NHTSA and Ricardo drew on Ricardo's knowledge to develop incremental benefits based in part on Ricardo's simulation work. Ricardo also noted differences between its report for EPA and the EPA Staff Technical Report in terms of the incremental benefits for individual technologies developed by EPA based on Ricardo's simulation.

Although submitted after the close of the comment period specified in the NPRM, comments by several state Attorneys General and other state and local official questioned the need and merits of full vehicle simulation within the context of CAFE analysis, stating that

Computer simulation models such as VEHSIM are not practical except perhaps during vehicle development to determine the performance of specific vehicle models where all vehicle engineering parameters are known and can be accounted for in the inputs to the model. Such an exercise is extremely data intensive, and extending it to the entire fleet makes it subject to multiple errors unless the specific parameters for each vehicle model are known and accounted for in the model inputs.\139\

\139\ Attorneys General of the States of California, Arizona,

Connecticut, Illinois, Maryland, Massachusetts, New Jersey, New

Mexico, Oregon, and Vermont, the Executive Officer of the California

Air Resources Board, the Commissioner of the New Jersey Department of Environmental Protection, the Secretary of the New Mexico

Environment Department, the Secretary of the Commonwealth of

Pennsylvania Department of Environmental Protection, and the

Corporation Counsel of the City of New York, Supplemental Comments

Regarding Alliance of Automobile Manufacturers Comments, Docket No.

NHTSA-2008-0089-0495, October 8, 2008, p. 3.

Considering the comments summarized above, the analyses to which they refer, and the nature of the analysis the agency performs when evaluating potential CAFE standards, NHTSA has concluded that full vehicle simulation, though useful to manufacturers' own product development efforts, remains neither necessary nor feasible for the MY 2011 CAFE analysis. NHTSA's basis for this conclusion is as follows:

Full vehicle simulation involves estimating the fuel consumption

(and, typically, emissions) of a specific vehicle over a specific driving cycle. Many engineering characteristics of the vehicle must be specified, including, but not limited to weight, rolling resistance, tire radius, aerodynamic drag coefficient, frontal area, engine maps\140\ and detailed transmission characteristics (gear ratios, shift logic, etc.), other drivetrain characteristics, and accessory loads.

Additional engine test data would also be required in order to update engine maps when evaluating the application of advanced engine technologies. Driving cycles--vehicle speeds over time--are specified on a second-by-second (or more finely-grained) basis. Using full vehicle simulation to estimate average fuel consumption under the test procedures relevant to CAFE involves many simulations to capture all the potential combinations of technologies that could be used.

\140\ An engine map specifies the engine's efficiency under many different operating conditions, each of which is defined in terms of rotational speed (i.e., revolutions per minute, or RPM) and load

(i.e., torque).

Given all of the requisite data representing a specific vehicle, full vehicle simulation can provide a powerful means of estimating vehicle performance while accounting for interactions between various vehicle components and systems. Full simulation can also provide a means of estimating vehicle performance under driving conditions not represented by the fuel economy test procedures. For

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an engineer involved in the design of a specific vehicle or vehicle component or system, or a manufacturer making specific decisions regarding the fleet of vehicles it will produce, vehicle simulation can be a powerful tool. However, even the most detailed simulation involving full combustion cycle simulation is not the ``gold standard'' for product design. Chrysler, for example, has portrayed simulation as one of several tools in its CAFE planning process, which also involves physical testing (i.e., bench testing, chassis dynamometer testing) of actual components and assembled vehicles.\141\

\141\ Fodale, F., Chrysler LLC, ``Fuel Economy/Fuels--Presented to NRC Committee on Fuel Economy of Light-Duty Vehicles'', November 27, 2007.

In purpose and corresponding requirements, NHTSA's evaluation of regulatory options is fundamentally different from the type of product planning and development that a manufacturer conducts. A manufacturer must make specific decisions regarding every component that will be installed in every vehicle it plans to produce, and it must ultimately decide how many of each vehicle it will produce. Although manufacturers have some ability to make ``mid-course adjustments,'' that ability is limited by a range of factors, such as contracts and tooling investments. By comparison, NHTSA attempts only to estimate how a given manufacturer might attempt to comply with a potential CAFE standard; given the range of options available to each manufacturer, NHTSA has little hope of predicting specifically what a given manufacturer will do. CAFE standards require average levels of performance, not specific technology outcomes. Therefore, while it is important that NHTSA avoid systematic bias when estimating the potential to increase the fuel economy of specific vehicle models, it is not important that the agency's estimates precisely forecast results for every future vehicle.

Furthermore, NHTSA evaluates the impact of CAFE standards on all manufacturers, based on a forecast of specific vehicle models each manufacturer will produce for sale in the U.S. in the future. An analysis for MY 2011 can involve thousands of unique vehicle models, hundreds of unique engines, and hundreds of unique transmissions.

Model-by-model representation, as used in the analysis for this final rule, allows the agency to, among other things, account for technologies expected to be present on each vehicle under ``business as usual'' conditions, thereby avoiding errors regarding the potential to add further technologies.

Because of the intense informational and computational requirements, industry-wide studies that rely on vehicle simulation reduce the fleet to a limited number of ``representative'' vehicles.

This reduction limits the ability to account for technological and other heterogeneity of the fleet, virtually ensuring the overestimation of improvements available to some vehicles (e.g., vehicles that begin with a great deal of technology) and some manufacturers (e.g., manufacturers that sell many high-technology vehicles). AVL's analysis for NESCCAF and Ricardo's analysis for EPA, each of which considered only five vehicle models, are both, therefore, of severely limited use for the kind of fleetwide analysis used in this final rule, although both provide useful information regarding the range of fuel savings achieved by specific technologies and ``packages'' of technologies.

The analysis conducted by Sierra Research for the Alliance considers a significantly greater number (25) of ``representative'' vehicles, drawing important distinctions between similarly-sized cars based on performance. Sierra was able to do so in part because it analyzed historical vehicles. For example, Sierra indicates that model year 1998 engines were used to supply VEHSIM with baseline, ``blended'' engine maps applied universally (rather than specific maps for each manufacturer and vehicle model) for vehicle model years out to 2020.

Considering that, even without increases in CAFE standards, many vehicles produced for sale in the U.S. during the time period considered in a CAFE rulemaking are likely to have technologies such as

VVLT and cylinder deactivation, NHTSA doubts ``blended'' 1998 engines are as representative as implied by Sierra's analysis.

Although NHTSA could, in principle, integrate full vehicle simulation of every vehicle model into its analysis of the future fleet, the agency expects that manufacturers would be unable to provide much of the required information for future vehicles. Even if manufacturers were to provide such information, using full vehicle simulation to estimate the effect of further technological improvements to future vehicles would involve uncertain detailed estimates, such as valve timing, cylinder deactivation operating conditions, transmission shift points, and hybrid vehicle energy management strategies for each specific vehicle, engine, and transmission combination. Even setting aside the vast increases in computational demands that would accompany the use of full vehicle simulation in model-by-model analysis of the entire fleet, the agency remains convinced that the availability of underlying information and data would be too limited for this approach to be practical.

As a third alternative, one that might be more explicitly

``physics-based'' than the use of synergy factors and vastly more practical than full vehicle simulation, NHTSA requested comment on the use of partitioned fuel consumption accounting. Aside from GM's nonspecific recommendation that the Volpe model be modified to account for the ``basic physics of vehicles,'' NHTSA did not receive comments regarding the relative merits of partitioning fuel consumption into several energy loss mechanisms for purposes of estimating the effects of fuel-saving technologies, even though the concept is similar to that proposed by Patton, et al. in 2002.\142\ Some manufacturers provided some of the information that would have been necessary for the implementation of this approach. However, as a group, manufacturers that submitted product plan information to the agency provided far too little disaggregated fuel consumption information to support the development of this approach. Although NHTSA continues to believe that partitioning fuel consumption into various loss mechanisms could provide a practical and sound basis for future analysis, the information required to support this approach is not available at this time.

\142\ Patton, et al., present an energy balance calculation that disaggregates fuel consumption into six energy loss categories, indicating that ``an accounting of the effects of individual technologies on energy losses within these categories provides a practical, physically-based means to evaluate and compare the fuel consumption effects of the various technologies.'' (Patton, et al.,

(2002), op. cit., p. 11.)

In conclusion, NHTSA observes that with respect to the CAFE analysis prepared for this final rule, full vehicle simulation could theoretically be used at three different levels. First, full vehicle simulation could be used only to provide specific estimates, that, combined with other data (e.g., from bench testing) would provide a basis for estimates of the effectiveness of specific individual technologies. While NHTSA will continue considering this type of analysis, the agency anticipates that it will continue to be feasible and informative to make somewhat greater use of full vehicle simulation. Second, full vehicle simulation could be fully integrated into NHTSA's model-by-model analysis of the entire fleet to be

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projected to be produced in future model years. NHTSA expects, however, that this level of integration will remain infeasible considering the size and complexity of the fleet. Also, considering the forward-looking nature of NHTSA's analysis, and the amount of information required to perform full vehicle simulation, NHTSA anticipates that this level of integration would involve misleadingly precise estimates of fuel consumption, even for MY 2011. Finally, full vehicle simulation can be used to develop less complex representations of interactions between technologies (such as was done using the lumped parameter model to develop the synergies for the final rule), and to perform reference points to which vehicle-specific estimates may be compared. NHTSA views this as a practical and productive potential use of full vehicle simulation, and will consider following this approach in the future.

NHTSA has contracted with NAS to, among other things, evaluate the potential use of full vehicle simulation and other fuel consumption estimation methodologies. Nevertheless, in addition to considering further modifications to the Volpe model, NHTSA will continue to consider other methods for evaluating the cost and effect of adding technology to manufacturers' fleets. 9. Refresh and Redesign Schedule

In addition to, and as discussed below, developing analytical methods that address limitations on overall rates at which new technologies can be expected to feasibly penetrate manufacturers' fleets, the agency has also developed methods to address the feasible scheduling of changes to specific vehicle models. In the Volpe model, which the agency has used to support the current rulemaking, these scheduling-related methods were first applied in 2003, in response to concerns that an early version of the model would sometimes add and then subsequently remove some technologies.\143\ By 2006, these methods were integrated into a new version of the model, one which explicitly

``carried forward'' technologies added to one vehicle model to succeeding vehicle models in the next model year, and which timed the application of many technologies to coincide with the redesign or freshening of any given vehicle model.\144\

\143\ 68 FR 16874 (Apr. 7, 2003).

\144\ 71 FR 17582 (Apr. 6, 2006).

Even within the context of the phase-in caps discussed below, NHTSA considers these model-by-model scheduling constraints necessary in order to produce an analysis that reasonably accounts for the need for a period of stability following the redesign of any given vehicle model. If engineering, tooling, testing, and other redesign-related resources were free, every vehicle model could be redesigned every year. In reality, however, every vehicle redesign consumes resources simply to address the redesign. Phase-in caps, which are applied at the level of manufacturer's entire fleet, do not constrain the scheduling of changes to any particular vehicle model. Conversely, scheduling constraints to address vehicle freshening and redesign do not necessarily yield realistic overall penetration rates (e.g., for strong hybrids).

In the automobile industry there are two terms that describe when changes to vehicles occur: redesign and refresh (i.e., freshening).

Vehicle redesign usually encompasses changes to a vehicle's appearance, shape, dimensions, and powertrain, and is traditionally associated with the introduction of ``new'' vehicles into the market, which is often characterized as the next generation of a vehicle. In contrast, vehicle refresh usually encompasses only changes to a vehicle's appearance, and may include an upgraded powertrain. Refresh is traditionally associated with mid-cycle cosmetic changes to a vehicle, within its current generation, to make it appear ``fresh.'' Vehicle refresh traditionally occurs no earlier than two years after a vehicle redesign or at least two years before a scheduled redesign. In the NPRM, NHTSA tied the application of the majority of the technologies to a vehicle's refresh/ redesign cycle, because their application was significant enough that it could involve substantial engineering, testing, and calibration work.

NHTSA based the redesign and refresh schedules used in the NPRM as inputs to the Volpe model on a combination of manufacturers' confidential product plans and NHTSA's engineering judgment. In most instances, NHTSA reviewed manufacturers' planned redesign and refresh schedules and used them in the same manner it did in past rulemakings.

However, in NHTSA's judgment, manufacturers' planned redesign and refresh schedules for some vehicle models were unrealistically slow considering overall market trends. In these cases, the agency re- estimated redesign and refresh schedules more consistent with the agency's expectations, as discussed below. Also, if companies did not provide product plan data, NHTSA used publicly available data about vehicle redesigns to project the redesign and refresh schedules for the vehicles produced by these companies.\145\

\145\ Sources included, but were not limited to manufacturers' web sites, industry trade publications (e.g., Automotive News), and commercial data sources (e.g., Wards Automotive, etc.).

Unless a manufacturer submitted plans for a more rapid redesign and refresh schedule, NHTSA assumed that passenger cars would normally be redesigned every 5 years, based on the trend over the last 10-15 years showing that passenger cars are typically redesigned every 5 years.

These trends were reflected in the manufacturer product plans that

NHTSA used in the NPRM analysis, and were also confirmed by many automakers in meetings held with NHTSA to discuss various general issues regarding the rulemaking.

NHTSA explained that it believes that the vehicle design process has progressed and improved rapidly over the last decade and that these improvements have made it possible for some manufacturers to shorten the design process for some vehicles in order to introduce vehicles more frequently in response to competitive market forces. Although manufacturers have likely already taken advantage of most available improvements, according to public and confidential data available to

NHTSA, almost all passenger cars will be on a 5-year redesign cycle by the end of the decade, with the exception being some high performance vehicles and vehicles with specific market niches.

NHTSA also stated in the NPRM that light trucks are currently redesigned every 5 to 7 years, with some vehicles (like full-size vans) having longer redesign periods. In the most competitive SUV and crossover vehicle segments, the redesign cycle currently averages slightly above 5 years. NHTSA explained that it is expected that the light truck redesign schedule will be shortened in the future due to competitive market forces Thus, for almost all light trucks scheduled for a redesign in model year 2014 and later, NHTSA projected a 5-year redesign cycle. Exceptions were made for high performance vehicles and other vehicles that traditionally had longer than average design cycles. For those vehicles, NHTSA attempted to preserve their historical redesign cycle rates.

NHTSA discussed these assumptions with several manufacturers at the

NPRM stage, before the current economic crisis. Two manufacturers indicated at

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that time that their vehicle redesign cycles take at least five years for cars and 6 years and longer for trucks because they rely on those later years to earn a profit on the vehicles. They argued that they would not be able to sustain their business if forced by CAFE standards to a shorter redesign cycle. The agency recognizes that some manufacturers are severely stressed in the current economic environment, and that some manufacturers may be hoping to delay planned vehicle redesigns in order to conserve financial resources. However, consistent with its forecast of the overall size of the light vehicle market from MY 2011 on, the agency currently expects that the industry's status will improve, and that manufacturers will typically redesign both car and truck models every 5 years in order to compete in that market.

NHTSA received relatively few comments regarding its refresh/ redesign schedule assumptions. UCS commented that redesign schedules should be shortened to 3 years, based on recent public statements by

Ford that they intended to move to that cycle, and based on other recent manufacturer behavior.

Although NHTSA agrees with UCS that remarks by one Ford official at a January 2008 conference suggest that that company was then hoping to accelerate its vehicle ``cycle time'' to 3 years, the agency questions the context, intended meaning and scope, and representation of those remarks.\146\ Further, the agency notes that the article referenced by

UCS also indicates that ``most manufacturers make changes to their vehicle lines every four years or more, depending on the segment of the market, with mid-cycle freshenings every two years or so.'' \147\

Although some manufacturers have, in their product plans, indicated that they plan to redesign some vehicle models more frequently than has been the industry norm, all manufacturers have also indicated that they expect to redesign some other vehicle models considerably less frequently. The CAR report submitted by the Alliance, prepared by the

Center for Automotive Research and EDF, states that ``For a given vehicle line, the time from conception to first production may span two and one-half to five years,'' but that ``The time from first production

(``Job 1'') to the last vehicle off the line (``Balance Out'') may span from four to five years to eight to ten years or more, depending on the dynamics of the market segment.'' The CAR report then states that ``At the point of final production of the current vehicle line, a new model with the same badge and similar characteristics may be ready to take its place, continuing the cycle, or the old model may be dropped in favor of a different product.'' \148\

\146\ Zoia, D.E. 2008. Ford to cut cycle times to three years.

Online at http://www.wardsauto.com. January 24.

\147\ Id.

\148\ See NHTSA-2008-0089-0170.1, Attachment 16, at 8 (393 of pdf).

NHTSA believes that this description, which states that a vehicle model will be redesigned or dropped after 4-10 years, is consistent with other characterizations of the redesign and freshening process, and supports its 5-year redesign assumption and its 2-3 year refresh cycle assumptions.\149\ Thus, for purposes of the final rule, NHTSA is retaining the 5-year redesign/2-3 year refresh assumptions employed in the NPRM. However, NHTSA will continue to monitor manufacturing trends and will reconsider these assumptions in subsequent rulemakings if warranted.

\149\ See id., at 9 (394 of pdf).

For purposes of the final rule, NHTSA has also considered confidential product plans where applicable and industry trends on refresh and redesign timing as discussed above, to apply specific technologies at redesign, refresh, or any model years as shown in Table

IV-7 below.

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As the table shows, most technologies are applied by the Volpe model when a specific vehicle is due for a redesign or refresh.

However, for low friction lubricants, the model is not restricted to applying it during a refresh/redesign year and thus it was made available for application at any time. Low friction lubricants are very cost-effective, can apply to multiple vehicle models/platforms and can be applied across multiple vehicle models/platforms in one year.

Although they can also be applied during a refresh/redesign year, they are not restricted to that timeframe because their application is not viewed as necessitating a major engineering redesign and associated testing/calibration.

For several technologies estimated in the NPRM to be available for application during any model year, NHTSA now estimates that these technologies will be available only at refresh or redesign. Those technologies include aggressive shift logic, improved accessories, low rolling resistance tires and low drag

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brakes. Aggressive shift logic is now one of the technologies included under improved automatic transmission controls. This technology requires a recalibration specific to each vehicle, such that it can therefore be applied only at refresh or redesign model years. The

``improved accessories'' technology has been redefined to include intelligent engine cooling systems, which require a considerable change to the vehicle and engine cooling system; therefore, improved accessories also can be applied only at refresh or redesign model years. Also, NHTSA concurs with manufacturers' confidential statements that indicating that low drag brakes and low rolling resistance tires can be applied only at refresh or redesign model years due to the need for vehicle testing and calibration (e.g., to ensure safe handling and braking) when these technologies are applied. 10. Phase-In Caps

In 2002, NHTSA proposed the first increases in CAFE standards in six years due to a previous statutorily-imposed prohibition on setting new standards. That proposal, for MY 2005-2007 light truck standards, relied, in part, on a precursor to the current Volpe model. This earlier model used a ``technology application algorithm'' to estimate the technologies that manufacturers could apply in order to comply with new CAFE standards.

NHTSA received more than 65,000 comments on that proposal. Among those were many manufacturer comments concerning lead time and the potential for rapid widespread use of new technologies. The agency noted that DaimlerChrysler and Ford ``argued that the agency had underestimated the lead time necessary to incorporate fuel economy improvements in vehicles, as well as the difficulties of introducing new technologies across a high volume fleet.'' Specific to Volpe's technology application algorithm, the agency noted that General Motors took issue with the algorithm's ``application of technologies to all truck lines in a single model year.'' \150\

\150\ 68 FR 16874 (Apr. 7, 2003).

In response to those concerns, Volpe's algorithm was modified ``to recognize that capital costs require employment of technologies for several years, rather than in a single year.'' \151\ Those changes moderated the rates at which technologies were estimated to penetrate manufacturers' fleets in response to the new (MY 2005-MY 2007) CAFE standards. These changes produced more realistic estimates of the technologies manufacturers could apply in response to the new standards, and thereby produced more realistic estimates of the costs of those standards.

\151\ Id., at 16885.

Prior to the next rulemaking, the Volpe model underwent significant integration and improvement, including the accommodation of explicit

``phase-in caps'' to constrain the rates at which each technology would be estimated to penetrate each manufacturer's fleet in response to new

CAFE standards.\152\ As documented in 2006, the agency's final standards for light trucks sold in MY 2008-MY 2011 were based on phase- in caps ranging from 17 percent to 25 percent (corresponding to full penetration of the fleet within 4 to 6 years) for most technologies, and from 3 percent to 10 percent (full penetration within 10 to 33 years) for more advanced technologies such as hybrid electric vehicles.\153\ The agency based these rates on consideration of comments and on the 2002 NAS Committee's findings that ``widespread penetration of even existing technologies will probably require 4 to 8 years'' and that for emerging technologies ``that require additional research and development, this time lag can be considerably longer''.\154\

\152\ These caps constrain the extent to which additional technology is applied by the model, beyond the levels projected in each manufacturer's baseline fleet. Also, because manufacturers' fleets are comprised of vehicles, engines, and transmissions sold in discrete volumes, phase-in caps cannot be applied as precise limits.

In some cases (when a phase-in cap is small or a manufacturer has a limited product line), doing so would prevent the technology from being applied at all. Therefore, the Volpe model enforces each phase-in cap constraint as soon as it has been exceeded by application of technologies to manufacturers.

\153\ 71 FR 17572, 17679 (Apr. 6, 2006).

\154\ Id. at 17572. See also 2002 NAS Report, at 5.

In its 2008 NPRM proposing new CAFE standards for passenger cars and light trucks sold during MY 2011-MY 2015, NHTSA considered manufacturers' planned product offerings and estimates of technology availability, cost, and effectiveness, as well as broader market conditions and technology developments. The agency concluded that many technologies could be deployed more rapidly than it had estimated during the prior rulemaking.\155\ For most engine technologies, the agency increased these caps from 17 percent to 20 percent, equivalent to reducing the estimated time for potential fleet penetration from 6 years to 5 years. For stoichiometric gasoline direct injection (GDI) engines, the agency increased the phase-in cap from 3 percent to 20 percent, equivalent to estimating that such engines could potentially penetrate a given manufacturer's fleet in 5 years rather than the previously-estimated 33 years. However, as in its earlier CAFE rulemakings, the agency continued to recognize that myriad constraints prohibit most technologies from being applied across an entire fleet of vehicles within a year, even if those technologies are available in the market.

\155\ 73 FR 24387-88 (May 2, 2008).

In addition to requesting further explanation of NHTSA's use of phase-in caps, commenters addressing phase-in caps generally asserted one of three themes: (1) That hybrid phase-in caps were much lower than market trends or manufacturer announcements would otherwise suggest;

(2) that the phase-in caps proposed in the NPRM were too high in the early years of the rulemaking and did not reflect the very small (from a manufacturing perspective) amount of lead-time between the final rule and the MY 2011 standards, and/or were too low in the later years of the rulemaking given the relatively-increased amount of lead-time for those model years; (3) that there are insufficient resources (either in terms of capital or engineering) to implement the number of technologies implied by the phase-in caps simultaneously.

Agency response: NHTSA continues to recognize that many factors constrain the rates at which manufacturers will be able to feasibly add fuel-saving technologies to the fleets they will sell in the United

States. For a given technology, examples of these factors may include, but would not be limited to the following:

Is the technology ready for commercial use? For example, can it operate safely and reliably under real-world driving conditions for several years and many miles?

If the technology requires special infrastructure (e.g., new electrical generation and charging facilities), how quickly will that be put in place?

How quickly can suppliers ramp up to produce the technology in mass quantities? For example, how quickly can they obtain the materials, tooling, and engineering resources they will need?

Are original equipment manufacturers (OEMs) ready to integrate the technology into vehicles? For example, how quickly can they obtain the necessary tooling (e.g., retool factories), engineering, and financial resources?

How long will it take to establish failure and warranty data, and to make sure dealers and maintenance and repair businesses have any new training and tooling required in order to work with the new technology?

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Will OEMs be able to reasonably recoup prior investments for tooling and other capital?

To what extent are suppliers and OEMs constrained by preexisting contracts?

NHTSA cannot explicitly and quantitatively evaluate every one of these and other factors with respect to each manufacturer's potential deployment of each technology available during the production intent or emerging technology framework. Attempting to do so would require an extraordinary effort by the agency, and would likely be subject to tremendous uncertainties. For example, in the current economic and market environment, the agency expects that it would be impossible to reliably predict specific characteristics of future supply chains.

Therefore, the agency has concluded that it is appropriate to continue using phase-in caps to apply the agency's best judgment of the extent to which such factors combine to constrain the rates at which technologies may feasibly be deployed. We note, however, that many of the assumptions about phase-in caps made in this final rule apply to years beyond MY 2011, because as the NAS Committee and commenters indicated, technologies are phased in over several years, so the agency evaluated the phasing-in of technologies over the five-year period proposed in the NPRM. NHTSA provides these assumptions both in response to comments and to provide context for the agency's decisions regarding

MY 2011 phase-in caps. We emphasize that all assumptions for years other than MY 2011 will be reconsidered for future rulemakings and may be subject to change at that time.

Considering the above-mentioned comments, NHTSA has concluded that the phase-in caps it applied during its analysis documented in the 2008

NPRM resulted in technology penetration rates that were unrealistically high in the earlier model years covered by its proposal, particularly for MY 2011. This was a significant basis for the proposed standards'

``front loading'' about which manufacturers expressed serious concerns.

In response, and based on this conclusion, the Volpe model was modified for purposes of the final rule analysis to use phase-in caps for each technology that vary from one year to the next, and that in many cases would have increased more rapidly in the later years of the agency's analysis than in earlier years. In making these changes, particularly to the MY 2011 phase-in caps, the agency has been mindful of the need to provide manufacturers sufficient lead time to add technologies to their fleets. In the agency's judgment, its revised approach more realistically represents manufacturers' capabilities and therefore produces more realistic estimates of the costs of new CAFE standards.

For some technologies, NHTSA also concluded that slower overall rates of fleet penetration are more likely than the rates shown in the

NPRM. The agency estimates that cylinder deactivation, stoichiometric

GDI, and turbocharging with downsizing would be able to potentially be added to 12-14 percent of the fleet per year on average, rather than the 20 percent phase-in caps used in the NPRM for these technologies.

Considering manufacturers' comments and some aspects of its reevaluation of the incremental benefits of available engine technologies, the agency has concluded that these technologies will, for some engines, require more significant hardware changes and certification burden than previously recognized, such that feasible deployment is likely to be somewhat slower than estimated in the NPRM.

NHTSA has also concluded, considering the complexities involved in deploying strongly hybridized vehicles (i.e., power split, two mode, and plug-in hybrids), it is unrealistic to expect that, in response to new CAFE standards, manufacturers can produce more of such vehicles in

MY 2011 than they are already planning. Therefore, NHTSA has set the MY 2011 phase-in cap for strong hybrids to zero in that model year. Based on new information regarding engineering resources entailed in developing new power split and two-mode hybrid vehicles, the agency estimated in its analysis that these technologies could be added to up to 11 percent and 8 percent, respectively, of a given manufacturer's long run fleet, rather than the 15 percent the agency estimated for the

NPRM. The agency also considered a less aggressive 1 percent longer run phase-in cap for plug-in hybrids, in part because although the agency expects that plug-in hybrids will rely on lithium-ion batteries, it is not clear whether and, if so, how the supply chain for large and robust lithium-ion batteries will develop.

On the other hand, NHTSA has also concluded that some technologies can potentially be deployed more widely than estimated in the NPRM. For example, the agency estimates that 6/7/8-speed transmissions, dual clutch or automated manual transmissions, secondary axle disconnect, and aerodynamic improvements can potentially (notwithstanding engineering constraints that, for example, preclude the application of aerodynamic improvements to some performance vehicles) be added at an average rate of 20 percent per year of a given manufacturer's fleet rather than the 14-17 percent average annual phase-in caps used in the

NPRM for these technologies. In the agency's judgment, increased phase- in caps are appropriate for these transmission technologies, in part because the agency's review of confidential product plans which indicated a higher than anticipated application rate of these technologies than existed at the time of the NPRM. Additionally, several manufacturers indicated a high likelihood of significant usage of dual clutch transmissions across their fleet of vehicles. The secondary axle disconnect technology was redefined for the final rule to consist of a somewhat basic, existing technology applicable only to 4 wheel-drive vehicles (a smaller population) rather than the NPRM- defined technology (which was applicable to both 4 and all wheel drive vehicles). The agency has also concluded that, because it has identified performance vehicles as such, and has estimated that aerodynamic improvements are not applicable to these vehicles, aerodynamic dynamic improvements can be applied more widely as long as they are applied consistent with vehicle redesign schedules.

Furthermore, considering changes in manufacturers' stated expectations regarding prospects for diesel engines, the agency estimates that diesel engines could be added to as much as 4 percent of a manufacturer's light truck fleet each year on average, rather than the 3 percent estimated in the NPRM. These changes in NHTSA's estimates stem from the agency's reevaluation of the status of these technologies, as revealed by manufacturers' plans and confidential statements, as well as other related comments submitted in response to the NPRM.

Regarding comments that manufacturers' public statements reflect the ability to deploy technology more rapidly than reflected in the phase-in caps NHTSA applied in the NPRM, NHTSA notes that it did consider such statements. Combined with other information, these led the agency to conclude that, as mentioned above, some technologies could, particularly in later years, be applied more widely than the agency had previously estimated. However, in their confidential statements to NHTSA, manufacturers

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are typically more candid about factors--both positive and negative-- that affects their ability to deploy new technologies than they are in public statements available to their competitors. Therefore, NHTSA places greater weight on manufacturers' confidential statements, especially when they are consistent with statements made by other manufacturers and/or suppliers. NHTSA also observes that some organizations have exhibited a tendency to take manufacturers' statements out of context, or overlook important caveats included in such statements, which are largely used for marketing purposes.

Table IV-8 below outlines the phase-in caps for each discrete technology for MY 2011. These phase-in caps, along with the expanded number and types of vehicle subclasses, address the concerns raised by commenters and represent a substantial improvement in terms of consideration of the factors affecting technology penetration rates over those used in the NPRM. Additional considerations regarding specific phase-in caps, including nonlinear increases in these caps, are presented in the more detailed technology-by-technology analysis summarized below.

For some of the technologies applied in the final rule, primarily the valvetrain and diesel engine technologies, NHTSA has utilized combined phase-ins caps since the technologies are effectively the same from the standpoints of engineering and implementation. The final rule represented diesel engines as two technologies that both result in the conversion of gasoline engine vehicles. The annual phase-in caps for these two technologies, which are both set to a maximum of 3 percent for passenger cars (4 percent for light trucks) have been combined so that the maximum total application of either or both technologies to any manufacturers' passenger car fleet is limited to 3 percent (not 6 percent). For example, if 3 percent of a manufacturers' passenger car fleet has received diesel following combustion restart in a given year, diesel following turbocharging and downsizing will not be applied because the phase-in cap for diesels would have been reached. These combined phase-in caps are discussed below where applicable to each technology.

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D. Specific Technologies Considered for Application and NHTSA's

Estimates of Their Incremental Costs and Effectiveness 1. What data sources did NHTSA evaluate?

In developing the technology assumptions in the final rule, NHTSA, working with Ricardo, examined a wide range of data sources and comments. We reexamined the sources we relied on for the NPRM such as the 2002 NAS Report, the 2004 NESCCAF report developed for CARB by AVL and Martec, the 2006 EEA report and the EPA certification data. We also considered more recent and updated sources of information and reports submitted to the NPRM docket, including the (1) Sierra Research report submitted by the Alliance as an attachment to its comments as another set of estimates for fuel economy cost and effectiveness,\156\ (2)

CARB's response to aspects of that report, which was filed as supplemental comment on October 14, 2008, (3) the 2008 Martec

Report,\157\ which updated the Martec report on which the 2004 NESCCAF study was based, and the EPA Staff Technical Report,\158\ which largely mirrored NHTSA's NPRM estimates.

\156\ Sierra Research, ``Attachment to Comment Regarding the

NHTSA Proposal for Average Fuel Economy Standards Passenger Cars and light Trucks Model Years 2011-2015,'' June 27, 2008. Available at

Docket No. NHTSA-2008-0089-0179.1.

\157\ Martec, ``Variable Costs of Fuel Economy Technologies,''

June 1, 2008. Available at Docket No. NHTSA-2008-0089-0169.1.

\158\ EPA Staff Technical Report: Cost and Effectiveness

Estimates of Technologies Used to Reduce Light-Duty Vehicle Carbon

Dioxide Emissions. EPA420-R-08-008, March 2008.

The agency also evaluated confidential data from a number of vehicle manufacturers and technology component suppliers.\159\ We note that vehicle manufacturers updated their product plans in response to

NHTSA's May 2008 Request for Comment.\160\

\159\ The major suppliers that provided NHTSA with fuel economy cost and effectiveness estimates in response to our request for comments included Borg-Warner, Cummins, and Delphi, while Borg-

Warner, Bosch, Coring, Cummins, Delphi, and Siemens also provided

NHTSA with fuel economy cost and effectiveness estimates during confidential meetings.

\160\ Manufacturers that provided NHTSA with fuel economy cost and effectiveness estimates in response to our request for comments include BMW, Chrysler, Daimler, Ford, GM, Honda, Nissan, and Toyota.

2. Individual technology descriptions and cost/effectiveness estimates

(a) Gasoline Engine Technologies

(i) Overview

Most passenger cars and light trucks in the U.S. have gasoline- fueled spark ignition internal combustion engines. These engines move the vehicle by converting the chemical energy in gasoline fuel to useful mechanical work output as shaft torque and power delivered to the transmission and to the vehicle's driving wheels. Vehicle fuel economy is directly proportional to the efficiency of the engine. Two common terms are used to define the efficiency of an engine are (1)

Brake Specific Fuel Consumption (BSFC), which is the ratio of the mass of fuel used to the output mechanical energy; and (2) Brake Thermal

Efficiency (BTE), which is the ratio of the fuel chemical energy, known

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as calorific value, to the output mechanical energy.

The efficiency of an automotive spark ignition engine varies considerably with the rotational speed and torque output demanded from the engine. The most efficient operating condition for most current engine designs occurs around medium speed (30-50 percent of the maximum allowable engine rpm) and typically between 70-85 percent of maximum torque output at that speed. At this operating condition, BTE is typically 33-36 percent. However, at lower engine speeds and torque outputs, at which the engine operates in most consumer vehicle use and on standardized drive cycles, BTE typically drops to 20-25 percent.

Spark ignition engine efficiency can be improved by reducing the energy losses that occur between the point of combustion of the fuel in the cylinders to the point where that energy reaches the output crankshaft. Reduction in this energy loss results in a greater proportion of the chemical energy of the fuel being converted into useful work. For improving engine efficiency at lighter engine load demand points, which are most relevant for CAFE fuel economy, the technologies that can be added to a given engine may be characterized by which type of energy loss is reduced, as shown in Table IV-9 below.

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As Table IV-9 shows, the main types of energy losses that can be reduced in gasoline engines to improve fuel economy are exhaust energy losses, engine friction losses, and gas exchange losses. Converting the gasoline engine to a diesel engine can also reduce heat losses.

Exhaust Energy Loss Reduction

Exhaust energy includes the kinematic and thermal energy of the exhaust gases, as well as the wasted chemical energy of unburned fuel.

These losses represent approximately 32 percent of the initial fuel chemical energy and can be reduced in three ways: first, by recovering mechanical or electrical energy from the exhaust gases; second, by improving the hydrocarbon fuel conversion; and third, by improving the cycle thermodynamic efficiency. The thermodynamic efficiency can be improved by either increasing the engine's compression ratio or by operating with a lean air/fuel ratio. The latter is not considered to be at the emerging technology point yet due to the non-availability of lean NOXaftertreatment, as discussed below. However, the compression ratio may potentially be raised by 1 to 1.5 ratios using stoichiometric direct fuel injection.

Engine Friction Loss Reduction

Friction losses can represent a significant proportion of the global losses at low load. These losses are dissipated through the cooling system in the form of heat. Besides via direct reduction measures, friction can also be reduced through downsizing the engine by means of increasing the engine-specific power output.

Gas Exchange Loss Reduction

The energy expended while delivering the combustion air to the cylinders and expelling the combustion products is known as gas exchange loss, commonly referred to as pumping loss. The main source of pumping loss in a gasoline engine is the use of an inlet air throttle, which regulates engine output by controlling the pre-combustion cylinder air pressure, but is an inefficient way to achieve this pressure control. A more efficient way of controlling the cylinder air pressure is to modify the valve timing or lift. Another way to reduce the average pumping losses is to ``downsize'' the

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engine, making it run at higher loads or higher pressures.

As illustrated in Table IV-9, several different technologies target pumping loss reduction, but it is important to note that the fuel consumption reduction from these technologies is not necessarily cumulative. Once most of the pumping work has been eliminated, adding further technologies that also target reduced pumping loss will have little additional effectiveness. Thus, in the revised decision trees, the effectiveness value shown for additional technologies targeting pumping loss depends on the existing technology combination already present on the engine.

(ii) Low Friction Lubricants (LUB)

One of the most basic methods of reducing fuel consumption in gasoline engines is the use of lower viscosity engine lubricants. More advanced multi-viscosity engine oils are available today with improved performance in a wider temperature band and with better lubricating properties. CAFE standards notwithstanding, the trend towards lower friction lubricants is widespread. Within the next several year, most vehicles are likely to use 5W-30 motor oil, and some will use even less viscous oils, such as 5W-20 or possibly even 0W-20, to reduce cold start friction.

The NPRM reflected NHTSA's belief that manufacturer estimates are the most accurate, and it estimated that low friction lubricants could reduce fuel consumption by 0.5 percent for all vehicle types at an incremental cost of $3, which represented the mid-point of manufacturer estimates range, rounded up to the next dollar. For the final rule

NHTSA used the $3 cost from the NPRM, updated it to 2007 dollars, and marked it up to a retail price equivalent (RPE) of $5. Several manufacturers commented confidentially that low friction lubricants could reduce fuel consumption by 0 to 1 percent, and the Alliance suggested 0.5 percent relative to the baseline fleet. These comments confirm NHTSA's NPRM effectiveness estimate, so NHTSA has retained it for the final rule.

Low friction lubricants may be applied to any class of vehicles.

The phase-in for low friction lubricants is capped at 50 percent for MY 2011. Honda commented that low friction lubricants cannot be applied to engines that have not been developed specifically for them.\161\ NHTSA understands that in some cases there could be a need for design changes and durability verification to implement low friction lubricants in existing engines. However, aftermarket low friction lubricant products already exist, and have been approved for use in existing engines.

\161\ Docket NHTSA-2008-0089-0191.1.

(iii) Engine Friction Reduction (EFR)

Besides low friction lubricants, manufacturers can also reduce friction and improve fuel economy by improving the design of engine components and subsystems. Examples include improvements in low-tension piston rings, roller cam followers, improved crankshaft design and bearings, material coatings, material substitution, more optimal thermal management, and piston and cylinder surface treatments.

In the NPRM, based on confidential manufacturer data and the NAS,

NESCCAF, and EEA reports, NHTSA estimated that friction reduction could incrementally reduce fuel consumption for all vehicles by 1 to 3 percent at a cost of $0 to $21 per cylinder resulting in cost estimates of $0-$84 for a 4-cylinder, $0-$126 for a V-6, and $0-$168 for a V-8.

For the final rule, NHTSA assumed there would be some cost associated with reducing engine friction, since at a minimum engineering and validation testing is required, in addition to any new components required such as roller followers or improved bearings. Additionally some revised components, such as improved surface materials/treatments, piston rings, etc., have costs that vary by component size which need to account for the full range of engines under consideration in the rulemaking, from small displacement gasoline to large displacement diesel engines.

Considering the above, NHTSA relied on confidential manufacturer comments in response to the NPRM to determine a lower technology cost bound of $35 for a 4-cylinder engine and an upper cost of $195 for a 6 cylinder engine. These costs were marked up by a 1.5 RPE factor to arrive at per-cylinder costs of $13 to $49 which were used to establish costs based on cylinder count. Costs of $52 to $196 for a 4-cylinder engine, $78 to $294 for a 6-cylinder engine, and $104 to $392 for an 8- cylinder engine were used in the final rule.

Confidential manufacturer comments submitted in response to the

NPRM showed an effectiveness range of 0.3 to 2 percent for engine friction reduction. Besides the comments received another effectiveness estimate, a November 2007 press release from Renault, claimed a gain of 2 percent over the NEDC cycle \162\ from engine friction reduction.\163\ Based on the available sources, NHTSA established the fuel consumption effectiveness estimate for the final rule as 1 to 2 percent.

\162\ Due to the advanced nature of many of the technologies discussed in the NPRM, and in an effort to find broad based rationale for the specific benefits of each technology type, reference data has been gathered that specifies fuel consumption benefits as measured on the NEDC test cycle. To make this conversion, data from the International Council on Clean

Transportation (ICCT) showed excellent correlation between CAFE test cycle results and NEDC test cycle results. While there was an offset in the linear best fit, the slope was nearly equal to 1; therefore, for this report, any percentage improvement found on the NEDC cycle will be assumed to be equivalent to gains found on the CAFE test cycle.

\163\ Renault press release, ``Renault Introduces The

Ecological, Economical Logan `Renault Eco[sup2]' Concept At The

Michelin Organized Challenge Bibendum, November 14, 2007. Available at http://www. renault.com/renault_ com/en/images/15181%2015181_

DP_logan_eco2_Shanghai_14_nov_DEF_DB_2_tcm1120-686305.pdf

(last accessed October 27, 2008).

Engine friction-reducing technologies are available from model year 2011 and may be applied to all vehicle subclasses. No learning factors were applied to costs as the technology has a loosely defined BOM which may in part consist of materials (surface treatments, raw materials) that are commodity based. As was the case in the NPRM, an average of 20 percent year-over-year phase-in rate starting in 2011 was adopted. As confirmed by manufacturers' comments, NHTSA has maintained the NPRM position that engine friction reduction may only be applied in conjunction with a refresh cycle.

(iv) Variable Valve Timing (VVT)

Variable valve timing (VVT) is a classification of valve-train designs that alter the timing of the intake valve, exhaust valve, or both, primarily to reduce pumping losses, increase specific power, and control the level of residual gases in the cylinder. VVT reduces pumping losses when the engine is lightly loaded by positioning the valve at the optimum position needed to sustain horsepower and torque.

VVT can also improve thermal efficiency at higher engine speeds and loads. Additionally, VVT can be used to alter (and optimize) the effective compression ratio where it is advantageous for certain engine operating modes.

VVT has now become a widely adopted technology: For the 2007 model year, over half of all new cars and light trucks have engines with some method of variable valve timing. Therefore, the degree of further improvement across the fleet is limited by the level of valvetrain technology already

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implemented on the vehicles. Comments from Ford received in response to the NPRM indicate that many of its new and upgraded engines during the specified time period will launch with or upgrade to advanced forms of

VVT, which are discussed below.\164\ Information found in the submitted product plans is used to determine the degree to which VVT technologies have already been applied to particular vehicles to ensure the proper level of VVT technology, if any, is applied. There are three different implementation classifications of variable valve timing: ICP (Intake

Cam Phasing), where a cam phaser is used to adjust the timing of the inlet valves only; CCP (Coupled Cam Phasing), where a cam phaser is used to adjust the timing of both the inlet and exhaust valves equally; and DCP (Dual Cam Phasing), where two cam phasers are used to control the inlet and exhaust valve timing independently. Each of these three implementations of VVT uses a cam phaser to adjust the camshaft angular position relative to the crankshaft position, referred to as ``camshaft phasing.'' This phase adjustment results in changes to the pumping work required by the engine to accomplish the gas exchange process. The majority of current cam phaser applications use hydraulically actuated units, powered by engine oil pressure and managed by a solenoid that controls the oil pressure supplied to the phaser. Electrically actuated cam phasers are relatively new, but are now in volume production with

Toyota, which suggests that technical issues have been resolved.

\164\ Docket No. NHTSA-2008-0089-0202.1, at 4.

Honda commented that VVT is not applicable on existing engine designs that do not already contain these technologies due to durability, noise-vibration-harshness (NVH), thermal, packaging, and other constraints that require engine redesign. 1. Intake Cam Phasing (ICP)

Valvetrains with ICP can modify the timing of the inlet valves by phasing the intake camshaft while the exhaust valve timing remains fixed. This requires the addition of a cam phaser on each bank of intake valves on the engine. An in-line 4-cylinder engine has one bank of intake valves, while V-configured engines have two banks of intake valves.

In the NPRM, NHTSA and EPA estimated that ICP would cost $59 per cam phaser or $59 for an in-line 4 cylinder engine and $119 for a V- type, for an overall cost estimate of $59 to $119, based on the NAS,

NESCCAF, and EEA reports and confidential manufacturer data. NHTSA received several updated cost estimates confidentially from manufacturers for ICP costs in response to the NPRM that varied over a wide range from $35 to $300, and additionally looked to the 2008 Martec report for costing guidance. According to the 2008 Martec report, content assumptions for ICP costing include the addition of a cam phaser and oil control valves at $25 and $10 respectively, per bank, which agreed with confidential manufacturer data received in response to the NPRM. These figures were then adjusted to include an incremental camshaft sensor per bank at $4, and an additional $2 increase to account for an ECU upgrade as shown by confidential data. Using a markup of 1.5 to yield a RPE value, the incremental cost for ICP in the final rule is estimated to be $61 per bank, resulting in a $61 charge for in-line engine configurations and $122 for V-engine configurations.

For fuel economy effectiveness values, NHTSA tentatively concluded in the NPRM that the incremental gain in fuel consumption for ICP would be 1 to 2 percent depending on engine configuration, in agreement with the NESCCAF study. Confidential manufacturer data submitted in response to the NPRM showed a larger effectiveness range of 1.0 to 3.4 percent, although the majority of those estimates fell at the lower end of that range. Based on the comments received, NHTSA retained the NPRM estimates of 1 to 2 percent incremental improvement in fuel consumption due to ICP.

ICP is applicable to all vehicle classes and can be applied at the refresh cycle. For the final rule, NHTSA has combined the phase-in caps for ICP, CCPS, CCPO and DCP and capped the joint penetration allowed at 15 percent in MY 2011 with time-based learning applied. 2. Coupled Cam Phasing (CCPS and CCPO)

Valvetrains with coupled (or coordinated) cam phasing can modify the timing of both the inlet valves and the exhaust valves an equal amount by phasing the camshaft of a single overhead cam (SOHC) engine or an overhead valve (OHV) engine.\165\ For overhead cam engines, this requires the addition of a cam phaser on each bank of the engine. Thus, an in-line 4-cylinder engine has one cam phaser, while V-engines have two cam phasers. For overhead valve (OHV) engines, which have only one camshaft to actuate both inlet and exhaust valves, CCP is the only VVT implementation option available.\166\

\165\ Although CCP appears only in the SOHC and OHV branches of the decision tree, it is noted that a single phaser with a secondary chain drive would allow CCP to be applied to DOHC engines. Since this would potentially be adopted on a limited number of DOHC engines NHTSA did not include it in that branch of the decision tree.

\166\ It is also noted that coaxial camshaft developments would allow other VVT options to be applied to OHV engines. However, since they would potentially be adopted on a limited number of OHV engines

NHTSA did not include them in the decision tree.

In the NPRM, NHTSA explained that for an OHV engine, the same phaser added for ICP would be used for CCP control, so the cost for CCP should be identical to that for ICP. For an OHV, since only one phaser would be required since only camshaft exists, NHTSA estimated the cost for CCP at $59 regardless of engine configuration, using the logic provided for ICP. For purposes of the final rule, the logic for ICP also carries over to the cost estimates for CCP. Cost assumptions for

CCP are the same as ICP resulting in RPE-adjusted costs of $61 for in- line SOHC or OHV engines and $122 for SOHC V-engine configurations, incremental to an engine without VVT.

For fuel economy effectiveness, NHTSA estimated in the NPRM that the incremental gain in fuel consumption for CCP is 1 to 3 percent above that obtained by ICP, in agreement with the NESCCAF report and confidential manufacturer data. Confidential manufacturer data submitted in response to the NPRM also showed an effectiveness range of 1 to 3 percent for CCP, although Ford has publicly reported a 3.3 percent improvement for CCP when applied to its 5.4 liter 3-valve V8 engine (which has high EGR tolerance due to the valve-masking effect with the 3-valve design).\167\ Most engines are not as EGR-tolerant and so will not achieve as much effectiveness from CCP as the Ford engine.

For purposes of the final rule, NHTSA essentially carried over the NPRM incremental effectiveness of applying the CCP technologies to be 1 to 3 percent. CCP can be applied to any class of vehicles at refresh. For the final rule, NHTSA has combined the phase-in caps for ICP, CCPS,

CCPO and DCP and capped the joint penetration at 15 percent in MY 2011.

Since these technologies are mature and in high volume, time-based learning factors are

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applied. CCP can be applied to any class of vehicles.

\167\ Robert Stein, Tachih Chou, and Jeffrey Lyjak, ``The

Combustion System Of The Ford 5.4 L 3 Valve Engine,'' Global

Powertrain Congress 2003--Advanced Engine Design & Performance, Sep 2003, Volume 24. Available at http://www.gpc-icpem.org/pages/ publications.html (last accessed Nov. 8, 2008).

3. Dual Cam Phasing (DCP)

The most flexible VVT design is dual (independent) cam phasing, where the intake and exhaust valve opening and closing events are controlled independently. This option allows the option of controlling valve overlap, which can be used as an internal EGR strategy. At low engine loads, DCP creates a reduction in pumping losses, resulting in improved fuel consumption. Additionally, increased internal EGR results in lower engine-out NOXemissions and improved fuel consumption. This fuel economy improvement depends on the residual tolerance of the combustion system, as noted in the CCP section above.

Additional improvements are observed at idle, where low valve overlap can result in improved combustion stability, potentially reducing idle fuel consumption.

In the NPRM, NHTSA estimated costs for DCP by building upon the cost estimates for ICP, where an additional cam phaser is added to control each bank of exhaust valves less the cost of the EGR valve which can be deleted. This resulted in an NPRM cost range of $89 to

$209. For purposes of the final rule, cost assumptions for DCP, which included inflation, were determined by essentially doubling the ICP hardware, yielding an incremental cost of $61 per engine cylinder bank, over ICP. This translates to a cost of $61 for in-line engines and $122 for V-engine configurations, incremental to ICP technology.

For fuel economy effectiveness, NHTSA estimated in the NPRM that the incremental gain in fuel consumption for DCP is 1 to 3 percent, in agreement with the NESCCAF report and confidential manufacturer data.

Confidential manufacturer data received in response to the NPRM showed an effectiveness range of 0.5 to 3.4 percent for DCP. Publicly available data from BMW \168\ and Ford \169\ show an effectiveness of 5 percent for DCP over engines without VVT, agreeing with the upper bounds for ICP and DCP combined. For purposes of the final rule, NHTSA concluded that the effectiveness for DCP should be at the upper end of the CCP range due to the additional flexibility gained through independent control of intake and exhaust valve timing, and therefore estimated an incremental fuel consumption reduction of 2 to 3 percent for DCP incremental to the 1 to 2 percent for ICP.

\168\ Meyer, BMW, ``Turbo-Charging BMW's Spray-Guided DI

Combustion System--Benefits and Challenges,'' Global Powertrain

Congress, September, 2005, vol. 33. Available at http://www.gpc- icpem.org/pages/publications.html (last accessed Nov. 8, 2008).

\169\ Ulrich Kramer and Patrick Phlips, ``Phasing Strategy For

An Engine With Twin Variable Cam Timing,'' SAE Technical Paper 2002- 01-1101, 2002. Available at http://www.sae.org/technical/papers/ 2002-01-1101. (last accessed Nov. 9, 2008),

There are no class-specific applications of this technology and DCP can be applied at the refresh cycle. For the final rule, NHTSA has combined the annual average phase-in caps for ICP, CCPS, CCPO and DCP and capped the joint penetration at 15 percent in MY 2011. The DCP technology is assumed to be produced at high volume, thus time-based learning is applied.

(v) Discrete Variable Valve Lift (DVVLS, DVVLD, DVVLO)

DVVL systems allow the selection between two or three separate cam profiles by means of a hydraulically actuated mechanical system. By optimizing the cam profile for specific engine operating regions, the pumping losses can be reduced by reducing the amount of throttling required to produce the desired engine power output. This increases the efficiency of the engine. DVVL is normally applied together with VVT control. DVVL is also known as Cam Profile Switching (CPS). DVVL is a mature technology with low technical risk.

In the NPRM, based on the NESCCAF report and confidential manufacturer data, NHTSA estimated the incremental cost for DVVL at

$169 to $322 compared to VVT depending on engine size, which included

$25 for controls and associated oil supply needs. In response to the

NPRM, confidential manufacturer comments noted a cost range of $150 to

$600 for DVVL on OHC engines. Sierra Research has noted costs ranging from $518 to $656 for DVVL including dual cam phasers on a mid-size car and $634 to $802 on trucks.\170\ For purposes of the final rule, NHTSA has changed the order of the technologies in the decision trees which has changed how the DVVL costs are handled.

\170\ Docket No. NHTSA-2008-0089-0179.1, p 59 and Docket No.

NHTSA-2008-0089-0046, p. 52.

For the overhead cam engines, SOHC and DOHC, the costs were derived by taking $30 per cylinder for lost motion devices, adding a $4 incremental cost for a camshaft position sensor upgrade and $10 for an oil control valve on each engine cylinder bank, as indicated by the 2008 Martec report. This assumes that one lost motion device is used to control either a single intake valve on an SOHC engine or a pair of intake valves on a DOHC engine, as was done in the NPRM. NHTSA's independent review concurred with data in the 2008 Martec report because it contained the most complete published description of DVVL costs and it agreed with confidential manufacturer data received in response to the NPRM NHTSA adopted these cost estimates for the final rule, such that incremental costs for DVVLS and DVVLD, including a 1.5

RPE markup, are $201 for an in-line 4-cylinder engine, $306 for V-6 engines, and $396 for V-8 engines. For overhead valve engines, OHV, the costs for V6 and V8 engines do not include the lost motion devices and control hardware since DVVLO follows cylinder deactivation on the OHV decision tree path and employs similar lost motion devices. Rather, the

DVVLO cost is for active engine mounts on V6 and V8 OHV engines which was based on $50 variable cost from Martec, adjusted to 2007 dollars and marked up with a 1.5 RPE factor to $76. For in-line 4-cylinder engines cylinder deactivation is not allowed so the cost for DVVLO is the same as for DVVLS and DVVLD at $201.

For fuel economy effectiveness, in the NPRM NHTSA estimated that

DVVL could incrementally reduce fuel consumption by 0.5 to 3 percent compared to VVT. Confidential manufacturer comments received in response to the NPRM indicated a 2 percent effectiveness for DVVL, while the Alliance commented that a two-step system with dual cam phasing could reduce fuel consumption by 6.3 percent, with 1.3 percent attributable to DVVL. Publicly-available estimates suggest an improvement over the NEDC test cycle of 8 percent for DCP with 2 stage inlet DVVL applied to a 1.6 liter DOHC 4 cylinder engine in a 1500 kg vehicle.\171\ With the DCP system expected to deliver 5 percent effectiveness, this suggests the DVVL system is giving approximately 3 percent. The comments received from manufacturers and publicly available data are in alignment with independent review suggesting a range of 1 to 3 percent for overhead cam engines with VVT. NHTSA has therefore estimated an incremental reduction in fuel consumption for

DVVLS and DVVLD of 1 to 3 percent for purposes of the final rule. On

OHV engines, DVVLO is applied following both VVT and cylinder deactivation, therefore the fuel consumption effectiveness has been

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reduced from 1 to 3 percent for OHC engines to 0.5 to 2.6 percent.

\171\ Mark Sellnau and Eric Rask, ``Two-Step Variable Valve

Actuation For Fuel Economy, Emissions, and Performance, Delphi

Research Labs, SAE 2003-01-0029. Available at http://www.sae.org/ technical/papers/2003-01-0029. (last accessed Nov. 9, 2008).

This technology may be applied to any class of vehicles with any kind of engine at the redesign cycle. For the final rule, NHTSA has combined the phase-in caps for DVVLS, DVVLD, DVVLO and CVVL and capped the joint penetration allowed at 15 percent in MY 2011 with time-based learning applied. Other technologies, such as continuously variable valve lift (CVVL), described below, will be implemented in place of

DVVL in some applications where the fuel economy requirements dictate further optimization of the engine's breathing characteristics to improve efficiency.

(vi) Continuously Variable Valve Lift (CVVL)

In CVVL systems, maximum valve lift is varied by means of a mechanical linkage, driven by an actuator controlled by the engine control unit. The valve opening and phasing vary as the maximum lift is changed; the relation depends on the geometry of the mechanical system.

BMW has the most production experience with CVVL systems and has sold port-injected ``Valvetronic'' engines since 2001. CVVL allows the airflow into the engine to be regulated by means of inlet valve opening reduction, which improves engine efficiency by reducing pumping losses from throttling the intake system further upstream as with a normally throttled engine.

Variable valve lift gives a further reduction in pumping losses compared to that which can be obtained with cam phase control only, with CVVL providing greater effectiveness than DVVL, since it can be fully optimized for all engine speeds and loads, and is not limited to a two or three step compromise. There may also be a small reduction in valvetrain friction when operating at low valve lift. This results in improved low load fuel consumption for cam phase control with variable valve lift as compared to cam phase control only. Most of the fuel economy effectiveness is achieved with variable valve lift on the inlet valves only.

It is generally more difficult to achieve good cylinder-to-cylinder airflow balance at low load with a CVVL valve-throttled engine due to the sensitivity of airflow to small differences in lift caused by manufacturing tolerances. BMW has reported mixture quality issues with

CVVL and port fuel injection, requiring a compromise on pumping work reduction to ensure good mixture quality. In addition, a small amount of throttling is necessary with CVVL to maintain the vacuum required for power brake assist, unless a separate vacuum pump is used. BMW calibrations maintain a small amount of inlet manifold depression on their ``Valvetronic'' engines to allow the brake servo to function, which reduces the efficiency gain from the system somewhat. Tumble air motion generated by the inlet port is not available in the cylinder at low valve lift, which has an effect on combustion characteristics. The high gas velocities at the valve seat generate high turbulence levels, but most of this has decayed by the time of ignition. This phenomenon could potentially lead to sub-optimal combustion characteristics, which would reduce the fuel consumption effectiveness of the technology.

In the NPRM, NHTSA estimated the cost for CVVL of $254 to $508 compared to VVT, with cost estimates varying from $254 for a 4-cylinder engine, $466 for a 6-cylinder engine, and $508 for an 8-cylinder engine, based on confidential manufacturer data and the NESCCAF report, with more weight given to the manufacturer data. As for DVVL, for purposes of the final rule, NHTSA relied primarily on the 2008 Martec report, because it contained the most complete published description of

CVVL costs and agreed with confidential manufacturer data received in response to the NPRM. The system consists of 1 stepper motor per bank to control an eccentric shaft and the costs as described by Martec include dual cam phasing are $285 for an in-line 4-cylinder engine,

$450 for a V-6 engine, and $550 for a V-8 engine. Applying a 1.5 RPE markup factor to these variable costs, and then deducting $122 for the incremental cost of both ICP and DCP per bank, the incremental RPE cost is $306 for a 4-cylinder engine, $432 for a 6-cylinder engine and $582 for an 8-cylinder engine.

For fuel economy effectiveness, in the NPRM NHTSA estimated that

CVVL could incrementally reduce fuel consumption by 1.5 to 4 percent compared to VVT, based on confidential manufacturer data and the

NESCCAF report. Confidential manufacturer comments received in response to the NPRM suggested a range of 3 to 7.4 percent incremental fuel consumption savings. NHTSA also found several sources reporting a 5 percent additional fuel consumption effectiveness over the NEDC cycle when applying CVVL to an engine with dual cam phasers.\172\ For purposes of the final rule, NHTSA has estimated the reduction in fuel consumption for CVVL at 1.5 to 3.5 percent over an engine with DCP.

This estimate is lower than the effectiveness reported by BMW and allows the application of CVVL without the need for the high level of manufacturing complexity inherent in BMW's ``Valvetronic'' engines.

\172\ See Johannes Liebl, Manfred Kluting, Jurgen Poggel, and

Stephen Missy, BMW, ``The New BMW 4-Cylinder Engine with Valvetronic

Part 2: Thermodynamics and Functional Features,'' MTZ Worldwide,

July/Aug. 2001, pp 26-29. See also Meyer, BMW, ``Turbo-Charging

BMW's Spray-Guided DI Combustion System--Benefits and Challenges,''

Global Powertrain Congress, Sept. 2005, vol. 33. Available at http:/

/www.gpc-icpem.org/pages/publications.html (last accessed Nov. 8, 2008). See also Rainer Wurms, Philipp Lobbert, Stefan Dengler, Ralf

Budack, and Axel Eiser, Audi, ``How Much VVT Makes Sense?'' Haus der

Technik Conference on Variable Valve Control, Essen, Feb. 2007.

There are no class specific applications of this technology, although it appears in only the DOHC portion of the decision tree. Due to the changes required to implement DVVL on an engine the Volpe model allows it to be applied at redesign model years only with time-based learning applied. For the final rule, NHTSA has combined the phase-in caps for DVVLS, DVVLD, DVVLO and CVVL and capped the joint penetration allowed at 20 percent per year on average (15 percent in year one).

There is no technical reason this technology could not be applied to all DOHC engines, but due to engineering resource limitations it is unlikely that CVVL will be applied to all engines, and that other technologies such as DVVL will be used in some instances.

(vii) Cylinder Deactivation (DEACS, DEACD, DEACO)

In conventional spark-ignited engines, combustion occurs in all cylinders of the engine (i.e., the engine is ``firing on all cylinders''), and throttling the airflow controls the engine output, or load. This is an inefficient method of operating the engine at low loads as pumping losses result from throttling. Cylinder deactivation

(DEAC) can improve engine efficiency by disabling or deactivating half of the cylinders when the load is less than half of the engine's total torque capability, allowing the active cylinders to operate at roughly twice the load level, and thereby incur roughly half the pumping losses.

Simplistically, cylinder deactivation control strategy relies on setting maximum and minimum manifold absolute pressures (which are directly proportional to load) within which it can deactivate the cylinders. The engine operating range over which cylinder deactivation may be enabled is restricted by other factors as well, with

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noise, vibration, and harshness (NVH) being the primary concern; these restrictions all reduce the fuel economy effectiveness achievable with cylinder deactivation. In general, DEAC has very high sensitivity of efficiency gain relative to vehicle application, according to comments from Ford, Chrysler, the Alliance, and in confidential comments submitted in response to the NPRM.

Manufacturers have stated that use of DEAC on 4-cylinder engines would cause unacceptable NVH; therefore NHTSA has not applied cylinder deactivation to 4-cylinder engines. In addition, to address NVH issues for V6 and V8 engines, active engine mounts are included in the content list. Noise quality from both intake and exhaust systems has been problematic on some vehicle applications, and in some cases, has resulted in active exhaust systems solutions with an ECU-controlled valve.

The NPRM reported an incremental cost range for DEAC at $203 to

$229, citing manufacturer data as the most credible, with the bill of materials including lost motion devices for each cylinder. The 2008

Martec report estimated the additional hardware necessary for cylinder deactivation ranging between $50 for the addition of two active engine mounts ($75 RPE using 1.5 RPE factor) where DVVL already exists. This value has been adopted by NHTSA in the final rule so DEACS and DEACD costs are $75. For OHV engines NHTSA estimates the costs for DEACO as being $306 for V6 engines and $400 for V8 engines that are not already equipped with DVVL using assumptions for lost motion devices plus incremental costs for oil control valves and camshaft position sensors as noted in the DVVL section.

For fuel economy effectiveness, in the NPRM NHTSA estimated that cylinder deactivation could reduce fuel consumption by 4.5 to 6 percent. As noted, DEAC has very high sensitivity of efficiency gain relative to vehicle application. Chrysler, for example, stated that the effectiveness could range from 3 to 10 percent on the same engine depending on the specific vehicle application.\173\ Confidential manufacturer comments received in response to the NPRM reported a range of 3 to 7.5 percent. For the final rule, the incremental fuel consumption effectiveness varies depending on which branch of the decision tree it is on: For DOHC engines which are already equipped with DCP and DVVLD there is little benefit that can be achieved since the pumping work has already been minimized and internal EGR rates are maximized, so the effectiveness ranges from 0 to 0.5 percent for DEACD; for SOHC engines which have CCP and DVVLS applied, NHTSA estimates a 2.5 to 3 percent effectiveness for DEACS; and for OHV engines, which do not have VVT or VVL technologies, the effectiveness for DEACO ranges from 3.9 to 5.5 percent.

\173\ Docket No. NHTSA-2008-0089-0215.1.

This technology may be applied only to V-6 and V-8 engines, as discussed above, and so does not apply to vehicle classes with I-4 engines. DEAC can be applied during a redesign or refresh model year with time-based learning. NHTSA proposed to raise the phase-in cap for this technology to 20 percent per year in the NPRM. For the final rule,

NHTSA has combined the phase-in caps for DEACS, DEACD and DEACO and capped the joint penetration allowed at 9 percent in MY 2011.

(viii) Conversion to Double Overhead Camshaft Engine With Dual Cam

Phasing (CDOHC)

This technology was named ``Multi-valve Overhead Camshaft Engine'' in the NPRM. Engines with overhead cams (OHC) and more than two valves per cylinder achieve increased airflow at high engine speeds and reductions of the valvetrain's moving mass and enable central positioning of the spark plug. Such engines typically develop higher power at high engine speeds. In the NPRM, the model was generally not allowed to apply multivalve OHC technology to OHV engine, except where continuous variable valve timing and lift (CVVL) is applied to OHV engine. In that case, the model assumed conversion to a DOHC valvetrain, because a DOHC valvetrain is a prerequisite for the application of any advanced engine technology over and above CVVL.

Since applying CVVL to an OHV engine is the last improvement that could be made, it was assumed that manufacturers would redesign that engine as a DOHC and include CVVL as part of that redesign.

However, it appears likely that vehicles will still use overhead valve (OHV) engine with pushrods and one intake and one exhaust valve per cylinder into the next decade. For the final rule, NHTSA assumed that conversion of an OHV engine to a DOHC engine would more likely be accompanied by dual cam phasing (DCP) than by CVVL, since DCP application rates are higher than CVVL rates.

For V8 engines, the incremental cost to redesign an OHV engine as a

DOHC with DCP was estimated as $746 which includes $415 for the engine conversion to DOHC per the 2008 Martec report and a 1.5 RPE factor, plus $122 for an incremental cam phasing system (reflecting the doubling of cam shafts). For a V6 engine we estimated 75 percent of the

V8 engine cost to convert to DOHC plus the same incremental coupled cam phasing cost to arrive at $590. For inline 4-cylinder engines, 50 percent of the V8 engine conversion costs were assumed and one additional cam phasing system yielding an incremental cost including a 1.5 RPE factor of $373.

For fuel economy effectiveness, NHTSA estimated in the NPRM that the incremental gain in fuel consumption for conversion of an OHV engine with cylinder deactivation and CCP to a DOHC engine with CVVL at 1 to 4 percent, in agreement with the NESCCAF report and confidential manufacturer data. The fuel consumption benefit for converting an OHV engine to a DOHC engine with DCP is due largely to friction reduction according to a confidential manufacturer comment. For the final rule the upper bound stated in the NPRM was reduced because DCP will give less improvement than CVVL compared to an engine that already has cylinder deactivation and CCP applied. NHTSA estimates the incremental fuel consumption effectiveness at 1 to 2.6 percent independent of the number of engine cylinders.

There are no class-specific applications of this technology. In the

NPRM, NHTSA proposed raising the phase-in cap to 20 percent per year, but has concluded for the final rule that a 9 percent phase-in cap for

MY 2011 is more consistent with manufacturers' comments. No comments were received regarding phase-in rates of converting OHV engines to

DOHC. The conversion from OHV to DOHC engine architecture with DCP is a major engine redesign that can be applied at redesign model years only with time-based learning applied.

(ix) Stoichiometric Gasoline Direct Injection (SGDI)

In gasoline direct injection (GDI) engines, fuel is injected into the cylinder rather than into the inlet manifold or inlet port. GDI allows for the compression ratio of the engine to be increased by up to 1.5 units higher than a port-injected engine at the same fuel octane level. As a result of the higher compression ratio, the thermodynamic efficiency is improved, which is the primary reason for the fuel economy effectiveness with stoichiometric DI systems. The compression ratio increase comes about as a result of the in-cylinder air charge cooling that occurs

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as the fuel, which is sprayed directly into the combustion chamber, evaporates.

Volumetric efficiency in naturally-aspirated GDI engines can also be improved by up to 2 percent, due to charge cooling, which improves the full load torque. The improved full load torque capability of GDI engines can have a secondary effect on fuel economy by enabling engine downsizing, thereby reducing fuel consumption.

Two operating strategies can be used in gasoline DI engines, characterized by the mixture preparation strategy. One strategy is to use homogenous charge where fuel is injected during the intake stroke with a single injection. The aim is to produce a homogeneous air-fuel- residual mixture by the time of ignition. In this mode, a stoichiometric air/fuel ratio can be used and the exhaust aftertreatment system can be a relatively low cost, conventional three- way catalyst. Another strategy is to use stratified charge where fuel is injected late in the compression stroke with single or multiple injections. The aim here is to produce an overall lean, stratified mixture, with a rich area in the region of the spark plug to enable stable ignition. Multiple injections can be used per cycle to control the degree of stratification. Use of lean mixtures significantly improves efficiency by reducing pumping work, but requires a relatively high cost lean NOXtrap in the exhaust aftertreatment system.

For purposes of this rulemaking, only homogeneous charge stoichiometric DI systems were considered, due to the anticipated unavailability of low sulfur gasoline during the time period considered. This decision was supported by comments from Mercedes, which sells lean burn DI engines in other world markets, stating that lean burn DI engines cannot function in the absence of ultra-low sulfur gasoline. Lean NOXtrap technologies require ultra-low sulfur gasoline to function at high conversion efficiency over the entire life cycle of a vehicle.

Gasoline DI systems effectiveness from the increased efficiency of the thermodynamic cycle. The fuel consumption effectiveness from DI technology is therefore cumulative to technologies that target pumping losses, such as the VVT and VVLT technologies. The Sierra Research report stated that Sierra Research could not determine from the NPRM decision trees if VVLT technologies were retained when SGDI was applied. To clarify, as the model progresses through the decision trees, technologies preceding SGDI are retained in the cumulative effectiveness and cost.

In the NPRM, NHTSA estimated the incremental fuel consumption effectiveness for naturally aspirated SGDI \174\ to be 1 to 2 percent.

The Alliance commented that it estimated 3 percent gains in fuel efficiency, as well as a 7 percent improvement in torque, which can be used to mildly downsize the engine and give up to a 5.8 percent increase in efficiency. Other published literature reports a 3 percent effectiveness for SGDI,\175\ and another source reports a 5 percent improvement on the NEDC drive cycle.\176\ Confidential manufacturer data submitted in response to the NPRM reported an efficiency effectiveness range of 1 to 2 percent. For the final rule NHTSA has estimated, following independent review of all the sources referenced above, the incremental gain in fuel consumption for SGDI to be approximately 2 to 3 percent.

\174\ SGDI was referred to as GDI or SIDI in the NPRM.

\175\ Paul Whitaker, Ricardo, Inc., ``Gasoline Engine

Performance and Emissions--Future Technologies and Optimization,''

ERC Symposium, Low Emission Combustion Technologies for Future IC

Engines, Madison, WI, June 8-9, 2005. Available at http:// www.erc.wisc.edu/symposiums/2005_Symposium/June%208%20PM/Whitaker_

Ricardo.pdf (last accessed Nov. 9, 2008).

\176\ Stefan Trampert, FEV Motorentechnik GmbH, ``Engine and

Transmission Development Trends--Rising Fuel Cost Pushes

Technology,'' Symposium on International Automotive Technology,

Pune, India, January 2007.

Content assumptions for cost estimating of SGDI include no major changes to engine architecture compared to a port fuel injection engine, although cylinder head casting changes are required to incorporate the fuel injection system and the piston must change as well to suit the revised combustion chamber geometry. The fuel injection system utilizes an electrically-driven low pressure fuel pump to feed a high pressure mechanical pump, supplying fuel at pressures up to 200 Bar. A common fuel rail supplies the injectors, which produce a highly atomized spray with a Sauter Mean Diameter (SMD) of 15-20 microns, which compares to approximately 50 microns for a port injector.

In the NPRM, NHTSA estimated the following incremental cost ranges for applying SGDI: $122 to $420 for an inline 4-cylinder engine, $204 to $525 for a V6 engine, and $228 to $525 for a V8 engine. The Alliance commented that NHTSA had not accounted for the costs required to address NVH concerns associated with the implementation of SGDI. For purposes of the final rule, all costs have been based upon side mount

DI technology as these costs were determined in the 2008 Martec Report to be lower than center mount DI systems. An applied RPE factor of 1.5 was used in all cases, and a NVH package was added to all engines in response to Alliance comments, providing incremental costs that ranged from $293 to $440 for an I4 engine, to $384 to $558 for a V6 engine and

$512 to $744 for a V8 engine.

Homogeneous, stoichiometric DI systems are regarded as mature technology with minimal technical risk and are expected to be increasingly incorporated into manufacturers' product lineups. Time- based learning has been applied to this technology due to the fact that over 1.5 million vehicles containing this technology are now produced annually. Due to the changes to the cylinder head and combustion system and the control system development required to adopt SGDI technology, which are fairly extensive, SGDI can be applied only at redesign model years. There are no limitations on applying SGDI to any vehicle class.

The phase-in cap for SGDI is applied at a 3 percent rate for MY 2011 in order to account for the lead time required to incorporate SGDI engines.

(x) Combustion Restart (CBRST)

Combustion restart allows ``start-stop'' functionality of DI engines through the implementation of an upgraded starter with bi- directional rotation to allow precise crankshaft positioning prior to subsequent fuel injection and spark ignition, allowing engine restart.

This method of implementing engine stop/start functionality allows not only the fuel savings from not idling the engine, but also reduces fuel consumption as the engine speeds up to its operational speed. A Direct

Injection (DI) fuel system is required for implementation of this technology.

NHTSA has determined, upon independent review, combustion restart to be a high technical risk due to the following unresolved issues.

First, very high or very low ambient air temperatures may limit the ability to start the engine in the described manner. Although the starter motor can provide fail-safe starting capability in these temperature limited areas, strategies must be developed to manage the transitions. Additionally, a fail-safe start strategy that recognizes failed attempts and responds quickly enough has yet to be demonstrated.

The risk of missed start events is currently relatively high, which is unacceptable from a production implementation perspective. As a result, availability of this technology was assessed as beyond the emerging technology time frame for purposes of this MY 2011 rulemaking.

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(xi) Turbocharging and Downsizing (TRBDS)

Forced induction in the form of turbocharging and supercharging has been used on internal combustion engines for many years. Their traditional role has been to provide enhanced performance for high-end or sports car applications. However, turbocharging and downsizing can also be used to improve fuel economy. There is a natural friction reduction with a boosted downsized engine, because engine friction torque is primarily a function of engine displacement. When comparing

FMEP (Friction Mean Effective Pressure--friction torque normalized by displacement) there is very little difference between the full size naturally-aspirated engine and the boosted downsized engine despite the higher cylinder pressure associated with higher BMEP. Turbocharging and downsizing can also reduce pumping losses (PMEP), because a turbocharged downsized engine runs at higher BMEP (Brake Mean Effective

Pressure) levels, and therefore higher manifold pressures, than a naturally aspirated engine. The upper limit of BMEP level that can be expected from a naturally aspirated engine is approximately 13.5 Bar, whereas a turbocharged engine can produce BMEP levels in excess of 20

Bar. Engines that are not downsized and boosted use a throttle to regulate load, but this causes pumping losses as discussed previously.

Thus, by using a small displacement engine with a turbocharger, the smaller engine works harder (higher cylinder load), which results in lower pumping loss since the throttle must be further open to produce the same road power output.

Due to the incremental nature of the decision tree, engines having turbocharging and downsizing applied are assumed to have SGDI already applied. In boosted engines, SGDI allows improved scavenging of the cylinder, which reduces the internal exhaust gas residual level and the charge temperature. This in turn allows a higher compression ratio to be used for a given fuel octane rating and can therefore improve the fuel consumption of boosted SGDI engines.

In most cases, a boosted downsized engine can replace a conventional naturally aspirated engine and achieve equivalent or greater (albeit at the expense of fuel economy) power and torque.

However, there are some challenges associated with acceptance of a down sized boosted engine, including:

Achievement of ``seamless'' power delivery compared to the naturally aspirated engine (no perceptible turbo lag);

A complication in emissions regulatory compliance, because the addition of a turbocharger causes additional difficulty with catalyst light off due to the thermal inertia of the turbo itself;

Potential issue with customer acceptance of smaller- displacement engines, given a common perception that only larger- displacement engines can be high-powered; and

Additional base engine cost and vehicle integration costs.

Manufacturers' structural changes to the base engine are generally focused on increasing the structure's capacity to tolerate higher cylinder pressures. NHTSA believes that it is reasonable to expect that the maximum cylinder pressure would increase by 25 to 30 percent over those typical of a naturally aspirated engine. Another consideration is that higher pressures lead to higher thermal loads.

One potential disadvantage of downsized and boosted engines is cost. Turbocharging systems can be expensive and are best combined with direct injection and other engine technologies. The Alliance expressed a related concern that the fuel economy effectiveness was based on the use of premium grade fuel in direct injection turbocharged engines, and argued that as the baseline vehicles were not fueled with premium gasoline, this gave the direct injection turbocharged engines an unrealistic advantage.\177\ However, CARB stated in its comments that premium fuel is not necessary for use with turbocharged downsized engines and that substantial effectiveness are still available with regular fuel.\178\ In fact, most turbocharged direct injection engines will have a compression ratio and calibration designed to give best performance on premium fuel, although they are safe to operate on regular fuel. On regular fuel, the knock sensor output is used to allow the ECU to keep the engine safe by controlling boost and ignition timing. Maximum torque is reduced on the lower octane fuel due to the

ECU intervention strategy, but at part load, where knock is not an issue, the fuel economy will not be affected adversely relative to the estimated effectiveness. Additionally, the driver retains the choice of obtaining more performance by paying more for premium fuel and will still obtain stated fuel consumption effectiveness.

\177\ Docket No. NHTSA-2008-0089-0179.1.

\178\ Docket No. NHTSA-2008-0089-0173.

Nevertheless, the case for using downsized boosted engines has strengthened with the wider introduction of direct injection gasoline engines. Downsized boosted engines with stoichiometric direct injection present minimal technical risk, although there have been only limited demonstrations of this technology achieving SULEV emission levels.

In the NPRM, NHTSA estimated that downsized and turbocharged engines could incrementally reduce fuel consumption from 5 to 7.5 percent. CARB commented that Sierra Research in its presentation to the

NAS committee on January 24, 2008, suggested there is no carbon dioxide reduction potential for turbocharging and downsizing, but argued that this is not supported by other vehicle simulation efforts nor by manufacturer plans to release systems such as the Ford EcoBoost.\179\

The Alliance and Sierra Research, in contrast, commented that turbocharged and downsized engines do not improve fuel economy unless they are also equipped with DI fuel systems and using premium fuel.\180\ NHTSA believes that turbocharging and downsizing, when combined with SGDI, offers benefits without the use of premium fuel as noted above. Confidential manufacturer data suggests an incremental range of fuel consumption reduction of 4.8 to 7.5 percent for turbocharging and downsizing. Other publicly-available sources suggest a fuel consumption benefit of 8 to 13 percent compared to current- production naturally-aspirated engines without friction reduction or other fuel economy technologies: A joint technical paper by Bosch and

Ricardo suggesting an EPA fuel economy gain of 8 to 10 percent for downsizing from a 5.7 liter port injection V8 to a 3.6 liter V6 with direct injection; \181\ a Renault report suggesting a 11.9 percent NEDC fuel consumption gain for downsizing from a 1.4 liter port injection in-line 4-cylinder engine to a 1.0 liter in-line 4-cylinder engine with direct injection; \182\ and a Robert Bosch paper suggesting a 13 percent NEDC gain for downsizing to a turbocharged DI engine.\183\

These

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reported fuel economy benefits show a wide range in large part due to the degree of vehicle attribute matching (such as acceleration performance) that was achieved.

\179\ Docket No. NHTSA-2008-0089-0173.4.

\180\ Docket No. NHTSA-2008-0089-0046, Docket No. NHTSA-2008- 0089-0179.1.

\181\ David Woldring and Tilo Landenfeld of Bosch, and Mark J.

Christie of Ricardo, ``DI Boost: Application of a High Performance

Gasoline Direct Injection Concept,'' SAE 2007-01-1410. Available at http://www.sae.org/technical/papers/2007-01-1410 (last accessed Nov. 9, 2008).

\182\ Yves Boccadoro, Lo[iuml]c Kermanac'h, Laurent Siauve, and

Jean-Michel Vincent, Renault Powertrain Division, ``The New Renault

TCE 1.2L Turbocharged Gasoline Engine,'' 28th Vienna Motor

Symposium, April 2007.

\183\ Tobias Heiter, Matthias Philipp, Robert Bosch, ``Gasoline

Direct Injection: Is There a Simplified, Cost-Optimal System

Approach for an Attractive Future of Gasoline Engines?'' AVL Engine

& Environment Conference, September 2005.

For purposes of the final rule, NHTSA estimated a net fuel consumption reduction of approximately 14 percent for a turbocharged downsized DOHC engine with direct injection and DCP over a baseline fixed-valve engine that does not incorporate friction reducing technologies. This equates to an incremental fuel consumption reduction of 2.1 to 5.2 percent for TRBDS, which is incremental to an engine with

SGDI and previously applied technologies (e.g., VVT and VVL) as defined by the decision tree. This wide range is dependent upon the decision tree path that is followed or the configuration of the engine prior to conversion to TRBDS. The incremental fuel consumption benefit for TRBDS is estimated to range from 2.1 to 2.2 percent for V6 and V8 engines and from 4.5 to 5.2 percent for inline 4-cylinder engines. As explained, the incremental improvement from TRBDS must be added to the previous technology point on the decision tree. In the case of SOHC and OHV engines, for example, moving to the TRBDS technology also assumes implementation of DOHC engine architecture in addition to DCP and SGDI.

In the NPRM, NHTSA estimated that the cost for a boosted/downsized engine system would be $690 for small cars, $810 for large trucks, and

$120 for all other vehicle classes, based on the NAS report, the EEA report, and confidential manufacturer data, which assumed downsizing allowed the removal to two cylinders in most cases, except for small cars and large trucks. CARB questioned Martec's cost estimates for turbocharging and downsizing, specifically the credit for downsizing a

V6 engine to an in-line 4 cylinder dropped from their estimate used in the NESCCAF report of $700 to $310 and the use of more expensive hardware than some manufacturers use. In response, NHTSA's independent review of the cost to downsize a V6 DOHC engine to a I4 DOHC engine closely aligned with the 2008 Martec credit of $310, while the report for NESCCAF was not specific with regard to the assumptions used to construct that estimate. Additionally, confidential manufacturer data submitted in response to the NPRM provided a range for TRBDS with SGDI of $600 to $1,400 variable cost or $900 to $2,100 RPE assuming a 1.5 markup factor. When comparing the confidential manufacturer cost range and the incremental RPE cost estimates for the final rule, it is important to realize the incremental cost for TRBDS does not include

SGDI since it is considered a separate technology.\184\

\184\ NHTSA also examined the Jetta TDI as an example of a current vehicle model that comes in both diesel and gasoline-engine form, but in attempting to do an apples-to-apples comparison with the non-turbocharged/downsized version, the SE, found indications that VW appears to be keeping the cost of the TDI down by removing other content (e.g., the SE has a sunroof, which normally costs around $1,000, while the TDI does not). Thus, NHTSA did not find

VW's price differential for the two versions of the Jetta to be convincing evidence of the actual cost of turbocharging and downsizing an engine.

Some of the costs included in turbocharging and downsizing come from structural changes due to the higher cylinder pressures and increased cylinder temperatures, which also drive additional cooling requirements (e.g. water-cooled charge air cooler, circulation pump, and thermostats) and require improved exhaust valve materials. High austenitic stainless steel exhaust manifolds and upgraded main bearings are some of the other hardware upgrades required. For purposes of the final rule, NHTSA used cost data from the 2008 Martec report, but constructed a bill of materials consistent with the incremental TRBDS technology as shown in the decision trees and based on confidential manufacturer data. For the vehicle subclasses which have a baseline gasoline V8 engine, two turbochargers rated for 1050 [deg]C at $250 each were added, $270 was deducted for downsizing to a V6 from a V8 engine, $217 was added for engine upgrades to handle higher operating pressures and temperatures at, and a water-cooled charge air cooler was added at $280. The baseline SOHC engine was converted to a DOHC engine with 4 valves per cylinder at a variable incremental cost of $92. The total variable costs summed to $819 and a 1.5 RPE factor was applied to arrive at $1,229 incremental cost to turbocharging and downsizing.

For the vehicle subclasses which have a baseline gasoline V6 engine, a twin-scroll turbocharger rated for 1050 [deg]C was added at a cost of $350, $310 was deducted for downsizing to an I4 from a V6 engine, $160 was added for engine upgrades to handle higher operating pressures and temperatures, and a water-cooled charge air cooler was added at $259. The baseline SOHC engine was converted to a DOHC engine with 4 valves per cylinder at a variable incremental cost of $87. The total variable costs summed to $548 and a 1.5 RPE factor was applied to arrive at $822 incremental cost to turbocharging and downsizing.

For the vehicle subclasses which have a baseline gasoline I4 engine, a twin-scroll turbocharger rated for 1050 [deg]C was added at a cost of $350, $160 was added for engine upgrades to handle higher operating pressures and temperatures, and a water-cooled charge air cooler was added at $259. The baseline SOHC engine was converted to a

DOHC engine with 4 valves per cylinder at a variable incremental cost of $46. The total variable costs summed to $815 and a 1.5 RPE factor was applied to arrive at $1,223 incremental cost for turbocharging and downsizing.

In summary, for the final rule NHTSA estimated TRBDS to have an incremental RPE cost of $1,223 for vehicle classes with a baseline in- line 4-cylinder engine downsized to a smaller I-4 engine which are:

Subcompact, Performance Subcompact, Compact and Midsize Car, and Small

Truck. For vehicle classes with a baseline V6 engine that was downsized to an I4 engine the RPE cost is estimated at $822; these classes are the Performance Compact, Performance Midsize and Large Car, Minivan and

Midsize Truck. The two vehicle classes with baseline V8 engines,

Performance Large Car and Large Truck, were downsized to V6 turbocharged engines at an incremental RPE cost of $1,229.

Time-based learning has been applied to TRBDS because submitted product plan data indicated turbocharging and downsizing would already be at high volume in 2011. Due to the fact that a turbocharged and downsized engine is entirely different than the baseline engine it can be applied only at redesign model years. The phase-in cap for TRBDS is applied at a 9 percent rate for MY 2011 in order to account for the lead time required to incorporate TRBDS engines.

(xii) Cooled Exhaust Gas Recirculation Boost (EGRB)

EGR Boost is a combustion concept that involves utilizing EGR as a charge dilutant for controlling combustion temperatures. Fuel economy is therefore increased by operating the engine at or near the stoichiometric air/fuel ratio over the entire speed and load range and using higher exhaust gas residual levels at part load conditions.

Further fuel economy increases can be achieved by increased compression ratio enabled by reduced knock sensitivity, which enables higher thermal efficiency from more advanced spark timing. Currently

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available turbo, charge air cooler, and EGR cooler technologies are sufficient to demonstrate the feasibility of this concept.

However, this remains a technology with a number of issues that still need to be addressed and for which there is no production experience. EGR system fouling characteristics could be potentially worse than diesel EGR system fouling, due to the higher HC levels found in gasoline exhaust. Turbocharger compressor contamination may also be an issue for low pressure EGR systems. Additionally, transient controls of boost pressure, EGR rate, cam phasers and intake charge temperature to exploit the cooled EGR combustion concept fully will require development beyond what has already been accomplished by the automotive industry. These are all ``implementation readiness'' issues that must be resolved prior to putting EGR Boost into volume production.

Because of these issues NHTSA did not consider EGR Boost in the

NPRM, and consequently had no tentative conclusions with regard to its cost or fuel economy effectiveness. For purposes of the final rule,

NHTSA found no evidence from commenters or elsewhere that these implementation readiness issues could be resolved prior to MY 2011.

Therefore, in the final rule, the phase-in cap for MY 2011 is zero.

(b) Diesel Engine Technologies

Diesel engines, which currently make up about 0.27 percent of engines in the MY 2008 U.S. fleet, have several characteristics that give them superior fuel efficiency compared to conventional gasoline, spark-ignited engines. Pumping losses are much lower due to lack of (or greatly reduced) throttling. The diesel combustion cycle operates at a higher compression ratio, with a very lean air/fuel mixture, and turbocharged light-duty diesels typically achieve much higher torque levels at lower engine speeds than equivalent-displacement naturally- aspirated gasoline engines. Additionally, diesel fuel has higher energy content per gallon.\185\

\185\ Burning one gallon of diesel fuel produces about 11 percent more carbon dioxide than gasoline due to the higher density and carbon to hydrogen ratio.

However, diesel engines, including those on the many diesel vehicles sold in Europe, have emissions characteristics that present challenges to meeting federal Tier 2 emissions standards. It is a significant systems-engineering challenge to maintain the fuel consumption advantage of the diesel engine while meeting U.S. emissions regulations, since fuel consumption is negatively impacted by emissions reduction strategies. Emission compliance strategies for diesel vehicles sold in the U.S. are expected to include a combination of combustion improvements and aftertreatment. These emission control strategies are currently widely used in Europe, but will have to be modified due to the fact that U.S. emission standards, especially for

NOX, are much tighter than corresponding European standards.

To achieve U.S. Tier 2 emissions limits, roughly 45 to 65 percent more

NOXreduction is required compared to the Euro VI standards.

Additionally, as discussed below, there may be a fuel consumption penalty associated with diesel aftertreatment since extra fuel is needed for the aftertreatment, subsequently this extra fuel is not used in the combustion process of the engine that provides torque to propel the vehicle.

Nevertheless, emissions control technologies do exist, and will enable diesel engines to make considerable headway in the U.S. fleet in coming years. Several key advances in diesel technology have made it possible to reduce emissions coming from the engine prior to aftertreatment. These technologies include improved fuel systems

(higher pressures and more responsive injectors), advanced controls and sensors to optimize combustion and emissions performance, higher EGR levels and EGR cooling to reduce NOX, lower compression ratios, and advanced turbocharging systems.

The fuel systems on advanced diesel engines are anticipated to be of a High-Pressure Common Rail (HPCR) type with piezoelectric injectors that operate at pressures up to 1800 Bar or greater and provide fast response to allow multiple injections per cycle. The air systems will include a variable geometry turbocharger for 4-cylinder inline engines with charge-air cooling and high-pressure and low-pressure EGR loops with EGR coolers. For V-6 or V-8 engines the air systems will employ series sequential turbo-charging with one variable geometry turbocharger and one fixed geometry turbocharger.

As suggested above, the traditional 3-way catalyst aftertreatment found on gasoline-powered vehicles is ineffective due to the lean-burn combustion of a diesel. All diesels will require a diesel particulate filter (DPF), a diesel oxidation catalyst (DOC), and a NOX reduction strategy to comply with Tier 2 emissions standards. The most common NOXreduction strategies include the use of lean

NOXtraps (LNT) or selective catalytic reduction (SCR), which are outlined below.

(i) Diesel Engine With Lean NOXTrap (LNT) Catalyst After-

Treatment

A lean NOXtrap operates, in principle, by storing

NOX(NO and NO2) when the engine is running in its normal (lean) state. When the control system determines (via mathematical model or a NOXsensor) that the trap is saturated with NOX, it switches the engine into a rich operating mode or may in some cases inject fuel directly into the exhaust stream to produce excess hydrocarbons that act as a reducing agent to convert the stored NOXto N2and water, thereby ``regenerating'' the LNT and opening up more locations for

NOXto be stored. LNTs are sensitive to sulfur deposits that can reduce catalytic performance, but periodically undergo a desulfurization engine-operating mode to clean it of sulfur buildup.

The fuel consumption penalty associated with aftertreatment systems, including both DPF and LNT, is taken into account in the reported values. In the case of the DPF, extra fuel is needed to raise the temperature of the DPF above approximately 550[deg]C to enable active regeneration. A similar process is needed to regenerate the LNT, but instead of being used to remove particulates and raise the temperature, the excess fuel is used to provide a fuel-rich condition at the LNT to convert the trapped NOXon the LNT to nitrogen gas. The estimated fuel consumption penalty on the CAFE test cycle associated with the LNT aftertreatment system is 5 percent on the EPA city cycle and 3 percent on the highway cycle, as described in the report to the EPA.\186\

\186\ Ricardo, ``A Study of Potential Effectiveness of Carbon

Dioxide Reducing Vehicle Technologies, Revised Final Report,'' at 62. Available at http://www.epa.gov/otaq/technology/420r08004a.pdf

(last accessed Oct. 4, 2008).

In order to maintain equivalent performance to comparable gasoline- engine vehicles, an inline 4-cylinder (I-4) diesel engine with displacement varying around 2 liters to meet vehicle performance requirements was assumed for Subcompact, Performance Subcompact,

Compact, and Midsize Passenger Car and Small Truck vehicle subclasses, and it was also assumed that these vehicles would utilize LNT aftertreatment systems.

In the NPRM, NHTSA estimated that LNT-based diesels could incrementally reduce fuel consumption by 8 to 15 percent at an incremental RPE cost of $1,500 to $1,600 compared to a direct injected turbocharged and downsized

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spark-ignition engine, in agreement with confidential manufacturer data. These costs were based on a ``bottom up'' cost analysis that was performed with EPA, which then subtracted the costs of all previous steps on the decision tree prior to diesel engines.

Comments submitted in response to the NPRM including both manufacturers' confidential data and non-confidential data sources for diesel engines was in the range of 16.7 percent to 26.7 \187\ percent fuel consumption benefit over a baseline gasoline engine at a variable cost of $2,000 to $11,200. Confidentially submitted diesel cost and effectiveness estimates generally did not differentiate between car and truck applications, engine size and aftertreatement systems leading to large ranges for both cost and effectiveness estimates. Additionally, most of the costs appeared to be stated as variable costs not RPE but this was not always completely discernible.

\187\ The 26.7 percent fuel consumption reduction is a maximum estimate cited in a June 2008 Sierra Research report (Docket No.

NHTSA-2008-089-0179.1) for a CAFE estimate in a midsize car, whereas an April 2008 Sierra report (Docket No. NHTSA-2008-089-0046) cites a maximum estimate of 22.4 percent for the same vehicle class; NHTSA was unable to discern why the estimates differed.

For purposes of the final rule, NHTSA estimated the net fuel consumption benefit for an I-4 diesel engine with LNT aftertreatment to be approximately 20 to 26 percent improvement over a baseline gasoline engine. This equates to a 5.3 to 7.7 percent improvement for DSLT, which is incremental to a turbocharged downsized gasoline engine

(TRBDS) with EGRB, and a 15.0 to 15.3 percent incremental improvement for DSLC, which is incremental to a gasoline engine with combustion restart (CBRST). The 2008 Martec report was relied upon for cost estimates and the diesel cost was adjusted by removing the downsizing credit and applying a 1.5 RPE marked up factor to arrive at a cost of

$4007 compared to a baseline gasoline engine. This results in an incremental RPE cost of $1,567 to $1,858 for DSLT and $2,963 to $3,254 for DSLC. NHTSA's independent review concurred with all the costs in this bill-of-material-based cost analysis.

A large part of the explanation for the cost increase since the

NPRM is the dramatic increase in commodity costs for the aftertreatment systems, namely the platinum group metals. The updated cost estimates of Martec 2008 and others reflect the rise of global costs for raw materials since Martec 2004 and other prior referenced cost estimates were conducted. As described in Martec 2008, engine technologies employing high temperature steels or catalysts with considerable platinum group metals usage have experienced tremendous inflation of raw material prices. These updated estimates account for current spot prices of platinum and rhodium which have demonstrated cost inflation amounting to between 300 and 750 percent of global prices.\188\

\188\ Martec, ``Variable Costs of Fuel Economy Technologies,''

June 1, 2008, at 13-20. Docket No. NHTSA-2008-0089-0169.1.

(ii) Diesel Engine With Selective Catalytic Reduction (SCR) After-

Treatment

An SCR aftertreatment system uses a reductant (typically, ammonia derived from urea) that is continuously injected into the exhaust stream ahead of the SCR catalyst. Ammonia combines with NOX in the SCR catalyst to form N2and water. The hardware configuration for an SCR system is more complicated than that of an

LNT, due to the onboard urea storage and delivery system (which requires a urea pump and injector into the exhaust stream). While a rich engine-operating mode is not required for NOX reduction, the urea is typically injected at a rate of 3 to 4 percent of the fuel consumed. Manufacturers designing SCR systems intend to align urea tank refills with standard maintenance practices such as oil changes.

The fuel consumption penalty associated with the SCR aftertreatment system is taken into account in the values reported here. Similar to the LNT system, extra fuel is needed to warm up the SCR system to an effective operating temperature. The estimated fuel consumption penalty on the CAFE test cycle associated with the SCR aftertreatment system is 5 percent on the EPA city cycle and none on the highway cycle, as described in the report to the EPA.\189\ A recent report, however, suggests a fuel economy benefit associated with the use of a SCR system, based on the supposition that the engine calibration is shifted towards improved fuel consumption and more of the NOX reduction is being handled by the SCR system.\190\ Nevertheless, since this benefit is not yet proven for high-volume production, it has not been applied for purposes of the final rule.

\189\ Ricardo, ``A Study of Potential Effectiveness of Carbon

Dioxide Reducing Vehicle Technologies, Revised Final Report,'' at 62. Available at http://www.epa.gov/otaq/technology/420r08004a.pdf

(last accessed Oct. 4, 2008).

\190\ Timothy V. Johnson, ``Diesel Emission Control in Review,''

Society of Automotive Engineers Technical Series, 2008-01-0069, 2008. Available at http://www.sae.org/technical/papers/2008-01-0069

(last accessed Nov. 9, 2008).

In order to maintain equivalent performance to comparable gasoline- engine vehicles, a V-6 diesel engine, with displacement varying around 3 liters was assumed for Performance Compact, Performance Midsize,

Large Passenger Car, Minivan, and Midsize Truck. A V-8 diesel engine, with displacement varying around 4.5 liters to meet vehicle performance requirements, was assumed for Large Truck and Performance Large Car vehicle classes. It was also assumed that these classes with V-6 and V- 8 diesel engines utilize SCR aftertreatment systems instead of LNT.

In the NPRM, NHTSA estimated incremental fuel consumption reduction for diesel engines with an SCR system to range from 11 to 20 percent at an incremental RPE cost of $2,051 to $2,411 compared to a direct injected turbocharged and downsized spark-ignition engine. These costs were based on a ``bottom up'' cost analysis that was performed with

EPA, which then subtracted the costs of all previous steps on the decision tree prior to diesel engines.

As explained above for LNT, confidential manufacturer and non- confidential comment data submitted in response to the NPRM for diesel engines was in the range of 16.7 percent to 26.7 percent fuel consumption benefit over a baseline gasoline engine at variable cost of

$2,000 to $11,200 with no detail about the aftertreatment, engine size or application. Additionally, Ricardo's vehicle simulation work for EPA found an incremental fuel economy benefit of 19 percent for a 4.8L diesel in a Large Truck.\191\ However, when the baseline 4-speed automatic transmission shift and torque converter lockup scheduling was optimized for the diesel engine, an additional 5 percent fuel economy benefit was obtained to yield an incremental benefit for a diesel of 24 percent. As noted in the report on page 84, however, this does not represent an optimized result, as only the final packages complete with all technologies were optimized. Nevertheless, this is a reasonable estimate for diesel engine fuel economy benefit over a baseline gasoline engine with coordinated cam phasing (CCP). This estimate did not have the aftertreatment penalty, however, so applying the 5 percent

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penalty associated with diesel oxidation catalyst, diesel particulate filter, and SCR aftertreatment brings the fuel economy benefit for diesel engine with aftertreatment down to 19 percent, which is equal to a 16 percent fuel consumption benefit.

\191\ Ricardo, ``A Study of Potential Effectiveness of Carbon

Dioxide Reducing Vehicle Technologies, Revised Final Report,'' Table 7-9 shows incremental fuel economy and CO2benfits for

Truck with technology package 11, p. 87. Available at http:// www.epa.gov/otaq/technology/420r08004a.pdf (last accessed Oct. 4, 2008).

For purposes of the final rule, NHTSA estimated the net fuel consumption benefit for a V-6 diesel engine with SCR aftertreatment to be approximately 20 to 26 percent improvement over a baseline gasoline engine. This equates to a 4.0 to 7.7 percent improvement for DSLT, which is incremental to a turbocharged downsized gasoline engine

(TRBDS) with EGRB, and a 9.9 to 13.1 percent incremental improvement for DSLC, which is incremental to a gasoline engine with combustion restart (CBRST.) The 2008 Martec report was relied upon for cost estimates and the diesel cost was adjusted by removing the downsizing credit and applying a 1.5 RPE marked up factor to arrive at a cost of

$5,603 compared to a baseline gasoline engine. This results in an incremental RPE cost of $3,110 to $3,495 for DSLT and $4,105 to $4,490 for DSLC. NHTSA's independent review concurred with all the costs in this bill-of-material-based cost analysis for V-6 engines.

NHTSA estimated the net fuel consumption benefit for a V-8 diesel engine with SCR aftertreatment to be approximately 19 to 25 percent improvement over a baseline gasoline engine. This equates to a 4.0 to 6.5 percent improvement for DSLT, which is incremental to a turbocharged downsized gasoline engine (TRBDS) with EGRB, and a 10.0 to 12.0 percent incremental improvement for DSLC, which is incremental to

CBRST. The 2008 Martec report was relied upon for cost estimates and the diesel cost was adjusted by removing the downsizing credit and applying a 1.5 RPE marked up factor to arrive at a cost of $7,002 compared to a baseline gasoline engine. This results in an incremental

RPE cost of $3,723 to $4,215 for DSLT and $5,125 to $5,617 for DSLC.

NHTSA's independent review concurred with all the costs in this bill- of-material-based cost analysis for V-8 engines.

The diesel engine with SCR has an incremental cost that is significantly higher for the final rule than the NPRM. NHTSA believes the increase is explained by the improved accuracy of the final rule analysis which relied on the updated cost estimates from the 2008

Martec Report as described previously \192\. In addition, comments from the Alliance suggested that the incremental diesel cost for a midsize car was $6,198 and $7,581 \193\ for a pickup truck.

\192\ Martec, ``Variable Costs of Fuel Economy Technologies,''

June 1, 2008, at 13-20. Docket No. NHTSA-2008-0089-0169.1.

\193\ These cost estimates are taken from the April 2008 Sierra

Research report (Docket No. NHTSA-2008-089-0046). A June 2008 Sierra

Research report (Docket No. NHTSA-2008-089-0179.1) contained lower estimates of $5,947 and $7,271 for the same vehicles; NHTSA was unable to discern the reason for the difference.

The economic breakeven point for diesel engine aftertreatment options is based on public information\194\ and on recent discussions that NHTSA and EPA have had with auto manufacturers and aftertreatment device manufacturers. NHTSA explained in the NPRM that it had received strong indications that LNT systems would probably be used on smaller vehicles while the SCR systems would be used on larger vehicles and trucks. The economic break-even point between LNT and SCR is dependent on the quantity of catalyst used, the market price for the metals in those catalysts, and the cost of the urea injection system. The NPRM estimated that the breakeven point would occur around 3 liters engine displacement, based on discussions with auto manufacturers and aftertreatment device manufacturers. Thus, NHTSA tentatively concluded that it would be cheaper to manufacture diesel engines smaller than 3 liters with an LNT system, and that conversely, it would be cheaper to manufacturer diesel engines larger than 3.0 liters with a SCR system.

No comments were submitted to NHTSA regarding the breakeven point between a LNT and SCR system. However, according to one source of recently published data the breakeven point occurs between 2.0 to 2.5L.\195\ Considering that continuing developments are being made in this area and the wide range of precious metal content required, NHTSA believes that an economic breakeven point of 2 to 3 liters is reasonable and that other factors will strongly influence which system is chosen by any given vehicle manufacturer.

\194\ Timothy V. Johnson, ``Diesel Emission Control in Review,''

Diesel Engine-Efficiency and Emissions Research (DEER) Conference,

Detroit, MI, August 20-24, 2006. Available at http:// www1.eere.energy.gov/vehiclesandfuels/pdfs/deer_2006/session2/ 2006_deer_johnson.pdf (last accessed Nov. 9, 2008). See also Tim

Johnson, ``Diesel Engine Emissions and Their Control,'' Platinum

Metals Review, 52, at 23-37 (2008). Available at http:// www.platinummetalsreview.com/dynamic/article/view/52-1-23-37 (last accessed Nov. 9, 2008)

\195\ Id.

Cummins commented that LNT systems should be considered for more than just the compact and subcompact vehicles, and stated that a number of large vehicles and trucks currently use LNT. Cummins argued that a

LNT after-treatment system can be a cost-effective technology on both small and larger engines. For the final rule, NHTSA assumed the use of a LNT after-treatment system for three additional vehicle subclasses compared to the NPRM. However, following the rationale explained in the preceding paragraph, the SCR type after-treatment system is assumed for larger vehicle subclasses. As is the case with all technologies in the analysis, technology application assumptions are based on the general understanding of what a manufacturer could do in response to meeting emissions compliance but other manufacturer specific factors will dictate the actual technology applications.

In the NPRM, NHTSA assumed a 3 percent phase in rate per year for diesel technologies. For the final rule, passenger cars, as defined by the technology class, retained the 3 percent combined (for DSLT and

DSLC) phase-in cap for MY 2011. However, diesel technologies for truck technology classes were allowed to be applied at a 4 percent combined

(for DSLT and DSLC) phase-in cap for MY 2011 to account for the higher application rates observed in the submitted product plans and diesel's favorable characteristics in truck applications. Volume-based learning was assumed for the NPRM, however, confidential product plans indicated that this technology would be in high-volume in the 2011 time frame, thus time-based learning was assumed for the final rule. For the final rule, diesel technologies can only be applied at redesign, which is consistent with the NPRM.

(c) Transmission Technologies

NHTSA has also reconsidered the way it applies transmission technologies in the Volpe model to obtain increased fuel savings. The revised decision tree for transmission technologies reflects the fact that baseline vehicles now include either 4- or 5-speed automatic transmissions, given that many manufacturers are already employing 5- speed automatic transmissions or are going directly to 6-speed automatics.\196\ The decision tree in the final rule also combines

``aggressive shift logic'' and

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``early torque converter lockup,'' although the NPRM considered them separately, because NHTSA concluded upon further review that the two technologies could be optimized simultaneously due to the fact that adding both of them primarily required only minor modifications to the transmission or calibration software. Cost and effectiveness numbers have also been thoroughly reexamined, as have learning rates and phase- in caps, based on comments received. The section below describes each of the transmission technologies considered.

\196\ Confidential product plans indicate that future products manufactured within the rulemaking period may not go from 4- or 5- speed transmission, but will instead introduce 6- or 7-speed automatic transmissions as replacements.

(i) Improved Transmission Controls and Externals (IATC)

During operation, an automatic transmission's controller manages the operation of the transmission by scheduling the upshift or downshift, and locking or allowing the torque converter to slip based on a preprogrammed shift schedule. The shift schedule contains a number of lookup table functions, which define the shift points and torque converter lockup based on vehicle speed and throttle position, and other parameters such as temperature. Aggressive shift logic (ASL) can be employed in such a way as to maximize fuel efficiency by modifying the shift schedule to upshift earlier and inhibit downshifts under some conditions, which reduces engine pumping losses and engine friction as noted in the gas engine section. Early torque converter lockup \197\ in conjunction with ASL can further improve fuel economy by locking the torque converter sooner, thus reducing inherent torque converter slippage or losses. As discussed above, the NPRM separated these two technologies, but they are combined for purposes of the final rule since the calibration software can be optimized for both functions simultaneously.

\197\ Although only modifications to the transmission calibration software are considered as part of this technology, very aggressive early torque converter lock up may require an adjustment to damper stiffness and hysteresis inside the torque converter.

Internal transmission hardware changes associated with this technology are addressed in 6/7/8-Speed Automatic Transmission with

Improved Internals section.

Calibrating the transmission shift schedule to improve fuel consumption reduces the average engine speed and increases the average engine load, which can lead to a perceptible increase in engine harshness. The degree to which the engine harshness can be increased before it becomes noticeable to the driver is strongly influenced by characteristics of the vehicle, and although it is somewhat subjective, it always places a limit on how much fuel consumption can be improved by transmission control changes. The Alliance agreed in its comments that ASL can be used effectively to reduce throttling losses, but at the expense of noise-vibration-harshness (NVH) and drivability concerns. The Alliance also commented that losses in the torque converter typically make automatic transmissions less efficient than manual transmissions, and suggested that efficiency can be improved by mechanically ``locking up'' the torque converter earlier or replacing the torque converter with a friction clutch of the type used on a manual transmission. Simply replacing a torque converter with a friction clutch, however, ignores the torque multiplication that torque converters provide at vehicle launch.

In the NPRM, NHTSA estimated that aggressive shift logic could incrementally reduce fuel consumption by 1 to 2 percent at an incremental cost of $38 and early torque converter lockup could incrementally reduce fuel consumption by 0.5 percent at a $30 cost for the calibration effort. Confidential manufacturer comments suggested that less aggressive shift logic must be employed on vehicles with low acceleration reserve, but that a 1-3 percent improvement in fuel economy was attainable on vehicles with adequate acceleration reserve.

For the final rule, NHTSA combined aggressive shift logic and early torque converter lockup into the IATC technology with an effectiveness estimate of 1.5 to 2.5 percent in agreement with most confidential manufacturer estimates. As aggressive shift logic and early torque converter lockup are both achievable with a similar calibration effort, the incremental cost for improved automatic transmission controls used the higher value of $38, converted this value to 2007 dollars, and applied a 1.5 RPE markup factor to arrive at an incremental cost estimate of $59 for the final rule.

The IATC technology is considered to be available at the start of the 2011 model year, and as was the case in the NPRM, NHTSA considers that it can be applied during a refresh model year since NVH concerns must be addressed. The technology is applicable to all vehicle subclasses and NHTSA determined IATC type technologies will be high volume within the 2011 time frame so time-based learning is assumed, with a phase-in cap for MY 2011 of 33 percent.

(ii) Automatic 6-, 7- and 8-Speed Transmissions (NAUTO)

Having more ``speeds'' on a transmission (i.e., having more gear ratios on the transmission) gives three effects in terms of vehicle performance and fuel economy. First, more gear ratios allow deeper 1st and 2nd gear ratios for improved launch performance, or increased acceleration. Second, a wider ratio spread also offers the ability to reduce the steps between gear ratios, which allows the engine to operate closer to optimum speed and load efficiency region. And third, a reduction in gear ratio step size improves internal transmission losses by reducing the sliding speeds across the clutches, thus reducing the viscous drag loss generated between two surfaces rotating at different speeds. Bearing spin losses are also reduced as the differential speed across the two bearing surfaces is reduced. This allows the engine to operate at a reduced load level to improve fuel economy.

Although the additional gear ratios improve shift feel, they also introduce more frequent shifting between gears, which can be perceived by consumers as bothersome. Additionally, package space limitations prevent 7- and 8-speed automatics from being applicable to front wheel drive vehicles.

Comparison between NPRM and final rule cost and effectiveness estimates are somewhat complicated by the revisions in the decision trees and technology assumptions. In the NPRM, NHTSA estimated that 6-, 7- and 8-speed transmissions could incrementally reduce fuel consumption by 0.5 to 2.5 percent at an incremental cost of $76 to

$187, relative to a 5-speed automatic transmission, a technology not used in the final rule decision tree, and the incremental cost for a 4- speed to a 5-speed automatic transmission (again no longer considered in the final rule) was estimated to be $76 to $167.

In response to NHTSA's request for information, confidential manufacturer data projected that 6-speed transmissions could incrementally reduce fuel consumption by 0 to 5 percent from a baseline 4-speed automatic transmission, while an 8-speed transmission could incrementally reduce fuel consumption by up to 6 percent from a baseline 4-speed automatic transmission. The 2008 Martec report estimated a cost of $323 (RPE adjusted) for converting a 4-speed to a 6-speed transmission and a cost of $638 (RPE adjusted) for converting a 4-speed to an 8-speed transmission. GM has publicly claimed a fuel economy improvement of up to 4 percent for its

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new 6-speed automatic transmissions.\198\ The 2008 EPA Staff Technical

Report found a 4.5 to 6.5 percent fuel consumption improvement for a 6- speed over a 4-speed automatic transmission.\199\

\198\ General Motors, news release, ``From Hybrids to Six-

Speeds, Direct Injection And More, GM's 2008 Global Powertrain

Lineup Provides More Miles with Less Fuel'' (released Mar. 6, 2007).

Available at http://www.gm.com/experience/fuel_economy/news/2007/ adv_engines/2008-powertrain-lineup-082707.jsp (last accessed Sept. 18, 2008).

\199\ Page 17, ``EPA Staff Technical Report: Cost and

Effectiveness Estimates of Technologies Used to Reduce Light-duty

Vehicle Carbon Dioxide Emissions'' Environmental Protection Agency,

EPA420-R-08-008, March 2008.

For the final rule, NHTSA estimated that the conversion to a 6-, 7- and 8-speed transmission (NAUTO) from a 4 or 5-speed automatic transmission with IATC would have an incremental fuel consumption benefit of 1.4 percent to 3.4 percent, for all vehicle subclasses. The 2008 Martec report, which quoted high volume, fully learned costs, was relied on to develop the final rule cost estimates. Subcompact,

Compact, Midsize, Large Car and Minivan subclasses, which are typically considered normal performance passenger cars, are assumed to utilize a 6-speed automatic transmission only (as opposed to 7 or 8 speeds) resulting in an incremental RPE cost of $323 from Martec 2008. For

Performance Subcompact, Performance Compact, Performance Midsize,

Performance Large car and Small, Midsize and Large truck, where performance and or payload/towing may be a larger factor, NHTSA assumed that 6-, 7- or 8-speed transmissions are applicable thus the incremental RPE cost range of $323-$638 was established which used the

Martec 2008 six speed cost and 8-speed costs for the estimates.

This technology will be available from the start of the rulemaking period. Confidential manufacturer data indicates the widespread use of 6-speed or greater automatic transmissions and introductions into the fleet occur primarily at vehicle redesign cycles. This prompted NHTSA to set the phase-in rate at 50 percent for MY 2011, but also to consider that the technology can only be applied at a redesign cycle, as opposed to the refresh cycle application of the NPRM. The technology is determined to be at high volume in the 2011 timeframe, and since these are mature and stable technologies, time-based learning factors are applied.

(iii) Dual Clutch Transmissions/Automated Manual Transmissions (DCTAM)

An automated manual transmission (AMT) is similar in architecture to a conventional manual transmission, but shifting and launch functions are performed through hydraulic or electric actuation. There are two basic types of AMTs, single-clutch and dual-clutch transmission

(DCT), both of which were considered in the NPRM. Upon further consideration and in response to manufacturer comments to only include dual-clutch AMTs, single-clutch AMTs are not applied in the analysis for the final rule.

Single clutch transmissions exhibit a torque interruption when changing gears because the clutch has to be disengaged. In a conventional manual transmission vehicle, the driver has initiated the gear change, and so expects to feel the resulting torque interruption.

With an AMT, in contrast, a control system initiates the shift, which is unexpected and can be disconcerting to the driver. Comments from

Ford in response to the NPRM indicated that the acceptability of this torque interruption among U.S. drivers is poor, although Ford also commented that DCTs do not have the risk of customer acceptance that

AMTs do. BorgWarner, a DCT supplier, echoed these comments. DCTs do not display the torque interrupt characteristic due to their use of two clutch mechanisms which allow for uninterrupted power transmission. To assist with launch of a DCT equipped vehicle, the first gear ratio can be deepened to gain back some of the performance advantage an automatic transmission possesses due to the torque converter's torque multiplication factor.

There are two types of DCT systems, wet clutch and dry clutch, which are used for different types of vehicles. Wet clutch DCTs offer a higher torque capacity that comes from the use of a hydraulic system that cools the clutches, but that are less efficient than the dry clutch type due to the losses associated with hydraulic pumping.

Additionally, wet DCTs have a higher cost due to the additional hydraulic hardware required. Wet clutch DCT systems have been available in the U.S. market on imported products since 2005, and Chrysler has publicly stated that it will have a DCT transmission in its 2010 model year vehicle line-up.\200\

\200\ Chrysler blog, ``Dual-Clutch Transmissions Explained''

(released October 3, 2007) available at http://blog.chryslerllc.com/ blog.do?p=entry&id=113, last accessed September 18, 2008.

Consistent with manufacturers' confidential comments and based on its own analysis, NHTSA determined that dry clutch DCTs are applicable to smaller front wheel drive cars, due to their lower vehicle weight and torque production, and wet clutch DCTs are more applicable to higher torque applications with higher power requirements. Therefore lower cost, higher efficiency dry clutch DCTs are specified for the

Subcompact and Compact Car vehicle classes, while all other classes required wet clutch DCTs.

In the NPRM, NHTSA estimated that the incremental cost for DCTs was

$141, independent of vehicle class, which was the midpoint of the

NESCCAF estimates and within the range provided confidential manufacturer data. CARB commented that NHTSA had incorrectly cited the cost of AMTs from the NESCCAF study in the NPRM, stating that AMTs had been determined to be cost neutral (zero cost) relative to baseline transmission, as opposed to a $0-$240 cost justification. Confidential manufacturer data suggest additional DCT costs from $80 to $740, with dry clutch DCT costs being approximately $100 less due to reduced hydraulic system content. The 2008 Martec study also reported variable costs for AMTs.

In the NPRM, NHTSA cited the NESCCAF study as projecting that AMTs could incrementally reduce fuel consumption by 5 to 8 percent and confidential manufacturer data projected that AMTs could incrementally reduce fuel consumption by 2 to 5 percent. On the basis of these estimates, NHTSA concluded in the NPRM that AMTs could incrementally reduce fuel consumption by 4.5 to 7.5 percent. Confidential manufacturer data received in response to the NPRM suggest a benefit of 2 to 12 percent for DCTs over a 6-speed planetary automatic, and one confidential manufacturer estimates a benefit of 1 to 2 percent for a dry clutch DCT over a wet clutch DCT. The 2008 EPA Staff Technical

Report also indicates a benefit of 9.5 to 14.5 percent for a DCT (wet or dry was not specified) over a 4-speed planetary automatic transmission.

For the final rule, NHTSA estimated a 5.5 to 9.5 percent improvement in fuel consumption over a baseline 4/5-speed automatic transmission for a wet clutch DCT, which was assumed for all vehicle subclasses except Subcompact and Compact Car. This results in an incremental effectiveness estimate of 2.7 to 4.1 percent over the NAUTO technology. For Subcompact and Compact Cars, which were assumed to use a dry clutch DCT, NHTSA estimated an 8 to 13 percent fuel consumption improvement over a baseline 4/5-speed automatic transmission, which equates

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to a 5.5 to 7.5 percent incremental improvement over the NAUTO technology.

The 2008 Martec report was utilized to develop the cost estimates for the final rule; it estimated an RPE cost of $450 for a dry clutch

DCT, and $600 for a wet clutch DCT, both relative to a baseline 4/5- speed. In the transmission decision tree for the final rule, this yielded a dry clutch DCT incremental cost estimate of $68 for the

Subcompact and Compact Cars relative to the NAUTO technology. For

Midsize, Large Car and Minivan classes the wet clutch DCT incremental cost over NAUTO is $218, which reflects the lower, 6-speed only cost of the NAUTO technology applied to these vehicles. The average incremental cost for wet DCT for the four Performance classes and the Small,

Midsize and Larger truck is $61, which is lower than the other vehicle subclasses due to the higher cost NAUTO technology (up to 8-speeds) that the DCTAM technology supersedes.

NHTSA relied upon confidential manufacturer product plans showing

DCT production will be readily available and at high volume by 2011.

Therefore volume-based learning is not applicable, and since this is a mature and stable technology, time-based learning is applied. As production facility conversion or construction may be required to facilitate required capacity, NHTSA limited the production phase-in caps in MY 2011 to 20 percent. As with other transmission technologies, application was allowed at redesign only due to the vehicle changes required to adapt a new type transmission.

(iv) Continuously Variable Transmission (CVT)

A continuously variable transmission (CVT) is unique in that it does not use gears to provide ratios for operation. Most CVTs use either a belt or chain on a system of two pulleys (the less common toroidal CVTs replace belts and pulleys with discs and rollers) that progressively vary the ratio, thus permitting an infinite number of effective gear ratios between a maximum and minimum value, and often a wider range of ratios than conventional automatic transmissions. This enables even finer optimization of the transmission ratio under different operating conditions and, therefore, some reduction of engine pumping and friction losses. In theory, the CVT has the ability to be the most fuel-efficient kind of transmission due to the infinite ability to optimize the ratio and operate the engine at its most efficient point. However, this effectiveness is reduced by the significant internal losses from high-pressure, high-flow-rate hydraulic pump, churning, friction loss, and bearing losses required to generate the high forces needed for traction.\201\

\201\ ``Transmission and Driveline--Major contributors to FUEL efficiency, safety, fun to drive and brand differentiation'', Car

Training Institute Symposium, May 6-7, 2008--Plenary Speech, Robert

Lee, Vice President, Mircea Gradu, Director Transmission and

Driveline, Chrysler LLC, USA. Available from the Car Training

Institute, for contact information see http://www.car-training- institute.com/cti_en/html/kontakt.html (last accessed Nov. 9, 2008).

Some U.S. car manufacturers have abandoned CVT applications because they failed to deliver fuel economy improvements over automatic transmissions. GM abandoned the use of CVT before 2006.\202\ Ford offered a CVT in the Five Hundred and Freestyle from MYs 2005-2007 and discontinued it thereafter. However, Chrysler offers CVTs in the Dodge

Caliber, the Jeep Compass, and the Jeep Patriot. Nissan was using CVTs in many vehicles, but appears to be restricting the use of this technology to passenger cars only.

\202\ See http://car-reviews.automobile.com/news/general-motors- to-kill-continually-variable-transmission/166/ (last accessed Oct. 23, 2008).

In the NPRM, NHTSA estimated a CVT effectiveness of approximately 6 percent over a 4-speed automatic, which was above the NESCCAF value but in the range of NAS. For costs, NHTSA concluded in the NPRM that the adjusted costs presented in the 2002 NESCCAF study represent the best available estimates, and thus estimated that CVTs could incrementally reduce fuel consumption by 3.5 percent when compared to a conventional 5-speed automatic transmission (which cost an incremental $76-$167), a technology which is considered a baseline transmission option on the final rule decision tree, at an incremental cost of $100 to $139. After reviewing confidential manufacturer data and the Martec report, for the final rule NHTSA is now estimating the incremental cost of CVTs to be

$300 for all vehicle subclasses, except for large performance cars, midsize light trucks and large light trucks for which the technology is incompatible.

Confidential manufacturer data in response to the NPRM suggested that the incremental effectiveness estimate from CVTs may be 2 to 8 percent over 4-speed planetary transmissions in simulation (however one commenter reported a zero percent improvement in dynamometer testing) at a cost of $140 to $800. Considering the NPRM conclusion and confidential data together with independent review, NHTSA has estimated the fuel consumption effectiveness for CVTs at 2.2 to 4.5 percent over a 4/5-speed automatic transmission, which translates into a 0.7 to 2.0 incremental effectiveness improvement over the IATC technology. NHTSA estimated the CVT incremental cost to be $300 for the final rule, noting that the NPRM costs were incremental to a 5-speed technology that is no longer represented in the decision tree, hence the higher final rule cost.\203\

\203\ Since the decision trees are configured differently, the net cost to CVT in the NPRM included 5-speed automatic transmission technology costs that are not applied in the final rule.

CVTs are currently available, but due to their limited torque- carrying capability, they are not applied to Performance Large cars and

Midsize and Large trucks. There is limited production capability for

CVTs, so the phase-in cap for MY 2011 is limited to 5 percent to account for new plants and tooling to be prepared. CVTs can be introduced at product redesign intervals only based on confidential manufacturer data and consistent with the NPRM approach (since it requires vehicle attribute prove-out, test and certification prior to introduction). Confidential manufacturer data indicates that CVTs will be at high volumes by 2011, and this is a mature and stable technology, therefore NHTSA applied time-based learning factors.

(v) 6-Speed Manual Transmissions (6MAN)

Manual transmissions are entirely dependent upon driver input to change gear ratio: the driver selects when to perform the shift and which gear ratio to select. This is the most efficient transfer of energy of all transmission layouts, because it has the lowest internal gear losses, with a minimal hydraulic system, and the driver provides the energy to actuate the clutch. From a systems viewpoint, however, vehicles with manual transmissions have the drawback that the driver may not always select the optimum gear ratio for fuel economy.

Nonetheless, increasing the number of available ratios in a manual transmission can improve fuel economy by allowing the driver to select a ratio that optimizes engine operation more often. Typically, this is achieved through adding overdrive ratios to reduce engine speed at cruising velocities (which saves fuel through reduced pumping losses) and pushing the torque required of the engine towards the optimum level. However, if the gear ratio steps are not properly designed, this may require the driver to

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change gears more often in city driving resulting in customer dissatisfaction. Additionally, if gear ratios are selected to achieve improved launch performance instead of to improve fuel economy, then no fuel saving effectiveness is realized.

NHTSA recognizes that while the manual transmission is very efficient, its effect on fuel consumption relies heavily upon driver input. In driving environments where little shifting is required, the manual transmission is the most efficient because it has the lowest internal losses of all transmissions. However, the manual transmission may have lower fuel efficiency on a drive cycle when drivers shift at non-optimum points.

In the NPRM, NHTSA estimated that a 6-speed manual transmission could incrementally reduce fuel consumption by 0.5 percent when compared to a 5-speed manual transmission, at an incremental cost of

$107. Confidential manufacturer data received in response to the NPRM suggests that manual transmissions could incrementally reduce fuel consumption by 0 to 1 percent over a base 5-speed manual transmission at an incremental cost of $40 to $900. Most confidential comments suggested that the incremental cost was within the lower quartile of the full range, thus $225 (the lower quartile upper-bound) was multiplied by the 1.5 RPE markup factor for a total of $338. Therefore, the final rule states that the incremental fuel consumption effectiveness for a 6-speed manual transmission over a 5-speed manual transmission is 0.5 percent at a RPE cost of $338.

This technology is applicable to all vehicle classes considered and can be introduced at product redesign intervals, consistent with the

NPRM and other final rule transmission technologies. Six-speed manuals are already in production at stable and mature high volumes so time- based learning is applied with a 33 percent phase-in rate for MY 2011.

(d) Hybrid and Electrification/Accessory Technologies

(i) Overview

A hybrid describes a vehicle that combines two or more sources of energy, where one is a consumable energy source (like gasoline) and one is rechargeable (during operation, or by another energy source).

Hybrids reduce fuel consumption through three major mechanisms: (1) By turning off the engine when it is not needed, such as when the vehicle is coasting or when stopped; (2) by recapturing lost braking energy and storing it for later use; and by (3) optimizing the operation of the internal combustion engine to operate at or near its most efficient point more of the time. A fourth mechanism to reduce fuel consumption, available only to plug-in hybrids, is by substituting the fuel energy with energy from another source, such as the electric grid.

Engine start/stop is the most basic of hybrid functions, and as the name suggests, the engine is shut off when the vehicle is not moving or when it is coasting, and restarted when needed. This saves the fuel that would normally be utilized to spin the engine when it is not needed. Regenerative braking is another hybrid function which allows some of the vehicle's kinetic energy to be recovered and later reused, as opposed to being wasted as heat in the brakes. The reused energy displaces some of the fuel that would normally be used to drive the vehicle, and thus results in reduced fuel consumption. Operating the engine at its most efficient operating region more of the time is made possible by adding electric motor power to the engine's power so that the engine has a degree of independence from the power required to drive the vehicle. Fuel consumption is reduced by more efficient engine operation, the degree of which depends heavily on the amount of power the electric motor can provide. Hybrid vehicles with large electric motors and battery packs can take this to an extreme and drive the wheels with electric power only and the engine consuming no fuel. Plug- in hybrid vehicles can substitute fuel energy with electrical energy, further reducing the fuel consumption.\204\

\204\ Substituting fuel energy with electrical energy may not actually save total overall energy used, when considering the inefficiencies of creating the electricity at a power plant and storing it in a battery pack, but it does enable use of other primary energy sources, and reduces the vehicle's fuel consumption.

Plug-in hybrids are also receiving increasing attention because of their ability to use ``clean energy'' from the electric grid, such as that solar or wind, which can reduce the overall greenhouse gas output.

Hybrid vehicles utilize some combination of the above mechanisms to reduce fuel consumption. The effectiveness of a hybrid, and generally the complexity and cost, depends on the utilization of the above mechanisms and how aggressively they are pursued.

In addition to the purely hybrid technologies, which decrease the proportion of propulsion energy coming from the fuel by increasing the proportion of that energy coming from electricity, there are other steps that can be taken to improve the efficiency of auxiliary functions (e.g., power-assisted steering or air-conditioning) which also reduce fuel consumption. These steps, together with the hybrid technologies, are collectively referred to as ``vehicle electrification'' because they generally use electricity instead of engine power. Three ``electrification'' technologies are considered in this analysis along with the hybrid technologies: Electrical power steering (EPS), improved accessories (IACC), and high voltage or improved efficiency alternator (HVIA).

(ii) Hybrid System Sizing and Cost Estimating Methodology

Estimates of cost and effectiveness for hybrid and related electrical technologies have been adjusted from those described in the

NPRM to address commenters' concerns that NHTSA considered technologies not likely to be adopted by automakers (e.g., 42V electrical systems) or did not scale the costs for likely technologies across the range of vehicle subclasses considered. To address these concerns, the portfolio of vehicle electrification technologies has been refined based on commenter data as described below in the individual hybrid technologies sections. Ricardo and NHTSA have also developed a ``ground-up'' hybrid technology cost estimating methodology and, where possible, validated it to confidential manufacturer data. The hybrid technology cost method accounts for variation in component sizing across both the hybrid type and the vehicle platform. The method utilizes four pieces of data: (1)

Key component sizes for a midsize car by hybrid system type; (2) normalized costs for each key component; (3) component scaling factors that are applied to each vehicle subclass by hybrid system type; and

(4) vehicle characteristics for the subclasses which are used as the basis for the scaling factors.

Component sizes were estimated for a midsize car using publicly available vehicle specification data and commenter data for each type of hybrid system as shown in Table IV-10.

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In developing Table IV-10, NHTSA made several assumptions:

(1) Hybrid controls hardware varies with the level of functionality offered by the hybrid technology. Assumed hybrid controls complexity for a 12V micro hybrid (MHEV) was 25 percent of a strong hybrid controls system and the complexity for an Integrated Starter Generator

(ISG) was 50 percent. These ratios were estimates based on the directional need for increased functionality as system complexity increases.

(2) In the time frame considered, Li-ion battery packs will have limited market penetration, with a majority of hybrid vehicles using

NiMH batteries. One estimate from Anderman indicates that Li-ion market penetration will achieve 35 percent by 2015.\205\ For the purposes of this analysis, it was assumed that mild and strong hybrids will use

NiMH batteries and plug-in hybrids will use Li-ion batteries.

\205\ Anderman, Advanced Automotive Battery Conference, May 2008. Proceedings available for purchase at http:// www.advancedautobat.com/Proceedings/index.html (last accessed

October 17, 2008).

(3) The plug-in hybrid battery pack was sized for a mid-sized car by assuming: the vehicle has a 20 mile all electric range and consumes an average of 300 W-hr per mile; the battery pack can be discharged down to 50 percent depth of discharge; and the capacity of a new battery pack is 20 percent greater than at end of life (i.e., range on a new battery pack is 24 miles).

(4) All hybrid systems included a DC/DC converter which was sized to accommodate vehicle electrical loads appropriate for increased vehicle electrification in the time frame considered.

(5) High voltage wiring scaled with hybrid vehicle functionality and could be represented as a fraction of strong hybrid wiring. These ratios were estimates based on the directional need for increased functionality as system complexity increases.

(6) All hybrid systems included a supplemental heater to provide vehicle heating when the engine is stopped, however, only stronger hybrids included electric air conditioning to enable engine stop/start when vehicle air conditioning was requested by the operator.

In the hybrid technology cost methodology developed for cost- scaling purposes, several strong hybrid systems replaced a conventional transmission with a hybrid-specific transmission, resulting in a cost offset for the removal of a portion of the clutches and gear sets within the transmission. The transmission cost in Table IV-11 below expresses hybrid transmission costs as a percentage of traditional automatic transmission cost, as described in the 2008 Martec Report, at

$850. The method assumed that the mechanical aspect of a power-split transmission with a reduced number of gear sets and clutches resulted in a cost savings of 50 percent of a conventional transmission with torque converter. For a 2-mode hybrid, the mechanical aspects of the transmission are similar in complexity to a conventional transmission with a torque converter, thus no mechanical cost savings was appropriate. The plug-in hybrid assumed a highly simplified transmission for electric motor drive, thus 25 percent of the base vehicle transmission cost was applied.

Estimates for the cost basis of each key component are shown in

Table IV-11 below along with the sources of those estimates. The cost basis estimates assume fully learned, high-volume (greater than 1.2 million units per annum) production. The costs shown are variable costs that are not RPE adjusted.

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Component scaling factors were determined based on vehicle characteristics for each type of hybrid system as shown in Table IV-12 below.

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NHTSA's CAFE database was used to define the average vehicle characteristics for each vehicle subclass as shown in Table IV-13 below, and these attributes were used as the basis of the scaling factors.

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Table IV-14 shows the costs for the different types of hybrid systems on a midsize vehicle. The individual component costs were scaled from the normalized costs shown in Table IV-11 according to the component size shown in Table IV-10 and adjusted to a low volume cost by backing out volume-

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based learning reductions.\206\ These component costs were summed to get the total low volume cost for each hybrid type, and a 1.5 RPE adjustment was applied. The ISG technology replaces the MHEV technology on the Electrification/Accessory technology decision tree, therefore the MHEV technology costs must be subtracted to reflect true costs

($2,898-$707 = $2,191 in this example).

\206\ High volume costs are multiplied by a factor of 1.56, which represents two cycles of 20 percent reverse learning, to determine the appropriate low volume, or unlearned costs.

Wherever possible, the results of the hybrid technology cost method were compared with values as previously described in the NPRM and the results generally matched prior estimates. Additionally, the results from the hybrid technology cost method were validated with public literature and confidential manufactures test data as allowed. Elements of the 2008 Martec report identified cost data and a detailed bill of materials for several comparable hybrid technologies (Micro-hybrid systems and Full Hybrid systems), and the hybrid technology cost model agreed well with this data. The scalable bill of material based methodology described above was determined to offer the best solution for estimating component sizes and costs across a range of hybrid systems and vehicle platforms and the validation of these cost outputs with other data sources suggests that this approach is a reasonable approach.

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(iii) Electrical Power Steering (EPS)

Electrical Power Steering (EPS) is advantageous over conventional hydraulic power-assisted steering in that it only draws power when the vehicle is being steered, which is typically a small percentage of the time a vehicle is operating. In fact, on the EPA test cycle no steering is done, so the CAFE fuel consumption effectiveness comes about by eliminating the losses from driving the hydraulic steering pump at engine speed. EPS systems use either an electric motor driving a hydraulic pump (this is a subset of EPS systems known as electro- hydraulic power steering) or an electric motor directly assisting in turning the steering column. EPS is seen as an enabler for all vehicle hybridization technologies, since it provides power steering when the engine is off. This was a primary consideration in placing EPS at the top of the Electrification/Accessory decision tree.

In the NPRM, NHTSA estimated the fuel consumption effectiveness for

EPS at 1.5 to 2 percent at an incremental cost of $118 to $197, believing confidential manufacturer data most accurate. In response to the NPRM Sierra Research suggested EPS and high efficiency alternators combined is worth 1 to 1.8 percent on the CAFE test cycle,\207\ and confidential manufacturer data indicated a 0.7 to 2.9 percent fuel consumption reduction. The cost range from confidential manufacturer data was $70 to $300. Sierra estimated EPS for cars at $82 and $150 for trucks.\208\ A market study by Frost & Sullivan

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indicated the cost of an EPS system at roughly $65 more than a conventional hydraulic (HPS) system.\209\ Because there is a wide range in the effectiveness for EPS depending on the vehicle size, NHTSA has increased the range from the NPRM to incorporate the lower ranges suggested by most manufacturers and estimates the fuel consumption effectiveness for EPS at 1 to 2 percent for the purpose of the final rule. The incremental costs are also estimated on range below the

Sierra value for cars but above the Frost & Sullivan estimate at a piece cost range of $70 to $80 and included a 1.5 RPE uplift to $105 to

$120 for the final rule.

\207\ Docket No. NHTSA-2008-0089-0179.1, Attachment 2, at 53.

\208\ Docket No. NHTSA-2008-0089-0179.1, Attachment 2, at 59.

\209\ Cost for EPS quoted at 48 Euros, at $1.35 per Euro exchange rate (Oct. 7, 2008) equates to $65, from Frost & Sullivan,

Feb. 9, 2006 ``Japanese Steering System Market Moves Into High

Gear,'' http://www.theautochannel.com/news/2006/02/09/210036.html

(last accessed Nov. 2, 2008).

EPS is currently in volume production in small to mid-sized vehicles with a standard 12V electrical system; however, heavier vehicles may require a higher voltage system, which adds cost and complexity. The Chevy Tahoe Hybrid, for example, uses a higher voltage

EPS system. For purposes of the final rule, NHTSA has applied EPS to all vehicle subclasses except for Large trucks.

In the NPRM, NHTSA assumed a 25 percent phase in rate of EPS technologies. For the purposes of the final rule, EPS phase-in caps were limited to 10 percent in MY 2011 to address confidential manufacturer concerns over lead time. In the NPRM, NHTSA assumed a volume-based learning effect for EPS. For the final rule, however,

NHTSA applied time-based learning for EPS since NHTSA's analysis indicated that this technology would be in high-volume use at the beginning of its first year of availability. NHTSA also assumed in the

NPRM that EPS could be applied during refresh model years, which was consistent with information provided in confidential product plans, therefore for the purpose of the final rule, NHTSA again applied EPS at refresh timing.

(iv) Improved Accessories (IACC)

Improved accessories (IACC) was defined in the NPRM as improvements in accessories such as the alternator, coolant and oil pumps that are traditionally driven by the engine. Improving the efficiency or outright electrification of these accessories would provide opportunity to reduce the accessory loads on the engine. However, as the oil pump provides lubrication to the engine's sliding surfaces such as bearings pistons, and camshafts and oil flow is always required when the engine is spinning, and it is only supplied when the engine is spinning, there is no efficiency to be gained by electrifying the oil pump.\210\

\210\ Oil pump electrification comes with an additional potential technical and financial risk (to warranty and consumer), in that significant engine damage can occur should the system fail to provide engine lubrication, even on a momentary basis.

Electrical air conditioning (EAC) could reduce fuel consumption by allowing the engine to be shut off when it is not needed to drive the vehicle. For this reason EAC is often used on hybrid vehicles. In highway driving, however, there is little opportunity to shut the engine off; furthermore, EAC is less efficient when the engine is running because it requires mechanical energy from the engine to be converted to electrical energy and then back again to mechanical. Since air conditioning is not required on the EPA city or highway test cycles, there is no CAFE fuel consumption effectiveness from EAC.

Therefore, EAC does not improve accessory efficiency apart from the hybrid technologies. For the purposes of the final rule, IACC refers strictly to improved engine cooling, since electrical lubrication and air conditioning are not effective stand-alone fuel saving technologies and improved alternator is considered as a separate technology given its importance to vehicle electrification.

Improved engine cooling, or intelligent cooling, can save fuel through two mechanisms: By reducing engine friction as the engine warms up faster; and by operating an electric coolant pump at a lower speed than the engine would (i.e., independent of engine speed). Intelligent cooling can be applied to vehicles that do not typically carry heavy payloads. Larger vehicles with towing capacity present a challenge for electrical intelligent cooling systems, as these vehicles have high cooling fan loads. Therefore, NHTSA did not apply IACC to the Large

Truck and SUV class.

In the NPRM, NHTSA estimated the fuel consumption effectiveness for improved accessories at 1 to 2 percent at an incremental cost of $124 to $166 based on the 2002 NAS Report and confidential manufacturer data. Confidential manufacturer data received in response to the NPRM and Sierra Research both suggested a range for fuel consumption effectiveness from 0.5 to 2 percent. A comment from MEMA suggested that improved thermal control of the engine could produce between 4 and 8 percent fuel economy improvement; \211\ however, NHTSA's independent review of intelligent cooling suggests this estimate is high and concurs with the estimates from NAS. Independent review found the cost for IACC at low volumes, assuming the base vehicle already has an electric fan, to be $180 to $220. These costs were adjusted to account for volume-based learning and then marked up to account for the 1.5 RPE factor. For the purposes of the final rule, NHTSA retained the fuel consumption effectiveness at 1 to 2 percent and estimated the incremental costs to be $173 to $211.

\211\ Docket No. NHTSA-2008-0089-0193.1.

MEMA also suggested that NHTSA consider solar glass technology to reduce cabin thermal loading; however, air conditioning technologies were not considered as part of this technology.

In the NPRM, NHTSA proposed a 25 percent phase-in cap for Improved

Accessories. To address manufacturer concerns over lead time in the early years, the IACC phase-in cap was limited to 10 percent for MY 2011 for the final rule. In the NPRM, NHTSA assumed for improved accessories a volume-based learning curve. For the final rule, however,

NHTSA applied time-based learning for IACC since NHTSA's analysis indicated that this technology would be in high-volume use at the beginning of its first year of availability. NHTSA assumed in the NPRM that improved accessories could be applied during any model year. For the purpose of the final rule, NHTSA applied intelligent cooling at refresh model years due to the significant changes required to the vehicle cooling system that necessitate recertification testing.

(v) 12V Micro Hybrid (MHEV) 12V Micro-Hybrid (MHEV) systems are the most basic of hybrid systems and offer mainly idle-stop capability. Their low cost and easy adaptability to existing powertrains and platforms can make them attractive for some applications. The conventional belt-driven alternator is replaced with a belt-driven, enhanced power starter- alternator and a redesigned front-end accessory drive system that facilitates bi-directional torque application. Also, during idle-stop, some functions such as power steering and automatic transmission hydraulic pressure are lost with conventional arrangements; so electric power steering and an auxiliary transmission pump are needed. These components are similar to those that would be used in other hybrid designs. Also included in this technology is the Smart Starter Motor.

This system is comprised of an enhanced starter motor, along with some electronic control that

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monitors the accelerator, brake, clutch positions, and the battery voltage as well as low-noise gears to provide fast and quiet engine starts. Despite its extended capabilities, the starter is compact and thus relatively easy to integrate in the vehicle. 12V micro hybrid was added to the technology list to address concerns from CARB and Delphi that the hybrid classifications used in the NPRM did not adequately represent these technologies.\212\

\212\ Docket Nos. NHTSA-2008-0089-0173 and -0144.1, respectively.

The effectiveness estimates by NHTSA for this technology are based on confidential manufacturer data and independent source data. For the vehicles equipped with (baseline) inline 4, those with smaller displacements, the effectiveness is between 1 and 2.9 percent, and for those equipped with V-6 or V-8, the effectiveness is between 3.4 and 4 percent. The 1 to 2.9 percent incremental fuel consumption savings applies to the Sub-Compact Car, Performance Sub-Compact Car, Compact

Car, Midsized Car, and Small Truck/SUV variants. The 3.4 to 4 percent incremental fuel consumption applies to the remaining classes with the exception of Large Truck/SUV where MHEV is not applied due to payload and towing requirements for this class.

Confidential manufacturer comments submitted in response to the

NPRM indicated a $200 to $1000 cost for the MHEV. The 12V micro-hybrid does not have a high voltage battery, and thus does not have a high- voltage wire cost. The 12V micro-hybrid system for the midsize vehicle has a 3kW electric motor. This agrees well with two commercially available systems used on smaller engines.\213\ The value used for the

DC/DC converter represents the cost for a 12V power conditioning circuit to allow uninterrupted power to the radio and a limited number of other accessories when the engine starter is engaged. The sizing for the rest of the components is shown in Table IV-9.

\213\ Citroen uses a 2kW system for a 1.4L diesel engine, and

Valeo has a 1.6kW system applicable for engines up to 2L in displacement. The midsize vehicle class has an average engine size of 2.9L, and thus a 3kW starter is appropriate.

The MHEV technology, which will be available from the 2011 model year, is projected to be in high volume use at the beginning of its first year of availability according to NHTSA's analysis, therefore volume based learning reductions (two cycles at 20 percent) were applied to ``learn'' the hybrid method costs and time based learning factors were applied throughout the remaining years. For the final rule, NHTSA established incremental costs ranging from $372 to $549 with the highest cost applying to the Performance Large Car class.

The 12V micro hybrid technology is applicable across all the vehicle segments except for the Large Truck/SUV class. Although this technology was not specifically stated in the NPRM, a phase-in cap of 3 percent for MY 2011 was assumed for hybrid technologies. For the final rule, this figure was retained since it is generally supportable within the industry as expressed at the SAE HEV Symposium in San Diego in Feb 2008.

The NPRM proposed that all of the hybrid technologies could be introduced during the redesign model year only. This view is consistent with manufacturer's views, therefore, for this rule making, NHTSA has assumed that 12V micro hybrids can only be introduced at the redesign model years.

(vi) High Voltage/Improved Alternator (HVIA)

In the NPRM, a 42V accessory technology was identified in the decision tree for Other Technologies. Several confidential manufacturer comments received by NHTSA related to 42V technology, and indicated that the effectiveness of 42V system were not realized when electrical conversion efficiencies were considered, and the cost of transitioning the industry from a 12V to 42V system made the technology unreasonable for deployment in the emerging technology time frame. As a result of these comments, NHTSA revised the technology from 42V technology to

High Voltage/Improved Alternator (HVIA).

The ``High Voltage/Improved Efficiency Alternator'' technology block represents technologies associated with increased alternator efficiency. As most alternators in production vehicles today are optimized for cost and the process for increasing the efficiency of an alternator is well understood by the industry, this technology is applicable to all vehicle subclasses except Midsize and Large Truck and

SUV where it is not considered applicable due to the high utility of these classes.

The NPRM identified fuel economy effectiveness that were based on 42V accessory systems, and are not directly applicable for this current technology definition. Confidential manufacturer data indicates that a midsized car with an improved efficiency alternator provided 0.2 to 0.9 percent fuel consumption effectiveness over the CAFE drive cycles, and a pickup truck provided 0.6 percent fuel consumption effectiveness over the same cycles. As this technology can be applied over a range of vehicles, NHTSA believes the fuel consumption effectiveness for larger vehicles will be biased downward. For purposes of this final rule,

NHTSA estimates the fuel consumption effectiveness for High Voltage/

Improved Efficiency Alternator'' technology at 0.2 to 0.9 percent.

The NPRM identified several sources for high voltage/improved efficiency alternators incremental costs, but focused this technology on 42V systems, thus making some of these references not representative of the current technology description. The NPRM ``Engine accessory improvement'' technology discussion, however, did quote the NESCCAF study that indicated a $56 cost for a high efficiency generator. An independent confidential study estimated that the incremental cost increase for a high efficiency generator at high volume was similar to the NESCCAF quoted cost, thus NHTSA concludes that the NESCCAF study cost of $56 is still a representative cost for this technology. At a 1.5 RPE value, this cost equates to $84.

As the definition of the technology has been revised from the NPRM, phase-in rates identified in the NPRM are not applicable. NHTSA believes the High voltage/Improved Efficiency Alternator technology represents an adjustment to the alternator manufacturing industry infrastructure, so for purposes of this final rule, phase-in caps for this technology were estimated at 10 percent for MY 2011.

Also, as the definition of the technology has been revised from the

NPRM, learning curve assumptions from the NPRM are not applicable. The high voltage/improved alternator technology costs were based on high volume estimates, thus, for purposes of the final rule, NHTSA assumed time-based learning (3 percent YOY) for High Voltage Systems/Improved

Alternator technology. For purposes of the final rule, NHTSA assumed the technology can be introduced during refresh or redesign model changes only.

(vii) Integrated Starter Generator (ISG)

The next hybrid technology that is considered is the Integrated

Starter Generator (ISG) technology. There are 2 types of integrated starter generator hybrids that are considered: the belt mounted type and the crank mounted type.

A Belt Mounted Integrated Starter Generator (BISG) system is similar to a micro-hybrid system, except that here it is defined as a system with a 110 to 144V battery pack which thus can

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perform some regenerative braking, whereas the 12V micro-hybrid system cannot. The larger electric machine and battery enables additional hybrid functions of regenerative braking and a very limited degree of operating the engine independently of vehicle load. While having a larger electric machine and more battery capacity than a MHEV, this system has a smaller electric machine than stronger hybrid systems because of the limited torque capacity of the belt driven design.

BISG systems replace the conventional belt-driven alternator with a belt-driven, enhanced power starter-alternator and a redesigned front- end accessory drive system that facilitates bi-directional torque application utilizing a common electric machine. Also, during idle- stop, some functions such as power steering and automatic transmission hydraulic pressure are lost with conventional arrangements; so electric power steering and an auxiliary transmission pump need to be added.

These components are similar to those that would be used in other hybrid designs.

A Crank Mounted Integrated Starter Generator (CISG) hybrid system, also called an Integrated Motor Assist (IMA) system, utilizes a thin axial electric motor (100-144V) bolted to the engine's crankshaft. The electric machine acts as both a motor for helping to launch the vehicle and a generator for recovering energy while slowing down. It also acts as the starter for the engine and is a higher efficiency generator. An example of this type of a system is found in the Honda Civic Hybrid.

For purposes of the final rule, NHTSA assumed the electric machine is rigidly fixed to the engine crankshaft, thus making electric-only drive not practical.\214\

\214\ A clutch between the engine and the electric motor would enable pure electric drive, but the Porsche Cayenne is the only example of such a system that is planned in the rulemaking time frame. Because of limited expected volumes of this type of system, and in the interest of reducing complexity, that variant is not included here.

The fuel consumption effectiveness of the ISG systems are greater than those of micro-hybrids, because they are able to perform the additional hybrid function of regenerative braking and able to utilize the engine more efficiently because some transient power demands from the driver can be separated from the engine operation. Their transient performance can be better as well, because the larger electric machine can provide torque boost. The ISG systems are more expensive than the micro hybrids, but have lower cost than the strong hybrids described below because the electrical component sizes (batteries, electric machines, power electronics, etc.) are sized in between the micro- hybrid and the strong hybrid components. The engineering effort required to adapt conventional powertrains to these configurations is also in between that required for micro-hybrid and strong hybrid configurations. Packaging is a greater concern due to the fact that the engine-motor-transmission assembly is physically longer, and the battery pack, high voltage cabling and power electronics are larger.

The hybrid decision tree was modified to address several manufacturer comments and comments from CARB and Delphi asking for more appropriate separation of hybrid technology classifications (i.e., 12V versus higher voltage Integrated Starter Generators, etc.). The inclusion of the ISG technology in the final rule is in response to these comments and those from subject matter experts.

The NPRM had proposed a fuel consumption savings of between 5 and 10 percent for ISG systems, and between 3.5 and 8.5 percent for the

Honda IMA system, both of which fall in the ISG category described above. Confidential manufacturer comments submitted in response to the

NPRM indicated an incremental 3.8 to 7.4 percent fuel consumption effectiveness and a $1,500 to $2,400 cost as compared to the baseline vehicle.

The incremental fuel consumption savings for the Compact Car variant for ISG over a 12V Micro-hybrid with start/stop was calculated using published data and confidential manufacturer data, while published Honda Civic Hybrid data was used to calculate the fuel consumption gains due to the hybrid system. For the final rule, gains for the other technologies also included on this vehicle were subtracted out to give an incremental effectiveness of 5.7 to 6.5 percent for ISG. Data for these individual gains was taken from confidential manufacturer data. The 5.7 to 6.5 percent incremental fuel consumption savings was carried over from the Compact Car to all other vehicle subclasses. A 2 percent incremental effectiveness was subtracted from the Performance subclasses to allow for the improved baseline performance

The NPRM proposed a cost of $1,636 to $2,274 for these systems. For the final rule, NHTSA determined the cost for the ISG system using system sizing data for different available ISG hybrids. The 2006 Honda

Civic has a Crank Mounted ISG and uses a 0.87 kW-hr battery pack. In light of the potential growth of vehicle electrification, a 1 kW-hr pack size was chosen for both the belt and crank mounted ISG systems.

The crank mounted ISG was sized as 11kW continuous (15kW peak). This is an average of the 10kW system on the 2003 Honda Civic and the 12kW system on the 2005 Honda Accord. The 2006 Civic has a 15kW system. The belt mounted ISG has a slightly smaller electric machine (7.5kW continuous and 10kW peak) due to power transmission limitations of the belt.

For the final rule, the hybrid technology cost method projected costs ranging from $2,475 to $3,290 for the Sub-Compact car class through the Midsize Truck classes as compared to the conventional baseline vehicle and the incremental costs of $1,713 to $2,457 were calculated by backing out the prior hybrid technology costs. The ISG technology is projected to be in low volume use at the beginning of the rulemaking period therefore low volume costs are used and volume-based learning factors are applied.

Integrated starter generator systems are applicable to all vehicle subclasses except Large Truck. In the NPRM, a phase-in cap of 3 percent was assumed for both the ``ISG with idle off'' and ``IMA'' technologies. For the final rule, NHTSA has retained the phase-in cap of 3 percent for MY 2011. These values are generally supportable within the industry as expressed at the SAE HEV Symposium in San Diego in

February 2008.

The NPRM proposed that all of the hybrid technologies could be introduced during the redesign model year only. This view is consistent with manufacturer's views as well, because all of the hybrid technologies under consideration require redesign of the powertrain

(ranging from engine accessory drive to transmission redesign) and vehicle redesign to package the hybrid components (from high voltage cabling to the addition of large battery packs). Given this, for purposes of the final rule, they can only be introduced in redesign model years.

(viii) Power Split Hybrid

The Power Split hybrid (PSHEV) is described as a full or a strong hybrid since it has the ability to move the vehicle on electric power only. It replaces the vehicle's transmission with a single planetary gear and a motor/generator. A second, more powerful motor/generator is directly connected to the vehicle's final drive. The planetary gear splits the engine's torque between the first motor/generator and the final drive. The first motor/generator uses power from the engine to either charge the battery or supply power to the wheels. The speed of the first motor/

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generator determines the relative speed of the engine to the wheels. In this way, the planetary gear allows the engine to operate independently of vehicle speed, much like a CVT. The Toyota Prius and the Ford Hybrid

Escape are two examples of power split hybrid vehicles.

In addition to providing the functions of idle engine stop and subsequent restart, regenerative braking, this hybrid system allows for pure EV operation. The two motor/generators are bigger and more powerful than those in an ISG hybrid, allowing the engine to be run in efficient operating zones more often. For these reasons, the power split system provides very good fuel consumption in city driving.

During highway cycles, the hybrid functions of regenerative braking, engine start/stop and optimal engine operation cannot be applied as often as in city driving, and so the effectiveness in fuel consumption are less. Additionally, it is less efficient at highway speeds due to the fact that the first motor/generator must be spinning at a relatively high speed and therefore incurs losses.

The battery pack for PSHEV is assumed to be 300V NiMH for the time period considered in this rulemaking, as is used in current PSHEV systems today. Their reliability is proven (having been in hybrids for over 10 years) and their cost is lower than Li Ion, so it is likely that the battery technology used in HEVs will continue to be NiMH for the near future for hybrids that do not require high energy storage capability like a plug-in hybrid does.

The Power Split hybrid also reduces the cost of the transmission, replacing a conventional multi-speed unit with a single planetary gear.

The electric components are bigger than those in an ISG configuration so the costs are correspondingly higher.

However, the Power Split system is not planned for use on full-size trucks and SUVs due to its limited ability to efficiently provide the torque needed by these vehicles. The drive torque is limited to the first motor/generator's capacity to resist the torque of the engine. It is anticipated that Large Trucks would use the 2-mode hybrid system.

In the NPRM, a phase-in rate of 3 percent was assumed for the power split technology. Although this system has been engineered for some vehicles by a couple of manufacturers, the required engineering resources both at OEMs and Tier 1 suppliers are high and most importantly, require long product development lead times. Thus NHTSA believes it would be extremely difficult for manufacturers to implement in levels greater than that of the submitted product plans for MY 2011.

For the final rule, NHTSA limited the volumes of power split hybrids to zero percent in MY 2011. Power split hybrid cost and effectiveness estimates will not be discussed here, given that the technology is not applied in MY 2011 beyond product plan levels in NHTSA's analysis, and

NHTSA will consider them further in its future rulemaking actions.

The NPRM proposed that all of the hybrid technologies could be introduced during the redesign model year only, consistent with manufacturer's views. Given this, for this final rule NHTSA has retained the redesign application timing.

(ix) 2-Mode Hybrid

The 2-mode hybrid (2MHEV) is another strong hybrid system that has all-electric drive capability. The 2MHEV uses an adaptation of a conventional stepped-ratio automatic transmission by replacing some of the transmission clutches with two electric motors, which makes the transmission act like a CVT. Like the Power Split hybrid, these motors control the ratio of engine speed to vehicle speed. But unlike the

Power Split system, clutches allow the motors to be bypassed, which improves both the transmission's torque capacity and efficiency for improved fuel economy at highway speeds. This type of system is used in the Chevy Tahoe Hybrid.

In addition to providing the hybrid functions of engine stop and subsequent restart and regenerative braking, the 2MHEV allows for pure

EV operation. The two motor/generators are bigger and more powerful than those in an ISG hybrid, allowing the engine to be run in efficient operating zones more often. For these reasons, the 2-mode system also provides very good fuel economy in city driving. The primary motor/ generator is comparable in size to that in the PSHEV system, but the secondary motor/generator is larger. The 2-mode system cost is greater than that for the power split system due to the additional transmission complexity and secondary motor sizing.

The battery pack for 2MHEV is assumed to be 300V NiMH for the time period considered in this rulemaking, as is used in current 2MHEV systems today. Their reliability is proven (having been in hybrids for over 10 years) and their cost is lower than Li Ion, so it is likely that the batteries will continue to be NiMH for the near future for hybrids that do not require high energy storage capability like a plug- in hybrid does.

Given the relatively large size of the 2 mode powertrain, this technology was assumed to be applicable to the Small through Large

Truck/SUV classes. In the NPRM, a phase-in rate of 3 percent was assumed for 2 mode hybrids. The 2-modes have recently been introduced in the marketplace on a few vehicle platforms. The engineering resources that are needed both at the OEMs and Tier 1s to develop this across many more platforms are considerable, as discussed above for power split hybrids. For purposes of the final rule, the phase-in rate has been set to zero percent in MY 2011. 2 mode hybrid cost and effectiveness estimates will not be discussed here, given that the technology is not applied in MY 2011 beyond product plan levels in

NHTSA's analysis, and NHTSA will consider them further in its future rulemaking actions.

The NPRM proposed that all of the hybrid technologies could be introduced during the redesign model year only, consistent with manufacturer's views. Given this, for this final rule NHTSA has retained the redesign application timing.

(x) Plug-In Hybrid

Plug-In Hybrid Electric Vehicles (PHEV) are very similar to other strong hybrid electric vehicles, but with significant functional differences. The key distinguishing feature is the ability to charge the battery pack from an outside source of electricity (usually the electric grid). A PHEV would have a larger battery pack with greater energy capacity, and an ability to be discharged further (referred to as ``depth of discharge'').\215\ No major manufacturer currently has a

PHEV in production, although both GM and Toyota have publicly announced that they will launch plug-in hybrids in limited volumes by 2010.

\215\ NHTSA notes that the fuel consumption effectiveness of

PHEVs is heavily dependent on the all-electric range, and hence the battery capacity. However, the fuel consumption effectiveness from a

PHEV is currently difficult to quantify objectively because there is no standardized fuel economy test procedure yet for a PHEV.

PHEVs offer a significant opportunity to displace petroleum-derived fuels with electricity from the electrical grid. The reduction in petroleum use depends on the electric-drive range capability and the vehicle usage (i.e., trip distance between recharging, ambient temperature, etc.). PHEVs can have a wide variation in the All Electric

Range (AER) that they offer. Some PHEVs are of the ``blended'' type where the engine is on during most of the vehicle operation, but the proportion of electric energy that is used to propel the vehicle is significantly higher than that used in a PSHEV or 2MHEV.

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PHEVs were not projected to be in volume use in the NPRM, but due to confidential manufacturer product plans, PHEVs do, in fact, appear in limited volumes in the final rule analysis, and therefore low volume, unlearned costs are assumed. However, the manufacturer-stated production volumes of PHEVs are very low, so the phase-in cap for MY 2011 is zero--given the considerable engineering hurdles, the low availability of Li-Ion batteries in the MY 2011 time frame and the reasons discussed above for power split and 2 mode hybrids, NHTSA did not believe that PHEVs could be applied to more MY 2011 vehicles beyond what was indicated in the product plans. Additionally, plug-in hybrid cost and effectiveness estimates will not be discussed here, given that the technology is not applied in MY 2011 beyond product plan levels in

NHTSA's analysis, and NHTSA will consider them further in its future rulemaking actions. The NPRM proposed that all of the hybrid technologies could be introduced during the redesign model year only, consistent with manufacturer's views. Given this, for this final rule

NHTSA has allowed application of PHEVs in redesign model years only.

(e) Vehicle Technologies

(i) Material Substitution (MS1, MS2, MS5)

The term ``material substitution'' encompasses a variety of techniques with a variety of costs and lead times. These techniques may include using lighter-weight and/or higher-strength materials, redesigning components, and size matching of components. Lighter-weight materials involve using lower-density materials in vehicle components, such as replacing steel parts with aluminum or plastic. The use of higher-strength materials involves the substitution of one material for another that possesses higher strength and less weight. An example would be using high strength alloy steel versus cold rolled steel.

Component redesign is an ongoing process to reduce costs and/or weight of components, while improving performance and reliability. The

Aluminum Association commented that lightweight structures are a significant enabler for the new powertrain technologies. Smaller and less expensive powertrains are required and the combination of reduced power and weight reduction positively reinforce and result in optimal fuel economy performance. An example would be a subsystem replacing multiple components and mounting hardware.

However, the cost of reducing weight is difficult to determine and depends upon the methods used. For example, a change in design that reduces weight on a new model may or may not save money. On the other hand, material substitution can result in an increase in price per application of the technology if more expensive materials are used. As discussed further below in Section VIII, for purposes of this final rule, NHTSA has considered only vehicles weighing greater than 5,000 lbs (curb weight) for weight reduction through materials substitution.

A typical BOM for Material Substitution would include primarily substitution of high strength steels for heavier steels or other structural, materials on a vehicle. This BOM was established for each class but was not adjusted for each class due to the fact that the vehicle technology of Material Substitution is already scaled by it being based on percent of curb weight at or over 5,000 lbs.

In the NPRM, NHTSA estimated fuel economy effectiveness of a 2 percent incremental reduction in fuel consumption per each 3 percent reduction in vehicle weight. Nissan commented that NHTSA's modeling of material substitution application was overly optimistic, but did not elaborate further. Confidential manufacturer comments in response to the NPRM did not provide standardized effectiveness estimates, but ranged from 3.3 to 3.9 percent mpg improvement for a 10 percent reduction in mass, to 0.20 to 0.75 percent per 1 percent weight reduction, to 1 percent reduction on the FTP city cycle per 100 lbs reduced, with a maximum possible weight reduction of 5 percent.

Bearing in mind that NHTSA only assumes material substitution for vehicles at or above 5,000 lbs curb weight and based on manufacturer comments which together suggest an incremental improvement in fuel consumption of approximately 0.60 percent to 0.9 percent per 3 percent reduction in material weight, NHTSA has estimated an incremental improvement in fuel consumption of 1 percent (corresponding to a 3 percent reduction in vehicle weight, or roughly 0.35 percent fuel consumption per 1 percent reduction in vehicle weight). This estimate is consistent with the majority of the manufacturer comments.

As for costs, in the NPRM NHTSA estimated incremental costs of

$0.75 to $1.25 per pound reduced through material substitution. The costs for material substitution were not clearly commented on in the confidential manufacturer responses. Confidential manufacturer estimates ranged from $50 to $511 for 1 percent reduction, although in most cases the cost estimates were not for the entire range of substitution (1-5 percent) and did not provide any additional clarification on how they specifically applied to the material substitution technology. Consequently, for purposes of the final rule

NHTSA retained the existing NPRM cost estimates with adjustments to 2007 dollar levels resulting in an incremental $1 to $2 per pound of substituted material, which applies to the MS1 and MS2 technology, and

$2 to $4 per pound for the MS5 technology. Costs for material substitution are not adjusted by vehicle subclass, as the technology costs are based on a percentage of the vehicle weight (per pound) and limited to Medium and Large Truck/SUV Van subclasses above 5,000 lbs curb weight.

The agency notes that comments from the Alliance and the Aluminum

Association associated engine downsizing with weight reduction/material substitution and quoted effectiveness for this action as well. NHTSA considers engine downsizing separately from typical material substitution efforts, and consequently did not include those cost and fuel economy effectiveness for this technology.

In the NPRM, NHTSA assumed a 17 percent phase-in rate for material substitution. NHTSA received only one confidential manufacturer comment regarding material substitution phase-in percentage, suggesting 17 to 30 percent, but the agency notes that it generally received comments suggesting a non-linear phase-in rate for this technology, that would start at a rate lower than the current NPRM value and increase over time. In response to these comments, NHTSA revised the MY 2011 phase-in percentage to 5 percent to account for lead time limitations.

For material substitution technologies, neither volume-based cost reductions nor time-based cost reductions are applied. This technology does not employ a particular list of components to employ credible cost reduction.

In the NPRM, NHTSA assumed that material substitution (1 percent) could be applied during a redesign model year only. For this final rule, based on confidential manufacturer comments, NHTSA estimated that material substitution (1 percent) could be applied during either a refresh or a redesign model year, due to minimal design changes with minimal component or vehicle-level testing required. However, NHTSA retained the assumption that material substitution (2 percent and 5 percent) could be applied

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during redesign model year only, as in the NPRM, because the agency neither received comments to contradict this assumption nor found other data to substantiate a change. The technology title was changed from

Material Substitution (3 percent) to Material Substitution (5 percent) to more accurately represent the cumulative amount for the technology.

(ii) Low Drag Brakes (LDB)

Low drag brakes reduce the sliding friction of disc brake pads on rotors when the brakes are not engaged because the brake pads are pulled away from the rotating rotor. A typical BOM for Low Drag Brakes would typically include changes in brake caliper speed by changing the brake control system, springs, etc. on a vehicles brake system. This

BOM was established for each class and was not adjusted for each class due to the fact that the vehicle technology BOM would not change by class across vehicle classes. Confidential manufacturer comments in response to the NPRM indicated that most passenger cars have already adopted this technology, but that ladder frame trucks have not yet adopted this technology. Consequently, in the final rule this technology was assumed to be applicable only to the Large Performance

Passenger Car and Medium and Large Truck classes.

In the NPRM, NHTSA assumed an incremental improvement in fuel consumption of 1 to 2 percent for low drag brakes. Confidential manufacturer comments submitted in response to the NPRM indicated an effective range of 0.5-1.0 percent for this technology and this range was applied in the final rule. As for costs, NHTSA assumed in the NPRM incremental costs of $85 to $90 for the addition of low drag brakes.

For the final rule, NHTSA took the average and adjusted it to 2007 dollars to establish an $89 final rule cost.

The NPRM assumed an annual average phase-in rate for low drag brakes of 25 percent. For the final rule, the MY 2011 phase-in cap is 20 percent. No learning curve was applied in the NPRM, but for the final rule, low drag brakes were considered a high volume, mature and stable technology, and thus time-based learning was applied. Low drag brakes are assumed in the final rule to be applicable at refresh cycle only.

(iii) Low Rolling Resistance Tires (ROLL)

Tire rolling resistance is the frictional loss associated mainly with the energy dissipated in the deformation of the tires under load-- and thus, influence fuel economy. Other tire design characteristics

(e.g., materials, construction, and tread design) influence durability, traction control (both wet and dry grip), vehicle handling, and ride comfort in addition to rolling resistance. A typical low rolling resistance tires BOM would include: tire inflation pressure, material change, and constructions with less hysteresis, geometry changes (e.g., reduced aspect ratios), reduction in sidewall and tread deflection, potential spring and shock tuning. Low rolling resistance tires are applicable to all classes of vehicles, except for ladder frame light trucks and performance vehicles. NHTSA assumed that this technology should not be applied to vehicles in the Large truck class due to the increased traction and handling requirements for off-road and braking performance at payload and towing limits which cannot be met with low resistance tire designs. Likewise, this technology was not applied to vehicles in the Performance Car classes due to increased traction requirements for braking and handling which cannot be met with low roll resistance tire designs. Confidential manufacturer comments received regarding applicability of this technology to particular vehicle classes confirmed NHTSA's assumption.

In the NPRM, NHTSA assumed an incremental reduction in fuel consumption of 1 to 2 percent for application of low rolling resistance tires. Confidential manufacturer comments varied widely and addressed the conflicting objectives of increasing safety by increasing rolling resistance for better tire traction, and improving fuel economy with lower rolling resistance tires that provide reduced traction.

Confidential manufacturer comments suggested fuel consumption effectiveness of negative impact to a positive 0.1 percent per year over the next five years from 2008, while other confidential manufacturer comments indicate that the percentage effectiveness of low rolling resistance tires would increase each year, although it would apply differently for performance classes. Confidential manufacturer comments also indicated that some manufacturers have already applied this technology and consequently would receive no further effectiveness from this technology. The 2002 NAS Report indicated that an assumed 10 percent rolling resistance reduction would provide an increase in fuel economy of 1 to 2 percent. NHTSA believes the NAS effectiveness is still valid and used 1 to 2 percent incremental reduction in fuel consumption for application of low rolling resistance tires in the final rule.

NHTSA estimated the incremental cost of four low rolling resistance tires to be $6 per vehicle in the NPRM, independent of vehicle class, although not applicable to large trucks. NHTSA received few specific comments on the costs of applying low rolling resistance tires however confidential manufacturer comments that were received provided widely ranging and higher costs. NHTSA increased the range from the NPRM cost estimates to $6 to $9 per vehicle in the final rule.

In the NPRM, NHTSA assumed an annual phase-in rate of 25 percent for low rolling resistance tires. Confidential manufacturer comments on the phase-in rate for low rolling resistance tires varied, with some suggesting that many vehicle classes already had high phase-in rates planned or accomplished. As discussed above, the comments also suggested a non-linear phase-in plan over the 5-year period.

Confidential manufacturer data was in the 25-30 percent range. Based on confidential manufacturer comments received and NHTSA's analysis, the final rule includes a phase-in cap for low rolling resistance tires with a phase-in rate of 20 percent for MY 2011.

For low rolling resistant tire technology, neither volume-based cost reductions nor time-based cost reductions are applied. This technology is presumed to be significantly dependent on commodity raw material prices and to be priced independent of particular design or manufacturing savings.

In the NPRM, NHTSA assumed that low rolling resistance tires could be applied during any model year. However, based on confidential manufacturer comments NHTSA recognizes that there are some vehicle attribute impacts which may result from application of low rolling resistance tires, such as changes to vehicle dynamics and braking.

Vehicle validation testing for safety and vehicle attribute prove-out is not usually planned for every model year, so NHTSA assumed that this technology can be applied during a redesign or refresh model year for purposes of the final rule.

(iv) Front or Secondary Axle Disconnect for Four-Wheel Drive Systems

(SAX)

To provide shift-on-the-fly capabilities, reduce wear and tear on secondary axles, and improve performance and fuel economy, many part- time four-wheel drive (4WD) systems use some type of axle disconnect.

Axle disconnects are

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typically used on 4WD vehicles with two-wheel drive (2WD) operating modes. When shifting from 2WD to 4WD ``on the fly'' (while moving), the front axle disconnect couples the front driveshaft to the front differential side gear only when the transfer case's synchronizing mechanism has spun the front driveshaft, transfer case chain or gear set and differential carrier up to the same speed as the rear driveshaft. 4WD systems that have axle disconnect typically do not have either manual- or automatic-locking hubs. For example, to isolate the front wheels from the rest of the front driveline, front axle disconnects use a sliding sleeve to connect or disconnect an axle shaft from the front differential side gear. The effectiveness to fuel efficiency is created by reducing inertial, chain, bearing and gear losses (parasitic losses).

Full time 4WD or all-wheel-drive (AWD) systems used for on-road performance and safety do not use axle disconnect systems due to the need for instantaneous activation of torque to wheels, and the agency is not aware of any manufacturer or suppliers who are developing a system to allow secondary axle disconnect suitable for use on AWD systems at this time. Secondary axle disconnect technology is primarily found on solid axle 4WD systems and not on the transaxle and/or independent axle systems typically found in AWD vehicles; thus, the application of this technology to AWD systems has not been considered for purposes of this rulemaking. The technology will be evaluated in future rulemakings.

Vehicle technology BOM information was not adjusted by vehicle classes due to the fact that the vehicle technology is limited to transfer case and front axle design changes. Scaling of components might be impacted but the components themselves will be the same. This is consistent with NHTSA's assumptions in the NPRM, and is supported by comments from confidential supplier and manufacturers. Secondary Axle

Disconnect BOM typically involves a transfer case which includes electronic solenoid with clutch system to disconnect front drive and using axle mounted vacuum or electric disconnect that still allows driveshaft rotation without connection to wheel ends.

In the NPRM, NHTSA employed ``unibody'' and ``ladder frame'' terms to differentiate application of this technology, and had suggested

``unibody'' AWD systems could apply this same technology. In actuality, most 4WD vehicles are ``ladder frame'' technology and AWD are

``unibody'' designs (which for the reasons stated above will not be considered for this technology). Ladder frame technology is typically associated with greater payload, towing, and off-road capability, whereas unibody designs are typically used in smaller, usually front- wheel drive vehicles, and are typically not associated with higher payload, towing, and off-road use. For the final rule, NHTSA removed these vehicle design criteria since it is not a requirement to incorporate axle disconnect technology, only a historical design point and vehicle manufacturers should not be limited to a specific vehicle or chassis configuration to apply this technology. Therefore, this technology is applicable to 4WD vehicles in all vehicle classes

(independent of chassis or frame design).

In the NPRM, NHTSA estimated an incremental reduction in fuel consumption of 1 to 1.5 percent for axle disconnect. Confidential manufacturer comments suggested an incremental effectiveness of 1 to 1.5 percent. Supported by this confidential manufacturer data, NHTSA maintained an incremental effectiveness of 1 to 1.5 percent for axle disconnect for the final rule.

As for costs, the NPRM estimated the incremental cost for adding axle disconnect technology at $114 for 4WD systems and the $676 estimate was for the AWD systems which are not applied in the final rule. NHTSA received no specific comments on costs for this technology and found no additional sources to support a change from this value for the 4WD value of $114, so for purposes of the final rule, NHTSA revised the $114 figure to 2007 dollars to establish a $117 final rule cost.

In the NPRM, NHTSA assumed a phase-in cap of 17 percent for secondary axle disconnect for each model year covered by the rulemaking. No specific comments were received regarding the phase-in rate for this technology, but as discussed above, manufacturers generally argued for a non-linear phase-in plan over the 5-year period covered by the rulemaking. Based on general comments received and

NHTSA's analysis, the final rule includes a phase-in rate for secondary axle disconnect of 17 percent in MY 2011.

In the NPRM, NHTSA assumed a volume-based learning curve factor of 20 percent for secondary axle disconnect. For the final rule, secondary axle disconnect learning was established as time-based due to confidential manufacturer data demonstrating that this is a mature technology, such that additional volumes will provide no additional advantage for incorporation by manufacturers.

In the NPRM, NHTSA assumed that secondary axle disconnect could be applied to a vehicle either during refresh or redesign model years.

NHTSA received no comments and found no sources to disagree with this assumption, and since testing to validate the functional requirements and vehicle attribute prove-out testing is usually not planned for every model year, NHTSA has retained this assumption for the final rule.

(v) Aerodynamic Drag Reduction (AERO)

Several factors affect a vehicle's aerodynamic drag and the resulting power required to move it through the air. While these values change with air density and the square and cube of vehicle speed, respectively, the overall drag effect is determined by the product of its frontal area and drag coefficient. Reductions in these quantities can therefore reduce fuel consumption. While frontal areas tend to be relatively similar within a vehicle class (mostly due to market- competitive size requirements), significant variations in drag coefficient can be observed. Significant fleet aerodynamic drag reductions may require incorporation into a manufacturer's new model phase-in schedules depending on the mix of vehicle classes distributed across the manufacturer's lineup. However, shorter-term aerodynamic reductions, with less of a fuel economy effectiveness, may be achieved through the use of revised exterior components (typically at a model refresh in mid-cycle) and add-on devices that are in general circulation today. The latter list would include revised front and rear fascias, modified front air dams and rear valances, addition of rear deck lips and underbody panels, and more efficient exterior mirrors.

Vehicle technology BOM information was not adjusted by vehicle classes due to the fact that Aero Drag Reductions are already scaled based on percent overall vehicle coefficient of drag CdA. Aero Drag

Reduction BOM could include (but would not be limited to) the following components or subsystems: Underbody covers, front lower air dams, overall front fascia changes, headlights, hood, fenders, grill, windshield angle, A-Pillar angle, door seal gaps, roof (which would both be high impact and very high cost), side view mirrors, door handles (low impact), ride height, rear deck lip, wheels, wheel covers, and optimizing the cooling flow path.

In the NPRM, NHTSA estimated an incremental aerodynamic drag reduction of 20 percent for cars, and 10 percent for trucks.

Confidential

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manufacturer comments received indicated that the 20 percent reduction for cars in the NPRM may have been overly optimistic, as significant changes in aero drag have already been applied to those vehicle classes. However, confidential manufacturer comments agreed with the 10 percent aerodynamic drag reduction for trucks, since there are still significant opportunities to improve aero drag in trucks designed for truck-related utility. The Sierra Research study submitted by the

Alliance concluded that a 10 percent incremental aerodynamic drag reduction for mid-size cars gives a 1.5 percent improvement in vehicle fuel economy. Thus, for purposes of the final rule, NHTSA has estimated that a fleet average of 10 percent total aerodynamic drag reduction is attainable (with a caveat for ``high-performance'' vehicles described below), which equates to incremental reductions in fuel consumption of 2 percent and 3 percent for cars and trucks, respectively. These numbers are in agreement with publicly-available technical literature

\216\ and are supported by confidential manufacturer information.

Performance car classes are excluded from this technology improvement because they have largely applied this technology already.

\216\ Sue Elliott-Sink, ``Improving Aerodynamics to Boost Fuel

Economy,'' May 2, 2006. Available at http://www.edmunds.com/advice/ fueleconomy/articles/106954/article.html (last accessed Oct. 5, 2008).

As for costs, in the NPRM NHTSA assumed an incremental cost of $0 to $75 for aero drag reduction on both cars and trucks. After reviewing the 2008 Martec Report, however, NHTSA concluded that a lower-bound cost of $0 was not supportable. NHTSA replaced the lower-bound cost with $40 (non-RPE) based on the assumptions that the underbody cover and acoustic covers described in the Martec report approximates the cost for one large underbody cover as might be required for minimal aero drag reduction actions.\217\ The upper limit was determined by updating the NPRM upper cost to 2007 dollars and applying an RPE uplift thereby establishing the incremental cost, independent of vehicle class, to range from $60 to $116 (RPE) for the final rule

\217\ 2008 Martec Report, at 25. NHTSA also assumed that the cost of fuel pulsation dampening technology noted in the Martec report grouped with the underbody cover and acoustic covers does not significantly impact the $40 cost as fuel pulsation dampening technology is very low in cost relative to the other actions.

Therefore NHTSA did not modify the $40 estimate.

In the NPRM, NHTSA assumed a 17 percent phase-in rate for aero drag reduction for each model year covered by the rulemaking. No specific comments were received regarding the phase-in rate for this technology, but as discussed above, manufacturers generally argued for a non-linear phase-in plan over a 5-year period. Based on comments received and

NHTSA's analysis, the final rule includes a phase-in rate for aero drag reduction of 17 percent for MY 2011. Neither volume-based cost reductions nor time-based cost reductions are applied. In the NPRM,

NHTSA assumed that aero drag reduction could be applied in either a refresh or a redesign model year and that assumption has been retained for the final rule.

(f) Technologies Considered But Not Included in the Final Rule Analysis

Although discussed and considered as potentially viable in the

NPRM, NHTSA has determined that three technologies will be unavailable in the time frame considered. These technologies have been identified as either pre-emerging or not technologically feasible. Pre-emerging technologies are those that are still in the research phase at this time, and which are not expected to be under development for production vehicles for several years. In another case, the technology depends on a fuel that is not readily available. Thus, for the reasons discussed below, these technologies were not considered in NHTSA's analysis for the final rule. The technologies are camless valve actuation (CVA), lean burn gasoline direct injection (LBDI), homogeneous charge compression ignition (HCCI), and electric assist turbocharging.

Although not applied in this rulemaking, NHTSA will continue to monitor the industry and system suppliers for progress on these technologies, and should they become available, consider them for use in any future rulemaking activity.

(i) Camless Valve Actuation

Camless valve actuation relies on electromechanical actuators instead of camshafts to open and close the cylinder valves. When electromechanical actuators are used to replace cams and coupled with sensors and microprocessor controls, valve timing and lift can be optimized over all conditions. An engine valvetrain that operates independently of any mechanical means provides the ultimate in flexibility for intake and exhaust timing and lift optimization. With it comes infinite valve overlap variability, the rapid response required to change between operating modes (such as HCCI and GDI), intake valve throttling, cylinder deactivation, and elimination of the camshafts (reduced friction). This level of control can enable even further incremental reductions in fuel consumption.

As noted in the NPRM, this technology has been under research for many decades and although some progress is being made, NHTSA has found no evidence to support that the technology can be successfully implemented, costed, or have defined fuel consumption effectiveness at this time.

(ii) Lean-Burn Gasoline Direct Injection Technology

One way to improve an engine's thermodynamic efficiency dramatically is by operating at a lean air-fuel mixture (excess air).

Fuel system improvements, changes in combustion chamber design and repositioning of the injectors have allowed for better air/fuel mixing and combustion efficiency. There is currently a shift from wall-guided injection to spray guided injection, which improves injection precision and targeting towards the spark plug, increasing lean combustion stability. Combined with advances in NOXafter-treatment, lean-burn GDI engines may eventually be a possibility in North America.

However, as noted in the NPRM, a key technical requirement for lean-burn GDI engines to meet EPA's Tier 2 NOXemissions levels is the availability of low-sulfur gasoline, which is projected to be unavailable during the time frame considered. Therefore the technology was not applied in the final rule

(iii) Homogeneous Charge Compression Ignition

Homogeneous charge compression ignition (HCCI), also referred to as controlled auto ignition (CAI), is an alternate engine operating mode that does not rely on a spark event to initiate combustion. The principles are more closely aligned with a diesel combustion cycle, in which the compressed charge exceeds a temperature and pressure necessary for spontaneous ignition. The resulting burn is much shorter in duration with higher thermal efficiency. Shorter combustion times and higher EGR tolerance permit very high compression ratios (which also increase thermodynamic efficiency), and additionally, pumping losses are reduced because the engine can run unthrottled.

NHTSA noted in the NPRM that several manufacturers had made public statements about the viability of incorporating HCCI into production vehicles over the next 10 years. Upon

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further review of confidential product plan information, and reviewing comments received in response to the NPRM, NHTSA has determined the technology will not be available within the time frame considered.

Consequently, the technology was not applied in the final rule.

(iv) Electric Assist Turbocharging

The Alliance commented that global development of electric assist turbocharging has not demonstrated the fuel efficiency effectiveness of a 12V EAT up to 2kW power levels since the 2004 NESCCAF study, and stated that it saw remote probability of its application over the next decade.\218\ While hybrid vehicles lower the incremental hardware requirements for higher-voltage, higher-power EAT systems, NHTSA believes that significant development work is required to demonstrate effective systems and that implementation in significant volumes will not occur in the time frame considered. Thus, this technology was not included on the decision trees.

\218\ NHTSA-2008-0089-0169.1, at 41.

E. Cost and Effectiveness Tables

The tables representing the Volpe model input files for incremental technology costs by vehicle subclass are presented below. The tables have been divided into passenger cars, performance passenger cars, and light trucks to make them easier to read.

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V. Economic Assumptions Used in NHTSA's Analysis

A. Introduction: How NHTSA Uses the Economic Assumptions in Its

Analysis

NHTSA's analysis of alternative CAFE standards for model year 2011 passenger cars and light trucks relies on a range of market information, estimates of the cost and effectiveness of technologies to increase fuel economy, forecasts of critical economic variables, and estimates of the values of important behavioral parameters. This section describes the sources NHTSA has relied upon to obtain this information, as well as how the agency developed the specific parameter values used in the analysis. Like the product plan information it obtains from vehicle manufacturers, these economic variables, forecasts, and parameter values play important roles in determining the level of CAFE standards, although some variables have larger impacts on the final standards than others.

As discussed above, the Volpe model uses the estimates of the costs and effectiveness of individual technologies to simulate the improvements that manufacturers could elect to make to the fuel economy of their individual vehicle models in order to comply with higher CAFE standards at the lowest cost, and to estimate each manufacturer's total costs for meeting new standards. To calculate the reductions in fuel use over the lifetime of each car and light truck model from the resulting increases in fuel economy, the model then combines those increases with estimates of the fraction of cars and light trucks that remain in service at different ages, the number of miles they are driven at each age, and the size of the fuel economy rebound effect.

Forecasts of future fuel prices are then applied to these fuel savings to estimate their economic value during each year the vehicles affected by the higher CAFE standards are projected to remain in service. The

Volpe model also uses estimates of the fractions of fuel

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savings that will reduce U.S. imports of crude petroleum and refined fuel to estimate the reduction in economic externalities that result from U.S. imports.

Using emission rates per mile driven by different types of vehicles or per gallon of fuel consumed, together with estimates of emissions that occur within the U.S. in the process of refining and distributing fuel, the Volpe model calculates changes in emissions of regulated (or criteria) air pollutants and carbon dioxide (CO2), the main greenhouse gas emitted during fuel production and vehicle use. These are combined with estimates of the economic damages to human health and property caused by regulated air pollutants, and by projected future changes in the global climate resulting from increases in

CO2emissions, to estimate the benefits from the resulting reductions in emissions. Finally, the model calculates benefits to vehicle owners from having to refuel less frequently based on the estimated values of vehicle occupants' time, the decline in vehicle operating costs due to lower fuel consumption, and the increase in mobility afforded by added rebound-effect driving.

As the following discussion makes clear, the costs and effectiveness of fuel economy technologies, forecasts of future gasoline prices, and the discount rate applied to future benefits have the largest influence over the level of the standards. In contrast, estimates of the value of economic externalities generated by U.S. petroleum imports, the fuel economy rebound effect, the gap between test and on-road fuel economy, and the economic values of reducing emissions of greenhouse gases and regulated air pollutants each have more modest effects on determining the final CAFE standards. NHTSA has analyzed the sensitivity of the final standards and their resulting benefits to plausible variation in the most important of these inputs, both by varying their values individually and conducting a Monte Carlo- type analysis of joint variation in their probably values. NHTSA recognizes that there may be other reasonable assumptions that the agency could have made. However, for purposes of the MY 2011 rulemaking, NHTSA continues to believe that the assumptions made are the most appropriate based on the information available. The agency will, however, review these assumptions in future rulemakings, especially in light of comments received and accounting for changing circumstances, both domestically and globally, and consider whether other assumptions would be more reasonable under the circumstances at that time.

For the reader's reference, Table V-1 below summarizes the values of many of the variables NHTSA uses to estimate the costs, fuel savings, and resulting economic benefits from increases in car and light truck CAFE standards.

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B. What economic assumptions does NHTSA use in its analysis? 1. Determining Retail Price Equivalent

NHTSA explained in the NPRM that the technology cost estimates used in the agency's analysis are intended to represent manufacturers' direct costs for high-volume production of vehicles with these technologies and sufficient experience with their application so that all cost reductions due to ``learning curve'' effects were fully realized. However, NHTSA recognized that manufacturers may also incur additional corporate overhead, marketing, or distribution and selling expenses as a consequence of their efforts to improve the fuel economy of individual vehicle models and their overall product lines.

\219\ Derived from NHTSA's $33 per metric ton estimate of the global value of reducing CO2emissions.

In order to account for these additional costs, NHTSA applied an indirect cost multiplier in the NPRM of 1.5 to the estimate of the vehicle manufacturers' direct costs for producing or acquiring each fuel economy-improving technology. Historically, NHTSA used an almost identical multiplier, 1.51, for the markup from variable costs or direct manufacturing costs to consumer costs. The markup takes into account fixed costs, burden, manufacturer's profit, and dealers' profit. NHTSA's methodology for determining this markup was peer- reviewed in 2006.\220\

\220\ See Docket No. NHTSA-2007-27453, Item 4.

NHTSA stated in the NPRM that the estimate of 1.5 was confirmed by

Argonne National Laboratory in a recent review of vehicle manufacturers' indirect costs. The Argonne study was specifically intended to improve the accuracy of future cost estimates for production of vehicles that achieve high fuel economy by employing many of the same advanced technologies considered in NHTSA's analysis.\221\

Thus, NHTSA stated in the NPRM that it believed that

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applying a multiplier of 1.5 to direct manufacturing costs to reflect manufacturers' increased indirect costs for deploying advanced fuel economy technologies is appropriate for use in the analysis for this rulemaking. NHTSA describes this multiplier in Section IV above as the

Retail Price Equivalent factor, or RPE factor.

\221\ Vyas, Anant, Dan Santini, and Roy Cuenca, Comparison of

Indirect Cost Multipliers for Vehicle Manufacturing, Center for

Transportation Research, Argonne National Laboratory, April 2000.

Available at http://www.transportation.anl.gov/pdfs/TA/57.pdf (last accessed August 14, 2008).

Some commenters argued that NHTSA's mark-up factor of 1.5 was too high. NESCAUM commented that NHTSA had relied on the 2004 NESCCAF study as one source for its technology estimates, but appeared to have incorrectly reported information from that study with regard to the mark-up factor.\222\ NESCAUM stated that in the report, entitled

``Reducing Greenhouse Gas Emissions from Light-Duty Motor Vehicles,''

NESCCAF only used a 1.4 RPE, but ``NHTSA applies a 1.5 retail price equivalent (RPE) factor to the manufacturer costs presented in Appendix

C of the NESCCAF report, and at other times uses a 1.4 RPE--and presents both costs as NESCCAF costs.'' NESCAUM argued that ``The reporting of costs using the 1.5 multiplier as NESCCAF costs is incorrect and leads to uncertainty as to how the costs were developed.'' \223\ NESCAUM stated that ``All reported costs and benefits, attributed to NESCCAF by NHTSA, [should] be reviewed carefully for errors and amended accordingly.'' CARB also stated that there was ``inconsistency * * * in the treatment of NESCCAF costs,'' because NHTSA sometimes used a 1.5 markup and sometimes 1.4, and argued that ``These errors in citing the NESCCAF report raise doubts about whether RPE costs from other sources are cited accurately.''

\222\ NESCAUM stated that NESCCAF, or Northeast States Center for a Clean Air Future, is an affiliate organization of NESCAUM.

\223\ NESCAUM gave a specific example with regard to the cost of a turbocharger, as follows:

NHTSA states the NESCCAF turbocharger cost is $600. In this case, NHTSA applied a 1.5 RPE factor to manufacturer costs presented in Appendix C of the NESCCAF report to arrive at the $600 cost. This is different from the cost that NESCCAF developed. Conversely, on page 24369 of the Federal Register notice, NHTSA accurately states the NESCCAF cylinder deactivation costs ranged from $161 to $210.

This cost accurately reflects manufacturer costs presented in

Appendix C of the NESCCAF report, multiplied by the 1.4 retail price equivalent used by NESCCAF.

CARB further commented that NHTSA had inconsistently added costs for the engineering effort required to add some technologies to vehicles, when those costs should have been covered by the RPE markup.

CARB cited NHTSA's language in the NPRM that ``manufacturers' actual costs for applying these technologies to specific vehicle models are likely to include additional outlays for accompanying design or engineering changes to each model, development and testing of prototype versions, recalibrating engine operating parameters, and integrating the technology with other attributes of the vehicle.'' (Emphasis added)

CARB argued that adding additional costs for engineering effort to any technology amounted to double-counting. CARB also commented that

NHTSA's methodology for determining the indirect cost markup was unsound, because ``the cost to incorporate a technology is the same regardless of vehicle production,'' and because ``manufacturers are moving toward global vehicle architectures in an effort to spread development costs across the largest volume of vehicles possible, thus reducing engineering costs.'' CARB argued that ``The engineering cost methodology cited in the NPRM conflicts with this trend as well.''

Other commenters argued that NHTSA's mark-up factor of 1.5 was too low. The Alliance commented that the RPE mark-up factor of 1.5 used by

NHTSA is ``far too low,'' and cited the Sierra Research report and a study by Wynn V. Bussman, submitted as an attachment by the Alliance, as concluding that ``the best estimate for RPE is more on the order of 2.0.'' The Alliance argued that NHTSA's citation of the Argonne study as support for an RPE of 1.5 was incorrect and out of context, stating that ``As both Bussman and Sierra noted, the Argonne National

Laboratory recommended use of 2.0 as the RPE factor.'' The Alliance stated that the Argonne study had simply used a 1.5 RPE for outsourced components, because ``Manufacturers that outsource components do not bear warranty and other costs under typical contractual arrangements.''

The Alliance argued that ``A 1.5 RPE * * * is simply unrepresentative for components that are developed in house by the original equipment manufacturers (``OEMs'').'' The Alliance further argued that ``Use of a 1.5 RPE for all purposes also glosses over the fact that outsourced components can nevertheless require significant integration expenditures from manufacturers putting together and selling entire vehicles.'' \224\ Chrysler concurred separately with the Alliance that

``NHTSA's use of an RPE of 1.5 does not adequately account for the full cost of implementing new technologies,'' and stated that an RPE of 2.0

``is the appropriate factor to use for new technologies.''

\224\ The Alliance cited the Sierra Research report as stating that ``* * * the 1.5 multiplier clearly does not apply to changes in engines, transmissions, or bodies in cases where the vehicle manufacturer designs and produces its own engines, transmissions, and bodies.'' Sierra Research report at 61.

The Alliance also commented that Bussman had ``considered the literature on RPE factors extensively,'' and ``concluded that studies that advised RPEs of approximately 1.5 were filled with errors and that when these errors were corrected, these studies also supported the conclusion that the proper RPE is 2.0.'' The Alliance concluded by arguing that the Sierra Research report had found that ``some recent analyses of RPE are based on unrepresentative and unsustainable profit levels by manufacturers,'' and that ``If realistic long-term profit rates are used, then the RPE increases from 2.0 to a range of 2.09 to 2.15.''

NADA did not expressly agree or disagree with a mark-up factor of 1.5, but commented that since the NPRM states that the 1.5 multiplier includes ``dealer profit'' among other related additional costs, NHTSA

``should review whether its estimates include all dealer costs-of-sales when calculating `dealer profit' and the extent to which it has properly accounted for the finance costs consumers typically pay when purchasing new automobiles.''

Agency response: NHTSA notes that the analysis for this final rule relies on entirely new cost estimates for fuel economy technologies developed by the agency in response to comments and in coordination with an international engineering consulting firm, Ricardo, Inc., based on a bill of materials approach as described in Section IV of this notice and not based on the 2004 NESCCAF study, so the issue of apparent inconsistency in the RPE factor applied to those estimates noted by NESCAUM and CARB is no longer relevant. The agency also notes that both the production and application of fuel economy-improving technologies include separate engineering cost components. Developing these technologies and readying them for high-volume production entails significant initial investments in product design and engineering, while as the NPRM pointed out, applying individual technologies to specific vehicle models can entail significant additional costs for accompanying engineering changes to its existing drive train, development and testing of prototype versions, recalibrating engine operating parameters, and integrating the technology with other attributes of the vehicle. While design and engineering costs for developing fuel economy-improving technologies are included in the production cost estimates for individual technologies,

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additional engineering costs incurred by manufacturers in applying them to specific vehicle models are included in NHTSA's estimate of the RPE factor. Finally, the agency notes that its estimate of the RPE factor includes high-volume production and application of fuel economy technologies, because it assumes that initial design and engineering costs to develop and begin production of these technologies will be recovered over large production volumes. Thus, NHTSA believes that

CARB's concerns about potential double-counting of engineering costs for developing and applying fuel economy technologies reflect a failure to recognize that engineering costs arise in both their development and application. The agency also believes that CARB's concern about whether

NHTSA's RPE factor assumes the spreading of initial design and engineering costs for developing these technologies over insufficiently high production volumes is unfounded.

In response to the concerns expressed by the Alliance and others that NHTSA's RPE factor is too low, the agency notes that the RPE factor of 2.0 reported in the Argonne and Sierra Research studies includes various categories of production overhead costs (for product development and engineering, depreciation and amortization of production facilities, and warranty) that are included in NHTSA's estimates of production costs for fuel economy technologies. When applied to technology production costs defined to include these components, the agency's RPE factor of 1.5 is thus consistent with full recovery of these cost components. This conclusion is independent of whether overhead costs for developing and producing fuel economy technologies are initially borne by equipment suppliers or by vehicle manufacturers themselves. Consequently, NHTSA has continued to employ an RPE factor of 1.5 in its analysis for this final rule. 2. Potential Opportunity Costs of Improved Fuel Economy

In the NPRM, NHTSA discussed the issue of whether achieving the fuel economy improvements required by alternative CAFE standards would require manufacturers to compromise the performance, carrying capacity, safety, or comfort of some vehicle models. If so, the resulting reduction in the value of those models to potential buyers would represent an additional cost of achieving the improvements in fuel economy required by stricter CAFE standards. While exact dollar values of these attributes to consumers are difficult to infer from vehicle purchase prices, changing vehicle attributes can affect the utility that vehicles provide to their owners, and thus their value to potential buyers. This is not to suggest that buyers typically attach low values to fuel economy; rather, it recognizes that buyers value many different attributes, so that requiring manufacturers to make tradeoffs among them may alter the overall value of certain vehicle models to individual buyers.

NHTSA has approached this potential problem by developing tentative cost estimates for fuel economy-improving technologies that include any additional production costs necessary to maintain the product plan levels of performance, comfort, capacity, and safety of the models on which they are used. In doing so, NHTSA primarily followed the precedent established by the 2002 NAS Report, although the NPRM updated its assumptions as necessary for purposes of the current rulemaking.

The NAS Report estimated ``constant performance and utility'' costs for fuel economy technologies, and NHTSA used those as the basis for its further efforts to develop the initial technology costs employed in analyzing manufacturers' costs for complying with alternative CAFE standards.

NHTSA acknowledged the difficulty of estimating technology costs that include costs for the accompanying changes in vehicle design that are necessary to maintain performance, capacity, and utility. However, as NHTSA stated in the NPRM, the agency believes that the tentative cost estimates for fuel economy-improving technologies should be generally sufficient to prevent significant reductions in consumer welfare provided by vehicle models to which manufacturers apply those technologies. Nonetheless, the NPRM sought comment on alternative ways to address these issues.

NHTSA did not receive comments that explicitly addressed NHTSA's question of whether there are better ways for the agency to estimate technology costs that capture changes in vehicle design so that fuel economy can be improved while maintaining performance, capacity, and utility. Some comments, however, expressed concern that the proposed

CAFE standards, and more stringent CAFE standards generally, would prevent manufacturers from maintaining intended levels of performance, comfort, capacity, and/or safety of at least some of their vehicle models.

For example, the American Farm Bureau Federation commented that the proposed standards would result in ``more expensive trucks that lack the power needed to perform the tasks required'' of them by farmers, and that ``trucks laden with expensive untested technologies may prove undependable and costly to repair.'' AFBF stated that farmers need trucks that can haul and tow heavy loads and trailers, which requires

``heavy frames, strong engines, and adequate horsepower and torque.''

AFBF argued that the proposal would cause manufacturers either to downsize and reduce power in their vehicles, or to sell fewer powerful trucks and increase their cost, all of which would create hardship for farmers who need such trucks for their livelihoods.

NADA similarly suggested in its comments that the proposed standards could constrain the ability of light truck manufacturers to meet ``market needs'' for towing and hauling capability, as well as space and power. NADA also stated that manufacturers of small high- performance (i.e., sports) cars might be forced by the stringency of the proposed standards to exit the market or reduce product offerings.

BMW expressed concern that the proposed footprint-based standards will ``provide a disincentive to install safety devices on vehicles,'' since ``In general, safety devices add mass,'' and ``additional mass will lead to higher fuel consumption.'' Thus, BMW argued, all manufacturers will think twice before adding safety equipment to a vehicle, in order not to hurt their chances of meeting the CAFE standards. Along those lines, BMW argued that its vehicles were ``high feature-density vehicles,'' which it defined as ``those that include extraordinary safety, comfort, and convenience features like electronic/advanced stability, braking, suspension, steering, lighting, and security controls.'' BMW stated that these vehicles ``have a high mass per footprint density,'' and suggested that the proposed footprint-based standards provide manufacturers with a disincentive to continue offering this type of vehicle.

Agency response: The agency did not include a reduction in performance as one of the countermeasures that the manufacturers could take to meet the final rule for two main reasons. First, the agency believes that manufacturers could meet the standards adopted in this final rule at the estimated compliance costs without noticeably affecting vehicle performance or utility. As noted previously, NHTSA's cost estimates for individual fuel economy-improving technologies are intended to include any additional production costs necessary to maintain the performance,

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comfort, capacity, and safety of the models on which they are used. The agency has reviewed its cost estimates for individual fuel economy technologies in detail, and is confident that they include sufficient allowances to prevent significant reductions in these critical attributes, and this in the utility that vehicle models to which manufacturers apply those technologies will provide to potential buyers.

Second, NHTSA believes that the commenters' concerns about potential opportunity costs for reduced vehicle performance and utility are largely unfounded. Manufacturers are technically capable of producing vehicles with reduced performance, as evidenced by the fact that most manufacturers offer otherwise-similar vehicle models that feature a range of engine sizes, and thus different levels of power and performance. Although some manufacturers offer versions of the same vehicle model with a smaller engine in Europe than is sold in the

United States, their decisions not to market these vehicles domestically demonstrates that they do not believe that they can produce and sell such vehicles to U.S. buyers in sufficient quantities to be profitable at this time. This is presumably because in order to sell vehicles that do not meet U.S. buyers' preferences for power and performance, manufacturers would be required to discount their prices sufficiently to compensate for their lower levels of these attributes.

While it may be true that a manufacturer could produce lower- performance versions of its vehicle models at reduced costs compared to a higher-performance version of that same model, this does not make performance reduction a zero or negative cost compliance option.

Manufacturers apparently estimate that the reduction in the values of lower-performing versions to their potential buyers exceeds their savings in manufacturing costs to produce them, since otherwise they would already produce and offer lower-performance versions of their existing models for sale. The net cost of reducing performance, which is measured by the difference between the reduced value of lower- performance models to buyers and manufacturers' cost savings for producing them, represents a cost of employing performance reduction as a compliance strategy.

Both manufacturers and NHTSA experience difficulty in determining how much value consumers place on performance, as well as in determining whether this value would remain stable over time. While

NHTSA recognizes that there may be specific situations where performance reduction may be a cost-effective compliance strategy for certain manufacturers, the agency believes that the net cost of reducing performance must generally be comparable to or higher than that of technological approaches to fuel economy improvement. Thus the outcome of this rulemaking process is not significantly affected by omission of performance reduction as an explicit compliance strategy.

In response to BMW's comment that footprint-based standards may discourage manufacturers from offering safety and other features that increase vehicle weight, NHTSA notes that increased vehicle weight due to safety and other features will make it more difficult for manufacturers to comply with any CAFE standard--whether attribute-based or uniform--and not just with footprint-based standards. Further, NHTSA believes that manufacturers will continue to include features whose value to potential buyers exceeds manufacturers' costs for supplying them. Those costs will include any outlays for additional fuel economy technologies that are necessary to compensate for the fuel economy penalties imposed by features that add weight, and thus enable manufacturers to comply with higher CAFE standards. NHTSA notes, however, that buyers generally appear to value such features highly, as evidenced by the prices of car and light truck models on which they are featured, as well as by prices that manufacturers generally charge when they offer such features as options. Any increase in costs to achieve

CAFE compliance that BMW or other manufacturers might experience as a result of providing these features likely should not, therefore, affect significantly the extent to which they are included as standard features or offered as optional features and purchased by vehicle buyers. 3. The On-Road Fuel Economy `Gap'

NHTSA explained in the NPRM that actual fuel economy levels achieved by passenger cars and light trucks in on-road driving fall somewhat short of their levels measured under the laboratory-like test conditions that EPA uses to establish its published fuel economy ratings. In analyzing the fuel savings from alternative CAFE standards for previous light truck rulemakings, NHTSA adjusted the actual fuel economy performance of each light truck model downward by 15 percent from its rated value to reflect the expected size of this on-road fuel economy ``gap.''

However, in December 2006, EPA adopted changes to its regulations on fuel economy labeling which were intended to bring vehicles' rated fuel economy levels closer to their actual on-road fuel economy levels.\225\ In its Final Rule, EPA estimated that actual on-road fuel economy for light-duty vehicles averages 20 percent lower than published fuel economy levels. For example, if the overall EPA fuel economy rating of a light truck is 20 mpg, the on-road fuel economy actually achieved by a typical driver of that vehicle is expected to be 16 mpg (20 mpg x 0.8). In the NPRM, NHTSA employed EPA's revised estimate of this on-road fuel economy gap in its analysis of the fuel savings resulting from the proposed and alternative CAFE standards.

\225\ 71 FR 77871 (Dec. 27, 2006).

NHTSA received no explicit comments regarding the on-road fuel economy gap. CARB submitted a report by Greene et al. that addressed in-use fuel economy, but was completed prior to EPA's changes to its labeling regulations, and CARB did not indicate in its comments how this report was relevant to the CAFE rulemaking.\226\ The report by

Sierra Research included by the Alliance did not comment specifically on NHTSA's use of EPA's estimate of the on-road fuel economy gap, but employed different ``adjustment factors'' ``to translate CAFE to customer service fuel economy,'' using a factor of 0.85 to ``adjust[] the `composite' CAFE value to what consumers are expected to achieve in customer service when the `city' mpg is discounted by 10% and the

`highway' mpg is discounted by 22%.'' Sierra Research also used a 0.82 adjustment factor for hybrid vehicles. However, these estimates were presented as part of Sierra's analysis with no explanation of how they were derived, nor why they differed from EPA's estimate of 20 percent

(which was available at the time when Sierra developed its report).\227\ Moreover, neither Sierra nor the Alliance suggested that

NHTSA use these numbers instead of EPA's for analyzing fuel savings.

\226\ David L. Greene et al., ``Analysis of In-Use Fuel Economy

Shortfall Based on Voluntarily Reported MPG Estimates,'' 2005.

Available at Docket No. NHTSA-2008-0089-0173.11.

\227\ Sierra Research report, at 96-97. Available at Docket No.

NHTSA-2008-0089-0179.1, Attachment 2.

Because no substantive comments were received on this issue, and because no new information on the magnitude of the on-road fuel economy gap has come to NHTSA's attention since the NPRM was published, NHTSA has continued

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to use the EPA estimate of a 20 percent on-road fuel economy gap for purposes of this final rule. 4. Fuel Prices and the Value of Saving Fuel

NHTSA explained in the NPRM that projected future fuel prices are a critical input into the economic analysis of alternative CAFE standards, because they determine the value of fuel savings both to new vehicle buyers and to society. NHTSA relied on the most recent fuel price projections from the U.S. Energy Information Administration's

(EIA) Annual Energy Outlook (AEO) in analyzing the proposed standards.

Specifically, the agency used the AEO 2008 Early Release forecasts of inflation-adjusted (constant-dollar) retail gasoline and diesel fuel prices, which NHTSA stated represent the most up-to-date estimate of the most likely course of future prices for petroleum products.\228\

Federal government agencies generally use EIA's projections in their assessments of future energy-related policies.

\228\ U.S. Department of Energy, Energy Information

Administration, Annual Energy Outlook 2008, Early Release, Reference

Case Table 12. Available at http://www.eia.doe.gov/oiaf/aeo/pdf/ aeotab_12.pdf (last accessed October 10, 2008). EIA released the full AEO 2008 in June 2008, which NHTSA stated in the NPRM it would use in the final rule. EIA explained upon releasing the full AEO 2008 that it had been updated from the Early Release to reflect

EIA's expectations of the effect of EISA, which was enacted after the Early Release was made public. The full AEO 2008 is available at http://www.eia.doe.gov/oiaf/aeo/pdf/0383(2008).pdf (last accessed

October 10, 2008).

The retail fuel price forecasts presented in AEO 2008 span the period from 2008 through 2030. Measured in constant 2006 dollars, the

Reference Case forecast of retail gasoline prices during calendar year 2020 in the Early Release was $2.36 per gallon, rising gradually to

$2.51 by the year 2030 (these values include federal, state, and local taxes). However, NHTSA explained in the NPRM that valuing fuel savings over the 36-year maximum lifetime of light trucks assumed in this analysis required fuel price forecasts that extended through 2050, the last year during which a significant number of MY 2015 vehicles would remain in service.\229\ To obtain fuel price forecasts for the years 2031 through 2050, NHTSA assumed that retail fuel prices would remain constant (in 2006 dollars) from 2031 through 2050.

\229\ The agency defines the maximum lifetime of vehicles as the highest age at which more than 2 percent of those originally produced during a model year remain in service. For recent model years, this age has typically been 25 years for passenger cars and 36 years for light trucks.

NHTSA stated that the value to buyers of passenger cars and light trucks of fuel savings resulting from improved fuel economy is determined by the retail price of fuel, which includes federal, state, and any local taxes imposed on fuel sales. Total taxes on gasoline averaged $0.47 per gallon during 2006, while those levied on diesel averaged $0.53. These figures include federal taxes plus the sales- weighted average of state fuel taxes. Because fuel taxes represent transfers of resources from fuel buyers to government agencies, however, rather than real resources that are consumed in the process of supplying or using fuel, NHTSA explained that their value must be deducted from retail fuel prices to determine the value of fuel savings resulting from more stringent CAFE standards to the U.S. economy.

In estimating the economy-wide or ``social'' value of fuel savings due to increasing CAFE levels, NHTSA assumed that current fuel taxes would remain constant in real or inflation-adjusted terms over the lifetimes of the vehicles being regulated. In effect, this assumed that the average value per gallon of taxes on gasoline and diesel fuel levied by all levels of government would rise at the rate of inflation over that period. This value was deducted from each future year's forecast of retail gasoline and diesel prices reported in the AEO 2008

Early Release to determine the social value of each gallon of fuel saved during that year as a result of improved fuel economy.

Subtracting fuel taxes resulted in a projected value for saving gasoline of $1.83 per gallon during 2020, rising to $2.02 per gallon by the year 2030.

In conducting the preliminary uncertainty analysis of benefits and costs from alternative CAFE standards, as required by OMB, NHTSA also considered higher and lower forecasts of future fuel prices. The results of the sensitivity runs were made available in the PRIA. EIA includes a ``High Price Case'' and a ``Low Price Case'' in each annual edition of its AEO, which reflect uncertainties regarding future conditions in the world petroleum market and the U.S. fuel refining and distribution system. However, EIA does not attach specific probabilities to either its Reference Case forecast or these alternative cases; instead, the High Price and Low Price cases are intended to illustrate the range of uncertainty that exists.\230\

\230\ In AEO 2008, EIA explains the High Price Case as follows:

The high price case assumes that non-OPEC conventional oil resources are less plentiful, and the overall costs of extraction are higher, than assumed in the reference case. The high price case also assumes that OPEC will choose to allow a decline in its market share to 38 percent of total world liquids production.

EIA also explains the Low Price Case as follows:

The low price case assumes that non-OPEC conventional oil resources are more plentiful, and the overall costs of extraction are lower, than in the reference case, and that OPEC will choose to increase its market share to 45 percent.

AEO 2008, at 51. As the reader can see, there is nothing probabilistic about either the Low or High Price Case vis-[agrave]- vis the Reference Case.

The AEO 2008 Early Release included only a Reference Case forecast of fuel prices and did not include the High and Low Price Cases, so

NHTSA estimated high and low fuel prices corresponding to the AEO 2008

Reference Case forecast by assuming that high and low price forecasts would bear the same relationship to the Reference Case forecast as the

High and Low Price cases in AEO 2007.\231\ These alternative scenarios projected retail gasoline prices that range from a low of $1.94 per gallon to a high of $3.26 per gallon during 2020, and from $2.03 to

$3.70 per gallon during 2030. In conjunction with NHTSA's assumption that fuel taxes would remain constant in real or inflation-adjusted terms over this period, these forecasts implied social values of fuel savings ranging from $1.47 to $2.79 per gallon during 2020, and from

$1.56 to $3.23 per gallon in 2030.

\231\ EIA, Annual Energy Outlook 2007, High Price Case, Table 12, available at http://www.eia.doe.gov/oiaf/aeo/pdf/aeohptab_ 12.pdf (last accessed October 10, 2008); and Annual Energy Outlook 2007, Low Price Case, Table 12, available at http://www.eia.doe.gov/ oiaf/aeo/pdf/aeolptab_12.pdf (last accessed October 10, 2008).

NHTSA explained that EIA is widely recognized as an impartial and authoritative source of analysis and forecasts of U.S. energy production, consumption, and prices. EIA has published annual forecasts of energy prices and consumption levels for the U.S. economy since 1982 in its Annual Energy Outlooks. These forecasts have been widely relied upon by federal agencies for use in regulatory analysis and for other purposes. Since 1994, EIA's annual forecasts have been based upon that agency's National Energy Modeling System (NEMS), which includes detailed representation of supply pathways, sources of demand, and their interaction to determine prices for different forms of energy.

From 1982 through 1993, EIA's forecasts of world oil prices--the primary determinant of prices for gasoline, diesel, and other transportation fuels derived from petroleum--consistently overestimated actual prices during future years, often very significantly. Of the total of 119 forecasts of future world oil prices for

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the years 1985 through 2005 that EIA reported in its 1982-1993 editions of the AEO, 109 overestimated the subsequent actual values for those years, on average exceeding their corresponding actual values by 75 percent.

Since that time, however, EIA's forecasts of future world oil prices show a more mixed record for accuracy. The 1994-2005 editions of the AEO reported 91 separate forecasts of world oil prices for the years 1995-2005, of which 33 subsequently proved too high, while the remaining 58 underestimated actual prices. The average absolute (i.e., regardless of its direction) error of these forecasts has been 21 percent, but over- and underestimates have tended to offset one another, so that on average EIA's more recent forecasts have underestimated actual world oil prices by 7 percent. Although both its overestimates and underestimates of future world oil prices for recent years have often been large, the most recent editions of the AEO have significantly underestimated petroleum prices during those years for which actual prices are now available.

However, NHTSA explained that it did not regard EIA's recent tendency to underestimate future prices for petroleum and refined products or the high level of current fuel prices as adequate justification to employ forecasts that differed from the Reference Case forecast presented in the Revised Early Release. NHTSA stated that this was particularly the case because this forecast was revised upward significantly since the initial release of AEO 2008, which in turn represented a major upward revision from EIA's fuel price forecast reported in AEO 2007. NHTSA also noted that retail gasoline prices across the U.S. had averaged $2.94 per gallon (expressed in 2005 dollars) for the first three months of 2008, slightly below EIA's revised forecast that gasoline prices will average $2.98 per gallon

(also in 2005 dollars) throughout 2008.

NHTSA also considered that comparing different forecasts of world oil prices showed that the Reference Case forecast in AEO 2007 was actually the highest of all six publicly-available forecasts of world oil prices over the 2010-2030 time period.\232\ NHTSA stated that because world petroleum prices are the primary determinant of retail prices for refined petroleum products such as transportation fuels, this suggested that the Reference Case forecast of U.S. fuel prices reported in AEO 2007 was likely to be the highest of those projected by major forecasting services. Further, as indicated above, EIA's most recent fuel price forecasts had been revised significantly upward from those projected in AEO 2007.

\232\ See http://www.eia.doe.gov/oiaf/archive/aeo07/pdf/ forecast.pdf, Table 19, at 106.

NHTSA received several thousand comments regarding its fuel price assumptions, mostly from individuals stating that current pump prices were much higher than EIA's Reference Case forecasts for future prices, and arguing that NHTSA should use higher fuel price assumptions for setting more stringent standards in the final rule. Summaries of the comments are presented below, grouped according to the following categories: (1) Fuel prices have the largest effect on CAFE stringency of any of NHTSA's economic assumptions; (2) EIA's Reference Case is too low compared to current gas prices; (3) current gas prices reflect a fundamental change in market conditions that will affect future prices;

(4) why NHTSA is incorrect in its representation of the Reference Case as the ``most likely course'' of future oil prices; (5) NHTSA's sensitivity analysis in the PRIA indicates that higher fuel price assumptions will lead to more stringent standards; (6) EIA's tendency to underestimate in its fuel price forecasts; (7) EIA's recent changes to its Short-Term Energy Outlook; (8) recent public statements on

NHTSA's fuel price assumptions; (9) comments in favor of or neutral with regard to NHTSA's use of the Reference Case for its fuel price assumptions; (10) what fuel price assumptions NHTSA should use in setting the standards in the final rule; and (11) whether NHTSA should hold public hearings regarding its fuel price assumptions.

(1) Fuel Prices Have the Largest Effect on CAFE Stringency of any of

NHTSA's Economic Assumptions

Several commenters addressed the impact that fuel price assumptions have on NHTSA's analysis of the appropriate stringency of CAFE standards. The Members of Congress\233\ stated that fuel prices have the largest effect of ``all the factors that could be considered on how high standards could be raised,'' and that therefore ``NHTSA's reliance on these highly unrealistic projections have the effect of artificially lowering the calculated `maximum feasible' fuel economy standards that

NHTSA is directed by law to promulgate.'' CFA commented that the underestimation of fuel prices affected every part of NHTSA's analysis, while CBD stated that ``The use of an inappropriate gasoline price projection greatly skews the results,'' and argued that ``NHTSA has failed to analyze a gas price that even approaches today's prices, even in the sensitivity analysis.'' EDF argued that because

``Underestimating future gasoline prices would lead NHTSA to undervalue the benefits to the U.S. and consumers from stronger fuel economy standards and set inefficiently low standards,'' NHTSA should ``perform extensive sensitivity analyses using higher gas price assumptions, including but not limited to the EIA `high price' projections.''

\233\ Representative Markey authored this comment, which was signed by himself and 44 other Members of Congress. In this section, when the term ``Members of Congress'' is used, this is the comment to which the agency refers. Besides the comments received from several Representatives and Senators regarding the fuel prices employed in NHTSA's analysis for the NPRM, Representative Markey and

Senator Cantwell additionally submitted bills in the House and

Senate to require NHTSA to use fuel prices at least as high as EIA's

High Price Case in setting CAFE standards. Representative Markey introduced H.R. 6643 on July 29, 2008, and Senator Cantwell introduced S. 3403 on July 31, 2008.

(2) EIA's Reference Case Is Too Low Compared to Current Gas Prices

Many commenters, including CBD, EDF, NRDC, Sierra Club et al., UCS,

CFA, the Attorneys General, NACAA, NESCAUM, the mayor of the City of

Key West, 45 Members of Congress, and several thousand individual commenters, stated that NHTSA's fuel price assumptions based on EIA's

Reference Case were unreasonably low given current gasoline prices.

CBD, for example, commented that NHTSA's use of the Reference Case fuel price estimates was ``impossible to justify'' given current fuel prices and the fact that ``there is every indication that the price of oil will continue to increase over the short term.'' UCS argued that although NHTSA ``point[ed] to recent increased fuel prices in AEO 2008 to justify use of AEO Reference Case data,'' the Reference Case projection ``still falls well below current gasoline prices.'' The

Attorneys General commented that EIA's Reference Case forecast indicated future fuel prices much lower than current pump prices, and argued that ``Unless NHTSA can provide publicly-available, mainstream documentation supporting an almost fifty percent drop from current prices, it must substantially re-calibrate those estimates.'' CFA and the Attorneys General further argued that even EIA's High Price Case was too low given current gasoline prices.

UCS also submitted nearly 7,000 form letters from individual citizens, which generally stated that gas prices in their home areas are currently significantly higher than NHTSA's fuel price assumptions for the proposed standards.

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The individual citizens commented that NHTSA should ``correct'' its fuel price assumptions for the final rule, so as not to ``allow automakers to shave three to four miles per gallon off of their CAFE requirements,'' and so as to achieve ``a fleet average of approximately 40 miles per gallon by 2020,'' which the letters stated ``is both feasible and cost effective using technology already available.''

Sierra Club submitted over 3,000 form letters from individual citizens commenting similarly that NHTSA must use ``realistic'' fuel prices for setting the standards in the final rule, given pump prices at that time of approximately $4 per gallon.

(3) Current Gas Prices Reflect a Fundamental Change in Market

Conditions That Will Affect Future Prices

A number of commenters argued that changed oil market conditions both make EIA's Reference Case out-of-date and will continue to impact future fuel prices. Public Citizen stated that ``Gas prices have been rising steadily since 2004,'' but that ``the price increases in the last six to 12 months have been especially dramatic, rising by over a third in the past six months, and by nearly 170 percent in five years.'' NESCAUM commented that current fuel prices are due principally to ``high global demand in a supply constricted market.'' NESCAUM further argued that ``There is little expectation that the gap between supply and demand will be narrowed in the foreseeable future,'' so

``the price of gasoline should remain * * * well above the mid-$2.00 range.'' CFA argued that ``geopolitical factors'' are responsible for gasoline prices setting ``record after record,'' and stated that the proposed standards ``do not reflect the fundamental reality of this crisis'' because NHTSA's ``analysis [is not based] on a value of gasoline savings that is consistent with the real world.'' ACEEE argued that the ``adherence [to the Reference Case forecast] is not justified, given recent changes in the oil market.'' However, ACEEE also argued that the High Price Case does not ``necessarily capture fully current understanding of how high fuel prices are likely to be in the coming decades.''

CARB stated that NHTSA's use of EIA's Reference Case ``border[s] on the absurd given recent fuel price hikes, [and] recent assessments that the price hikes are structural.'' CARB cited and attached to its comments an ``Economic Letter'' by the Federal Reserve Bank of Dallas from May 2008, which stated that factors such as changes in global oil supply and demand, the weakening of the dollar, and the fact that much global oil production takes place in ``politically unstable regions * *

* suggest the days of relatively cheap oil are over and the global economy faces a future of high energy prices.''

NRDC stated that other analysts such as Goldman Sachs and Citigroup predict higher gasoline prices at least through 2011, due to lack of

``spare capacity'' in either OPEC or non-OPEC supply. NRDC also cited

EIA's June 25, 2008 International Energy Outlook (IEO), which has a similar reference case to AEO 2008, and which NRDC quoted as stating that given ``current market conditions, it appears that world oil prices are on a path that more closely resembles the projection in the high price case than in the reference case.'' \234\

\234\ Energy Information Administration (2008) International

Energy Outlook 2008: Complete Highlights. June 25.

(4) Why NHTSA Is Incorrect in Its Representation of the Reference Case as the ``Most Likely Course'' of Future Oil Prices

UCS stated that NHTSA was incorrect to assume that EIA's Reference

Case ``represent[s] the EIA's most up-to-date estimate of the most likely course of future prices for petroleum products,'' arguing that

EIA itself does not refer to the Reference Case projection as the

``most likely course,'' but states that the Reference Case merely

``assumes that current policies affecting the energy sector remain unchanged throughout the projection period.''

(5) NHTSA's Sensitivity Analysis in the PRIA Indicates That Higher Fuel

Price Assumptions Will Lead to More Stringent Standards

A number of commenters, including NACAA, Public Citizen, UCS,

Sierra Club et al. and ACEEE, cited NHTSA's sensitivity analysis using the EIA High Price case as evidence that, as the Members of Congress stated, ``demonstrates that the technology is available to cost- effectively achieve a much higher fleet wide fuel economy of nearly 35 mpg in 2015.'' CFA also stated that the High Price Case, which NHTSA ran as a sensitivity analysis using approximately $3.40 per gallon in 2008 dollars for 2015, was a ``more realistic fuel price scenario, one that is not terribly high.''

(6) EIA's Tendency to Underestimate in Its Fuel Price Forecasts

Several commenters, including UCS, CFA, NRDC, CARB, and the

Attorneys General argued that EIA estimates were unreliable because EIA had underestimated in recent years. CARB cited NHTSA's statement on page 24406 of the NPRM (73 FR 24406, May 2, 2008) noting ``EIA's own recent tendency to underestimate,'' as CARB put it, as indication that

NHTSA's use of EIA's Reference Case ``border[s] on the absurd.'' CFA argued that ``EIA's projections of gasoline prices have been consistently low and NHTSA was not obligated to use those projections.'' NRDC analyzed EIA's forecasting accuracy in greater detail, concluding that ``The past five versions of the AEO have all underestimated actual gasoline prices,'' in both the Reference and High

Case scenarios, and providing a table comparing EIA Reference and High

Case projections from one year prior to the actual average recorded price in 2003-2008, which showed actual prices as consistently higher than EIA projections.

(7) EIA's Recent Changes to Its Short-Term Energy Outlook

Several commenters stated that recent EIA upward revisions to its

Short-Term Energy Outlook fuel price forecasts indicate that the longer-term Reference Case forecasts are also in need of upward revision. CARB, for example, argued that recent EIA upward revisions to its short-term fuel price forecasts provide further evidence that ``the assumptions underlying the EIA long-term gasoline projections have significantly changed since EIA last made those long-term projections.'' CFA similarly argued that EIA needed to adjust its long- term projections upward given recent increases in short-term projections, and stated that extrapolating EIA's short-term projections linearly results in a gasoline price in 2015 of $5.50 per gallon in 2008 dollars, which might not itself be reliable for purposes of setting CAFE standards, but is high enough to indicate that ``EIA's high price scenario seems much more appropriate as the basis for

NHTSA's economic analysis.'' NRDC and the Attorneys General made similar arguments. The Attorneys General suggested that consequently,

NHTSA should attempt to ``obtain from EIA a truly current projection for gasoline prices over the relevant period'' for use in the final rule.

(8) Recent Public Statements on NHTSA's Fuel Price Assumptions

Several commenters, including the Members of Congress, Public

Citizen, UCS, NRDC, Sierra Club et al., and the Attorneys General cited testimony by EIA Administrator Guy Caruso on June 11, 2008, before the

House Select Committee on Energy Independence and

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Global Warming, as evidence that, as the Attorneys General argued,

``Even EIA agrees that NHTSA should have not used its reference case for the analysis in this rulemaking, but instead should have used EIA's high price case.'' Administrator Caruso testified, in response to a question regarding whether NHTSA should use EIA's High Price Case scenario to set CAFE standards, that ``We're on the higher price path right now. If you were to ask me today what I would use, I would use the higher price.'' \235\

\235\ UCS stated that this quote was taken from ``Global Warming

Hearing on the Future of Oil,'' June 11, 2008, which it stated was available online at http://speaker.house.gov/blog.

The Members of Congress and Sierra Club et al., also cited then-DOT

Secretary Peters' May 17, 2008 statement that ``As we look toward the finalization of the rule and look again what the average fuel costs are then, I think we're going to make more progress on the miles per gallon at a lower overall cost.'' \236\ The commenters argued that this statement indicated an expectation that fuel prices used in the final rule would be higher than those used in the NPRM.

\236\ Sierra Club cited David Shepardson, ``Gas prices may spur revision of mpg plan,'' Detroit News Washington, Saturday, May 17, 2008, for this quote from Secretary Peters.

(9) Comments in Favor of or Neutral With Regard to NHTSA's Use of the

Reference Case for Its Fuel Price Assumptions

NADA was the only commenter arguing directly in favor of NHTSA continuing ``to rely on the most recent reference case fuel price projections of the U.S. Energy Information Administration's (EIA).''

NADA recognized that EIA has over- and under-estimated fuel prices in the past, but argued that ``Despite the inherent volatility or uncertainty of fuel prices, EIA and NHTSA would be remiss if they were to arbitrarily abandon the best models and data available or to use

`high' or `low' price case projections that are inherently not probabilistic.'' NADA further commented that ``the use of a high price case to justify unduly costly CAFE standards could lead to decreased new motor vehicle sales and a commensurate lower than projected rate of fuel energy savings and greenhouse gas reduction benefits.''

The Alliance did not argue that NHTSA should use any particular fuel price in its economic assumptions, but commented that NHTSA should not conclude that ``recent increases in gasoline prices nationwide'' would justify more stringent CAFE standards. The Alliance cited the

Sierra Research and NERA reports, which it said performed sensitivity analyses using all of EIA's price scenarios (Low, Reference, and High), and ``did not find that use of the `high' case significantly altered its conclusions about the feasibility of imposing much higher costs on manufacturers.'' Given that Sierra and NERA both concluded that the proposed standards were already too stringent, this result is hardly surprising.

(10) What Fuel Price Assumptions NHTSA Should Use in Setting the

Standards in the Final Rule

Many commenters, including UCS, CARB, ACEEE, Sierra Club et al., the Attorneys General, and the Members of Congress stated that NHTSA should set standards in the final rule using fuel price assumptions equivalent to at least EIA's High Price Case. Wisconsin DNR suggested that NHTSA use the ``high price fuel scenario'' in EIA's International

Energy Outlook (2008) for a ``suitable higher estimate from a recognized federal agency.'' \237\

\237\ Wisconsin DNR cited the source of the ``high price fuel scenario'' as ``DOE-EIA Report 0484 (2008),'' which is

EIA's International Energy Outlook (IEO) for 2008. NHTSA assumes that the commenter intended to cite this source, and not AEO 2008.

However, EIA describes the forecasts of world oil prices--a primary determinant of U.S. fuel prices--reported in IEO 2008 as ``* * * consistent with those in the Annual Energy Outlook 2008,'' and cites

AEO2008 as the source for those oil price projections. See U.S.

Energy Information Administration, International Energy Outlook 2008, Chapter 2, ``Liquid Fuels,'' Figure 30 and accompanying text.

Available at http://www.eia.doe.gov/oiaf/ieo/liquid_fuels.html

(last accessed October 4, 2008).

Several commenters calling for ``at least'' the High Price Case also suggested other preferred alternatives. CARB suggested that NHTSA delay the final rule until ``recent volatility has stabilized and EIA can provide its final 2008 estimates in February 2009.'' The Attorneys

General suggested NHTSA obtain ``relevant, up-to-date data directly'' from EIA ``specifically for the docket in this rulemaking,'' or ``wait for EIA's public, final 2008 estimates, which are scheduled to be released in December.'' ACEEE commented that NHTSA should ``Work with

EIA to produce an up-to-date fuel price projection for purposes of the final rule. * * *'' Sierra Club et al., stated that NHTSA should also

``examine other fuel price estimates, such as the oil futures market price predictions which project prices for a barrel of oil through 2016.''

Other commenters suggested that NHTSA develop estimates based on current pump-price equivalents for its fuel price assumptions. Public

Citizen commented that NHTSA should ``base its final rulemaking on a more realistic estimate of future fuel price based on the high estimate and an at-the-pump price that pushes the standard in the direction of real-world gas prices.'' NESCAUM urged NHTSA ``to reevaluate the effect of a wider range of gasoline prices to the $4.00 per gallon level and above,'' stating that it would raise standards. EDF stated that NHTSA must set standards that ``reflect real world gas prices.'' CBD stated that ``Today's gas price must form the starting point for the analysis, and calculations must be performed that consider the overwhelmingly likely scenario that gas prices will be significantly higher than the projections used in the NPRM.'' NRDC stated that because both the

Reference and High Case scenarios are too low, ``NHTSA should develop a plausible and realistic projection of future oil prices for use in determining maximum feasible fuel economy levels.''

(11) Whether NHTSA Should Hold Public Hearings Regarding Its Fuel Price

Assumptions

Several commenters called for NHTSA to hold hearings regarding the appropriate stringency of CAFE standards, specifically in light of fuel prices. CFA, in requesting hearings, commented that EIA's Reference

Case resulted in fuel prices that are too low, and ``have consistently been used [in recent CAFE rulemakings] to undercut the use of existing technology to meet the statutory goals. CFA stated that ``The use of more realistic fuel prices make more technology cost-justified and will result in higher standards.'' Environment America, National Wildlife

Federation, NRDC, Pew Environment Group, Sierra Club, and UCS also submitted a joint comment requesting public hearings and citing NHTSA's fuel price assumptions. Like CFA, the commenters stated that using the

EIA Reference Case ``vastly undercuts the potential for higher fuel economy'' and that ``If NHTSA used more realistic gas prices, we could be on a path to achieving higher fuel economy that is both technologically achievable and cost effective.''

Agency response: NHTSA has carefully considered available evidence, recent trends in petroleum and fuel prices, and the comments it received on the NPRM analysis. After doing so, NHTSA has decided to use

EIA's High Price Case forecast in its final rule analysis and to determine the MY 2011 CAFE standards. As NHTSA recognized in the NPRM, commenters are correct that projected future fuel prices have the

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largest effect of all the economic assumptions that NHTSA employs in determining benefits both to new vehicle buyers and to society, and thus on CAFE stringency. This is why it is vital that NHTSA base its fuel price assumptions on what it believes to be the most accurate forecast available that covers the expected lifetimes of MY 2011 passenger cars and light trucks, which can extend up to 25-35 years from the date they are produced. The long time horizon of NHTSA's analysis also makes it critical that the agency not rely excessively on current price levels as an indicator of the prices that are likely to prevail over an extended future period. Instead, NHTSA relies largely on EIA's professional expertise and extensive experience in developing forecasts of future trends in energy prices, as do most other federal agencies.

In addition, NHTSA notes that several manufacturers employed fuel prices consistent with or exceeding the AEO 2008 High Price Case for the time period covered by the rulemaking in their revised product plan estimates of fuel economy and sales for individual models. If the agency employs fuel price forecasts that differ from those used by manufacturers, it may incorrectly attribute the fuel savings resulting from increased market demand for fuel economy to higher CAFE standards, or conversely, underestimate the fuel savings resulting from increased standards by attributing too much of the increase in fuel economy to higher market demand. Given manufacturers' assumptions about fuel prices, the agency's estimates of fuel savings and economic benefits resulting from the standards adopted in this final rule are conservative, because they are likely to underestimate fuel savings attributable to the increase in fuel economy above its market- determined level that CAFE standards will require.

Although some commenters suggested that NHTSA develop its own fuel price forecasts based on then-current pump prices, NHTSA does not believe that it has the independent capability to provide a more reliable prediction of future fuel prices, or that it would have the credibility of EIA's forecasts. If NHTSA had assumed that that fuel prices would remain at their mid-2008 peak levels throughout the lifetimes of MY 2011 cars and light trucks, the agency would have overvalued the benefits attributed to fuel savings, and thus likely have established excessively stringent MY 2011 standards. While petroleum prices were rising at the time the NPRM was published, eventually reaching nearly $140 per barrel, since then global average prices for crude oil have declined to levels as low as $35 per barrel.\238\ The recent extreme volatility in petroleum and fuel prices illustrates the danger in relying on current prices as an indicator of their likely future levels, and gives NHTSA greater confidence in relying on EIA's forecasts of future movements in fuel prices in response to changes in demand and supply conditions in the marketplace.

\238\ Energy Information Administration, World Crude Oil Prices, data for week ended 1/2/2009, available at http://tonto.eia.doe.gov/ dnav/pet/pet_pri_wco_k_w.htm (last accessed February 12, 2009).

While NHTSA also agrees with the commenters that the sensitivity analysis demonstrates that higher CAFE standards could be established if higher fuel price assumptions were employed, the agency cannot simply choose to employ higher fuel price assumptions because it wishes to raise CAFE levels. Doing so would be inconsistent with the agency's approach of using what it concludes is the most reliable estimate of the benefits from conserving fuel when establishing fuel economy standards. NHTSA recognizes that predicting future oil prices is difficult, particularly during periods when world economic conditions are as volatile as they are today. Nevertheless, NHTSA continues to believe that EIA's fuel price forecasts as reported in its AEO represent the most reliable estimates of future fuel prices, and thus of the benefits from reducing fuel consumption through higher CAFE standards. While NHTSA recognizes that other forecasts exist, the agency believes the EIA forecasts are preferable for its purposes, since they are the product of an impartial government agency with considerable and long-standing expertise in this field. Any simple extrapolation of current or recent retail fuel prices, which commenters recognize have shown extreme volatility in recent months, is likely to provide a considerably less reliable forecast of future prices than the current AEO. Each time EIA issues a new AEO, it considers recent and likely future developments in the world oil market, the effect of the current geopolitical situation on oil supply and prices, and conditions in the domestic fuel supply industry that affect pump prices.\239\

\239\ AEO 2008 states as follows with regard to factors which

EIA accounts for in developing the Reference Case:

As noted in AEO2007, energy markets are changing in response to readily observable factors, which include, among others: Higher energy prices; the growing influence of developing countries on worldwide energy requirements; recently enacted legislation and regulations in the United States; changing public perceptions on issues related to emissions of air pollutants and greenhouse gases and the use of alternative fuels; and the economic viability of various energy technologies.

For example, the Overview section to AEO 2008 states that because

EISA was passed between the Early Release and the time of publication for AEO 2008, EIA updated the Reference Case to reflect the impact it expected EISA to have on fuel prices. EIA also updated its projections for the AEO 2008 Reference Case ``to better reflect trends that are expected to persist in the economy and in energy markets,'' including a lower projection for U.S. economic growth (a key determinant of U.S. energy demand), higher price projections for crude oil and refined petroleum products, slower projected growth in energy demand, higher forecasts of domestic oil production (particularly in the near term), and slower projected growth in U.S. oil imports.\240\ Thus NHTSA is confident that EIA is aware of and has accounted reasonably for current political and economic conditions that are likely to affect future trends in fuel supply, demand, and retail prices.

\240\ AEO 2008 Overview, at http://www.eia.doe.gov/oiaf/aeo/ overview.html (last accessed October 10, 2008).

Although a majority of commenters asserted that EIA's Reference

Case forecast is likely to underestimate future fuel prices significantly, and that NHTSA's reliance on the Reference Case resulted in insufficiently stringent proposed CAFE standards, they did so in an environment when retail fuel prices were at or above $4.00 per gallon.

Many commenters stated that at a minimum, NHTSA should use EIA's High

Price Case as the source for its fuel price forecasts, primarily because those appeared to be more consistent with then-current fuel prices. As one illustration, NRDC cited EIA's own International Energy

Outlook 2008, published the same month as the AEO 2008, which stated that given ``* * * current market conditions, it appears that world oil prices are on a path that more closely resembles the projection in the high price case than in the reference case.'' \241\ Commenters also cited EIA Administrator Caruso's June 2008 statement that ``We're on the higher price path right now. If you were to ask me today what I would use, I would use the higher price.'' NHTSA also notes that several manufacturers in their confidential product plan submissions indicated that they had based their product plans on gas price estimates

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that were either between EIA's Reference and High Price Cases, or above even the High Price Case.

\241\ Energy Information Administration (2008) International

Energy Outlook 2008: Complete Highlights. June 25.

The AEO High Price Case is best understood in the context of its relationship to the Reference Case. EIA described the Reference Case as follows in AEO 2008:

The reference case represents EIA's current judgment regarding exploration and development costs and accessibility of oil resources in non-OPEC countries. It also assumes that OPEC producers will choose to maintain their share of the market and will schedule investments in incremental production capacity so that OPEC's conventional oil production will represent about 40 percent of the world's total liquids production.\242\

\242\ AEO 2008, at 199. Available at http://www.eia.doe.gov/ oiaf/aeo/pdf/0383(2008).pdf (last accessed October 10, 2008).

In contrast, EIA describes its Low Price case in the following terms:

The low price case assumes that OPEC countries will increase their conventional oil production to obtain approximately a 44- percent share of total world liquids production, and that conventional oil resources in non-OPEC countries will be more accessible and/or less costly to produce (as a result of technology advances, more attractive fiscal regimes, or both) than in the reference case. With these assumptions, non-OPEC conventional oil production is higher in the low price case than in the reference case.\243\

\243\ Id.

Finally, EIA describes its High Price case as follows:

The high price case assumes that OPEC countries will continue to hold their production at approximately the current rate, sacrificing market share as global liquids production increases. It also assumes that oil resources in non-OPEC countries will be less accessible and/or more costly to produce than assumed in the reference case.\244\

\244\ Id.

As these descriptions emphasize, EIA's Low and High Price Cases are based on specific assumptions about the possible behavior of oil- producing countries and future developments affecting global demand for petroleum energy, and how these might differ from the behavior assumed in constructing its Reference Case. However, this distinction does not necessarily imply that EIA expects either its Low Price or High Price

Case forecast to be more accurate than its Reference Case forecast, since EIA offers no assessment of which set of assumptions underlying its Low Price, Reference, and High Price cases it believes is most reliable.

EIA did recognize that world oil prices at the time the final version of AEO 2008 were above even those forecast in its High Price

Case. However, it attributed this situation to short-term developments, most or all of which were likely to prove transitory, as evidenced by its statement in the Overview to AEO 2008:

As a result of recent strong economic growth worldwide, transitory shortages of experienced personnel, equipment, and construction materials in the oil industry, and political instability in some major producing regions, oil prices currently are above EIA's estimate of the long-run equilibrium price.\245\

\245\ Id., at 5.

This observation is consistent with EIA's statement in IEO 2008 that current market conditions appeared to place world oil prices on a path closer to the High Price Case than the Reference Case. While EIA clearly expects prices to remain high in the near term, this does not necessarily imply that it expects its High Price Case forecast to be more reliable over the extended time horizon spanned by AEO 2008.

NHTSA has seriously considered the comments it received on the fuel price forecasts used in the NPRM analysis, and paid close attention to recent developments in the world oil market and in U.S. retail fuel prices. The agency has also reviewed forecasts of world oil prices and

U.S. fuel prices available from sources other than EIA, as well as the views expressed by petroleum market experts, professional publications, and press reports.\246\ The agency notes that although both the views of experts and projections of petroleum prices differ widely, the emerging consensus appears to be that world petroleum and U.S. retail fuel prices are likely to remain at levels that are more consistent with those forecast in the AEO 2008 High Price Case than with the

Reference Case forecasts over the foreseeable future.\247\

\246\ These include EIA, Short-Term Energy Outlook, various issues, available at http://www.eia.doe.gov/emeu/steo/pub/ contents.html (last accessed November 13, 2008); International

Energy Agency, World Energy Outlook 2008, summary available at http://www.iea.org/Textbase/npsum/WEO2008SUM.pdf (last accessed

November 13, 2008); AJM Petroleum Consultants, The AJM Price

Forecast, available at http://www.ajmpetroleumconsultants.com/ index.php?page=price-forecast (last accessed Novemebr 13, 2008);

PetroStrategies, Inc, Survey of Oil Price Forecasts, available at http://www.petrostrategies.org/Graphs/Oil_Price_Forecasts.htm

(last accessed November 13, 2008); International Monetary Fund,

World Economic Outlook, October 2008, Chapter 3: Is Inflation Back?

Commodity Prices and Inflation, available at http://www.imf.org/ external/pubs/ft/weo/2008/02/pdf/c3.pdf (last accessed November 13, 2008); and Federal Reserve Bank of Dallas Economic Letter, Volume 3,

No. 5, May 2008, available at http://www.dallasfed.org/research/ eclett/2008/el0805.html (last accessed November 13, 2008).

\247\ In the AEO High Price Case, prices for imported petroleum are projected to average about $75 per barrel over the next 10 years, while U.S. retail gasoline prices are forecast to average

$2.90 per gallon over that same period; see AEO 2008, High Price

Case Table 12, available at http://www.eia.doe.gov/oiaf/aeo/excel/ aeohptab_12.xls (last accessed October 19, 2008).

Over the period from 2011, when the standards adopted in this final rule would take effect, and 2030, the outer time horizon of the AEO 2008 forecasts, retail gasoline prices in the AEO 2008 High Price case are projected to rise steadily from $2.95 to $3.62 per gallon, averaging $3.28 per gallon (all prices expressed in 2007 dollars). For the years 2031 and beyond, the agency's analysis assumes that retail fuel prices will remain at their forecast values for the year 2030, or

$3.62 per gallon. These prices are significantly higher than the AEO 2008 Revised Early Release Reference Case forecast used in the agency's

NPRM analysis, which averaged $2.34 per gallon (in 2006 dollars) over that same period.\248\ After deducting state and federal fuel taxes, this revised forecast results in an average value of $3.08 per gallon of fuel saved over the lifetimes of 2011 passenger cars and light trucks. Because of the uncertainty surrounding future gasoline prices, the agency also conducted sensitivity analyses using EIA's Reference and Low Price case forecasts of retail fuel prices.

\248\ The fuel price forecasts reported in EIA's AEO 2008

Revised Early Release and Final Release reflect the estimates effects of various provisions of EISA--including the requirement to achieve a combined CAFE level of 35 mpg by model year 2020--on the demand for and supply of gasoline and other transportation fuels.

Thus the fuel price forecasts reported in these versions of AEO 2008 may already account for the reduction in fuel demand expected to result from the CAFE standards adopted in this Final Rule, whereas the agency's analysis of their effects would ideally use fuel price forecasts that do not assume the adoption of higher CAFE standards for model years 2011-20. However, the agency notes that the difference between the Reference Case forecasts of retail gasoline prices for 2011-30 between EIA's Early Release of AEO 2008, which did not incorporate the effects of EISA, and its subsequent Revised

Early Release, which did reflect EISA, averaged only $0.0004 (i.e., less than one-half cent) per gallon over the period 2011-30. This suggests that accounting for the effect of EISA would have had only a minimal effect on the fuel price forecasts used in this analysis.

NHTSA is aware that EIA recently released a preliminary version of its Annual Energy Outlook 2009, which appears to confirm then-EIA

Administrator Caruso's testimony before the House Select Committee in

June 2008 that the future path of gasoline prices likely more closely resembles the AEO 2008 High Price Case than the 2008 Reference Case.

However, the agency has elected not to use this

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newly-available forecast of fuel prices in this final rule, in part because it did not have adequate time to replicate the entire analysis reported in this rule using revised forecasts of fuel prices.\249\

Moreover, the forecast of gasoline prices from AEO 2009 Early Release averages $3.45 over the period from 2009-30, only slightly higher than the comparable figure for the AEO 2008 High Price forecast the agency relied upon in preparing this analysis. Thus incorporating EIA's newest forecast would be unlikely to have an effect on the fuel economy standards adopted in this rule. The agency will continue to monitor fuel price forecasts available from all sources and other forecasts, and consider their implications for its choice among alternative price scenarios developed by EIA.

\249\ U.S. Energy Information Administration, Annual Energy

Outlook 2009 Early Release, available at http://www.eia.doe.gov/ oiaf/aeo/index.html (last accessed February 12, 2009).

5. Consumer Valuation of Fuel Economy and Payback Period

In the NPRM, NHTSA explained that in estimating the value of fuel economy improvements that would result from alternative CAFE standards to potential vehicle buyers, NHTSA assumed that buyers value the resulting fuel savings over only part of the expected lifetime of the vehicles they purchase. Specifically, we assume that buyers value fuel savings over the first five years of a new vehicle's lifetime, and that buyers behave as if they do not discount the value of these future fuel savings. NHTSA chose the five-year figure because it represents the current average term of consumer loans to finance the purchase of new vehicles. NHTSA recognized that the period over which individual buyers finance new vehicle purchases may not correspond to the time horizons they apply in valuing fuel savings from higher fuel economy, but NHTSA expressed its belief that five years represents a reasonable estimate of the average period over which buyers who finance their purchases of new vehicles receive--and thus are compelled to recognize--the monetary value of future fuel savings resulting from higher fuel economy.

NHTSA explained that the value of fuel savings over the first five years of a vehicle model's lifetime that would result under each alternative fuel economy standard is calculated using the projections of retail fuel prices described in the section above. The value of fuel savings is then deducted from the technology costs incurred by the vehicle's manufacturer to produce the improvement in that model's fuel economy estimated for each alternative standard, to determine the increase in the ``effective price'' to buyers of that vehicle model.

The Volpe model uses these estimates of effective costs for increasing the fuel economy of each vehicle model to identify the order in which manufacturers would be likely to select models for the application of fuel economy-improving technologies in order to comply with stricter standards. The average value of the resulting increase in effective cost from each manufacturer's simulated compliance strategy is also used to estimate the impact of alternative standards on manufacturers' total sales for future model years.

However, NHTSA stated that it is important to recognize that the agency estimates the aggregate value to the U.S. economy of fuel savings resulting from alternative standards--or their ``social'' value--over the entire expected lifetimes of vehicles manufactured under those standards, rather than over this shorter ``payback period'' that NHTSA assumes for vehicle buyers. This point is discussed in the section below titled ``Vehicle survival and use assumptions.'' NHTSA noted that as indicated previously, the maximum vehicle lifetimes used to analyze the effects of alternative fuel economy standards are estimated to be 25 years for passenger cars and 36 years for light trucks.

NADA and Sierra Research agreed with the agency's assumption of a 5-year payback period for consumer valuation of fuel economy. NADA commented that NHTSA's assumption of a 5 year payback period for consumer valuation of fuel economy was reasonable. NADA argued that

``Even at high fuel prices, consumers who view fuel economy as an important purchase criteria are hard pressed to make the case for buying a more fuel efficient new vehicle if the up-front capital costs associated with doing so cannot be recouped in short order.'' Thus,

NADA concluded, ``NHTSA should assume that most prospective purchasers will not invest in fuel economy improvements that do not exhibit a payback of five years or sooner.'' NADA also added that factors other than the value of fuel savings should also be taken into account in calculating the length of the payback period; specifically, it stated that ``for purposes of calculating payback, real-world purchaser finance costs, opportunity costs, and additional maintenance costs all should be accounted for.''

The Sierra Research report submitted by the Alliance as Attachment 2 to its comments ``considered fuel cost savings over `payback' periods of 5 and 20 years,'' but stated parenthetically that ``It is more likely that average consumers would consider the savings during the period of time they expect to own the vehicle, likely closer to the five-year period.''

Other commenters disagreed with the agency's assumption of a 5-year payback period for consumer valuation of fuel economy. Mr. Delucchi stated simply that NHTSA ``should not do a `payback' analysis with a zero discount rate and a 5-year payback period, because there is no economic theory or consumer behavioral evidence to support this.''

However, he offered no additional suggestions as to what NHTSA should use instead. Similarly, as part of its discussion on fuel price estimates, the Sierra Club commented that NHTSA had ``arbitrarily restricted'' the consumer payback period to 5 years, but offered no further comments or explanation of this point.

CFA commented that ``the five year payback constraint plays a critical role in ordering the technologies that are included in the fleet to comply with various levels of the standard,'' and argued that while NHTSA should perhaps not have included a payback period at all, if it intended to do so, it should justify the 5-year payback period better and consider a longer payback period. CFA commented that ``it is not clear that one must assume a payback for any component of a vehicle purchase. But if one does, the logical connection is between the period of ownership and the payback, not the loan period.'' CFA further commented that NHTSA failed to recognize the extent to which

``consumers and the market appreciate fuel economy,'' arguing that

``even if one looks at the ownership period, most alternative investment opportunities available to consumers do not yield a five year payback period; hybrids, many of which have payback periods of ten years or more, are flying off auto dealer lots. Increasing the payback period by one year raises the value of the fuel savings substantially, by 20 percent.''

Ford commented that NHTSA should not have used the increase in the

``effective price'' to buyers to determine consumer valuation of fuel economy, for two reasons. First, Ford argued that while NHTSA

``implicitly assumed that the technology costs incurred by the manufactures can be fully passed on to buyers,'' this is not true ``in the competitive environment of the U.S. automotive market.'' Second,

Ford

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commented that the estimates of ``effective price'' depend on fuel price assumptions, such that ``a higher gasoline price assumption will lower the effective price estimates, holding everything else constant.'' Ford cited the June 26, 2008 analysis by Sierra Research that ``estimates that a consumer would not break even over a 20 year period unless gas prices are sustained at $4.47 a gallon. Sierra also concluded that by using a more conservative payback period of 5 years the estimated breakeven gas price would have to be $6.59.''

Ford argued that NHTSA should instead use ``hedonic pricing technique in estimating the consumer valuation of fuel economy,'' which

``determines the price of a vehicle by the characteristics of the car such as towing, cargo volume, performance etc.'' Ford also argued that

NHTSA should not use ``effective price'' as a way of identifying in which order manufacturers would apply technologies, because ``It is quite unlikely that manufacturers are using this metric for selecting models, since most manufacturers do not assume the technology costs can be fully passed on to the buyers.''

Agency response: NHTSA notes that the payback period and the effective cost calculation affect only the order in which manufacturers are assumed to apply technologies in order to improve the fuel economy of specific vehicles, and thus have no effect on the final CAFE standards. Thus the assumptions about the length of the payback period and discount rate that affect these calculations, while subject to some uncertainty, are not a critical determinant of CAFE standards themselves. Instead, their main role is to estimate the increase in the value to potential buyers of the increases in fuel economy of specific vehicle models, and to provide some indication of the extent to which manufacturers are likely to be able to recoup their costs for complying with higher CAFE standards through increases in those vehicles' sales prices. The agency also reiterates that it estimates the social benefits of fuel savings resulting from alternative standards over the entire expected lifetimes of cars and light trucks subject to higher

CAFE standards, rather than over the payback period assumed for vehicle buyers. Although many commenters mistakenly believe that the payback period has an important effect on the stringency of the fuel economy standards and therefore were suggesting different periods, no commenter provided any data to support a different number of years for payback.

Thus NHTSA has continued to employ the same assumptions used in the

NPRM in developing the CAFE standards adopted in this final rule. 6. Vehicle Survival and Use Assumptions

NHTSA stated in the NPRM that its preliminary analysis of fuel savings and related benefits from adopting alternative standards for MY 2011-2015 passenger cars and light trucks was based on estimates of the resulting changes in fuel use over their entire lifetimes in the U.S. vehicle fleet. NHTSA's first step in estimating lifetime fuel consumption by vehicles produced during a model year is to calculate the number of vehicles that are expected to remain in service during each future year after they are produced and sold.\250\ This number is calculated by multiplying the number of vehicles originally produced during a model year by the proportion expected to remain in service at the age they will have reached during each subsequent year, often referred to as a ``survival rate.''

\250\ Vehicles are defined to be of age 1 during the calendar year corresponding to the model year in which they are produced.

Thus, for example, model year 2000 vehicles are considered to be of age 1 during calendar year 2000, age 2 during calendar year 2001, and to reach their maximum age of 26 years during calendar year 2025. NHTSA considers the maximum lifetime of vehicles to be the age after which less than 2 percent of the vehicles originally produced during a model year remain in service. Applying these conventions to vehicle registration data indicates that passenger cars have a maximum age of 26 years, while light trucks have a maximum lifetime of 36 years. See Lu, S., NHTSA, Regulatory Analysis and Evaluation

Division, ``Vehicle Survivability and Travel Mileage Schedules,''

DOT HS 809 952 (January 2006), at 8-11. Available at http://www- nrd.nhtsa.dot.gov/pdf/nrd-30/NCSA/Rpts/2006/809952.pdf (last accessed August 21, 2008).

NHTSA explained that for the number of passenger cars and light trucks that will be produced during future years, it relies on projections reported by the EIA in its AEO Reference Case forecast.\251\ For age-specific survival rates for cars and light trucks, NHTSA uses updated values estimated from yearly registration data for vehicles produced during recent model years, to ensure that forecasts of the number of vehicles in use reflect recent increases in the durability and expected life spans of cars and light trucks.\252\

These updated survival rates suggest that the typical expected lifetimes of recent-model passenger cars and light trucks are 13.8 and 14.5 years, respectively.

\251\ U.S. Energy Information Administration, Annual Energy

Outlook 200, Reference Case Table 43. Available at (last accessed

October 4, 2008).

\252\ See Lu, supra note 250, at 8-11.

NHTSA's next step in estimating fuel use was to calculate the total number of miles that the cars and light trucks produced in each model year affected by the proposed CAFE standards will be driven during each year of their lifetimes. To estimate total miles driven, the number of cars and light trucks projected to remain in use during each future year (calculated as described above) was multiplied by the average number of miles that they are expected to be driven at the age they will have reached in that year.

The agency initially estimated the average number of miles driven annually by cars and light trucks of each age using data from the

Federal Highway Administration's 2001 National Household Transportation

Survey (NHTS).\253\ The agency then adjusted the NHTS estimates of annual vehicle use to account for the effect of differences in fuel cost per mile driven between the date the NHTS was conducted and the future years when MY 2011 cars and light trucks would be in use. This adjustment is intended to account for the ``rebound effect'' on vehicle use caused by changes in fuel cost per mile (see Section V.B.8. below).

Fuel cost per mile driven is measured by the retail price of fuel per gallon forecast for a future calendar year, divided by the estimated on-road fuel economy in miles per gallon achieved by vehicles of each model year that remain in service during that future year. The agency made this adjustment by applying its estimate of the rebound effect to the difference in fuel cost per mile driven between 2001, when the NHTS was conducted, and the projected average fuel cost per mile over the lifetimes of MY 2011 cars and light trucks.

\253\ For a description of the NHTS, see http://nhts.ornl.gov/ quickStart.shtml (last accessed August 21, 2008).

Finally, NHTSA estimated fuel consumption during each calendar year of model year 2011 vehicles' lifetimes by dividing the total number of miles that that model year's surviving vehicles are driven by the fuel economy that they are expected to achieve under each alternative CAFE standard. Lifetime fuel consumption by MY 2011 cars or light trucks is the sum of the fuel use by the vehicles produced during that model year that are projected to remain in use during each year of their expected lifetimes. In turn, the savings in lifetime fuel use by MY 2011 cars or light trucks that would result from each alternative CAFE standard would be the difference between its lifetime fuel use at the fuel economy level they are projected to attain under the Baseline (No

Action) alternative, and their lifetime fuel use at the higher fuel economy level they are

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projected to achieve under that alternative standard.

As an illustration of this procedure, the revised estimates of new vehicle sales used in the final rule analysis project that 6.85 million light trucks will be produced during 2011, and NHTSA's updated survival rates showed that slightly more than half of these--50.1 percent, or 3.43 million--are projected to remain in service during the year 2025, when they will have reached an age of 14 years. At that age, the estimates of vehicle use employed in this final rule analysis indicate that light trucks achieving the fuel economy level required under the

Baseline alternative would be driven an average of 9,385 miles, assuming that the AEO 2008 High fuel price forecast proves to be correct. Thus surviving model year 2011 light trucks are projected to be driven a total of 32.20 billion miles (= 3.43 million surviving vehicles x 9,385 miles per vehicle) during 2025. Summing the results of similar calculations for each year of their 36-year maximum lifetime, the 6.85 million light trucks originally produced during MY 2011 would be driven a total of 1,185 billion miles under the Baseline alternative.

Under the Baseline alternative, MY 2011 light trucks are projected to achieve a test fuel economy level of 23.0 mpg, which corresponds to actual on-road fuel economy of 18.4 mpg (= mpg x 80 percent). Thus, their lifetime fuel use under the Baseline alternative is projected to be 64.4 billion gallons (1,185 billion miles divided by 18.4 miles per gallon). Under the Optimized CAFE standard for MY 2011, light trucks are projected to achieve a test fuel economy of 25.0 mpg, which corresponds to an actual on-road mpg of 20.0. After adjusting their average annual mileage to reflect the increase in usage that results from the rebound effect of improved fuel economy, MY 2011 light trucks are projected to be driven a total of 1,187 billion miles over their expected lifetimes. Thus their lifetime fuel consumption under the

Optimized CAFE standard is projected to amount to 59.4 billion gallons

(1,187 billion miles divided by 20.0 miles per gallon), a reduction of 5.0 billion gallons from the 64.4 billion gallons they would consume under the Baseline alternative.

NHTSA received no specific comments regarding the assumptions about vehicle survival and use described in the NPRM. The exact figures for annual vehicle use that are employed in the agency's analysis supporting the final rule are updated to reflect differences in estimated fuel economy levels under alternative CAFE standards, but are otherwise unchanged from those used in the NPRM. 7. Growth in Total Vehicle Use

In the NPRM, NHTSA also explained its assumptions for potential future growth in average annual vehicle use. By assuming that the average number of miles driven by cars and light trucks at each age-- and thus their lifetime total mileage--will remain constant over the future, NHTSA effectively assumes that future growth in total vehicle- miles driven stems only from increases in the number of vehicles in use, rather than from continuing increases in the average number of miles that cars and light trucks are driven each year.\254\ Similarly, because the survival rates used to estimate the number of cars and light trucks remaining in service to various ages are assumed to remain fixed for future model years, growth in the total number of cars and light trucks in use is effectively assumed to result only from increasing sales of new vehicles. In order to determine the validity of these assumptions, the agency conducted a detailed analysis of the causes of recent growth in total car and light truck use.

\254\ As described in the preceding section, increases in fuel economy required by CAFE standards are assumed to increase lifetime usage of cars and light trucks due to the fuel economy rebound effect. Because a vehicle's fuel economy is determined when it is produced, however, the resulting changes in its average annual use at each age and its expected lifetime mileage are also determined when it is produced. While the fuel economy rebound effect thus contributes to differences in annual and lifetime vehicle use between the Baseline alternative and Optimized CAFE standards, it is not a source of continuing growth in average annual miles per vehicle or in total annual VMT over the future.

From 1985 through 2005, the total number of miles driven (usually referred to as vehicle-miles traveled, or VMT) by passenger cars increased 35 percent, equivalent to a compound annual growth rate of 1.5 percent.\255\ During that time the total number of passenger cars registered in the U.S. grew by about 0.3 percent annually, almost exclusively as a result of increasing sales of new cars.\256\ Thus, growth in the average number of miles that passenger cars are driven each year accounted for the remaining 1.2 percent (= 1.5 percent--0.3 percent) annual growth in total passenger car use.\257\

\255\ Calculated from data reported in FHWA, Highway Statistics,

Summary to 1995, Table VM-201a, available at http:// www.fhwa.dot.gov/ohim/summary95/vm201a.xlw (last accessed August 20, 2008), and Highway Statistics Publications, Annual Editions 1996- 2005, Table VM-1, available at http://www.fhwa.dot.gov/policy/ohpi/ hss/hsspubs.cfm (last accessed October 4, 2008); follow links to individual annual editions, select Section V: Roadway Extent

Characteristics, and Performance, scroll down to section entitled

``Traffic and Travel Data,'' and select link to Table VM-1.

\256\ An increase in the fraction of new passenger cars remaining in service beyond age 10 accounted for approximately one- tenth of total growth in the U.S. automobile fleet from 1985 to 2005, while the remaining 90 percent was accounted for by growth in sales of new automobiles. The fraction of new automobiles remaining in service to various ages was computed from R.L. Polk vehicle registration data for 1997 through 2005 by the agency's Center for

Statistical Analysis.

\257\ Id.

The NPRM explained, however, that over this same period, total VMT by light trucks increased much faster, growing at an annual rate of 5.1 percent. In contrast to the causes of growth in passenger car use, nearly all growth in light truck use over these two decades was attributable to rapid increases in the number of light trucks in use.

FHWA data show that growth in total miles driven by ``Two-axle, four- tire trucks,'' a category that includes most or all light trucks subject to CAFE standards, averaged 5.1 percent annually from 1985 through 2005. However, the number of miles that light trucks are driven each year averaged 11,114 during 2005, almost unchanged from the average figure of 11,016 miles during 1985.\258\ This means that virtually all of the growth in total light truck VMT over this period resulted from growth in the number of these vehicles in service, rather than from growth in their average annual use. In turn, growth in the size of the nation's light truck fleet has resulted almost exclusively from rising production and sales of new light trucks, since the fraction of new light trucks remaining in service to various ages has remained stable or declined very slightly over the past two decades.\259\

\258\ Id.

\259\ See the Lu study, supra note 250.

On the basis of this analysis, NHTSA tentatively concluded in the

NPRM that its projections of future growth in light truck VMT account fully for the primary cause of its recent growth, which has been the rapid increase in sales of new light trucks during recent model years.

However, the assumption that average annual use of passenger cars will remain fixed over the future seemed to ignore an important source of recent growth in their total use, the gradual increase in the average number of miles they are driven. NHTSA explained that to the extent that this factor continued to represent a significant source of growth in future passenger car use, the agency's analysis would be likely to underestimate the reductions in fuel use and related environmental impacts resulting from more stringent CAFE

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standards for passenger cars.\260\ NHTSA stated that it planned to account explicitly for potential future growth in average annual use of both cars and light trucks in the analysis for the final rule. NHTSA received no specific comments to the NPRM about vehicle survival and use.

\260\ NHTSA explained that assuming that average annual miles driven per passenger car will continue to increase over the future would increase the agency's estimates of total lifetime mileage for

MY 2011 passenger cars. Their estimated lifetime fuel use would also increase under each alternative standard considered in the NPRM, but in inverse relation to their fuel economy. Thus, NHTSA explained, lifetime fuel use would increase by more under the No Increase alternative than under any of the alternatives that would increase passenger car CAFE standards, and by progressively less for the alternatives that impose stricter standards. NHTSA stated that taking account of this factor would thus increase the agency's estimates of fuel savings for those alternatives, just as omitting it would cause the agency's analysis to underestimate those fuel savings.

In its analysis for this final rule, the agency has used estimates of the annual number of miles driven by MY 2011 passenger cars and light trucks at each age of their expected lifetimes that reflect the previously-discussed adjustment for increased use due to the fuel economy rebound effect. Similarly, these estimates also reflect the effect on vehicle use of differences in fuel prices between the year 2001, when the National Household Travel Survey (NHTS), the agency's original source for its estimates of annual vehicle use by age, was conducted, and the AEO 2008 forecast of fuel prices for the period when these vehicles will be in use. As discussed briefly in the preceding section and in more detail in the following section, changes in fuel prices are also assumed to cause a rebound effect in vehicle use, because--like increases in fuel economy--variation in retail fuel prices directly affects vehicles' fuel cost per mile driven. Because future fuel prices are projected to be significantly higher than the

$1.80 (2007 dollars) average that prevailed at the time the NHTS was conducted, this adjustment reduces projected average vehicle use during future years, thus partly offsetting the effect of higher fuel economy.

Finally, the agency's estimates of vehicle use assume that the average number of miles driven by passenger cars will continue to rise by 1 percent annually, slightly below its 1.2 percent average annual growth rate over the past two decades. This growth is assumed to be independent of the changes in passenger car use that are projected to result from increased fuel economy and higher fuel prices through the rebound effect. Because average annual use of light trucks has not increased significantly over the past two decades, no future change in light truck use is assumed to occur independently of those attributable to higher fuel prices and improved fuel economy through the rebound effect.

NHTSA received no specific comments regarding the assumptions about growth in total vehicle use presented in the NPRM. The assumptions employed in the agency's analysis supporting the final rule remain unchanged from those used in the NPRM. 8. Accounting for the Rebound Effect of Higher Fuel Economy

As discussed in the NPRM, the rebound effect refers to the tendency of vehicle use to increase in response to higher fuel economy. The rebound effect occurs because an increase in a vehicle's fuel economy reduces its fuel cost for each mile driven (typically the largest single component of the cost of operating a vehicle), and vehicle owners take advantage of this reduced cost by driving more. Even with higher fuel economy, this additional driving uses some fuel, so the rebound effect reduces the fuel savings that would otherwise result when fuel economy standards require manufacturers to increase fuel economy. The rebound effect is usually expressed as the percentage by which annual vehicle use increases when the cost of driving each mile declines, due either to an increase in fuel economy or a reduction in the retail price of fuel.

The rebound effect is an important parameter in NHTSA's evaluation of alternative CAFE standards for future model years, because it affects the actual fuel savings that are likely to result from adopting stricter standards. The rebound effect can be measured by estimating the elasticity of vehicle use with respect either to fuel economy itself, or to fuel cost per mile driven.\261\ When expressed as a positive percentage, either of these parameters gives the fraction of fuel savings that would be expected to result from increased fuel economy, but is offset by the added fuel use that occurs when vehicles with higher fuel economy are driven more.

\261\ Fuel cost per mile is equal to the price of fuel in dollars per gallon divided by fuel economy in miles per gallon, so fuel cost per mile declines when a vehicle's fuel economy increases.

In the NPRM, NHTSA summarized existing research on the rebound effect in order to explain its rationale for choosing the estimate of 15 percent it employed in analyzing alternative MY 2011-2015 fuel economy standards; the following paragraphs repeat NHTSA's summary for the reader's benefit.

Research on the magnitude of the rebound effect in light-duty vehicle use dates to the early 1980s, and almost unanimously concludes that a statistically-significant rebound effect occurs when vehicle fuel efficiency improves.\262\ The most common approach to estimating its magnitude has been to analyze household survey data on vehicle use, fuel consumption, fuel prices (often obtained from external sources), and other determinants of household travel demand to isolate the response of vehicle use to higher fuel economy. Other studies have relied on econometric analysis of annual U.S. data on vehicle use, fuel economy, fuel prices, and other variables to identify the response of total or average vehicle use to changes in fuel economy. Two recent studies analyzed yearly variation in vehicle ownership and use, fuel prices, and fuel economy among individual states over an extended time period in order to measure the response of vehicle use to changing fuel economy. Most studies measure the influence of fuel economy on vehicle use indirectly through its effect on fuel cost per mile driven, although a few attempt to measure the direct effect of fuel economy on vehicle use.

\262\ Most studies estimate that the long-run rebound effect is significantly larger than the immediate response to increased fuel efficiency, since over a longer period drivers have more opportunities to adjust their vehicle use to changes in fuel costs.

This long-run effect is more appropriate for evaluating the fuel savings likely to result from stricter CAFE standards, since the increases in fuel economy they require would reduce fuel costs over the entire lifetimes of vehicles they affect. These lifetimes can extend up to 25 years for passenger cars, and up to 36 years for light trucks.

An important distinction among studies of the rebound effect is whether they assume that the effect is constant, or varies over time in response to prevailing fuel prices, fuel economy levels, personal income, and household vehicle ownership. This distinction is important because studies that allow the rebound effect to vary in response to changes in these factors are likely to provide more reliable forecasts of its future value.

In order to arrive at a preliminary estimate of the rebound effect for use in assessing the fuel savings, emissions reductions, and other impacts of the alternative standards, NHTSA reviewed 22 studies of the rebound effect conducted from 1983 through 2007. NHTSA then conducted a detailed analysis of the 66 separate estimates of the long-run rebound effect reported in these studies, which is summarized in

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Table V-2 below.\263\ As the table indicates, historical estimates of the long-run rebound effect range from as low as 7 percent to as high as 75 percent, with a mean of 23 percent. A higher rebound effect means that more of the savings in fuel use expected to result from higher fuel economy will be offset by additional driving, so that less fuel savings will actually result.

\263\ Some studies did not separately present the overall rebound effect, so NHTSA derived estimates of the overall rebound effect when the studies reported more detailed results. For example, when studies estimated different rebound effects for households owning different numbers of vehicles, but did not report an overall rebound effect, NHTSA computed a weighted average of the reported values using the distribution of households among vehicle ownership categories.

Limiting the sample of rebound effect estimates to the 50 estimates reported in the 17 published studies yields the same range but a slightly higher mean (24 percent), while focusing on the authors' preferred estimates from published these studies narrows this range and lowers its average slightly. In all three cases, the median estimate of the rebound effect, which is less likely to be influenced by unusually small and large estimates, is 22 percent. As Table V-2 indicates, approximately two-thirds of all estimates reviewed, all published estimates, and authors' preferred estimates fall in the range of 10 to 30 percent.

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The type of data used and authors' assumptions about whether the rebound effect varies over time have important effects on its estimated magnitude, although the reasons for these patterns are difficult to identify. As the table shows, the 34 estimates derived from analysis of

U.S. annual time-series data produce a median estimate of 14 percent for the long-run rebound effect, while the median of the 23 estimates based on household survey data is more than twice as large (31 percent). The 37 estimates from studies that assume a constant rebound effect produce a median of 20 percent, while the 29 estimates from studies allowing the rebound to vary have a slightly higher median value (23 percent).

In selecting a value for the rebound effect to use in analyzing alternative fuel economy standards for this rulemaking, NHTSA attached greater significance to

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studies that allow the rebound effect to vary in response to changes in the factors that affect its magnitude. The agency's view is that updating their estimates to reflect current economic conditions provides a more reliable indication of its likely magnitude over the lifetimes of vehicles that will be affected by those standards. As

Table V-2 reports, recalculating these 29 original estimates using 2006 values for retail fuel prices, average fuel economy, personal income, and household vehicle ownership reduces their median estimate to 16 percent.\264\ Considering the empirical evidence on the rebound effect as a whole, but according greater importance to the updated estimates from studies allowing the rebound effect to vary, NHTSA selected a rebound effect of 15 percent in the NPRM to evaluate the fuel savings and other effects of the alternative fuel economy standards. However,

NHTSA stated that it did not believe that evidence of the rebound effect's dependence on fuel prices or household income is sufficiently convincing to justify allowing its future value to vary in response to forecast changes in these variables. A range extending from 10 percent to at least 20 percent, and perhaps as high as 25 percent, appeared to

NHTSA to be appropriate for the required analysis of the uncertainty surrounding these estimates. While the agency selected 15 percent, it also conducted analyses using rebound effects of 10 and 20 percent. The results of these sensitivity analyses are shown in the FEIS at Section 3.4.4.2.

\264\ As an illustration, Small and Van Dender (2005) allow the rebound effect to vary over time in response to changes in real per capita income as well as in response to average fuel cost per mile driven. While their estimate for the entire interval (1966-2001) that they analyze is 22 percent, updating this estimate using 2007 values of these variables reduces the rebound effect to about 10 percent. Similarly, updating Greene's 1992 original estimate of a 15 percent rebound effect to reflect 2007 fuel prices and average fuel economy reduces it to approximately 7 percent. See David L. Greene,

``Vehicle Use and Fuel Economy: How Big is the Rebound Effect?'' The

Energy Journal, 13:1 (1992), at 117-143.

In contrast, the distribution of households among vehicle ownership categories in the data samples used by Hensher et al.

(1990) and Greene et al. (1999) are nearly identical to the most recent estimates for the U.S., so updating their original estimates to current U.S. conditions changes them very little. See David A.

Hensher, Frank W. Milthorpe, and Nariida C. Smith, ``The Demand for

Vehicle Use in the Urban Household Sector: Theory and Empirical

Evidence,'' Journal of Transport Economics and Policy, 24:2 (1990), at 119-137; see also David L. Greene, James R. Kahn, and Robert C.

Gibson, ``Fuel Economy Rebound Effect for Household Vehicles,'' The

Energy Journal, 20:3 (1999), at 1-21.

The only commenter suggesting that NHTSA use a larger rebound effect than 15 percent was the Alliance, which based its comments on analyses it commissioned from Sierra Research and NERA Economic

Consulting, Inc. Sierra Research cited a 1999 paper by David Greene, et al., at ORNL as evidence that the long-run rebound effect should be 20 percent,\265\ and stated further that NHTSA used a rebound effect of 20 percent in its April 2003 final rule setting fuel economy standards for

MY 2005-2007 light trucks. Sierra Research assumed a 17 percent rebound effect in its analysis for the Alliance ``to be conservative.'' NERA's report argued that NHTSA should use a rebound effect of 20 percent, because 15 percent gave ``disproportionate weight'' to the Small and

Van Dender study, which NERA called ``a single study with empirical limitations.'' NERA stated that its analysis ``corrected'' the Small and Van Dender model, the primary correction apparently being to

``properly account for differences in the cost of living across states,'' with respect to income and fuel prices. NERA consequently used a 24 percent rebound effect for its report.

\265\ David L. Greene, et al., ``Fuel Economy Rebound Effect for

U.S. Household Vehicles,'' The Energy Journal, Vol. 20, No. 3, 1999.

Other commenters, including CARB, UCS, EDF, Public Citizen, CFA, and Mark Delucchi, argued that NHTSA should use a lower rebound effect than 15 percent, generally because Small and Van Dender's recent study found a lower rebound effect. CARB, for example, commented that while it is true that the consensus estimate of past studies is that the rebound effect should be 15 percent, Small and Van Dender had found a long-run rebound effect of 4.9 percent for the 1997-2001 period in

California due to higher incomes, and that it would decline even further by 2020. Thus, CARB argued, NHTSA should accept ``two critical findings'' of the Small and Van Dender study, specifically that (1) the future value of the rebound effect would decline as household real income increases; and that (2) as fuel prices increase, people spend a larger share of their income on fuel purchases, thus becoming more sensitive to fuel prices. CARB stated that NHTSA should use a rebound effect of no higher than 10 percent, and conduct a sensitivity analysis using a rebound effect of 5 percent.

UCS similarly commented that if NHTSA intends to ``attach greater significance'' to the Small and Van Dender study, as NHTSA stated in the NPRM, then it must accept Small and Van Dender's conclusion ``that the rebound effect in the U.S. is small and has been getting smaller.''

Thus, UCS argued, NHTSA should employ a rebound effect of no greater than 10 percent, and only if NHTSA used higher fuel prices in the final rule. UCS implied, however, that NHTSA should apply no rebound effect at all unless it used higher fuel prices in the final rule, citing a 2005 final report by Small and Van Dender to CARB as stating that ``* *

* [the authors] cannot prove that there is any rebound effect resulting from stricter fuel efficiency regulations * * *.'' Mr. Delucchi also commented that NHTSA should use a lower rebound effect because the agency should ``give more weight to Small and Van Dender,'' although he did not explain how the agency should give this additional weight. Mr.

Delucchi also stated that a recent study by Hughes et al. ``found a very low short-run price elasticity of demand for gasoline.''

EDF and Public Citizen focused on other findings in the Small and

Van Dender study to argue for a lower rebound effect. EDF commented that NHTSA should not have selected a 15 percent rebound effect based on existing rebound effect literature, because when Small and Van

Dender reviewed the literature, the authors suggested ``that many prior studies have overestimated the rebound effect because of some model specification problems, such as not allowing for the fact that fuel efficiency is endogenous, i.e., driving more efficient cars might encourage more driving, but long commutes might encourage purchase of more fuel efficient vehicles.'' EDF argued that because Small and Van

Dender's study did not have these biases, NHTSA should use a 10 percent rebound effect, ``to be consistent with the latest findings and to reflect current conditions of income, urbanization and fuel costs.''

EDF also suggested that the rebound effect may be zero, citing

Greene's 2005 testimony before the House of Representatives Science

Committee that ``the rebound effect could be reduced to negligible if we `[take] into account the fact that increased fuel economy will increase the price of vehicles together with the likelihood that governments will respond to losses in highway revenues by raising motor fuel taxes.' '' Public Citizen focused on Small and Van Dender's finding that ``most empirical measurements of the rebound effect rely heavily on variations in the fuel price,'' stating that this ``again raises the question of whether NHTSA's assumptions about the rebound effect are colored by the estimates of future fuel prices.''

CFA commented that NHTSA should use a rebound effect of no higher than

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5 percent, citing a recent analysis by the Congressional Budget Office that rising real incomes have made consumers much less responsive to short-run changes in gasoline prices. CFA thus argued that since gasoline is more expensive now, NHTSA was incorrect to assume ``that consumers irrationally burn up their fuel savings on increased driving, rather than use it to buy other goods and services and applied this

`rebound' effect to analyses where it should not play a role.'' CFA also argued that NHTSA should have identified and provided more information about the conclusions in each of the studies it reviewed in developing its number for the rebound effect.

Agency response: NHTSA has updated the 29 estimates from studies that allowed the rebound effect to vary to reflect 2008 fuel prices, fuel economy, vehicle ownership levels, and household income. The resulting updated estimates are significantly higher than those reported in the NPRM, primarily because of the large increase in fuel prices since 2006 (the date to which the estimates reported in the NPRM were updated). The updated 2008 estimates of the fuel economy rebound effect range from 8 percent to 46 percent, with a median value of 19 percent. Using the average retail gasoline price forecast for 2011-30 from the AEO 2008 High Price case, the projected estimates of the rebound effect for those years would range from 7 percent to 46 percent, with a median value of 19 percent.

NHTSA also notes that the forecast of fuel prices used to develop its adopted CAFE standards for MY 2011 projects that retail gasoline prices will continue to rise by somewhat more than 1 percent annually over the lifetimes of vehicles affected by those standards. At the same time, real household incomes are projected to grow by about 2 percent annually over this same period. Given the relative sensitivity of the

Small and Van Dender rebound effect estimate to changes in fuel prices and income, these forecasts suggest that future growth in fuel prices is likely to offset a significant fraction of the projected decline in the rebound effect that would result from income growth.

In response to the comment by EDF citing Greene's statement that the rebound effect could be negligible over the foreseeable future,

NHTSA notes that increases in the purchase price or ownership cost of vehicles may not significantly affect the marginal cost of additional vehicle use, since the depreciation and financing components of vehicle ownership costs vary only minimally with vehicle use. In addition, the agency notes that Greene's assertion that governments are likely to respond to losses in fuel tax revenues by raising fuel tax rates (thus increasing retail fuel prices) is highly speculative, and there is limited evidence that this has actually occurred in response to recent declines in state fuel tax revenues.\266\

\266\ Federal Highway Administration data show that fuel tax revenues declined in only 5 of the 50 states between 2000 and 2006, and that none of these states raised gasoline taxes over that same period; see FHWA, Highway Statistics 2006, Table MF-205, available at http://www.fhwa.dot.gov/policy/ohim/hs06/pdf/mf205.pdf (last accessed November 13, 2008), Table MF-1 available at http:// www.fhwa.dot.gov/policy/ohim/hs06/xls/mf1.xls (last accessed

November 13, 2008), and Highway Statistics 2000, Table MF-1 available at http://www.fhwa.dot.gov/ohim/hs00/xls/mf1.xls (last accessed November 13, 2008).

In light of these results, NHTSA has elected to continue to use a 15 percent rebound effect in its analysis of fuel savings and other benefits from higher CAFE standards for this final rule. Recognizing the uncertainty surrounding this estimate, the agency has analyzed the sensitivity of its benefits estimates to a range of values for the rebound effect from 10 percent to 20 percent. In its future CAFE rulemaking activities, NHTSA will review all new available data and consider whether and to what extent any assumptions regarding the rebound effect merit revising based on that data. 9. Benefits From Increased Vehicle Use

The NPRM explained that NHTSA also values the additional benefits that derive from increased vehicle use due to the rebound effect. This additional mobility provides drivers and their passengers better access to social and economic opportunities away from home, because they are able to make longer or more frequent trips. The amount by which the total benefits from this additional travel exceed its costs (for fuel and other operating expenses) measures the net benefits that drivers receive from the additional travel, usually referred to as increased consumer surplus. NHTSA's analysis estimates the economic value of this increased consumer surplus using the conventional approximation, which is one half of the product of the decline in vehicle operating costs per mile and the resulting increase in the annual number of miles driven. The NPRM noted that the magnitude of these benefits represents a small fraction of the total benefits from the alternative fuel economy standards considered.

In its comment on the NPRM, NERA speculated that NHTSA ``may have miscalculated the `consumer surplus' associated with the additional driving due to the rebound effect.'' NERA stated that NHTSA

* * * describes its calculation in terms of the conventional triangle under the demand curve but above the price paid. However, it appears that instead NHTSA estimated the total area under the demand curve for the extra VMT traveled. That is appropriate if

NHTSA's estimates of net savings in fuel expenditures include additional expenditures on the additional fuel consumed as a result of the rebound effect.

NHTSA notes in response to NERA's comment that its estimates of net savings in fuel expenditures do reflect the costs for additional fuel consumed as a result of increased rebound-effect driving. Thus the agency has correctly calculated the increase in consumer surplus associated with the additional driving due to the rebound effect. Since it received no other comments on the estimates of benefits from increased vehicle use presented in the NPRM, NHTSA has calculated these benefits using the same procedure in its analysis supporting this final rule. 10. Added Costs From Congestion, Crashes, and Noise

NHTSA also factors in the additional costs from increased traffic congestion, motor vehicle accidents, and highway noise that result from additional vehicle use associated with the rebound effect. Increased vehicle use can contribute to traffic congestion and delays by increasing traffic volumes on facilities that are already heavily traveled, which may cost drivers more in terms of increased travel time and operating expenses. Increased vehicle use can also increase the external costs associated with traffic accidents; although drivers may consider the costs they (and their passengers) might face from the possibility of being involved in a traffic accident when they decide to make additional trips, it is very unlikely that they account for the potential ``external'' costs that any accident imposes on the occupants of other vehicles or on pedestrians.

Finally, increased vehicle use can also contribute to traffic noise, which causes inconvenience, irritation, and potentially even discomfort to occupants of other vehicles, to pedestrians and other bystanders, and to residents or occupants of surrounding property.

Since drivers are unlikely to consider the effect their vehicle's noise has on others, noise represents another externality that NHTSA attempts to account for. Any increase in these externality costs, however, is dependent on the traffic conditions under which

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additional rebound-effect driving takes place.

In the NPRM, NHTSA relied on estimates developed by the Federal

Highway Administration (FHWA) of the increased external costs of congestion, accidents (property damage and injuries), and noise costs caused by added driving due to the rebound effect.\267\ These estimates are intended to measure the increases in costs due to these externalities caused by automobiles and light trucks that are borne by persons other than their drivers, or ``marginal'' external costs.

Updated to 2007 dollars, FHWA's ``Middle'' estimates for marginal congestion, accident, and noise costs caused by automobile use amount to 5.4 cents, 2.3 cents, and 0.1 cents per vehicle-mile (or 7.8 cents per vehicle-mile in total), while costs for light trucks are 4.8 cents, 2.6 cents, and 0.1 cents per vehicle-mile (7.5 cents per vehicle-mile in total).\268\ These costs are multiplied by the annual increases in automobile and light truck use from the rebound effect to yield the estimated increases in congestion, accident, and noise externality costs during each future year.

\267\ These estimates were developed by FHWA for use in its 1997

Federal Highway Cost Allocation Study. See http://www.fhwa.dot.gov/ policy/hcas/final/index.htm (last accessed October 5, 2008).

\268\ Id., at Tables V-22, V-23, and V-24 (last accessed October 5, 2008).

NHTSA received comments from the Alliance and from the Mercatus

Center on the increased costs from congestion, crashes, and noise due to the rebound effect. The Alliance submitted an analysis by NERA

Economic Consulting that argued that NHTSA had underestimated the increased costs from congestion, crashes, and noise. The NERA analysis disagreed with NHTSA's method for updating the FHWA estimates, arguing that it was unclear exactly how NHTSA had updated the FHWA values to 2006 dollars. The NERA analysis also argued that FHWA's estimate was

``based on a value of $12.38 per vehicle hour (in 1994 dollars),'' while NHTSA used a value of $24 per vehicle hour ``to value time savings it estimates would result from fewer fill-ups as a result of higher MPG and increased range for a tank of fuel.'' Thus, the NERA analysis concluded that NHTSA had overvalued the time savings, which

NERA seemed to attribute to its belief that NHTSA does not value time spent in traffic congestion ``at least as highly as time spent in service stations while filling up.'' \269\ Thus, the NERA analysis argued that congestion costs per mile would increase by about 68 percent if NHTSA had updated FHWA's estimates in a ``consistent'' manner with ``NHTSA's valuation of time savings for vehicle occupants in another part of its analysis.''

\269\ NERA appears to suggest that time spent in service stations while filling up includes the fact that ``stops at service stations often serve multiple purposes, not just refueling.'' NERA then appears to suggest that people feel similarly about time spent in traffic congestion.

The NERA analysis also argued that the baseline 1997 congestion values ``should be adjusted upward even more to reflect increasing levels of congestion between then and now and the further increases likely'' within the lifetimes of the vehicles, the basis for NHTSA's cost analysis. The analysis stated that this was because ``With higher baseline congestion, the marginal impact of additional VMT will increase because congestion, like other queuing phenomena, increases at an increasing rate as capacity utilization grows.''

NERA also argued more generally that increased costs from congestion, crashes, and noise are proportional to the rebound effect, which means that a higher rebound effect would result in higher costs.\270\

\270\ NERA suggested using a rebound elasticity of -0.2 instead of -0.15, which it claimed would increase the costs from congestion, crashes, and noise by about one third.

The NERA analysis did not cover NHTSA's estimates of accident and noise costs per mile, but cited the same RFF study referred to in the

NPRM to say that it ``estimated a value per mile roughly 20 percent higher ($0.030 vs. $0.025) than NHTSA's.''

The Mercatus Center focused only on congestion costs, and commented that NHTSA should consider ``The possibility that the cost of increased congestion, a product of the `rebound effect,' does not take into account likely increasing marginal costs as considered in NHTSA's model.'' The commenter stated that NHTSA's estimates ``implicitly assume[] a constant marginal cost of congestion across all possible total quantities of vehicle miles driven for each vehicle category.''

However, it cited the FHWA study as stating that congestion cost impacts are ``extremely sensitive'' to peak versus off-peak traffic periods. Thus, the commenter argued, if the costs can vary within a day

(as during peak and off-peak periods), they must certainly vary across years, if the total amount of traffic varies across years as well. In essence, if VMT increases, total congestion and the marginal cost of congestion must also increase, all other things held constant.

However, if all other things are not held constant, e.g., if new roads are built to handle increasing traffic, the commenter argued that

``total congestion does not necessarily increase with increases in total vehicle miles driven.'' The commenter argued that NHTSA should include an estimate of the costs of building additional roads or altering existing ones to mitigate congestion due to the rebound effect. That estimate should include accounting for ``the increasing difficulty of building a new road in an urbanized area,'' which the commenter stated is ``probably one of the best examples of an activity that has rapidly increasing marginal costs,'' as well as the environmental costs of building new roads, i.e., costs due to sprawl.

The commenter asserted that ``It is incumbent upon NHTSA and the

Environmental Protection Agency to produce an inclusive estimate of the costs of the rebound effect--one that either includes both increasing marginal cost of congestion and the cost of the new roads that will lead to increased congestion.''

The Mercatus Center also pointed out an apparent inconsistency in the NPRM in the reporting of FHWA's estimates of passenger car versus light truck costs for increased congestion, crashes, and noise.

For this final rule, NHTSA has corrected the inconsistency in the

NPRM's reporting of external costs from additional automobile and light truck use noted by the Mercatus Center.

NHTSA notes that congestion cost associated with additional travel may be particularly high if it occurs during peak travel periods and on facilities that are already heavily utilized. However, the FHWA estimates of increased congestion costs from added vehicle use assume that the increase in travel is distributed over the hours of the day and among specific routes in proportion to the existing temporal and geographic distributions of total VMT. Thus while some of the additional travel may impose significant costs for additional congestion and delays, much of it is likely to occur at times and locations where excess roadway capacity is available and congestion costs imposed by added vehicle use are minimal.

NHTSA believes it is reasonable to assume that additional vehicle use due to the fuel economy rebound effect will be distributed over the day and among locations in much the same way as current travel is distributed. As a consequence, the FHWA estimates of congestion costs from increased vehicle use are likely to provide more accurate estimates of the increased congestion

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costs caused by added rebound-effect driving than are the estimates submitted by commenters, which apply to peak travel periods and locations that experience high traffic volumes. Thus in the analysis supporting the final rule, NHTSA has continued to rely upon the FHWA values to estimate the increase in congestion costs likely to result from added rebound-effect driving. 11. Petroleum Consumption and Import Externalities

The NPRM also discussed the fact that U.S. consumption and imports of petroleum products also impose costs on the domestic economy that are not reflected in the market price for crude petroleum, or in the prices paid by consumers of petroleum products such as gasoline. In economics literature on this subject, these costs include (1) higher prices for petroleum products resulting from the effect of U.S. oil import demand on the world oil price; (2) the risk of disruptions to the U.S. economy caused by sudden reductions in the supply of imported oil to the U.S.; and (3) expenses for maintaining a U.S. military presence to secure imported oil supplies from unstable regions, and for maintaining the Strategic Petroleum Reserve (SPR) to cushion against resulting price increases.\271\ Higher U.S. imports of crude oil or refined petroleum products increase the magnitude of these external economic costs, thus increasing the true economic cost of supplying transportation fuels above the resource costs of producing them.

Conversely, reducing U.S. imports of crude petroleum or refined fuels or reducing fuel consumption can reduce these external costs. Any reduction in their total value that results from improved passenger car and light truck fuel economy represents an economic benefit of setting more stringent CAFE standards, in addition to the value of fuel savings and emissions reductions themselves.

\271\ See, e.g., Bohi, Douglas R. and W. David Montgomery

(1982). Oil Prices, Energy Security, and Import Policy, Washington,

DC, Resources for the Future, Johns Hopkins University Press; Bohi,

D.R. and M.A. Toman (1993). ``Energy and Security: Externalities and

Policies,'' Energy Policy 21: 1093-1109; and Toman, M.A. (1993).

``The Economics of Energy Security: Theory, Evidence, Policy,'' in

A.V. Kneese and J.L. Sweeney, eds. (1993). Handbook of Natural

Resource and Energy Economics, Vol. III, Amsterdam, pp. 1167-1218.

NHTSA explained that increased U.S. oil imports can impose higher costs on all purchasers of petroleum products, because the U.S. is a sufficiently large purchaser of foreign oil supplies that changes in

U.S. demand can affect the world price. The effect of U.S. petroleum imports on world oil prices is determined by the degree of OPEC monopoly power over global oil supplies, and the degree of monopsony power over world oil demand exerted by the U.S. The combination of these two factors means that increases in domestic demand for petroleum products that are met through higher oil imports can cause the price of oil in the world market to rise, which imposes economic costs on all other purchasers in the global petroleum market in excess of the higher prices paid by U.S. consumers.\272\ Conversely, reducing U.S. oil imports can lower the world petroleum price, and thus generate benefits to other oil purchasers by reducing these ``monopsony costs.''

\272\ For example, if the U.S imports 10 million barrels of petroleum per day at a world oil price of $20 per barrel, its total daily import bill is $200 million. If increasing imports to 11 million barrels per day causes the world oil price to rise to $21 per barrel, the daily U.S. import bill rises to $231 million. The resulting increase of $31 million per day is attributable to increasing daily imports by only 1 million barrels. This means that the incremental cost of importing each additional barrel is $31, or

$10 more than the newly-increased world price of $21 per barrel.

This additional $10 per barrel represents a cost imposed on all other purchasers in the global petroleum market by U.S. buyers, in excess of the price they pay to obtain those additional imports.

NHTSA stated that although the degree of current OPEC monopoly power is subject to debate, the consensus appears to be that OPEC remains able to exercise some degree of control over the response of world oil supplies to variation in world oil price so that the world oil market does not behave completely competitively.\273\ The extent of

U.S. monopsony power is determined by a complex set of factors, including the relative importance of U.S. imports in the world oil market, and the sensitivity of petroleum supply, and demand to its world price among other participants in the international oil market.

Most evidence appears to suggest that variation in U.S. demand for imported petroleum continues to exert some influence on world oil prices, although this influence appears to be limited.\274\

\273\ For a summary of this issue, see Leiby, Paul N., Donald W.

Jones, T. Randall Curlee, and Russell Lee, Oil Imports: An

Assessment of Benefits and Costs, ORNL-6851, Oak Ridge National

Laboratory, November 1, 1997, at 17. Available at http:// pzl1.ed.ornl.gov/ORNL6851.pdf (last accessed August 26, 2008).

\274\ Id., at 18-19.

The second component of external economic costs imposed by U.S. petroleum imports that NHTSA considered arises partly because an increase in oil prices triggered by a disruption in the supply of imported oil reduces the level of output that the U.S. economy can produce. The reduction in potential U.S. economic output depends on the extent and duration of the increases in petroleum product prices that result from a disruption in the supply of imported oil, as well as on whether and how rapidly these prices return to pre-disruption levels.

Even if prices for imported oil return completely to their original level, however, economic output will be at least temporarily reduced from the level that would have been possible without a disruption in oil supplies.

Because supply disruptions and resulting price increases tend to occur suddenly rather than gradually, they can also impose costs on businesses and households for adjusting their use of petroleum products more rapidly than if the same price increase had occurred gradually over time. These adjustments impose costs because they temporarily reduce economic output even below the level that would ultimately be reached once the U.S. economy completely adapted to higher petroleum prices. The additional costs to businesses and households reflect their inability to adjust prices, output levels, and their use of energy and other resources quickly and smoothly in response to rapid changes in prices for petroleum products.

Since future disruptions in foreign oil supplies are an uncertain prospect, each of these disruption costs must be adjusted by the probability that the supply of imported oil to the U.S. will actually be disrupted. The ``expected value'' of these costs--the product of the probability that an oil import disruption will occur and the costs of reduced economic output and abrupt adjustment to sharply higher petroleum prices--is the appropriate measure of their magnitude. Any reduction in these expected disruption costs resulting from a measure that lowers U.S. oil imports represents an additional economic benefit beyond the direct value of savings from reduced purchases of petroleum products.

While the vulnerability of the U.S. economy to oil price shocks is widely thought to depend on total petroleum consumption rather than on the level of oil imports, variation in imports is still likely to have some effect on the magnitude of price increases resulting from a disruption of import supply. In addition, changing the quantity of petroleum imported into the U.S. may also affect the probability that such a disruption will occur. If either the size of the likely price increase or the probability that U.S. oil supplies will be disrupted is affected by oil imports, the expected value of the costs from a

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supply disruption will also depend on the level of imports.

NHTSA explained that businesses and households use a variety of market mechanisms, including oil futures markets, energy conservation measures, and technologies that permit rapid fuel switching to

``insure'' against higher petroleum prices and reduce their costs for adjusting to sudden price increases. While the availability of these market mechanisms has likely reduced the potential costs of disruptions to the supply of imported oil, consumers of petroleum products are unlikely to take account of costs they impose on others, so those costs are probably not reflected in the price of imported oil. Thus, changes in oil import levels probably continue to affect the expected cost to the U.S. economy from potential oil supply disruptions, although this component of oil import costs is likely to be significantly smaller than estimated by studies conducted in the wake of the oil supply disruptions during the 1970s.

The third component that NHTSA identified of the external economic costs of importing oil into the U.S. includes government outlays for maintaining a military presence to secure the supply of oil imports from potentially unstable regions of the world and to protect against their interruption. Some analysts also include outlays for maintaining the U.S. Strategic Petroleum Reserve (SPR), which is intended to cushion the U.S. economy against the consequences of disruption in the supply of imported oil, as additional costs of protecting the U.S. economy from oil supply disruptions.

NHTSA expressed its belief that while costs for U.S. military security may vary over time in response to long-term changes in the actual level of oil imports into the U.S., these costs are unlikely to decline in response to any reduction in U.S. oil imports resulting from raising future CAFE standards for passenger cars and light trucks. U.S. military activities in regions that represent vital sources of oil imports also serve a broader range of security and foreign policy objectives than simply protecting oil supplies, and as a consequence are unlikely to vary significantly in response to changes in the level of oil imports prompted by higher standards.

Similarly, NHTSA stated that while the optimal size of the SPR from the standpoint of its potential influence on domestic oil prices during a supply disruption may be related to the level of U.S. oil consumption and imports, its actual size has not appeared to vary in response to recent changes in oil imports. Thus while the budgetary costs for maintaining the SPR are similar to other external costs in that they are not likely to be reflected in the market price for imported oil, these costs do not appear to have varied in response to changes in oil import levels.

In analyzing benefits from its recent actions to increase light truck CAFE standards for model years 2005-2007 and 2008-2011, NHTSA relied on a 1997 study by Oak Ridge National Laboratory (ORNL) to estimate the value of reduced economic externalities from petroleum consumption and imports.\275\ More recently, ORNL updated its estimates of the value of these externalities, using the analytic framework developed in its original 1997 study in conjunction with recent estimates of the variables and parameters that determine their value.\276\ These include world oil prices, current and anticipated future levels of OPEC petroleum production, U.S. oil import levels, the estimated responsiveness of oil supplies and demands to prices in different regions of the world, and the likelihood of oil supply disruptions. ORNL prepared its updated estimates of oil import externalities for use by EPA in evaluating the benefits of reductions in U.S. oil consumption and imports expected to result from its

Renewable Fuel Standard Rule of 2007 (RFS).\277\

\275\ Id.

\276\ Leiby, Paul N., ``Estimating the Energy Security Benefits of Reduced U.S. Oil Imports: Final Report,'' Oak Ridge National

Laboratory, ORNL/TM-2007/028, Revised March 14, 2008. Available at http://pzl1.ed.ornl.gov/energysecurity.html (click on link below

``Oil Imports Costs and Benefits'') (last accessed August 26, 2008).

\277\ 72 FR 23899 (May 1, 2007).

The updated ORNL study was subjected to a detailed peer review by experts nominated by EPA, and its estimates of the value of oil import externalities were subsequently revised to reflect their comments and recommendations.\278\ Specifically, reviewers recommended that ORNL increase its estimates of the sensitivity of oil supply by non-OPEC producers and oil demand by nations other than the U.S. to changes in the world oil price, as well as reduce its estimate of the sensitivity of U.S. GDP to potential sudden increases in world oil prices.

\278\ Peer Review Report Summary: Estimating the Energy Security

Benefits of Reduced U.S. Oil Imports, ICF, Inc., September 2007.

After making the revisions recommended by peer reviewers, ORNL's updated estimates of the monopsony cost associated with U.S. oil imports ranged from $2.77 to $13.11 per barrel, with a most likely estimate of $7.41 per barrel (in 2005 dollars). These estimates imply that each gallon of fuel saved as a result of adopting higher CAFE standards will reduce the monopsony costs of U.S. oil imports by $0.066 to $0.312, with the most likely value $0.176 per gallon saved. ORNL's updated and revised estimates of the increase in the expected costs associated with oil supply disruptions to the U.S. and the resulting rapid increase in prices for petroleum products amount to $2.10 to

$7.40 per barrel, with a likely estimate of $4.59 per barrel (again in 2005 dollars). According to these estimates, each gallon of fuel saved will reduce the expected cost disruption to the U.S. economy by $0.050 to $0.176 per gallon, with the most likely value $0.109 per gallon.

NHTSA stated that when updated to 2006 dollars, the updated and revised ORNL estimates suggest that the combined reduction in monopsony costs and expected costs to the U.S. economy from oil supply disruptions resulting from lower fuel consumption total $0.120 to

$0.504 per gallon, with a most likely estimate of $0.295 per gallon.

This represents the additional economic benefit likely to result from each gallon of fuel saved by higher CAFE standards, beyond the savings in resource costs for producing and distributing each gallon of fuel saved. NHTSA explained that it employed this most likely estimate in its analysis of the benefits from fuel savings projected to result from alternative CAFE standards for MYs 2011-2015. NHTSA also analyzed the effect on these benefits estimates from variation in this value over the range from $0.120 to $0.504 per gallon of fuel saved.

NHTSA's analysis of benefits from alternative CAFE standards for the NPRM did not include cost savings from either reduced outlays for

U.S. military operations or maintaining a smaller SPR among the external benefits of reducing gasoline consumption and petroleum imports by means of tightening future standards. NHTSA stated that this view concurs with both the original ORNL study of economic costs from

U.S. oil imports and its recent update, which conclude that savings in government outlays for these purposes are unlikely to result from reductions in consumption of petroleum products and oil imports on the scale of those likely to result from reductions in consumption of petroleum products and oil imports on the scale of those likely to result from the alternative increases in CAFE standards considered for

MYs 2011-2015.

All commenters addressing the issue of military costs argued that

NHTSA should use a value higher than zero. Mr. Delucchi, CARB, and the

Attorneys General all cited Mr. Delucchi's 2008

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peer-reviewed article in Energy Policy \279\ to argue that military costs should be higher than zero. CARB commented that the study

``undermines the 15-year-old logic from a Congressional Research Study, which NHTSA appears to adopt here (page 24411), which concluded we have so many other security interests in the Middle East that sharply reducing oil imports, therefore, would not affect our military expense there.'' CARB argued that ``to the contrary, the Energy Policy study authors conclude `spending on defense of the Persian Gulf is in fact related to U.S. interests in the region, which are mainly, but not entirely, oil interests.' '' CARB cited the study as stating that the

``best estimate of this relationship translates to $0.03-$0.15 per gallon * * *'' The Attorneys General also cited the Energy Policy article as assigning ``values to the military savings attributable to decreased oil imports,'' and referenced the same per-gallon conclusion.

\279\ Mark A. Delucchi and James J. Murphy, ``U.S. military expenditures to protect the use of Persian Gulf oil for motor vehicles,'' 36 Energy Policy 2253 (2008). Available at Docket No.

NHTSA-2008-0089-0173.14.

The Attorneys General also argued that given that ``one of the primary purposes of EISA is to achieve energy security,'' and given that the ``impact of higher CAFE standards on energy security is not zero,'' it was ``astounding'' that ``NHTSA assigned a value of zero to the government outlay aspect of energy security (increased military spending and purchases for the Strategic Petroleum Reserve).''

(Emphasis in original.) The Attorneys General compared NHTSA's decision not to monetize military security costs in the NPRM to NHTSA's decision not to monetize benefits from reducing CO2emissions in the

April 2006 light truck CAFE rule, and argued that the Ninth Circuit's decision in CBD supports their position that ``Uncertainty about a benefit's value is not a valid reason to assign that value at zero.''

\280\ The Attorneys General also argued that just as increases in CAFE standards cannot eliminate global warming, but are part of the overall global warming solution, increases in CAFE standards similarly ``will not'' in and of itself, eliminate these energy security costs,'' but are ``a necessary piece of the puzzle in assessing all of the costs and benefits of a CAFE standard.''

\280\ Citing CBD v. NHTSA, 508 F.3d 508, 533-35.

CFA cited the same Delucchi article to comment that ``A zero for the military and strategic value of oil reduction is simply wrong.''

CFA argued that ``There is a substantial policy and academic literature that believes oil has a military value,'' and that ``The fact the statute had energy independence and security in its title should have alerted NHTSA to the likelihood that Congress considers the military and strategic value of oil important.'' CFA provided a fairly long excerpt from the Delucchi article to argue that there may be large unquantifiable costs beyond specific expenditures on the military with regard to the ``entire relevant military or `security' cost of using oil,'' including reduced flexibility in the conduct of U.S. foreign policy, strains on international relations due to the activities of the U.S. military and even due to competition for oil, anti-American sentiment due to the presence of the U.S. military in the Middle

East, political destabilization of the Middle East, and the nonfinancial human-suffering cost of war and political instability related to U.S. demand for oil.\281\

\281\ CFA comments at 48, citing Delucchi at 2262.

CFA concluded that ``NHTSA should have quantified what it could in the framework of the model,'' and ``To the extent that there is a large and significant unquantifiable value, it should have oriented its considerations toward greater energy conservation.'' CFA suggested a value of $0.30 for military costs, apparently on the basis of this argument.

Public Citizen also commented that NHTSA's value for military security costs should be higher than zero. Public Citizen stated that

NHTSA's rationale for assigning a zero value was similar to its logic in assigning a value of zero to reducing CO2emissions in the 2006 light truck CAFE final rule, and argued that the Ninth Circuit had ``rejected this justification in Center for Biological Diversity v.

NHTSA, finding that uncertainty about how to assign a value was not a justification for setting the value at zero.'' NRDC and the Sierra Club et al. also made this point in their comments.

NRDC stated that ``the undisputed fact that there are currently military expenditures associated with the protection of access to oil supplies implies that there must be a positive military cost associated with each gallon of gasoline consumed.'' NRDC argued that ``Since it can be assumed that the United States would expend little or no military resources to secure access to a non-strategic commodity, there must exist a positive benefit in moving the consumption to the point where oil is no longer a strategic commodity.'' NRDC described this value as ``the country's opportunity to decrease military expenditure or respond more flexibly to supply threats, and must have a positive magnitude.'' NRDC suggested several ``aggregate expenditure estimates

produced

through rigorous, data-driven analysis'' for NHTSA to consider, including the estimate of $0.03 to $0.17 from the Delucchi article, a 2004 analysis for the National Commission on Energy Policy estimating a ``peacetime per gallon'' cost of $0.23 to $0.28, \282\ and estimates of $0.14 to $0.26 per gallon based on a 2005 study by the

International Center for Technology Assessment.\283\ NRDC stated, however, that because ``current expenditures may pale in comparison to the total future financial cost of military actions,'' ``this presents a strong rationale for using per-gallon cost estimates near the upper bound of the determined range.'' NRDC argued that ``The initial

literature

review herein suggests that the per gallon marginal benefit of reducing oil consumption may be as high as 28 cents per gallon of gasoline.''

\282\ Jaffe, Amy Myers (2004). United States and the Middle

East: Policies and Dilemmas. Analysis commissioned by the National

Commission on Energy Policy.

\283\ International Center for Technology Assessment (2005).

``Gasoline Cost Externalities: Security and Protection Services.''

NRDC stated that it adjusted the estimates found in the study from 2005 values of 13 to 23 cents into 2008 values using http:// data.bls.gov/cgi-bin/cpicalc.pl.

The Sierra Club et al. commented that NHTSA must ``provide an accurate dollar value for'' ``the national security costs of oil,'' by

``considering the relevant research.'' Sierra Club argued that the national security costs of oil are twofold, coming from both climate change and oil dependence. Regarding the national security costs expected from climate change, Sierra Club commented that a recent

``report from the National Intelligence Council * * * found that climate change poses a serious national security threat to our country,'' in the form of ``humanitarian disasters, economic migration, and food and water shortages'' due to climate change contributing to

``political instability, disputes over resources, and mass migrations'' in many ``at-risk regions'' of the world, that will have economic impacts in the United States. Regarding the national security costs of oil dependence, Sierra Club cited the 2005 ICTA report mentioned by

NRDC as an example of the ``numerous studies * * * [that] document these costs.''

Although UCS offered no discussion of military costs in its primary comment document, it submitted as an attachment a report suggesting that NHTSA use a value of $0.35 per gallon (in 2006 dollars) for

``improved oil security.'' The report cited ``A recent study from Oak

Ridge National

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Laboratory [which] assesses these energy security benefits of reduced oil consumption at $14.51 per barrel, or $0.35 per gallon.'' \284\ The report stated that ``This is a conservative assessment, as it excludes all military program costs, as well as the `difficult-to-quantify foreign policy impact of oil import reliance.' (Leiby 2007)''

\284\ The report noted that it had updated this value from 2004 dollars to 2006 dollars.

NHTSA received no comments on the estimates of monopsony costs or potential costs from oil supply disruptions. Thus it has continued to employ the estimates of these costs reported in the updated ORNL study in establishing final CAFE standards and evaluating their benefits. The agency notes, however, that the monopsony cost varies directly with world oil prices, and that the forecast of world oil prices used in this analysis differs significantly from that assumed in the ORNL study. Thus NHTSA has adjusted the updated ORNL estimate of the monopsony cost to reflect the AEO 2008 High Price Case forecast of world oil prices, which averages $88 per barrel (in 2007 dollars) over the period from 2011-30. Expressed in 2007 dollars, NHTSA's revised estimates of the reductions in monopsony costs and expected costs from oil supply disruptions are $0.266 and $0.116 per gallon of fuel saved.

NHTSA disagrees with commenters who asserted that fuel savings resulting from higher CAFE standards are likely to result directly in reductions in U.S. military expenses to protect the supply of petroleum imports, particularly from the Persian Gulf region. NHTSA agrees that by reducing fuel consumption and U.S. petroleum imports from politically unstable regions, higher CAFE standards might reduce the military and political risks posed by U.S. military deployments in these regions. However, the agency does not believe there is convincing evidence at this time that reducing these risks would necessarily reduce U.S. military activities or expenditures in the Persian Gulf or elsewhere. None of the commenters presented any evidence that reductions in U.S. military spending would occur in response to fuel savings and reductions in U.S. petroleum imports, nor do any of the references included in their comments provide such evidence.

In particular, NHTSA does not agree with Public Citizen's analogy between energy security and ``global warming costs.'' Although the economic valuation of climate-related benefits from reducing carbon dioxide emissions is uncertain, there is nevertheless a direct causal link between changes in U.S. oil consumption and changes in U.S. carbon dioxide emissions. In contrast, no such causal linkage--either scientific or empirical--exists between changes in U.S. oil consumption or imports and changes in U.S. military expenditures in the Persian

Gulf, or elsewhere in the world. The agency notes that one particularly comprehensive and authoritative treatment of the potential security benefits from reducing U.S. energy consumption reaches exactly this same conclusion.\285\

\285\ Douglas R. Bohi and Michael A. Toman, Economics of Energy

Security, Kluwer Academic Publishers, 1996.

Although one recent economic analysis cited widely by commenters did estimate the value of U.S. military spending attributable to securing oil imports from the Persian Gulf region, this study does not estimate the extent to which U.S. military spending is likely to vary in response to changes in U.S. imports of Persian Gulf oil. Nor does it estimate the potential savings in U.S. military outlays that might result from reductions in U.S. oil imports of the magnitude likely to result from higher CAFE standards.\286\

\286\ See Mark A. Delucchi and James J. Murphy, U.S. Military

Expenditures to Protect the Use of Persian Gulf Oil Imports, 36

Energy Policy 2253 (2008) (assigning a cost of between $0.03 and

$0.15 per gallon). Available at Docket No. NHTSA-2008-0089-0173.14.

The study argues that its purpose is to develop ``the military cost of highway transportation.'' The authors attempt to do this in four steps:

Estimate the amount spent annually to defend all U.S. interests in the Persian Gulf;

Deduct the cost of defending U.S. interests other than oil in the Persian Gulf;

Deduct the cost of defending against the possibility of a worldwide recession due to the effects of an oil price shock or supply interruption originating in the Persian Gulf on other countries; and

Deduct the cost of defending the use of oil in sectors of the U.S. economy other than highway transportation.

This analysis yields an estimate of the annual ``military cost of oil use by motor vehicles'' in the United States ranging from $5.8 billion to $25.4 billion in 2004. The authors then divide these figures by 2004 U.S. gasoline and diesel consumption by on-road motor vehicles to arrive at an average ``military cost of highway transportation'' ranging from $0.03 to $0.15 per gallon of fuel.\287\

\287\ Id., at 2260.

However, the authors do not argue that U.S. military spending would be reduced by this--or any other--amount as a consequence of incremental reductions in domestic consumption of transportation fuels.

Instead, they describe their estimate in the following terms: ``The bottom line of our analysis is that if all motor vehicles in the U.S.

(light-duty and heavy-duty) did not use oil, Congress might reduce defense spending by $6-$25 billion annually in the long run. This amounts to about $0.03-$0.15 per gallon ($0.01-$0.04 per liter) of all gasoline and diesel motor fuel in 2004.'' (p. 2260; emphasis added.)

Thus the values they report are clearly intended as estimates of the total and average per-gallon costs of U.S. military activities in the Persian Gulf that might reasonably be related to petroleum consumption by U.S. motor vehicles, and not as estimates of the extent to which those costs might be reduced as a consequence of lower fuel consumption by U.S. motor vehicles. Nothing in their analysis suggests that this average value bears any necessary relationship to the savings in military outlays that might results from modest reductions in U.S. petroleum consumption or imports. Although the authors speculate that the proportional reduction in these outlays might be larger than any proportional reduction in U.S. petroleum imports from the Persian Gulf region, they provide no support for this hypothesis.\288\

\288\ Id., at 2261-2262.

Nor does this study attempt to demonstrate any causal or empirical linkage between domestic consumption of transportation fuels and the level of U.S. military activities or spending in the Persian Gulf (or elsewhere), as would be required to support any argument that military outlays would actually be reduced in response to lower U.S. fuel consumption and petroleum imports. As the authors clearly acknowledge, achieving any reduction in U.S. military spending that might be facilitated by lower U.S. oil imports would require specific actions by

Congress, and would not result automatically or necessarily. However carefully their analysis of military spending might be done, defining some fraction of U.S. military expenditures as being allocated to the defense of oil interests in the Persian Gulf, and then dividing the resulting figure by some quantity of petroleum use does not demonstrate any causal linkage between changes in the numerator (military spending) and incremental changes in the denominator (petroleum consumption) of this calculation.

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The analysis described above is irrelevant to NHTSA's analysis of fuel economy standards, because NHTSA's cost-benefit analysis is properly concerned with comparing two alternative states of the world:

(1) The world as we expect it to exist over the next few years, in the absence of any new CAFE standards, compared with (2) an alternative world that is identical in every respect except that new CAFE standards are in place. NHTSA should, therefore, consider how U.S. defense expenditures might vary between these two states of the world. The relevant question for a cost-benefit analysis is: How much would U.S. military expenditures change if U.S. passenger-car and light-truck fuel consumption is several percent lower in the next decade than it otherwise would have been?

Neither the Congress nor the Executive Branch has ever attempted to calibrate U.S. military expenditures, force levels, or deployments to any oil market variable, or to some calculation of the projected economic consequences of hostilities in the Persian Gulf. Instead, changes in U.S. force levels, deployments, and thus military spending in that region have been largely governed by political events, emerging threats, and other military and political considerations, rather than by shifts in U.S. oil consumption or imports. NHTSA thus concludes that the levels of U.S. military activity and expenditures are likely to remain unaffected by even relatively large changes in light duty vehicle fuel consumption.

Nevertheless, the agency conducted a sensitivity analysis of the potential effect of assuming that some reduction in military spending would result from fuel savings and reduced petroleum imports in order to investigate its impacts on the standards and fuel savings. Assuming that the preceding estimate of total U.S. military costs for securing

Persian Gulf oil supplies is correct, and that approximately half of these expenses could be reduced in proportion to a reduction in U.S. oil imports from the region, the estimated savings would range from

$0.02 to $0.08 (in 2007 dollars) for each gallon of fuel savings that was reflected in lower U.S. imports of petroleum from the Persian Gulf.

If the Persian Gulf region is assumed to be the marginal source of supply for U.S. imports of crude petroleum and refined products, then each gallon of fuel saved might reduce U.S. military outlays by $0.05 per gallon, the midpoint of this range. NHTSA employs this estimate in its sensitivity analysis.

While NHTSA believes that military expenditures appropriated by the

U.S. Congress are not directly related to changes in domestic petroleum consumption, the agency recognizes that reductions in petroleum consumption may provide other benefits that are more difficult to quantify, by reducing some constraints on U.S. diplomatic and military action. U.S. foreign policy decisions consider a wide range of U.S. interests, including the maintenance of secure petroleum supplies.

Reduced consumption of petroleum might allow the U.S. to more vigorously pursue other foreign policy interests, by reducing concerns about the implications of pursuing these other interests for the availability and continuity of petroleum imports.

The agency recognizes, however, that both the effect of reducing

U.S. petroleum imports on the flexibility of its foreign policy initiatives and the economic value of such additional flexibility are highly uncertain. Reducing petroleum consumption is likely to have unpredictable effects on both military actions and diplomatic initiatives, and even if the U.S. government planned and signaled its foreign policy intentions under various levels of petroleum consumption in advance, NHTSA is unaware of any accepted methods for establishing the economic value of increased freedom in designing military or diplomatic actions. And because the nation's foreign policy intentions are not communicated in advance, the agency would need to develop a procedure for anticipating how military and diplomatic actions would respond to future changes in petroleum consumption. Nevertheless, in its future rulemaking activities, NHTSA will investigate whether practical methods for predicting and valuing in economic terms any increased flexibility in U.S. foreign policy that is likely to result from reduced petroleum imports exist or can be developed. 12. Air Pollutant Emissions

(a) Impacts on Criteria Pollutant Emissions

Criteria air pollutants are common pollutants that EPA regulates under the Clean Air Act, by establishing permissible concentrations on the basis of human health-related or science-based criteria.\289\ NHTSA explained in the NPRM that while reductions in domestic fuel refining and distribution that result from lower fuel consumption will reduce

U.S. emissions of criteria air pollutants, additional vehicle use associated with the rebound effect from higher fuel economy will in turn increase emissions of those pollutants. Thus, the net effect of stricter CAFE standards on emissions of each criteria pollutant depends on the relative magnitudes of its reduced emissions in fuel refining and distribution, and increases in its emissions from vehicle use.

Because the relationship between emissions rates in fuel refining \290\ and in vehicle use \291\ is different for each criteria pollutant, the net effect of fuel savings from the proposed standards on total emissions of each pollutant is likely to differ. Criteria air pollutants emitted by vehicles and during fuel production include carbon monoxide (CO), hydrocarbon compounds (usually referred to as

``volatile organic compounds'' or VOCs), nitrogen oxides

(NOX), fine particulate matter (PM2.5) and sulfur oxides (SOX).

\289\ Criteria pollutants regulated by EPA include ozone, particulate matter, carbon monoxide, nitrogen oxides, sulfur dioxide, and lead. For more information, see http://www.epa.gov/air/ urbanair/ (last accessed October 5, 2008).

\290\ That is, emissions per gallon of fuel refined.

\291\ That is, emissions per mile driven.

For additional vehicle use due to the rebound effect, NHTSA estimates the increase in emissions of these pollutants by multiplying the increase in total miles driven by vehicles of each model year and age by age-specific emission rates per vehicle-mile for each pollutant.

NHTSA developed these emission rates using EPA's MOBILE6.2 motor vehicle emissions factor model.\292\ Emissions of these pollutants also occur during crude oil extraction and transportation, fuel refining, and fuel storage and distribution. The reduction in total emissions from each of these sources thus depends on the extent to which fuel savings result in lower imports of refined fuel, or in reduced domestic fuel refining. To a lesser extent, they also depend on whether any reduction in domestic gasoline refining is translated into reduced imports of crude oil or reduced domestic extraction of petroleum.

\292\ U.S. EPA, MOBILE6 Vehicle Emission Modeling Software, available at http://www.epa.gov/otaq/m6.htm#m60 (last accessed

October 5, 2008).

Based on an analysis of changes in U.S. gasoline imports and domestic gasoline consumption forecast in AEO's 2008 Early Release,

NHTSA tentatively estimated in the NPRM that 50 percent of fuel savings resulting from higher CAFE standards would result in reduced imports of refined gasoline, while the remaining 50 percent would

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reduce domestic fuel refining.\293\ The reduction in domestic refining was assumed to leave its sources of crude petroleum unchanged from the mix of 90 percent imports and 10 percent domestic production projected by AEO.

\293\ Estimates of the response of gasoline imports and domestic refining to fuel savings from stricter standards are variable and highly uncertain, but NHTSA's preliminary analysis as of the time the NPRM was published indicated that under any reasonable assumption about these responses, the magnitude of the net change in criteria pollutant emissions (accounting for both the rebound effect and changes in refining emissions) is extremely low relative to their current total.

For fuel refining and distribution, NHTSA proposed to estimate criteria pollutant emission reductions using emission rates from

Argonne National Laboratories' Greenhouse Gases and Regulated Emissions in Transportation (GREET) model.\294\ The GREET model provides separate estimates of air pollutant emissions that occur in four phases of fuel production and distribution: Crude oil extraction, crude oil transportation and storage, fuel refining, and fuel distribution and storage.\295\ NHTSA tentatively assumed, for purposes of the NPRM analysis, that reductions in imports of refined fuel would reduce criteria pollutant emissions during fuel storage and distribution only.

Reductions in domestic fuel refining using imported crude oil as a feedstock were tentatively assumed to reduce emissions during crude oil transportation and storage, as well as during gasoline refining, distribution, and storage, because less of each of these activities would be occurring. Similarly, reduced domestic fuel refining using domestically produced crude oil was tentatively assumed to reduce emissions during phases of gasoline production and distribution.\296\

\294\ Argonne National Laboratories, The Greenhouse Gas and

Regulated Emissions from Transportation (GREET) Model, Version 1.8.

Available at http://www.transportation.anl.gov/software/GREET/ index.html (last accessed October 5, 2008).

\295\ Emissions that occur during vehicle refueling at service stations (primarily evaporative emissions of VOCs) are already accounted for in the ``tailpipe'' emission factors used to estimate the emissions generated by increased car and light truck use. GREET estimates emissions in each phase of gasoline production and distribution in mass per unit of gasoline energy content; these factors are then converted to mass per gallon of gasoline using the average energy content of gasoline.

\296\ As NHTSA stated in the NPRM, in effect, this assumes that the distances crude oil travels to U.S. refineries are approximately the same whether the oil travels from domestic oilfields or import terminals, and that the distances that gasoline travels from refineries to retail stations are approximately the same as those from import terminals to retail stations.

The net changes in emissions of each criteria pollutant were calculated by adding the increases in their emissions that result from increased vehicle use and the reductions that result from lower domestic fuel refining and distribution. The net change in emissions of each criteria pollutant was converted to an economic value using estimates of the economic damage costs per ton emitted \297\ developed by EPA and submitted to OMB for review. For certain criteria pollutants, EPA estimates different per-ton costs for emissions from vehicle use than for emissions of the same pollutant during fuel production, reflecting differences in their typical geographic distributions, contributions to ambient pollution levels, and resulting population exposure.

\297\ These costs result primarily from damages to human health.

NHTSA received comments on this issue from the Alliance, NADA, the

Air Improvement Resources Committee of the Alamo Area Council of

Governments, and an individual, Mr. Mark Delucchi. Mr. Delucchi commented that NHTSA should clarify what kinds of damages are included in the per-ton damage cost estimates for criteria pollutants and

CO2. He suggested that if NHTSA's estimates are based on

EPA's damage estimates, then they do not include health damages, visibility, crop damages, materials damages, and natural-ecosystem damages. Mr. Delucchi argued that NHTSA should include estimates for these additional categories of damage due to pollutants, and that the agency ``can find peer-reviewed estimates of damages in most of these categories on [his] faculty web page.''

The Air Improvement Resources Committee of the Alamo Area Council of Governments (Texas) did not comment specifically on NHTSA's estimates for criteria pollutants, but simply expressed its support for the proposed standards due to the fact that they would ``create net reductions in oxides of nitrogen over the lifetimes of Model Years 2011-2015 vehicles, and the San Antonio region is NOX limited, meaning reducing NOXemissions in the region will have a greater impact on ozone levels than would comparable volatile organic compound (VOC) reductions.'' The AIRC stated that ``Although the proposed rulemaking would create a net increase in VOCs, the

NOXincrease is of greater benefit for ozone formation in our region,'' and therefore the AIRC supported the proposed standards.

The Alliance commented more specifically on NHTSA's estimates for criteria pollutants, arguing that NHTSA's estimates of reductions in ozone precursors were overstated for two main reasons: First, because

``NHTSA did not properly take into account the new source review standards [under the Clean Air Act], and otherwise assumed away federal

(and state) laws that would have the effect of requiring offsets from the upstream refineries that NHTSA attempts to claim credit for;'' and second, because ``there is no indication that NHTSA has * * * considered the fleet turnover effect,'' ``meaning that the significant costs NHTSA will add to the price of new vehicles will delay the transition the market would naturally make to more fuel efficient and cleaner vehicles.'' NADA also argued that the ``Criteria pollutant reduction benefits associated with the proposed CAFE standards are overstated as the negative impact of inhibited fleet turnover was not accounted for.''

As support for its comment that NHTSA had overlooked federal and state laws that would impact upstream criteria pollutant emissions, the

Alliance cited both the Sierra Research and the NERA Reports it included as attachments to its comments. Sierra Research commented that

``Most upstream emissions associated with the use of gasoline * * * in areas with air pollution problems'' are already subject to air pollution control regulations, such that ``changes in fuel type or the volume of fuel produced are governed by * * * offset requirements and credit provisions.'' Sierra Research argued that the GREET model used by NHTSA ignores the impacts of these regulations, by assuming that reductions in gasoline consumption translate directly into reductions in pollutant emissions. However, Sierra argued, in tightly regulated areas of the country, the air pollution control system will be much more complicated than that, such that any ``give'' in one part of the pollution control system will simply be absorbed by another part, and there will be no net reduction in emissions for that area. Sierra also argued that the GREET model does not properly account for ``marketing''

(i.e., from gasoline station) emissions, which have been reduced in recent years due to proliferating vapor recovery system regulations at the state and local levels.

The NERA Report first argued that NHTSA had overestimated the amount of criteria pollutant emissions that would be reduced. It echoed

Sierra Research's comment about New Source Review standards impacting criteria pollutant emissions, but argued further that their analysis of total emissions estimates for refineries in the National

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Emission Inventory database for 2002 suggested that NHTSA had substantially overestimated NOXand PM2.5 emissions, by ``more than two and three times * * *, respectively.''

NERA compared NEI database refinery emissions estimates for 2002 to

``estimates of refining emissions based on NHTSA's emission factors for refineries and U.S. production of gasoline and diesel fuels in that same year (EPA 2002),'' assuming that NHTSA's estimates should be smaller, since ``refineries produce other products besides gasoline and diesel fuel.'' However, NERA found that ``estimates based on NHTSA's rates for only two refinery products (gasoline and diesel fuel) are larger than the NEI estimates for all refinery operations.'' NERA thus concluded that NHTSA had overestimated the benefits associated with reducing criteria pollutant emissions, because it had overestimated the amount of criteria pollutant emissions that would be reduced. NERA also stated that to the extent that fuel consumption was reduced in the long-run, refineries would be subject to more stringent emissions standards anyway, or fuel imports would be reduced, which would have no impact on U.S. emissions, although NERA did not attempt to quantify those effects.

The NERA Report next argued that NHTSA had used ``ad hoc'' estimates of the value per ton of criteria pollutants based on recommendations from EPA's OTAQ, which were unverifiable. NERA implied that NHTSA should instead use ``values based on published EPA estimates,'' which it found included in a 2006 report by OMB to

Congress. NERA stated that ``OMB's values are slightly higher than

NHTSA's for VOCs, but substantially lower for PM2.5and

SOX.''

The NERA Report finally argued that ``increasing quality-adjusted new vehicle prices will lead to an increase in the average age of the vehicle fleet, [which] will increase emissions both because older vehicles faced less stringent emission standards when sold and because the effectiveness of controls (especially those for NOX) declines as the vehicle ages.'' NERA did not, however, attempt to quantify these emissions impacts. The Alliance in its comments emphasized this point about the fleet turnover effect, stating that it

``shows that most criteria pollutant and air toxic levels will worsen for decades in consequence of NHTSA's proposed standards, as consumers delay purchasing new, more fuel-efficient vehicles in the current marketplace prior to an expensive new government mandate.'' The

Alliance argued that EPCA and principles of administrative law require

NHTSA to consider this effect.\298\

\298\ NHTSA notes that the Alliance also included a Sierra

Research report previously submitted to EPA in connection with

California's waiver application regarding the fleet-turnover effect with respect to California's proposed GHG emissions standards, as

Attachment 14 to the Alliance's comments. NHTSA has not summarized the findings of that report in detail because it believes that the purpose for which the Alliance submitted the report is already captured by the NERA Report comments, and because the fleet-turnover effect due to California's proposed standards would have no direct impact on NHTSA's decision for the final rule.

Agency response: In response to Mr. Delucchi's comment, NHTSA is confident that the damage cost estimates it used in the NPRM to value reductions in criteria air pollutants and their chemical precursors include the full range of human health impacts known to be associated with exposure to each of these pollutants that current scientific and economic knowledge allows to be quantified and valued in economic terms. Differences between these damage costs and the estimates by OMB cited by commenters reflect the fact that the estimates provided to

NHTSA by EPA apply specifically to emissions by motor vehicles, and include separate costs for emissions from stationary sources such as petroleum refineries where such differences are appropriate. The estimates provided by EPA also reflect more up-to-date knowledge about the human health impacts of exposure to criteria air pollutants and the economic costs associated with those impacts than do the estimates reported by OMB. Thus in the analysis it conducted for this final rule,

NHTSA has continued to use the damage cost estimates supplied by EPA to determine the economic costs or benefits from changes in emissions of criteria air pollutants that result from higher CAFE standards.

In response to comments provided by NERA on behalf of the Alliance,

NHTSA acknowledges that it may have overestimated reductions in upstream emissions of some criteria air pollutants (particularly PM and

NOX) resulting from fuel savings in the analysis it conducted for the NPRM. NHTSA has taken two steps to remedy this possible overestimation. First, the agency used updated emission factors supplied by EPA for vehicles used to transport crude petroleum and refined fuel, including ocean tankers, railroad locomotives, barges, and heavy-duty trucks, to recalculate the emissions factors for each stage of fuel production and distribution in Argonne's GREET model. These updated emission factors reflect the effects of recent and pending EPA regulations on vehicle emissions and fuel composition, and result in significant reductions in the upstream emission rates for fuel production and distribution estimated using GREET. These lower upstream emission rates reduce NHTSA's estimates of emissions during fuel production and distribution under both Baseline and alternative

CAFE standards, and by doing so also lower the reductions in upstream emissions projected to result from any increase in CAFE standards from their Baseline levels.

In addition, NHTSA notes that the estimates of reductions in upstream emissions it reported in the NPRM incorrectly included reductions in ocean tanker emissions for transportation of crude petroleum from overseas to ports or offshore oil terminals in the U.S.

Since most of these emissions probably occur outside of the U.S., they should not be included in NHTSA's estimates of upstream emissions reductions, since those are intended to represent changes in domestic emissions of criteria air pollutants.\299\ NHTSA has revised its analysis for this final rule to exclude reductions in ocean tanker emissions.

\299\ Emissions from ocean tankers while in port areas, as well as pipeline or truck emissions occurring during transportation of crude petroleum from import terminals to U.S. refineries, do occur within the U.S., and reductions in these emissions should be included when estimating changes in domestic emissions. However, it is not possible to separate these emissions from those that occur in foreign ports or on the open oceans, so NHTSA's analysis does not include reductions in them. As a consequence, the analysis may underestimate reductions in upstream emissions occurring within the

U.S.

In response to comments by Sierra Research and NERA submitted by the Alliance, NHTSA notes that there are currently two cap-and-trade programs governing emissions of criteria pollutants by large stationary sources. The Acid Rain Program seeks to limit NOXand

SO2emissions, but applies only to electric generating facilities.\300\ The NOXBudget Trading Program is also primarily intended to reduce electric utility emissions, but does include some other large industrial sources such as refineries; however, as of 2003, refineries participating in the program accounted for less than 5 percent of total NOXemissions by U.S. refineries.\301\ In addition, some

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refineries could be included among the sources of NOX emissions that will be controlled under EPA's Clean Air Interstate

Rule, which is scheduled to take effect beginning in 2009. However, refinery NOXemissions could only be affected in states that specifically elect to include sources other than electric generating facilities in their plans to comply with the rule, and EPA has indicated that it expects states to achieve the emissions reductions required by the Clean Air Interstate Rule primarily from the electric power industry.\302\ Thus, the agency continues to assume that the reduction in domestic gasoline refining estimated to result from the adopted CAFE standard will be reflected in reduced refinery emissions of criteria pollutants.

\300\ For a detailed description of the Acid Rain program, see http://www.epa.gov/airmarkt/progsregs/arp/basic.html#princips (last accessed October 6, 2008).

\301\ Estimated from EPA, NOXBudget Trading Program

(SIP Call) 2003 Progress Report, Appendix A, http://www.epa.gov/ airmarkets/cmprpt/nox03/NBP2003AppendixA.xls, and National Air

Quality and Emissions Trends Report 2003, Table A-4, http:// www.epa.gov/air/airtrends/aqtrnd03/pdfs/a4.pdf.

\302\ The Clean Air Interstate Rule also requires reductions in

SO2emissions and establishes an emissions trading program to achieve them, but only electric generating facilities are included in the rule's SO2emissions trading program; see

EPA, Clean Air Interstate Rule: Basic Information, http:// www.epa.gov/cair/basic.html#timeline (last accessed October 6, 2008) and http://www.epa.gov/cair/pdfs/cair_final_fact.pdf (last accessed October 6, 2008). Although the rule was held to exceed the scope of EPA's delegated authority under the CAA, North Carolina v.

EPA, 531 F.3d 896 (2008), the Court remanded the rule to EPA and so it remains in force. Order of December 23, 2008 in No. 05-1244.

NHTSA also notes in response to comments by Sierra Research and

NERA submitted by the Alliance that emissions occurring during refueling at retail stations are included in the emissions factors estimated using EPA's MOBILE emission factor model, which also accounts for expected future reductions in these emissions. Thus, NHTSA believes that reductions in refueling emissions were correctly estimated in its

NPRM analysis, and has not revised its procedures for doing so.

Finally, in response to comments by the Alliance and NERA, NHTSA acknowledges that the effect of higher prices for new vehicles on the retention and use of older vehicles is potentially significant, depending on the magnitude of expected price increases. As indicated in the discussion of the appropriate discount rate to use in analyzing the impacts of alternative CAFE standards (see Section V.B.14 below), however, NHTSA believes that manufacturers are likely to experience difficulty raising prices for new cars and light trucks sufficiently to recover all their costs for complying with higher CAFE standards. Based on a detailed econometric analysis of the effects of new vehicle prices and other variables on retirement rates for used vehicles very similar to the analysis conducted by NERA for the Alliance, NHTSA concludes that price increases for MY 2011 cars and light trucks likely to result from higher CAFE standards are unlikely to cause significant or lasting changes in retirement rates for older vehicles. NHTSA also notes that the vehicles whose retirement rates would be most affected by increases in prices for MY 2011 passenger cars and light trucks are those that will be 10-15 years of age at the time when 2011 vehicles are offered for sale.\303\ These include cars and light trucks produced during model years 2001 through 2005, and NHTSA's analysis of their emission rates at those ages predicted using EPA's MOBILE6.2 motor vehicle emission factor model suggests that they will not be dramatically higher than emission rates for comparable new 2011 models. Thus the effect on total motor vehicle emissions of criteria air pollutants resulting from any reduction in new vehicle sales and accompanying increase in use of older vehicles caused by increased prices for new 2011 cars and light trucks is likely to be modest.

\303\ This conclusion is based on unpublished econometric analysis of the effects of new vehicle prices and other variables on retirement rates for used vehicles conducted by the Volpe Center.

This analysis concluded that retirement rates for 10-15 year old vehicles are most sensitive to changes in new vehicle prices.

In its future CAFE rulemaking activities, NHTSA will coordinate with EPA to develop updated estimates for the economic benefits that are likely to result from reducing motor vehicle emissions of criteria air pollutants and the resulting atmospheric concentrations of these pollutants. EPA maintains an on-going research program to document, estimate, and value the reduction in threats to human health that occur in response to declines in atmospheric pollutant levels and population exposure to harmful concentrations of these pollutants. At the same time, the agency will incorporate recent improvements in EPA's motor vehicle emission factor models to increase the accuracy of its estimates of changes in criteria pollutant emissions resulting from increased fuel economy. Similarly, the agency will also support any efforts by EPA to develop comparable estimates of the economic value of reduced threats to human health that result from lower emissions of hazardous air pollutants by motor vehicles, while continuing to improve its methods for estimating reductions in emissions of these pollutants that result from increased fuel efficiency.

(b) Reductions in CO2Emissions

In the NPRM, NHTSA also discussed the fact that fuel savings from stricter CAFE standards result in lower emissions of carbon dioxide

(CO2), the main greenhouse gas emitted as a result of refining, distributing, and using transportation fuels. Lower fuel consumption reduces CO2emissions directly, because the primary source of transportation-related CO2emissions is fuel combustion in internal combustion engines. NHTSA tentatively estimated reductions in carbon dioxide emissions resulting from fuel savings by assuming that the entire carbon content of gasoline, diesel, and other fuels is converted to carbon dioxide during the combustion process.\304\

\304\ NHTSA explained that this assumption results in a slight overestimate of carbon dioxide emissions, since a small fraction of the carbon content of gasoline is emitted in the forms of carbon monoxide and unburned hydrocarbons. However, the magnitude of this overestimate is likely to be extremely small. This approach is consistent with the recommendation of the Intergovernmental Panel on

Climate Change for ``Tier 1'' national greenhouse gas emissions inventories. Cf. Intergovernmental Panel on Climate Change, 2006

Guidelines for National Greenhouse Gas Inventories, Volume 2,

Energy, Chapter 3, ``Mobile Combustion,'' at 3.16. See http:// www.ipcc-nggip.iges.or.jp/public/2006gl/pdf/2_Volume2/V2_3_Ch3_

Mobile_Combustion.pdf (last accessed October 6, 2008).

Reduced fuel consumption also reduces carbon dioxide emissions that result from the use of carbon-based energy sources during fuel production and distribution.\305\ For purposes of the NPRM, NHTSA estimated the reductions in CO2emissions during each phase of fuel production and distribution using CO2emission rates obtained from the GREET model discussed above, using the previous assumptions about how fuel savings are reflected in reductions in each phase. The total reduction in CO2emissions from the improvement in fuel economy under each alternative CAFE standard is the sum of the reductions in emissions from reduced fuel use and from lower fuel production and distribution.

\305\ NHTSA did not, for purposes of the NPRM, attempt to estimate changes in upstream emissions of GHGs other than

CO2. This was because carbon dioxide from final combustion itself accounts for nearly 97 percent of the total

CO2-equivalent emissions from petroleum production and use, even with other GHGs that result from those activities

(principally methane and nitrous oxide) weighed by their higher global warming potentials (GWPs) relative to CO2.

Calculated from EPA's Inventory of U.S. Greenhouse Gas Emissions and

Sinks 1990-2006, Tables 3-3, 3-39, and 3-41, EPA 430-R-08-05, April 15, 2008. Available at http://www.epa.gov/climatechange/emissions/ downloads/08_CR.pdf (last accessed August 15, 2008).

NHTSA stated in the NPRM that it had not attempted to estimate changes in emissions of other GHGs, in particular methane, nitrous oxide, and

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hydrofluorocarbons,\306\ and invited comment on the importance and potential implications of doing so under NEPA.

\306\ This was because methane and nitrous oxide account for less than 3 percent of the tailpipe GHG emissions from passenger cars and light trucks, while CO2emissions account for the remaining 97 percent. Of the total (including non-tailpipe) GHG emissions from passenger cars and light trucks, tailpipe

CO2represents about 93.1 percent, tailpipe methane and nitrous oxide represent about 2.4 percent, and hydrofluorocarbons

(from air conditioner leaks) represent about 4.5 percent. Calculated from EPA's Inventory of U.S. Greenhouse Gas Emissions and Sinks 1990-2006, Table 215, EPA 430-R-08-05, April 15, 2008. Available at http://www.epa.gov/climatechange/emissions/downloads/08_CR.pdf

(last accessed August 15, 2008).

NHTSA received two comments on this issue. The Alliance commented that NHTSA's decision not to address other GHGs was within the agency's discretion for two reasons. First, because as the Alliance stated that

NHTSA suggested in the NPRM, ``analyzing the emissions of GHGs other than CO2simply does not have a large effect on any analysis of potential GHG benefits as connected to CAFE standard setting,'' which the Alliance argued CARB also implicitly agreed with by denominating other GHGs in CO2-equivalents. The Alliance stated that even though other GHGs have higher global warming potentials than CO2, ``even factoring GWP into the analysis still leaves the other GHGs with little significance to any consideration of the benefits of more-stringent CAFE standards.'' The

Alliance further argued that the Ninth Circuit decision only concerned

NHTSA's valuation of CO2, so that NHTSA had no obligation under case law to monetize the effects of other GHGs as long as it evaluates them qualitatively.\307\

\307\ The Alliance cited Center for Auto Safety v. Peck, 751

F.2d 1336, 1367, 1368 (D.C. Cir. 1985) (Scalia, J.) (upholding agency decision predicated upon weighing of non-monetized and monetized benefits against monetized costs).

CBD, in contrast, agreed with NHTSA that other GHGs make up only a small portion of the total GHGs emitted from automobiles. However, CBD argued that these other GHG emissions ``* * * nonetheless represent large amounts of greenhouse gases and must be included in both the economic and environmental analyses.'' CBD gave the example that ``* *

* nitrous oxide emissions with greenhouse gas impacts equivalent to 29 million metric tons of CO2are far from insignificant.''

NHTSA also notes that EPA's TSD on reducing GHG emissions, which was submitted as an attachment to EDF's comments, considers GHGs generally rather than focusing on CO2.

In response to the comment from CBD, NHTSA has prepared detailed estimates of changes in emissions of certain non-CO2GHGs, including methane and nitrous oxide, that would result from alternative

CAFE standards for 2011-15 passenger cars and light trucks. These estimates are reported in the Final Environmental Impact Statement accompanying this rule.\308\ Because the estimated reductions in emissions of these non-CO2GHGs represent a small fraction of reductions in CO2emissions, however, and because they are less reliable than the estimates of reductions in CO2 itself, NHTSA has not included the economic value of reductions in non-

CO2GHGs in its estimates of economic benefits from higher

CAFE standards.\309\

\308\ The FEIS is available at Docket No. NHTSA-2008-0060-0605.

\309\ Expressed in CO2-equivalent terms using global warming potentials estimated by IPCC, the reductions in methane and nitrous oxide emissions represent only about 3% of the estimated reduction in CO2itself. NHTSA views its estimates of non-CO2GHGs as less reliable than those of

CO2itself partly because the vehicle emission factors for methane and nitrous oxide obtained from documentation for EPA's

MOVES motor vehicle emission factor model assume little or no change over future model years or with vehicle age, in contrast to the pronounced declines projected for emissions of criteria air pollutants and CO2. Similarly, the emission factors for non-CO2GHGs during gasoline and diesel production and distribution that are utilized in Argonne's GREET model are assumed to be fixed over the period spanned by NHTSA's analysis, again in contrast to those for criteria air pollutants and CO2.

(c) Economic Value of Reductions in CO2 Emissions

Emissions of carbon dioxide and other greenhouse gases (GHGs) occur throughout the process of producing and distributing transportation fuels, as well as from fuel combustion itself. By reducing the volume of fuel consumed by passenger cars and light trucks, higher CAFE standards will thus reduce GHG emissions generated by fuel use, as well as throughout the fuel supply cycle. Lowering these emissions is likely to slow the projected pace and reduce the ultimate extent of future changes in the global climate, thus reducing future economic damages that changes in the global climate are otherwise expected to cause.

Further, by reducing the probability that climate changes with potentially catastrophic economic or environmental impacts will occur, lowering GHG emissions may also result in economic benefits that exceed the resulting reduction in the expected future economic costs caused by gradual changes in the earth's climatic systems.

Quantifying and monetizing benefits from reducing GHG emissions is thus an important step in estimating the total economic benefits likely to result from establishing higher CAFE standards. Since direct estimates of the economic benefits from reducing GHG emissions are generally not reported in published literature on the impacts of climate change, these benefits are typically assumed to be the ``mirror image'' of the estimated incremental costs resulting from an increase in those emissions. That is, the benefits from reducing emissions are usually measured by the savings in estimated economic damages that an equivalent increase in emissions would otherwise have caused.

Researchers usually estimate the economic costs of increased GHG emissions in several steps. The first is to project future changes in the global climate and the resulting economic damages that are expected to result under a baseline projection of net global GHG emissions.

These projections are usually developed using models that relate concentrations of GHGs in the earth's atmosphere to changes in summary measures of the global climate such as temperature and sea levels, and in turn estimate the reductions in global economic output that are expected to result from changes in climate. Since the effects of GHG emissions on the global climate occur decades or even centuries later, and there is considerable inertia in the earth's climate systems, changes in the global climate and the resulting economic impacts must be estimated over a comparably long future period.

Next, this same process is used to project future climate changes and resulting economic damages under the assumption that GHG emissions increase by some increment during a stated future year. The increase in projected global economic damages resulting from the assumed increase in future GHG emissions, which also occurs over a prolonged period extending into the distant future, represents the added economic costs resulting from the assumed increase in emissions. Discounted to its current value as of the year when the increase in emissions are expected to occur and expressed per unit of GHG emissions (usually per ton of carbon emissions, with non-CO2GHGs converted to their equivalents in terms of carbon emissions), the resulting value represents the global economic cost of increasing GHG emissions by one unit--usually a metric ton of carbon--in a stated future year. This value is often referred to in published research and debates over climate policy as the Social Cost of Carbon (SCC), and applies

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specifically to increased emissions during that year.

This process involves multiple sources of uncertainty, including those in scientific knowledge about the effects of varying levels of

GHG emissions on the magnitude and timing of changes in the functioning of regional and global climatic and ecological systems. In addition, significant uncertainty surrounds the anticipated extent, geographic distribution, and timing of the resulting impacts on the economies of nations located in different regions of the globe. Because the climatic and economic impacts of GHG emissions are projected to occur over the distant future, uncertainty about the correct rate at which to discount these future impacts also significantly affects the estimated economic benefits of reducing GHG emissions.

Researchers have not yet been able to quantify many of the potentially significant effects of GHG emissions and their continued accumulation in the earth's atmosphere on the global climate. Nor have they developed complete models to represent the anticipated impacts of changes in the global climate on economic resources and the productivity with which they are used to generate economic output. As a consequence, the estimates of economic damages resulting from increased

GHG emissions that are generated using integrated models of climate and economic activity exclude some potentially significant sources of costs that are likely to result from increased emissions. As a result, estimates of economic benefits derived from these models' estimates of the likely future climate-related economic damages caused by increased

GHG emissions may underestimate the true economic value of reducing emissions, although the extent to which they are likely to do so remains unknown.

In the NPRM, NHTSA explained how it accounted for the economic benefits of reducing CO2emissions in this rulemaking, both in developing the proposed CAFE standards and in assessing the economic benefits of each alternative that was considered. The agency noted that the Ninth Circuit found in CBD v. NHTSA that NHTSA had been arbitrary and capricious in deciding not to monetize the benefit of reducing

CO2emissions, stating that the agency had not substantiated the conclusion in its April 2006 final rule that the appropriate course was not to monetize (i.e., quantify the value of) carbon emissions reduction at all. NHTSA's discussion in the NPRM of how it estimated the economic value of reductions in CO2emissions received a great deal of attention from commenters, so for the reader's benefit, it is largely reproduced below.

To that end, NHTSA reviewed published estimates of the ``social cost of carbon'' (SCC) emissions. As noted above, the SCC refers to the marginal cost of additional damages caused by the increase in expected climate impacts resulting from the emission of each additional metric ton of carbon, which is emitted in the form of CO2.\310\ It is typically estimated as the net present value of the impact over some extended time period (100 years or longer) of one additional ton of carbon emitted into the atmosphere. Because atmospheric concentrations of greenhouse gases are increasing over time, and the potential damages from global climate are believed to increase with higher atmospheric

GHG concentrations, the economic damages resulting from an additional ton of CO2emissions are expected to increase over time.

Thus, estimates of the SCC are typically reported for a specific year, and these estimates are generally larger for emissions in more distant future years.

\310\ Carbon itself accounts for 12/44, or about 27 percent, of the mass of carbon dioxide (12/44 is the ratio of the molecular weight of carbon to that of carbon dioxide). Thus, each ton of carbon emitted is associated with 44/12, or 3.67, tons of carbon dioxide emissions. Estimates of the SCC are typically reported in dollars per ton of carbon, and must be divided by 3.67 to determine their equivalent value per ton of carbon dioxide emissions.

NHTSA found substantial variation among different authors' estimates of the SCC, much of which can be traced to differences in their underlying assumptions about several variables. These variables include the sensitivity of global temperatures and other climate attributes to increasing atmospheric concentrations of GHGs, discount rates applied to future economic damages from climate change, whether damages sustained by developing regions of the world should be weighted more heavily than damages to developed nations, how long climate changes persist once they occur, and the economic valuation of specific climate impacts.\311\

\311\ For a discussion of these factors, see Yohe, G.W., R.D.

Lasco, Q.K. Ahmad, N.W. Arnell, S.J. Cohen, C. Hope, A.C. Janetos, and R.T. Perez, ``Perspectives on climate change and sustainability,'' 2007, in Climate Change 2007: Impacts, Adaptation and Vulnerability, Contribution of Working Group II to the Fourth

Assessment Report of the Intergovernmental Panel on Climate Change,

M.L. Parry, O.F. Canziani, L.P. Palutikof, P.J. van der Linden and

C.E. Hanson, eds., Cambridge University Press, 2007, at 821-824.

Available at http://www.ipcc.ch/ipccreports/ar4-wg2.htm (last accessed March 23, 2009).

NHTSA explained that, taken as a whole, recent estimates of the SCC may underestimate the true damage costs of carbon emissions because they often exclude damages caused by extreme weather events or climate response scenarios with low probabilities but potentially extreme impacts, and may underestimate the climate impacts and damages that could result from multiple stresses on the global climatic system. At the same time, however, many studies do not consider potentially beneficial impacts of climate change, and do not adequately account for how future technological innovations, development patterns, and adaptations could reduce potential impacts from climate change or the economic damages they cause.

Given the uncertainty surrounding estimates of the SCC, NHTSA suggested that the use of any single study may not be advisable, since its estimate of the SCC will depend on many assumptions made by its authors. NHTSA cited the Working Group II's contribution to the Fourth

Assessment Report of the United Nations Intergovernmental Panel on

Climate Change (IPCC) as noting that:

The large ranges of SCC are due in large part to differences in assumptions regarding climate sensitivity, response lags, the treatment of risk and equity, economic and non-economic impacts, the inclusion of potentially catastrophic losses, and discount rates.\312\

\312\ Climate Change 2007: Impacts, Adaptation and

Vulnerability, Contribution of Working Group II to the Fourth

Assessment Report of the Intergovernmental Panel on Climate Change, at 17. Available at http://www.ipcc.ch/ipccreports/ar4-wg2.htm (last accessed March 23, 2009).

Although the IPCC is considered authoritative on the topic of the

SCC, it did not recommend a single estimate. However, the IPCC did cite the Tol (2005) study on four separate occasions as the only available survey of the peer-reviewed literature that has itself been subjected to peer review.\313\ Tol developed a probability function using the SCC estimates of the peer-reviewed literature, which ranged from less than zero to over $200 per metric ton of carbon. In an effort to resolve some of the uncertainty in reported estimates of climate damage costs from carbon emissions, Tol (2005) reviewed and summarized 103 estimates of the SCC from 28 published studies. He concluded that when only peer- reviewed studies published in recognized journals are considered, ``* *

* climate change impacts may be very uncertain but it is unlikely that the marginal damage costs of carbon dioxide emissions exceed $50 per

metric

ton carbon,'' \314\ which is about

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$14 per metric ton of CO2. In the NPRM, NHTSA assumed that the summary SCC estimates reported by Tol were denominated in U.S. dollars of the year of his article's publication, 2005.

\313\ Id., at 17, 65, 813, and 822.

\314\ Tol, Richard S.J., ``The marginal damage costs of carbon dioxide emissions: an assessment of the uncertainties,'' Energy

Policy 33 (2005), 2064-2074, at 2072.

NHTSA stated that because of the number of assumptions required by each study, the wide range of uncertainty surrounding these assumptions, and their critical influence on the resulting estimates of climate damage costs, some studies have undoubtedly produced estimates of the SCC that are unrealistically high, while others are likely to have estimated values that are improbably low. Using a value for the

SCC that reflects the central tendency of estimates drawn from many studies reduces the chances of relying on a single estimate that subsequently proves to be biased.

It is important to note that the published estimates of the SCC almost invariably include the value of worldwide damages from potential climate impacts caused by carbon dioxide emissions, and are not confined to damages likely to be suffered within the U.S. In contrast, the other estimates of costs and benefits of raising fuel economy standards included in this proposal include only the economic values of impacts that occur within the U.S. For example, the economic value of reducing criteria air pollutant emissions from overseas oil refineries is not counted as a benefit resulting from this rule, because any reduction in damages to health and property caused by overseas emissions are unlikely to be experienced within the U.S.

In contrast, the reduced value of transfer payments from U.S. oil purchasers to foreign oil suppliers that results when lower U.S. oil demand reduces the world price of petroleum (the reduced ``monopsony effect'') is counted as a benefit of reducing fuel use. \315\ The agency states that if its analysis were conducted from a worldwide rather than a U.S. perspective, however, the benefit from reducing air pollution overseas would be included, while reduced payments from U.S. oil consumers to foreign suppliers would not.

\315\ The reduction in payments from U.S. oil purchasers to domestic petroleum producers is not included as a benefit, however, since it represents a transfer that occurs entirely within the U.S. economy.

In the NPRM, NHTSA tentatively concluded that in the interest of analytical consistency, i.e., in order to be consistent with the agency's use of exclusively domestic costs and benefits in prior CAFE rulemakings, the appropriate value to be placed on climate damages caused by carbon emissions should be the one that reflects the change in damages to the U.S. alone. Accordingly, NHTSA noted that the value for the benefits of reducing CO2emissions might be restricted to the fraction of those benefits that are likely to be experienced within the U.S.

Although no estimates are currently available for the benefits to the U.S. itself that are likely to result from reducing CO2 emissions, NHTSA explained that it expected that if such values were developed, the agency would employ those, rather than global benefit estimates, in its analysis. NHTSA also stated that it anticipated that if such values were developed, they would be lower than comparable global values, since the U.S. is likely to sustain only a fraction of total global damages resulting from climate change.

In the meantime, NHTSA explained that it elected to use the mean value of peer-reviewed estimated global value reported by Tol (2005), which was $43 per metric ton of carbon, as an upper bound on the global benefits resulting from reducing each metric ton of U.S. emissions.\316\ This value corresponds to approximately $12 per metric ton of CO2when expressed in 2006 dollars. The Tol (2005) study is cited repeatedly as an authoritative survey in various IPCC reports, which are widely accepted as representing the general consensus in the scientific community on climate change science.

\316\ $43 per ton of carbon emissions was reported by Tol (at 2070) as the mean of the ``best'' estimates reported in peer- reviewed studies (at the time). It thus differs from the mean of all estimates reported in the peer-reviewed studies surveyed by Tol. The

$43 per ton value was also attributed to Tol by IPCC Working Group

II (2007), at 822.

Since Tol's estimate includes the worldwide costs of potential damages from carbon dioxide emissions, NHTSA elected to employ it as an upper bound on the estimate value of the reduction in U.S. domestic damage costs that is likely to result from lower CO2 emissions.\317\ NHTSA noted that Tol had a more recent (2007) and inclusive survey published online with peer-review comments. NHTSA stated that it had elected not to rely on this study, but that it would consider doing so in its analysis for the final rule if the survey had been published, and would also consider any other newly-published evidence.

\317\ For purposes of comparison, NHTSA noted that in the rulemaking to establish CAFE standards for MY 2008-11 light trucks,

NRDC recommended a value of $10-$25 per ton of CO2 emissions reduced by fuel savings, and both EDF and UCS recommended a value of $50 per ton of carbon, which is equivalent to about $14 per ton of CO2emissions.

NHTSA noted that the IPCC Working Group II Fourth Assessment Report

(2007, at 822) further suggests that the SCC is growing at an annual rate of 2.4 percent, based on estimated increases in damages from future emissions reported in published studies. NHTSA also elected to apply this growth rate to Tol's original 2005 estimate. Thus, by 2011,

NHTSA estimated that the upper bound on the benefits of reducing

CO2emissions will have reached about $14 per metric ton of

CO2, and will continue to increase by 2.4 percent annually thereafter.

In setting a lower bound, the agency agreed with the IPCC Working

Group II report (2007) that ``significant warming across the globe and the locations of significant observed changes in many systems consistent with warming is very unlikely to be due solely to natural variability of temperatures or natural variability of the systems.''

(p. 9) Although this finding suggests that the global value of economic benefits from reducing carbon dioxide emissions is unlikely to be zero,

NHTSA stated that it does not necessarily rule out low or zero values for the benefit to the U.S. itself from reducing emissions.

In some of the analysis it performed to develop the CAFE standards,

NHTSA employed a point estimate for the value of reducing

CO2emissions. For this estimate, the agency used the midpoint of the range from $0 to $14, or $7.00, per metric ton of

CO2as the initial value for the year 2011, and assumed that this value would grow at 2.4 percent annually thereafter. This estimate was employed for the analyses conducted using the Volpe model to support development of the proposed standards. The agency also conducted sensitivity analyses of the benefits from reducing

CO2emissions using both the upper ($14/metric ton) and lower ($0/metric ton) bounds of this range.

NHTSA sought comment on its tentative conclusion for the value of the SCC, the use of a domestic versus a global value for the economic benefit of reducing CO2emissions, the rate at which the value of the SCC grows over time, the desirability of and procedures for incorporating benefits from reducing emissions of GHGs other than

CO2, and any other aspects of developing a reliable SCC value for purposes of establishing CAFE standards.

NHTSA received many comments on its assumptions in the NPRM about the SCC. The comment summaries are presented below and grouped by topic:

(1) NHTSA's proposal of a single value for the SCC;

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(2) NHTSA's proposal of $7 as the value for the SCC;

(3) NHTSA's proposal of $0 as the lower bound estimate for the domestic U.S. value for the SCC;

(4) NHTSA's proposal of $14 as the upper bound estimate for the domestic U.S. value for the SCC;

(5) other values that NHTSA could have proposed for the SCC;

(6) NHTSA's use of a domestic versus a global value for the economic benefit of reducing CO2emissions;

(7) the rate at which the SCC grows over time;

(8) the discount rate that should be used for SCC estimates; and

(9) other issues raised by commenters.

(1) NHTSA's Proposal of a Single Value for the SCC

NHTSA received a comment on its proposal of a single value for the

SCC from Prof. Gary Yohe, an economist who has considered the SCC extensively and whom NHTSA cited in the NPRM. Prof. Yohe commented that the NPRM had stated that ``Using a value for the SCC that reflects the central tendency of estimates drawn from many studies reduces the chances of relying on a single estimate that subsequently proves to be biased.'' \318\ Prof. Yohe argued that proposing a single value for the

SCC inherently creates bias, because ``Any value is based on presumptions about pure rate of time preference, risk and/or inequity aversion, and climate sensitivity.''

\318\ 73 FR 24414 (May 2, 2008).

(2) NHTSA's Proposal of $7 as the Value for the SCC

NHTSA received comments from 3 individuals, CARB, the Attorneys

General, 10 U.S. Senators, 10 environmental and consumer groups, and the Alliance. Prof. Tol, whose 2005 paper provided the basis for

NHTSA's proposal of an SCC number, commented that contrary to NHTSA's belief that the dollars used in Tol (2005) were 2005 dollars, they were in fact 1995 dollars. Prof. Tol also commented that NHTSA should

``alert the reader'' that although Tol (2007) was only ``conditionally accepted,'' as NHTSA had noted in the NPRM, the newer study ``finds larger estimates than the 2005 paper.'' Sierra Club et al., in its comments, also stated that Prof. Tol had commented on the NPRM, arguing that using 1995 instead of 2005 dollars ``would make his 1995 value of

$14 closer to a 2005 value of $19.26.''

Several commenters disputed NHTSA's proposal of $7 as the midpoint between $0 and $14. UCS argued that proposing $7 puts as much weight on

$0 as on $14, even though failing to assign a value was declared by the

Ninth Circuit to be arbitrary and capricious. CBD commented that

``NHTSA's methodology for the selection of an estimate of the value of reducing greenhouse gas emissions is arbitrary and designed to minimize the estimate.'' CBD argued that ``* * * simply splitting the difference between two points is not a defensible methodology, particularly when the low point of the range is not part of a valid range but simply an arbitrary selection of zero as an endpoint.''

EDF also commented NHTSA's decision to propose $7 because it is the midpoint between $0 and $14 also ``lacks a reasoned basis,'' for which

``NHTSA fails to provide any justification.''

The Sierra Club et al. commented that NHTSA is wrong to place

``equal weighting and probability'' on $0 and $14 and pick the median, and that $7 is ``far below current carbon estimates,'' citing the 2006

Stern Review which found an SCC of ``on the order of'' $85/tonne

CO2. The Sierra Club argued that this shows how ``misguided and unrealistic NHTSA's carbon pricing really is.''

The Attorneys General commented that NHTSA's decision to simply halve Tol's estimate was ``not a reasoned judgment.''

Public Citizen argued that there is no justification for using the midpoint, and that NHTSA should instead ``weight the credibility of each estimate,'' by making ``apples to apples'' comparisons between the studies by ``looking at studies based on their assumptions.'' Public

Citizen argued that this will help NHTSA avoid skewing the result of averaging estimates from multiple studies. NRDC similarly argued that proposing $7 as ``a simple average of its proposed upper and lower bounds * * * assumes a normal distribution of damages, which is decidedly not the distribution of social cost of carbon estimates.''

NRDC further argued that ``* * * most social cost of carbon estimates are biased downwards, for the simple reason that almost all models assume perfect substitutability between normal consumption goods and environmental goods.'' NRDC cited 2007 research by Sterner and Persson disaggregating ``goods'' into ``environmental goods'' and ``consumption goods,'' which found that the price of an environmental good like carbon reductions increased at a faster rate as damage progressed than consumption goods would increase. Accordingly, NRDC argued, ``NHTSA's social cost of carbon is much too low.''

Prof. Hanemann also commented that NHTSA did not justify its decision to pick the midpoint (between $0 and $14) and then project it to 2011, although he focused more particularly on NHTSA's not having applied ``the escalation factor of a 2.4 percent increase in real terms beginning in 2005.''

The Alliance commented that proposing $7 as the midpoint between $0 and $14 is incorrect. The Alliance argued that NHTSA must try harder to estimate the purely domestic effects of CO2emissions reductions, and stated that NERA had found that the U.S. portion of world gross product ``is a much better means of allocating the United

States' share of any benefits in reduced CO2emissions'' than picking the midpoint of a range of global SCC estimates. NERA assumed that the U.S. portion is 20 percent, which ``reduces NHTSA's estimate of CO2benefits with the `optimized standard' for

MY2015 from $869 million to $348 million.'' NERA also argued that this was conservative, since the U.S., as a developed country, should be better able to adapt to negative global warming consequences.

Several commenters also criticized Tol (2005) as being out of date.

Prof. Hanemann made this point, and commented that ``more recent analyses show higher damage estimates.'' The Attorneys General similarly commented that ``It seems likely that there are better estimates'' than Tol's, ``Since [that] article is now three years old, and it itself explains in detail the many deficiencies in the economic literature at that time.'' The Attorneys General stated that ``NHTSA should consult with EPA on this issue, and conduct a review of the current scientific and economics literature.''

Several commenters simply argued that $7/ton is too low a value for the SCC. CARB argued that ``NHTSA's assumed social cost of carbon in the future is also unreasonably low, and if set at defensible levels that also properly value cumulative impacts, could affect the stringency of the standards.'' Carin Skoog, an individual, similarly commented that ``The arbitrary decision to use $7/ton underestimates the economic, social, and environmental consequences of the impacts of global warming.'' ACEEE similarly commented that NHTSA's use of $7/ton is both ``inconsistent with current estimates'' and ``fails to take into account the potentially high probability of a catastrophic climate change situation.'' The 10 U.S. Senators who commented stated that

NHTSA's value of $7 per ton

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is ``underestimated,'' and ``likely to be found arbitrary and capricious.''

(3) NHTSA's Proposal of $0 as the Lower Bound Estimate for the Domestic

U.S. Value for the SCC

No commenters supported NHTSA's use of $0/ton as the lower bound estimate for the U.S. domestic SCC. Several commenters, including UCS,

EDF, and Prof. Hanemann cited the IPCC Fourth Assessment Report as evidence that, as Prof. Hanemann stated, ``there is no credible evidence of any significant net benefit to the U.S. from the climate change scenarios developed for the Fourth IPCC Report.'' The U.S.

Senators who commented also stated that in citing the IPCC as not precluding low or zero values to the U.S., NHTSA had ``fail[ed] to recognize that IPCC was looking at global estimates which are not disaggregated.''

Commenters also mentioned other reports as providing evidence that there would be some net adverse impact on the U.S. from climate change, and thus a lower bound value of $0 was untenable. Prof. Hanemann cited the recent USCCSP report ``conclusively eliminates the notion that climate change is likely to have no net adverse impact on the United

States.''

UCS argued that proposing $0 as the lower bound ``implies the possibility that climate change won't have any negative consequences,'' which ``stands in stark contrast to recent government study findings on

U.S. climate change effects and findings from * * * the Academies of

Science for the G8+5.''

EDF commented that ``A recent review of economic studies on the predicted impacts of climate change on different economic sectors in the U.S. by the Center for Integrative Environmental Research at the

University of Maryland, `The US Economic Impacts of Climate Change and the Costs of Inaction: A Review and Assessment,' also demonstrates the range and scope of adverse impacts that climate change will have on different sectors and regions of the U.S. economy.'' EDF stated that

``The study concluded that `Scientific evidence is mounting that climate change will directly or indirectly affect all economic sectors and regions of the country, though not all equally. Although there may be temporary benefits from a changing climate, the costs of climate change rapidly exceed benefits and place major strains on public sector budgets, personal income and job security.' ''

Sierra Club et al. commented that ``several government reports

that

have clearly stated that CO2emissions do have a significant impact on our economy.'' NHTSA's conclusion that ``it does not necessarily rule out low or zero carbon values for the benefit to the U.S. itself from reducing emissions'' is arbitrary given agency's admission that ``the global value of economic benefits from reducing carbon dioxide emissions is unlikely to be zero.''

NRDC cited a U.S. government report that ``documents that many of the projected impacts have already begun,'' as well as the Stern Review which ``estimated that impacts could result in a loss of 5-20 percent of world GDP by 2100,'' and its own May 2008 report which ``found U.S. damages from four impacts alone would cost 1.8 percent of GDP by 2100.''

Several commenters instead raised objections to studies that may show a positive net benefit to the U.S. from climate change, such that a domestic SCC value could be $0. CBD stated that NHTSA offered

``absolutely no evidence to support'' proposing $0 as the lower bound, and argued that ``only one study surveyed in Tol (2005) included central estimates below $0.00; and that was a non-peer-reviewed article, also authored by Tol.'' CBD further argued that Tol (2005) never found, nor included as a consideration in developing SCC estimates, as NHTSA suggested in the NPRM, that any studies failed ``to consider potentially beneficial impacts of climate change,'' or to account adequately ``for how future development patterns and adaptations could reduce potential impacts from climate change or the economic damages they cause.''

Prof. Hanemann also argued that studies suggesting any possible positive net benefit to U.S. from global warming ``have serious flaws and cannot withstand serious scrutiny,'' and concluded that a value of

$0 per ton is ``wildly unrealistic'' ``even [for] a sensitivity analysis.''

NRDC commented that ``NHTSA's lower bound seems to be based upon the fact that some estimates exist that are zero and even negative.''

However, NRDC argued that ``These lower bound estimates are likely based on outdated science.'' NRDC ``urge[d] NHTSA to do a rigorous re- examination of Tol's work, eliminating outdated zero estimates and adjusting for fat tailed upper distributions.''

Several commenters also focused on the CBD decision to argue that

NHTSA may not use $0 as the lower bound estimate, because as UCS stated, ``the Ninth Circuit found a value of $0 to be arbitrary and capricious.'' EDF also commented that NHTSA's decision to pick $0 as the lower bound ``lacks a reasoned basis,'' given the Ninth Circuit decision. Sierra Club et al. and the U.S. Senators similarly commented that $0 as the lower bound is contrary to CBD. The comment by the U.S.

Senators stated that ``* * * we can only conclude that the purpose of this `low bound' estimate is to cut the more accurate value in half in an arbitrary manner. We recommend NHTSA remove or justify this low bound estimate in its final CAFE regulation.''

(4) NHTSA's Proposal of $14 as the Upper Bound Estimate for the

Domestic U.S. Value for the SCC

No commenters supported NHTSA's proposal of $14/ton, based on Tol

(2005), as the upper bound estimate for the domestic U.S. value for the

SCC. ACEEE argued that ``NHTSA's decision to use Tol's estimate of $14 as the upper bound based on the argument that this value includes the worldwide costs CO2is flawed,'' although the commenter did not explain why.

Some commenters argued that NHTSA should not have picked the median from Tol (2005) as its upper bound estimate.

The U.S. Senators who commented stated that NHTSA is wrong to use

$14 as the upper bound because Tol's median is an average of multiple estimates, and averages should be used as averages and not as maximums.

The Senators stated further that ``NHTSA selected the lower of Tol's two estimates without explanation.'' The U.S. Senators also commented that Tol (2007) updates the previous study and finds a median of over

$19/ton. NRDC also cited Tol (2007) as reflecting an increase in the median from $14 to $20 dollars per ton of CO2.

Sierra Club et al. commented that $14 is an incorrect ``maximum,'' because the maximum that Tol ``states that the maximum carbon value is in the range of $55-$95 per metric ton CO2.'' The commenter further argued that if NHTSA could justify $0 as the lower bound,

``then it should not be able to rule out the high value of $95 per ton

CO2in the study, and the average value would be much higher.''

NRDC commented that NHTSA should not have used Tol's median value of $14 as its upper bound for two reasons. First, a median value is not properly reflective of climate change damage estimate distributions, which are ``asymmetric'' with ``fat'' upper tails. And second, because of the unique aspects of climate change damage estimates, such as

``nonlinearities, abrupt change, and thresholds,'' ``a full probability density function should be estimated, using the full range of all [SCC] estimates from the studies, not

Page 14342

simply a collection of their `best-guesses.' '' [Emphasis in original.]

NRDC argued that research has shown that ``When the same traditional social cost of carbon analyses are rerun incorporating the potential for nonlinear change, the resulting policy conclusions are changed considerably to greater mitigation,'' and that ``Another recent study has shown that incorporating the potential for low-probability, high- damage events can increase the social cost of carbon by a factor of 20.''

NRDC also cited Prof. Weitzman to argue that the complications of climate change damage estimates require any analysis to weigh more heavily the ``low probability/high catastrophic risks,'' because these will otherwise be insufficiently accounted for. In discussing the uncertainties associated with climate change, NRDC cited Weitzman as stating that

The result of this immense cascading of huge uncertainties is a

``reduced form'' of truly stupendous uncertainty about the aggregate-utility impacts of catastrophic climate change, which mathematically is represented by a very-spread-out very-fat-tailed

PDF [probability density function] of what might be called (present discounted) ``welfare sensitivity'' * * * [T]he value of ``welfare sensitivity'' is effectively bounded only by some very big number representing something like the value of statistical civilization as we know it or maybe even the value of statistical life on earth as we know it.

Thus, NRDC argued, using an upper bound of $14 cannot possibly account for the uncertainties and risk of climate change. Like Sierra Club et al., NRDC further argued that ``* * * for consistency with the rationale used for proposing the lower bound, NHTSA's upper bound should be based upon some function of the highest estimates in the Tol 2005 study (the very highest was $1,666).''

Some commenters argued that NHTSA had overlooked particular aspects of the Tol (2005) study, and thus arrived at $14 incorrectly.

CBD argued that NHTSA overlooked key aspects of the Tol (2005) analysis in proposing $14 per ton, including the fact that Tol included significantly higher estimates in his analysis. EDF similarly commented that NHTSA had failed to ``discuss the significant gaps in the existing research reviewed in [Tol (2005)] and focuse[d] on a specific estimate of the SCC that is biased toward lower value estimates.'' EDF stated that NHTSA's decision to use only peer-reviewed studies from Tol (2005) introduced particular bias, because those studies ``systematically used higher discount rates * * * which may have biased their results downward'' compared to averaging all the studies together.

Some commenters argued that Tol (2005) was flawed to the point that it could not provide a reliable basis for NHTSA to use its median estimate as the upper bound.

CBD commented that ``the studies cited in the Tol (2005) survey dated back as much as 18 years, to 1991, and 25 of the 28 studies cited were published more than five years ago,'' so given that climate change science is progressing very rapidly, these studies are probably outdated.

EDF also argued that ``Most of the 28 studies surveyed by Tol'' are outdated and ``consider only a limited number of potential impacts from climate change,'' as Tol recognizes by cautioning that the estimates analyzed ``may understate the true cost of climate change.'' EDF stated that the IPCC's ``most recent compilation of SCC research'' agrees. EDF also commented that Tol's meta-analysis ``compares studies with widely different methodologies and assumptions,'' particularly discount rates, which EDF stated NHTSA should have controlled for because it ``can have a considerable impact on SCC estimates.''

NRDC criticized Tol (2005) extensively in its comments. NRDC stated that Tol's estimate was based on studies which exclude (1) ``non-market costs, such as damage to and loss of entire ecosystems and species;'' and (2) ``studies of national security costs caused by conflicts over stressed resources and increased migration from heavily impacted areas,'' which ``describe global warming as a `threat multiplier.' ''

NRDC recognized that Tol acknowledged that ``costs such as those described above are poorly accounted for in current social cost of carbon estimates,'' but insisted that NHTSA must nonetheless account for them.

NRDC also argued that Tol's estimate is based on outdated studies, because ``there are smaller natural sinks for carbon than Tol assumed, higher emissions than he assumed, a higher temperature response to emissions than he assumed, and faster changes in observed impacts than he assumed.'' NRDC commented that recent events like Hurricane Katrina are evidence that the U.S. cannot adapt to climate change-related disasters as fast as previously thought. NRDC further commented that it was unclear whether Tol's estimate ``included any valuation for lost lives,'' suggesting that including this valuation could raise SCC considerably, and arguing that EPA accounts for it in Clean Air Act rulemakings.

(5) Other Values That NHTSA Could Have Chosen for the SCC

Many commenters suggested other SCC values that they thought NHTSA should use instead of a value based on Tol (2005).

Several commenters mentioned SCC values produced by EPA. In March 2008, EPA produced an analysis for the Senate Committee on Environment and Public Works for S. 2191, ``America's Climate Security Act,'' also known as the Lieberman-Warner bill.\319\ Public Citizen commented that

NHTSA's upper bound estimate should be at least as high as EPA's estimates for the Lieberman-Warner bill, which Public Citizen said

``are more recent than the Tol estimate cited in NHTSA's notice.''

Public Citizen commented that EPA ``estimated the value of

CO2in 2015 between $22 and $40 per metric ton of

CO2, and cited two other analyses with higher estimates of

$48 and $50 per metric ton CO2.'' Sierra Club et al. also commented that NHTSA must use a higher SCC value, and stated that

``EPA's recent analysis of America's Climate Security Act of 2007 noted that the value of a ton of CO2could be as high as $22-

$40.28.'' An individual, Carin Skoog, also commented that ``The US EPA recently suggested the value of a ton of CO2could be as high as $22-35.'' ACEEE appeared to refer obliquely to the EPA estimates, recommending that NHTSA use a higher CO2 estimate. ACEEE argued that ``legislative efforts to implement a carbon regime in which the projected market cost of CO2is expected to lie between $20 and $30--significantly higher than the average damage cost assumed by NHTSA--serves as evidence that the U.S. is now beginning to contemplate the high risk of rising greenhouse gas emissions.''

\319\ Available at http://www.epa.gov/climatechange/downloads/ s2191_EPA_Analysis.pdf (last accessed March 23, 2009).

NRDC commented that NHTSA cited ``compliance cost estimates provided by NRDC and others in the 2006 light truck rulemaking'' in describing its proposal of the upper bound estimate. NRDC argued that

NHTSA should instead consider damage costs and not rely on compliance cost estimates. NRDC stated that ``If NHTSA were to consider compliance costs it must consider current analyses, such as EPA's analysis of S. 2191, which finds that CO2allowances would cost 19 to 67

(2005) dollars per ton of CO2-equivalent in 2012 rising at 5 percent per year real (the range for EPA's Core Scenario is $19 to $35 in 2012, rising at 5 percent per year real).''

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EPA also recently released a ``Technical Support Document on the

Benefits of Reducing GHG Emissions,'' \320\ (TSD) to accompany an

Advance Notice of Proposed Rulemaking (ANPRM) on regulating GHG emissions under the Clean Air Act.\321\ EDF commented in its original comments that ``The higher SCC estimates contained in EPA's draft ANPR, and EPA's accompanying discussion of the remaining omissions and weaknesses in state-of-the-art SCC research, further demonstrates that

NHTSA's estimates are underestimating the benefits of reducing carbon dioxide emissions, and therefore setting CAFE standards below optimal levels.'' After the TSD was released, EDF submitted it to NHTSA's NPRM docket, and submitted late additional comments arguing that NHTSA must

``adjust its final rulemaking action in accordance with EPA's assessment and findings,'' because ``EPA's assessment is far more rigorous than NHTSA's proposal, and EPA's determinations are supported by a considerable and well-reasoned volume of information.'' EDF stated that EPA did its own meta-analysis ``building on'' Tol (2005) and

(2007), but including ``only recent peer reviewed studies that met a range of quality criteria in its evaluation.'' EDF further stated that

EPA arrived at an estimate of $40/tCO2(using a 3 percent discount rate), or $60/tCO2(using a 2 percent discount rate). EDF commented that EPA concluded that estimates ``likely underestimate costs of carbon dioxide emissions,'' because they do not account for all the climate change impacts identified by the IPCC, like

``non-market damages, the effects of climate variability, risks of potential extreme weather, socially contingent events [(such as violent conflict)], and potential long-term catastrophic events.''

\320\ Available at Docket No. NHTSA-2008-0089-0456.2.

\321\ EPA's ANPRM was signed July 11, 2008, after NHTSA's NPRM was published. See 73 FR 44353 (July 30, 2008).

The U.S. Senators who commented argued that NHTSA's use of $14/ton based on Tol (2005) as the ``high bound'' estimate was incorrect because EPA had been working since 2007 ``to develop more accurate,

`state-of-the-art' estimates of the benefits of reducing greenhouse gas pollution.'' The Senators stated that ``Although EPA's estimates have not been finalized, the Agency used $40 per ton as the value of reducing carbon dioxide emissions.'' The Senators further stated that

``NHTSA's draft rule inexplicably makes no mention of EPA's extensive research and analysis in this area.''

Other commenters argued that NHTSA should have used or considered the value at which CO2allowances are currently trading in the EU regulatory system. UCS stated that using $14 as the upper end is

``unacceptably low,'' given that ``The European Climate Exchange, which provides a futures market value for global warming pollution in

Europe's carbon constrained market, indicates 2011 contracts for carbon dioxide at approximately $45 (U.S.) per metric ton--well above the figure cited by NHTSA.'' UCS argued that ``This value represents a predicted marginal abatement cost (the cost of avoiding global warming pollution), and is likely a conservative estimate of the benefit of reducing global warming since the cost of avoiding climate change is lower than the cost of fixing the damage after it occurs.'' UCS further argued that this number is also ``generally consistent with other recent allowance price estimates, such as the EPA's assessment of GHG allowance prices under Lieberman-Warner: $22-$40 in 2015 and $28-$51 in 2020 (EPA figures are in 2005 dollars per ton of CO2- equivalent.)''

Sierra Club et al., Public Citizen, and CARB all also commented that NHTSA's value for the SCC is too low, and that NHTSA should instead use a CO2damage value based on the market value in the European Trading System, either the current value (which Public

Citizen stated was ``recently * * * around [euro]30 per allowance (one metric ton CO2equivalent),'' and CARB stated was

``currently trading around $42 per ton''), or some future value. Sierra

Club et al. argued that ``the futures market value for a metric ton of

CO2in 2011 is already up to $45,'' while CARB went on to argue that ``* * * Germany Deutsche Bank [is] forecasting EUA prices of

$60 for 2008 and EUA prices as high as $100 by 2020 [citation removed].''

Other commenters suggested other SCC values different from any discussed so far. For example, Prof. Hanemann argued that, based on his own research, NHTSA use a value of ``about $25 per metric ton [of

CO2] in 2005$,'' and should apply a real growth rate of 2.4 percent per year to determine the value of reducing emissions in future years. CARB, in contrast, commented that ``NHTSA should also consider using substantially higher estimates.'' CARB stated that ``the

International Energy Agency (IEA) recently estimated that to limit global CO2emissions by the 50 percent GHG reduction that the IPCC concluded is needed to keep global temperatures from rising more than two degrees Celsius by 2050, CO2offset prices will need to rise to up to $200 per ton * * *.'' CARB further argued that ``* * * even this higher market price for carbon may not incorporate the true cost of all natural resources damages, an externality.''

Mr. Montgomery commented that NHTSA should use an SCC value of $0, because he argued that ``If a comprehensive cap on [CO2] emissions is put in place, as many commentators and policymakers predict, then the choice of policy instrument will have no effect on the overall level of emissions,'' such that ``Tightening a CAFE standard will only result in greater mitigation in emissions from

motor vehicles

and less mitigation in parts of the economy where decisions are made in response to carbon prices without specific regulatory mandates.'' Thus, Mr. Montgomery concluded that ``the damages from global warming will be the same no matter what the level of the CAFE standard, so that the SCC used should be zero.''

Mr. Montgomery also commented that an SCC based on Tol's estimates will be too high if the ``global policy objective toward greenhouse gas emissions * * * is a lower concentration than that on which the Tol estimates are based.'' Mr. Montgomery argued that ``Marginal damages depend on the level of GHG concentrations at which they are measured,'' so that ``If the goal for global concentrations is set at a high level

(e.g., 750 ppm) then damages from an additional ton of CO2

(due to higher concentrations during the period of its residence in the atmosphere) will be higher than if the goal is set at a low level (350 ppm) at which point most of the damaging consequences have been eliminated.''

Ford redacted much of its discussion of the SCC based on confidentiality concerns, but seemed to argue generally that reducing

CO2emissions from motor vehicles is expensive compared to reducing emissions in other sectors, and commented that ``All sectors must contribute'' to reducing emissions. Ford ``recommended that NHTSA consider using CO2mitigation cost in their analysis in lieu of emission damage cost.''

NADA commented that ``NHTSA should consider incorporating into its analysis the $2.97 per metric ton recently paid by the U.S. House of

Representatives for carbon offsets.'' \322\

\322\ NADA cited the ``Statement of Daniel P. Beard, Chief

Administrative Officer, U.S. House of Representatives, Concerning the Purchase of Carbon Offsets,'' which does not list the specific price paid for the offsets described. Available at http:// cao.house.gov/press/cao-20080205.shtml (last accessed March 23, 2009).

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The Alliance was the only commenter to suggest that NHTSA not quantify the SCC at all. The Alliance argued that ``* * * given the fact that no published studies of which we are aware address the SCC apportionment issue, NHTSA would be well within its rights to decide that SCC will be considered purely in a qualitative balancing fashion and not quantified.'' The Alliance cited Transmission Access Policy

Study Group v. FERC, 225 F.3d 667, 736 (D.C. Cir. 2000) (``Given that

FERC's comparison of the frozen efficiency case to its base case yielded little difference, the agency had no reason to conduct further analysis. By rigorously examining the frozen efficiency case, even though it believed the case to be unreasonable, FERC ensured that its decision was `fully informed' and `well-considered.' '').

(6) NHTSA's Use of a Domestic Versus a Global Value for the Economic

Benefit of Reducing CO2Emissions

NHTSA received a number of comments on its tentative decision to employ a domestic value for the SCC instead of a global value. Several commenters supported a domestic value, while other commenters supported a global value.

The Alliance argued that NHTSA must consider only domestic impacts both because of EPCA, which refers to ``the need of the United States to conserve energy,'' and because of the ``extraterritoriality'' or

``Aramco canon,'' see EEOC v. Arabian American Oil Co., 499 U.S. 244, 260 (1991) (``It is a longstanding principle of American law `that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States.')

(quoting Foley Bros. v. Filardo, 336 U.S. 281, 285 (1949)). The

Alliance further argued that because NHTSA must consider only domestic impacts, it must ``develop some mechanism for scaling down the global

SCC estimates produced in the published literature,'' besides NHTSA's proposal which just took the midpoint between $0 and $14 as the domestic SCC value. The Alliance argued that it would be inappropriate to use land mass to determine the domestic portion, since so much of the land mass on the planet is uninhabited; and also argued that it would be inappropriate to use population, since ``not all human beings live in areas that are expected to be equally impacted by climate change.'' As discussed above, the Alliance cited to the NERA Report that it included with its comments as having found that an SCC value based on the U.S. share of world gross product was more appropriate.

NADA similarly commented that ``NHTSA should account only for any domestic impacts of reducing the social costs of motor vehicle

CO2, given that EPCA focuses on U.S. energy security and all other costs and benefits evaluated with respect to the proposed CAFE standards are domestic only.''

Mr. Delucchi agreed with NHTSA's discussion that ``consistency requires'' that only U.S. domestic ``global warming damages'' be considered if NHTSA also accounts for the monopsony effect in the reduced value of transfer payments from U.S. oil purchasers to foreign oil suppliers. Mr. Delucchi suggested that NHTSA use a procedure described in his previous research to estimate the fraction of global damages from climate change that would be borne within the U.S., and apply this fraction to the estimated global SCC to determine the value of U.S. domestic benefits from reducing emissions. This procedure adjusts the fraction of global GDP accounted for by the U.S. by the relative sensitivity of the U.S. to climate damages compared to the remainder of the world, which Delucchi measures by the ratio of U.S. dollar damages from climate change per dollar of U.S. GDP to global economic damages from climate change per dollar of global GDP. Using this method, he estimates that U.S. damages from climate change are likely to represent 0-14 percent of total global damages, and thus that the value to the U.S. of reducing carbon emissions is equal to that same percentage of the estimated global value of the SCC.\323\

\323\ Mark A. Delucchi, Summary of the Non-Monetary

Externalities of Motor Vehicle Use, UCD--ITS-RR-96-3 (9) rev.1,

Institute of Transportation Studies, University of California,

Davis, originally published September 1998, revised October 2004.

Available at http://www.its.ucdavis.edu/publications/2004/UCD-ITS-

RR-96-03(09)--rev1.pdf (last accessed March 23, 2009).

Mr. Montgomery argued that a domestic SCC value was appropriate, commenting that ``U.S. policy should be based on marginal damages to the U.S. from CO2emissions in the U.S., as stated in relevant OMB circulars on cost-benefit analysis and suggested in the draft.'' Mr. Montgomery further stated that ``The consensus appears to be that richer countries are less vulnerable than poorer, and that temperature increases will be least in temperate regions like the

U.S.'' Thus, Mr. Montgomery argued that a conservative estimate of U.S. damages would be a calculation ``based on the ration of U.S. GDP to world GDP.''

Other commenters argued that NHTSA should use a global SCC value.

NRDC commented that because ``Carbon dioxide is a global pollutant, and much of the damages other countries will experience are a result of

U.S. emissions,'' and because ``emissions in other countries will cause damages in the U.S.,'' that ``It is fundamentally inconsistent with the global circulation of these pollutants to arbitrarily limit assessment of the benefits of reducing U.S. emissions to those accruing in our own territory.'' NRDC also commented that national security studies show that the global social costs of carbon will ``spill over'' to the U.S. and other wealthy countries. EDF also commented that NHTSA should use a global SCC number rather than a domestic one, because ``Climate change is clearly a global issue,'' so EDF ``recommend[s] that benefits of reducing CO2concentrations should reflect benefits to society as a whole.''

EDF and the U.S. Senators commented that use of a global SCC value would be consistent with OMB guidance that international impacts of regulations may be considered if appropriate. The Senators also commented that the U.S. must consider the global climate change effects of its regulations because it ratified the United Nations Framework

Convention on Climate Change in 1992. If every nation considers only domestic effects of climate change, the Senators argued, emissions reduction policies will fall ``far short of the socially optimized level.''

CBD similarly commented that NHTSA should use a global value for

CO2, arguing that using $7 ``fails to incorporate the full economic costs of global climate change, values that are difficult to monetize, and costs to the world outside the boundaries of the United

States.'' CBD stated that ``In general, the estimate of the social costs of climate change fails to incorporate the loss of biodiversity, complex and large-scale ecosystem services, and the disproportionate impacts of global climate change on the developing world.'' CBD also stated that NHTSA's use of $0 as the lower bound estimate is

``[p]resumably * * * meant to imply that the United States might benefit economically by letting other countries bear the costs of unabated American greenhouse gas emissions. Setting aside the tremendous ethical implications of such a position, NHTSA provides absolutely no evidence to support the claim.''

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In its late comments accompanying its submission of EPA's TSD, EDF argued that EPA's TSD concluded that a global number is correct, for several reasons. Because GHGs are global pollutants and affect everyone, using ``domestic only'' estimates would ``omit potential impacts on the United States (e.g., economic or national security impacts) resulting from climate change impacts in other countries.''

Consequently, a global number must be used to avoid missing any benefits and to maximize global net benefits (i.e., ``countries would need to mitigate up to the point where their domestic marginal cost equals the global marginal benefit.'' EDF stated that EPA's TSD cites

Nordhaus (2006), and says that ``Net present value estimates of global marginal benefits internalize the global and intergenerational externalities of reducing a unit of emissions and can therefore help guide policies towards an efficient level of provision of the public good.''

(7) The Rate at Which the SCC Grows Over Time

Several commenters cited the IPCC Fourth Assessment Report with regard to the rate at which the SCC should increase over time. CBD commented that as part of the Fourth Assessment Report, the IPCC ``* *

* states that `It is virtually certain that the real social cost of carbon and other greenhouse gases will increase over time; it is very likely that the rate of increase will be 2% to 4% per year.' '' The

U.S. Senators commented that the 2.4 percent per year increase that

NHTSA used in the NPRM is incorrect, because ``the IPCC report states that `it is very likely that the rate of increase will be 2% to 4% per year.' ''

EDF stated that IPCC's recommendation of a 2.4 percent growth rate was meant to be used in combination with a low, intergenerational discount rate. EDF further argued that after the Fourth Assessment

Report was released, one of the lead authors recommended using a growth rate of 3 percent, but that ``The OMB equivalent guidance for the UK *

* * recommend using a 2 percent yearly increase.'' EDF thus concluded that the 2.4 percent growth rate could be used, but only with a maximum 3 percent discount rate, and argued that a range of growth rates should be run in the sensitivity analysis ``because of considerable uncertainty.''

(8) The Discount Rate That Should Be Used for SCC Estimates

Commenters urged NHTSA to consider a low or even negative discount rate in choosing an estimate for the SCC. CBD, for example, stated that

Stern found that `` `If consumption falls along a path, the discount rate can be negative. If inequality rises over time, this would work to reduce the discount rate, for the social welfare functions typically used. If uncertainty rises as outcomes further into the future are contemplated, this would work to reduce the discount rate, with the welfare functions typically used.' '' CBD then argued that ``A negative discount rate would dramatically increase the cost of climate change in the cost-benefit analyses in the proposed rule.''

NRDC commented that NHTSA should use a discount rate of no more than 3 percent for the entire rulemaking, and returned to this argument in its SCC discussion, criticizing Tol's estimate for relying

``primarily upon estimates that did not use current accepted climate change discounting procedures of a declining discount rate over time.''

In its initial comments, EDF stated that NHTSA should only consider recent studies that use a 3 percent discount rate for estimating SCC.

In its late comments, EDF stated that EPA's TSD concluded that ``a low discount rate is most appropriate for SCC estimation,'' for several reasons. First, because OMB Circular A-4 allows agencies to use a lower discount rate when there are inter-generational benefits associated with a rulemaking. Second, because ``In this inter-generational context, a three percent discount rate is consistent with observed interest rates from long-term intra-generational investments (net of risk premiums) as well as interest rates relevant for monetary estimates of the impacts of climate change that are primarily consumption effects.'' Third, because EPA had found that the scientific literature supports the use of a discount rate of 3 percent or lower, as being ``* * * more consistent with conditions associated with long- run uncertainty in economic growth and interest rates, intergenerational considerations, and the risk of high impact climate damages (which could reduce or reverse economic growth).''

(9) Other Issues Raised by Commenters

The remaining issues raised by commenters with regard to NHTSA's proposal regarding the value for the SCC were as follows:

Public Citizen commented that NHTSA should also have considered

``the costs of inaction on reducing greenhouse gas emissions and the resultant consequences of global warming,'' including other environmental and health consequences such as those analyzed in NHTSA's

DEIS. Public Citizen cited EPA's denial of California's waiver request and ``a recent report from the University of Maryland'' as evidence of some of these costs, and argued that NHTSA needed to estimate ``the costs of inaction'' in making its final decision.

NRDC commented that emissions reductions may be ``greater than what

CAFE accomplishes,'' such that the U.S. would ``get * * * a larger social cost of carbon benefits stream,'' if the U.S. actions in

``taking a lead in reducing emissions * * * [helps to] induce other countries, especially China and India, to also reduce.'' NRDC also argued that ``Carbon dioxide has a very slow decay rate in the atmosphere, lasting hundreds of years into the future,'' which means that ``the social costs of carbon extend well past the life time of the vehicle.'' Thus, ``Any sensible benefits stream would extend them at least several decades past the lifetime of a vehicle.''

In its original comments, EDF argued that NHTSA should have considered using a risk-management framework in developing an SCC estimate, because cost-benefit analysis ``cannot capture the range of uncertainty and risk that characterizes climate change.'' EDF cited

Prof. Weitzman's work as highlighting ``that the expected damages of climate change may be dominated by the existence of consequences which have very low probability but very high damages (such as double-digit increases in mean global temperature), or a `fat tail' in the distribution of possible outcomes.'' In its late comments, EDF added that EPA's TSD also suggested that a risk assessment framework may be more appropriate than cost-benefit analysis ``in light of the ethical implications of climate change and the difficulty in valuing catastrophic risks to future generations.'' The TSD went on to say that

``Economics alone cannot answer the questions, policy, legal, ethical considerations are relevant too, and many cannot be quantified. When there is much uncertainty, economics recommends a risk management framework for guiding policy.''

Agency response: In determining its responses to the public comments on the value of reducing CO2emissions, the agency was mindful that the 9th Circuit remanded rulemaking to NHTSA ``for it to include a monetized value for this benefit [the reduced risk of global warming as a result of reducing CO2emissions] in its analysis of the proper CAFE standards.'' \324\ (Emphasis added.) NHTSA understands this directive to require the agency to include within its modeling, with at least some level of

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specificity, actual values for the SCC. Further, as in the case of other public comments, the agency is required by the Administrative

Procedure Act to respond to the relevant and significant public comments, including those central to the agency's decision on standards under EPCA, in a manner reflecting consideration of the relevant factors.

\324\ CBD, 508 F.3d 508, 535.

As noted above, in the NPRM, we tentatively selected the mean value

($14) in Tol (2005) as a global value, and announced plans to attempt to develop and possibly use a domestic value for the final rule. For most of the analysis it performed to develop the proposed standards using the Volpe CAFE model, NHTSA used a single estimate for a domestic value of reducing CO2emissions. The agency thus elected to use the midpoint of the range from $0 to $14 (or $7.00) per metric ton of CO2as the initial value for the year 2011, and assumed that this value would grow at 2.4 percent annually thereafter. This estimate was employed for the analyses conducted using the Volpe CAFE model to support development of the proposed standards. The agency also conducted sensitivity analyses of the benefits from reducing

CO2emissions using both the upper ($14 per metric ton, since the domestic value could not exceed the global one) and lower ($0 per metric ton) bounds of this range.

After considering comments on the approach it employed in the NPRM and more recent estimates of the SCC, NHTSA has decided to employ a range of estimates for the value of reducing GHG emissions in the analysis it performed to support this Final Rule for MY 2011 as discussed in further detail below. To do so, the agency identified a range of estimates from current peer-reviewed estimates of the value of the SCC, and then tested the sensitivity of alternative CAFE standards to this range of uncertainty while holding the other economic parameters used in its analysis fixed at their estimated values. The range of estimates, which the agency believes fairly represents the uncertainty surrounding the value of the SCC, consists of a domestic value ($2) at the lower end, a global value ($33) equal to the mean value in Tol (2008) and a global value ($80) one standard deviation above the mean value. NHTSA believes that, based on currently available information and analysis, $2 is a reasonable domestic value and $33 is a reasonable global value, but notes the uncertainty regarding both values. The agency tested the sensitivity of alternative CAFE standards to this range of uncertainty while holding the other economic parameters used in its analysis fixed at their estimated values.

On the basis of this analysis, the agency has concluded that its adopted standards for MY 2011 are not sensitive to the alternative estimates of the value of reducing CO2emissions, so although it has selected global and domestic values for the SCC for use in analyzing the effects of different SCC values on the standards in this one-year rulemaking, NHTSA believes that is not necessary for purposes of this rulemaking to make definitive, long term choices about the most appropriate global or domestic value or to choose between using a global versus domestic value. This approach is sufficient for this rulemaking and will allow efforts to make more specific choices to be deferred until additional scientific and economic evidence can be accumulated, and the participation of other federal agencies in those efforts can enable the development of a consistent estimate for use in those agencies' respective regulatory and policy-making activities, including the next CAFE rulemaking.

The agency is well aware that scientific and economic knowledge about the contribution of GHG emissions to changes in the future global climate and the potential resulting damages to the world economy continues to evolve rapidly. Thus, any value placed in this rulemaking on reducing CO2emissions is subject to likely change. NHTSA recognizes the importance of continuing to monitor current research on the potential economic damages resulting from climate change, and of periodically updating estimates of the value of reducing CO2 emissions to reflect continuing advances in scientific and economic knowledge about the nature and extent of climate change and the threat it poses to world economic development. NHTSA recognizes the interest and expertise of other federal agencies, particularly EPA and DOE, in the issue of valuing the reductions in climate damages that are likely to result from those agencies' own efforts to reduce GHG emissions.

NHTSA will continue to work closely with those and other federal agencies in the development and review of the economic values of reducing GHG emissions that it plans to employ in its next CAFE rulemaking.

Global Value of Reducing CO2Emissions

To develop a range of estimates that accurately reflects the uncertainty surrounding the value of reducing emissions, NHTSA relied on Tol's (2008) expanded and updated survey of 211 estimates of the global SCC, which was published after the agency completed the analysis it conducted to develop its proposed CAFE standards.\325\ Tol's 2008 survey encompasses a larger number of estimates for the global value of reducing carbon emissions than its previously-published counterpart,

Tol (2005), and continues to represent the only recent, publicly- available compendium of peer-reviewed estimates of the SCC that has itself been peer-reviewed and published. The wide range of estimates it includes reflects their authors' varying assumptions about critical parameters that affect the SCC, including the sensitivity of the global climate system to increasing atmospheric concentrations of

CO2and other GHGs, the extent of economic damages likely to result from climate change, the rate at which to discount future damages, the relative valuation of climate damages likely to be sustained by nations with different income levels, and the degree of collective aversion to the risk of extreme climate change and the resulting potential for equally extreme economic damages. NHTSA believes that Tol's updated survey provides a reliable and consistent current basis for establishing a range of plausible values for reducing

CO2emissions from fuel production and use.

\325\ Richard S.J. Tol (2008), The social cost of carbon:

Trends, outliers, and catastrophes, Economics--the Open-Access,

Open-Assessment E-Journal, 2 (25), 1-24.

Tol's updated survey includes 125 estimates of the SCC published in peer-reviewed journals through the year 2006. Each of these represents an independent estimate of the world-wide value of increased economic damages from global climate change that would be likely to result from a small increase in carbon emissions, and by implication, the global value of the reduction in future economic damages from climate change that would result from an incremental decline in GHG emissions. Tol reports that the mean value of these estimates is $71 per ton of carbon emissions, and that the standard deviation of this estimate--a measure of how much a typical estimate differs from their average value--is $98 per ton; the fact that this latter measure is significantly larger than the mean value indicates the broad range spanned by the estimates.

NHTSA staff confirmed in conversations with the author that these values apply to carbon emissions occurring during the mid-1990s time frame, and are expressed in

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approximately 1995 dollars.\326\ The $71 mean value of the social cost of increased carbon emissions reported by Tol corresponds to a global value of $19 per metric ton of CO2emissions reduced or avoided when expressed in 1995 dollars, while the $98 standard deviation for carbon emissions corresponds to $27 per ton of

CO2.\327\ Adjusted to reflect increases since the mid-1990s in the marginal damage costs of emissions at now-higher atmospheric concentrations of GHGs, and expressed in 2007 dollars, Tol's mean value corresponds to a global damage cost of $33 per ton of CO2 emitted during the year 2007, with a standard deviation of nearly $47 per ton. Thus, the value that is one standard deviation above the $33 figure is $80 per ton of CO2.

\326\ Tol (2008), Table 1, p. 16.

\327\ As noted in an earlier footnote, carbon itself accounts for 12/44, or about 27 percent, of the mass of carbon dioxide (12/44 is the ratio of the molecular weight of carbon to that of carbon dioxide). Thus, each ton of carbon emitted is associated with 44/12, or 3.67, tons of carbon dioxide emissions. Estimates of the SCC are typically reported in dollars per ton of carbon, and must be divided by 3.67 to determine their equivalent value per ton of carbon dioxide emissions.

Many commenters noted that some recent estimates of the SCC are significantly higher that those reported by Tol (2005), and suggested that NHTSA employ these higher estimates of the SCC to determine the value of reducing CO2emissions. Specifically, commenters highlighted the widely-cited Stern Review's estimate that the current

SCC is likely to be in excess of $300 per metric ton of carbon, or approximately $80 per ton of CO2.\328\ Some commenters argued that Stern's estimate should be given substantial weight in determining the value of reducing CO2emissions used to develop the agency's final CAFE standards. Although Stern's estimate is reported in Tol's 2008 survey, it is not included in the estimates that form the basis for NHTSA's revised range of values, because Stern's study has not yet been subjected to formal peer review.

\328\ Stern, N.H., S.Peters, V.Bakhshi, A.Bowen, C.Cameron,

S.Catovsky, D.Crane, S.Cruickshank, S.Dietz, N.Edmonson, S.-

L.Garbett, L.Hamid, G.Hoffman, D.Ingram, B.Jones, N.Patmore,

H.Radcliffe, R.Sathiyarajah, M.Stock, C.Taylor, T.Vernon, H.Wanjie, and D.Zenghelis (2006), Stern Review: The Economics of Climate

Change Cambridge University Press, Cambridge, England.

NHTSA notes that the Stern Report's estimate of the SCC employs a low value for the discount rate it applies to future economic damages from climate change, and that this assumption is largely responsible for its high estimate of the SCC. Hope and Newbury demonstrate that substituting a more conventional discount rate would reduce Stern's estimate of the benefits from reducing emissions to the range of $20-25 per ton of CO2, which is well within the range of other estimates summarized in Tol's 2008 survey, and significantly below the

$33 equivalent of the mean of peer-reviewed estimates Tol reports.\329\

\329\ See Hope, Chris, and David Newbery, ``Calculating the

Social Cost of Carbon,'' unpublished paper, Cambridge University,

May 2006, p. 15.

Other commenters noted that EPA has recently developed preliminary estimates of the value of reducing CO2emissions, and recommended that NHTSA employ these values in its analysis of alternative CAFE standards. EPA's estimates are reported in that agency's Technical Support Document on Benefits of Reducing GHG

Emissions (GHG Benefits TSD) accompanying its Advance Notice of

Proposed Rulemaking on motor vehicle CO2emissions.\330\ In that document, EPA derives estimates of the SCC using the subset of estimates included in Tol's 2008 survey drawn from peer-reviewed studies published after 1995 that do not employ so-called equity weighting.\331\ Updated from their original mid-1990s values to reflect increases in the marginal damage costs of emissions at growing atmospheric concentrations of CO2and expressed in 2006 dollars, EPA reports average values of $40 per ton of CO2 for studies using a 3 percent discount rate, and $68 per ton for studies using a 2 percent discount rate.\332\ (The discount rates employed in developing the 125 peer-reviewed estimates surveyed by Tol ranged from 1 to 10 percent.\333\)

\330\ U.S. EPA, Technical Support Document on Benefits of

Reducing GHG Emissions, EPA-HQ-OAR-2008-318-0078.pdf, June 12, 2008.

\331\ Equity weighting assigns higher weights per dollar of economic damage from climate change that are expected to be borne by lower-income regions of the globe, in an attempt to make the welfare changes corresponding to those damages more comparable to the damages expected to be sustained by higher-income world regions.

\332\ These values are reported in EPA, Table 1. p. 12. Using the original estimates included in Tol's 2008 survey, which were supplied to NHTSA by the author, the agency calculates these values at $38 per ton and $62 per ton for 3% and 2% discount rates, slightly below the estimates reported by EPA. These differences may be attributable to the two agencies' use of different measures of inflation to update the original estimates from mid-1990s to 2007 price levels (NHTSA employs the Implicit Price Deflator for U.S.

GDP, generally considered to be an accurate index of economy-wide price inflation).

\333\ Tol (2008), Table A1.

NHTSA recognizes that in a recent rulemaking, DOE used a range of values from $0 to $20 (in 2007 dollars) per ton to estimate the benefits of reductions in CO2emissions resulting from new energy conservation standards for commercial air conditioning equipment.\334\ DOE derived the upper bound of this range from the mean of published estimates of the SCC reported in the same earlier survey by Tol (2005) that NHTSA relied upon for the value it used to analyze the CAFE standards proposed in the NPRM, and the lower bound from the assumption that reducing CO2emissions would produce no economic benefit. However, NHTSA believes that the estimates of the mean and standard deviation derived from Tol's more recent (2008) and comprehensive survey of published estimates of the SCC provides a more up-to-date range of values for reductions in CO2emissions resulting from higher CAFE standards, primarily because Tol's 2008 survey includes a larger number of estimates of the SCC, as well as more recently-published estimates.

\334\ Department of Energy, 10 CFR Part 431, Energy Conservation

Program for Commercial and Industrial Equipment: Packaged Terminal

Air Conditioner and Packaged Terminal Heat Pump Energy Conservation

Standards: Final Rule, Federal Register, October 7, 2008, pp. 58813- 58814.

The agency is aware that rapid advances in modeling climate change and its potential economic damages have occurred over the past decade, and that the choice of discount rates has an important influence on estimates of the SCC. In its next CAFE rulemaking, NHTSA will be working closely with EPA and other federal agencies to review the arguments for more selective use of published estimates of the SCC advocated by the EPA. However, based on the information gathered and analysis performed by the agency through last fall, and in view of the fact that this is a one model year rulemaking and the agency will review matters in considerable detail for the post MY 2011 proposal to be issued later this year, NHTSA is not now taking that step. Thus, for the purposes of this final rule, NHTSA has elected to use all 125 SCC estimates from peer-reviewed studies reported by Tol, instead of the more limited subset of these estimates relied upon by EPA. Including the full array of studies provides a reasonable basis for valuing reductions in CO2emissions. Specifically, NHTSA believes that there is still value at this time in considering pre-1995 studies and those that employ equity weighting (which account for 58 of the 125 peer-reviewed estimates included in Tol's survey), particularly recognizing that those studies have been published in peer-reviewed journals.\335\

\335\ Again using the original estimates from Tol's 2008 survey supplied by the author, NHTSA estimates that excluding the 18 pre- 1995 estimates from the 125 used to develop the $33 per ton mean estimate would increase it to $36 per ton, while excluding the 40 estimates that employ equity weighting would reduce the mean estimate to $23 per ton. Excluding both pre-1995 estimates and those that employ equity weighting would eliminate a total of 58 of the 125 peer-reviewed estimates, and reduce their mean value to $20 per ton.

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For the purpose of this rulemaking, NHTSA has also elected not to base its estimates of the value of reducing CO2emissions solely on estimates that utilize a single discount rate. NHTSA acknowledges that the varying discount rates employed by different researchers are an important source of the significant differences in their resulting estimates of the SCC. However, the agency believes that the appropriate rate at which to discount economic damages occurring in the distant future is an economic parameter whose correct value for the purpose of analyzing future climate change and the resulting economic damages is subject to significant uncertainty, analogous to that surrounding other critical scientific and economic parameters in climate analysis. In the agency's view, it is reasonable to consider estimates based on different discount rates at the present time instead of attempting to resolve this uncertainty in the time left to complete this one-year rulemaking by limiting the sample of estimates to those that employ the single discount rate it regards as most appropriate. In its next CAFE rulemaking, NHTSA will work with EPA, DOE and other federal agencies to consider anew the issue of whether to rely exclusively on values of the SCC that are developed using discount rates that are consistent with the rate the agency uses to discount the value of reductions in future GHG emissions reductions to their present values.\336\

\336\ Climate economic studies report estimates of the SCC for specific future years, often in the form of a value for some stated base year and an estimate of the annual rate at which it will grow, as total atmospheric concentrations of GHGs are assumed to increase.

These studies use some assumed rate to discount economic damages that are projected to occur over a very long span of future years to their present values as of the future year when emissions increases are assumed to occur. These estimates of the SCC during specific future years are used to value the reductions in GHG emissions that would result each year over the lifetimes of vehicles affected by

CAFE standards; for example, higher CAFE standards for model year 2011 cars and light trucks would reduce GHG emissions each year from 2011 through approximately 2047, and the value of reducing those emissions by one ton will rise each year over that span. The estimated economic values of the reductions in GHG emissions during each of those future years must in turn be discounted to their present values as of today, so that they can be compared with the present values of other benefits and with vehicle manufacturers' costs for meeting higher CAFE standards. The rate used to perform this latter discounting must be selected by NHTSA, and the choice of its value is discussed in detail in Section V.B.14.

As some commenters pointed out, another approach NHTSA could rely on to estimate the value of reducing GHG emissions would be to use actual or projected prices for CO2emission permits in nations that have adopted or proposed GHG emission cap and trade systems. In theory, permit prices would reflect the incremental costs for achieving the last emissions reductions necessary to comply with the overall emissions cap. If this cap were based on an estimate of the level of global emissions required to prevent an unacceptable degree of climate change, permit prices could provide an estimate of the benefits of reducing GHG emissions to a level that forestalls unacceptable climate change. A related approach would be to use estimates of the cost of reducing emissions from specific sources other than passenger cars or light trucks to estimate the value of reducing CO2 emissions via higher CAFE standards, under the reasoning that requiring higher fuel economy for cars and light trucks would allow these costs to be avoided or saved.

NHTSA considered the use of CO2permit prices to measure the benefits from reducing emissions via higher CAFE standards, but did not select this approach primarily because of the current difficulty in deciding what is considered an ``acceptable'' degree of climate change.

The answer to that question cannot be provided by environmental, technological or economic analyses alone or even in combination; answering that question also involves policy judgment. The agency also notes that there would also be considerable scientific uncertainty in determining the level of emissions reduction that would be necessary to limit climate change to any degree that was deemed acceptable, even if agreement on the latter could be achieved. Since permit prices would depend on the level of emission reduction that is required, they are likely to reflect this uncertainty. Additionally, as a general matter, permit prices reflect avoided costs of emission reductions and there is no direct or necessary relationship between avoided costs and benefits.

Finally, still other commenters urged the agency to take into account the economic value of any reduction in the risk of catastrophic climate events resulting from lower GHG emissions when estimating the benefits from reducing emissions. Most of the estimates of the SCC that are included in Tol's updated review treat the risks and potential damages from catastrophic events using conventional probabilistic methods to compute the ``expected'' value of a wide range of potential changes in climate and associated economic damages. However, few studies of the SCC attempt to include explicit premiums that measure the population's aversion to accepting the risks of catastrophic climate damages.\337\ Further, most published studies of climate damages report insufficiently detailed results to allow the calculation of appropriate risk premiums.

\337\ Under the conventional assumption that successive increases in consumption produce progressively smaller improvements in economic welfare, the welfare level associated with the mean of a range of possible consumption levels is higher than the mean of the welfare levels associated with each possible level of consumption.

Moreover, the difference between these welfare levels increases as the span of possible consumption levels is broadened, as would occur if increased GHG emissions have the potential to cause drastic climate changes and result in similarly drastic economic damages. In this situation, the true economic costs of increased emissions include not only the resulting increase in the probabilistic expected value of climate-related economic damages, but also the compensation that those suffering these damages would require in order to willingly accept the increased risk of catastrophic damages, even if that risk is extremely small. Conversely, the value of reducing GHG emissions should include not only the resulting reduction in the expected value of future climate-related economic damages, but also the added amount people would be willing to pay for the associated reduction in the risk that such catastrophic damage might occur.

NHTSA acknowledges that including an appropriate premium to reflect the value of reducing the risks of catastrophic climate events could significantly increase its estimate of the value of reducing

CO2emissions, but it has not attempted to do so at this time.\338\ (For discussion of NHTSA's consideration of abrupt climate change, see Sec. 3.4.3.2.4 of the FEIS.) However, the agency is aware of recent research suggesting that including an appropriate risk premium can significantly increase estimates of the SCC, and by implication increase the estimated value of reducing CO2 emissions.\339\ In working with EPA, DOE and other federal agencies in the development of revised estimates of the benefits from reducing

CO2emissions that could be used in the next CAFE rulemaking, NHTSA will carefully consider any new research that explicitly estimates risk premiums, and evaluate their applicability to the issue of estimating economic benefits from reductions in

CO2emissions resulting from future CAFE standards. The agency will also work with those agencies and departments in exploring the possibility

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of calculating an appropriate risk premium using results reported in published studies of the SCC together with any necessary assumptions about the underlying economic behavior, such as the response of welfare to successive increases in consumption levels.

\338\ Tol estimates that including an appropriate risk premium would increase the mean estimate of the SCC included in his more recent survey by 15-27%; see Tol (2008), Table 2.

\339\ Hope, Chris, and David Newbery (2006), Calculating the social cost of carbon, University of Cambridge, May 2, 2006.

Domestic Value of Reducing CO2Emissions

The agency was able to develop a domestic value by using the mean estimate of the global value of reduced economic damages from climate change resulting from reducing CO2emissions as a starting point; estimating the fraction of the reduction in global damages that is likely to be experienced within the U.S.; and applying this fraction to the mean estimate of global benefits from reducing emissions to obtain an estimate of the U.S. domestic benefits from lower GHG emissions.

The agency constructed an estimate of the U.S. domestic benefits from reducing CO2emissions using estimates of U.S. domestic and global benefits from reducing greenhouse gas emissions developed by

EPA and reported in that agency's Technical Support Document accompanying its advance notice of proposed rulemaking on motor vehicle

CO2emissions.\340\ Specifically, NHTSA calculated the ratio of domestic to global values of reducing CO2emissions estimated by EPA using the Climate Framework for Uncertainty,

Negotiation, and Distribution (FUND) integrated assessment model.

\340\ U.S. EPA, Technical Support Document on Benefits of

Reducing GHG Emissions, June 12, 2008.

EPA's central estimates of domestic and global values for reducing

GHG emissions during 2007 using the FUND model using a 3 percent discount rate were $1 and $17 per metric ton (in 2006$), which suggests that benefits to the U.S. from reducing CO2emissions are likely to represent about 6 percent of their global total. The comparable figures derived using a 2 percent discount rate are $4 and

$88 for 2007, suggesting that U.S. domestic benefits from reductions in

CO2emissions would amount to less than 5 percent of their global total. EPA's results also suggest that these fractions are likely to remain roughly constant over future decades.\341\ Applying the 5-6 percent figure to the $33 per metric ton mean estimate of the global value of reducing CO2emissions derived previously yields an estimate of approximately $2 per metric ton for the domestic benefit from reducing U.S. CO2emissions in 2007.

\341\ These values are reported in EPA, Table 1. p. 12.

NHTSA also constructed a second estimate of the fraction of global economic damages from climate change likely to be borne by the U.S., using the procedure described by Delucchi in his comments on the

NPRM.\342\ Delucchi noted that the fraction of global damages from climate change borne within the U.S. can be estimated by adjusting the

U.S. share of world economic output, measured by the ratio of U.S. GDP to gross world product, by the relative sensitivity of U.S. and world economic output to damages resulting from climate change. Using data on the U.S. share of world economic output (which ranges from 20-28 percent) and published estimates of the relative sensitivity of the

U.S. economy to climate damages compared to the world economy as a whole, Delucchi estimated that the U.S. fraction of global economic damages from climate change is likely to range from 0-14 percent.

Applying the midpoint of this range (7 percent) to the $33 per ton mean estimate of the global value of reducing CO2emissions also yields an estimate of approximately $2 per metric ton for the domestic benefit from reducing U.S. CO2emissions in 2007.

\342\ Mark A. Delucchi, Summary of the Non-Monetary

Externalities of Motor Vehicle Use, UCD-ITS-RR-96-3 (9) rev. 1,

Institute of Transportation Studies, University of California,

Davis, originally published September 1998, revised October 2004, pp. 49-51. Available at http://www.its.ucdavis.edu/publications/ 2004/UCD-ITS-RR-96-03(09)--rev1.pdf (last accessed March 23, 2009).

Choosing Between a Global Value and a Domestic Value, and Estimating the Global Values

As the IPCC has noted, CO2and other GHGs are chemically stable, and thus remain in the atmosphere for periods of a decade to centuries or even longer, becoming well-mixed throughout the earth's atmosphere. As a consequence, emissions of these gases have extremely long-term effects on the global climate. Further, emissions from any particular geographic area (for example, the U.S.) are expected to contribute to changes in the global climate that will affect many other countries around the world. Similarly, emissions occurring in other countries will contribute to changes in the earth's future climate that are expected to affect the well-being of the U.S. The long-lived nature of atmospheric GHGs means that emissions of these gases from any location or source can affect the global climate over a prolonged period, and can thus result in economic damages to many other nations as well as over subsequent generations.

In view of the global effects of GHG emissions, reducing those emissions to an economically efficient level, i.e., one that maximizes the difference between the total benefits from limiting the extent of climate change and the total costs of achieving the reduction in emissions necessary to do so, would require each individual nation to limit its own domestic emissions to the point where its domestic costs for further reducing emissions within its borders equal the global value of reduced economic damages that result from limiting climate change. NHTSA believes that this argument has considerable merit from the standpoint of economic theory.

If individual nations were instead to consider only the domestic benefits they receive from limiting the pace or extent of climate change, each nation would reduce emissions only to the point where its costs for achieving further reductions equal the benefits to its domestic economy from limiting the impacts of climate change. As a result, the combined global reduction in emissions resulting from individual nations' comparisons of their domestic benefits from limiting climate change to their domestic costs for reducing emissions might be inadequate to slow or limit climate change.

At the same time, however, the agency must also consider the economic, environmental and other effects on the U.S. that a choice of a global value in this rulemaking might have, given the current stage of ongoing domestic legislative activity and negotiations regarding effective international cooperation and coordination. NHTSA notes that there might be risks to nations that unilaterally attempt to reduce their emissions by adopting policies or regulations whose domestic marginal costs equal the global marginal benefits from reducing the threat of climate change. Such actions could induce economic activity within their borders--particularly production by emissions-intensive industries--to shift to nations that adopt less stringent regulations or lower economic penalties on emissions within their respective borders. Such a shift would cause emissions abroad to increase, offsetting at least some of the benefits of domestic emissions reductions.

The agency recognizes that the arguments for using global versus domestic values of reducing GHG emissions are complex, and cannot be resolved satisfactorily by the unilateral actions of any single federal agency. Instead, resolution of whether to use a domestic or global value for reducing

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emissions, and developing reliable estimates of those values, as relevant, will require active participation by all federal agencies whose regulatory and policy-making activities will be affected by this decision, as well as leadership from the Administration. In reaching such a consensus, participants will need to assess not only the economic arguments favoring global versus domestic values of reducing emissions, but also the prospects for effective international cooperation to reduce global GHG emissions, the likelihood that leadership by the U.S. in seeking emissions reductions would spur international efforts to reduce emissions, and the precedents established by federal agencies that have previously evaluated benefits from regulations that lower GHG emissions. They will also need to consider arguments that U.S. citizens may attach some value to reductions in the threat of climate impacts occurring in other regions of the globe, and that reducing the impacts of climate change on other nations may have important ``spillover'' benefits to the U.S. itself. A position has not been adopted by the relevant entities.

In these circumstances, NHTSA decided to take a pragmatic approach to estimating the value of reducing GHG emissions for the immediate and limited purpose of this rulemaking. As noted above, we used the mean value in Tol (2008). To develop a reasonable upper-bound estimate of that value for purposes of this rule, the agency used a value one standard deviation above the $33 mean value.\343\ As also noted above, the standard deviation of peer-reviewed estimates from Tol's 2008 survey is $47 per ton when expressed in comparable terms, which yields an upper-bound estimate of $80 per ton (equal to $33 plus $47) of

CO2emissions avoided.\344\ Because the $80 per ton value is higher than those corresponding to nearly 90% of the 125 peer-reviewed estimates of the SCC included in the survey, the agency views it as a reasonable upper bound on the likely global value of reducing

CO2emissions.\345\ For the purposes of this rulemaking,

NHTSA believes that the range extending from the $2 per ton estimate of the domestic value of reducing CO2emissions to the $80 per ton estimate of the global value is sufficiently broad to illustrate the sensitivity of alternative MY 2011 CAFE standards and the resulting fuel savings and emissions reductions to plausible differences in the

SCC.

\343\ A two-standard deviation range around the agency's $33 per ton central estimate would extend from minus $59 to $126 per ton of

CO2emissions. The agency notes that the lower end of this range implies economic benefits of $59 for each additional ton of CO2emissions during 2007, while its upper end significantly exceeds all but two of the 125 peer-reviewed estimates included in Tol's 2008 survey.

\344\ A value one standard deviation below the $33 mean would be

-$14 per ton, which implies economic benefits of $14 for each additional ton of emissions. Because of this implication, NHTSA regards the $2 per ton estimate of the domestic value of reducing emissions as a more plausible lower bound on the value of reducing emissions than the $-14 per ton figure.

\345\ Tol reports that the 90% confidence limit of the distribution of peer-reviewed values is $170 per ton, while adding one standard deviation to his reported mean yields a value of $169; see Tol (2008), Table 1.

Rate of Growth of SCC

The marginal cost per ton of additional CO2emissions is generally expected to rise over time, because the increased pace and degree of climate change--and thus the resulting economic damages-- caused by additional emissions are both expected to rise in proportion to the existing concentration of CO2in the earth's atmosphere. The IPCC Fourth Assessment Report variously reported that the climate-related economic damages resulting from an additional ton of carbon emissions are likely to grow at a rate of 2.4 percent annually, and at a rate of 2-4 percent annually.\346\ Virtually all commenters who addressed this issue indicated that the IPCC intended the 2.4 percent growth rate it reported for the SCC in one passage to instead read ``2-4 percent,'' and many urged NHTSA to apply a 3 percent or higher growth rate to determine the future value of the SCC.

\346\ Yohe et al. (2007), p. 13 reports that ``* * * it is very likely that the rate of increase [in the social cost of carbon] will be 2% to 4% per year.'' However, p. 822 states that ``* * * the SCC will increase over time; current knowledge suggests a 2.4% per year rate of growth.''

NHTSA staff reviewed the underlying references from which the disputed figure was derived, and those sources clearly report the growth rate implied by their estimates of the future value of the SCC for different future years as 2.4 percent, instead of the 2-4 percent asserted by commenters.\347\ Although most studies that estimate economic damages caused by increased GHG emissions in future years produce an implied growth rate in the SCC, neither the rate itself nor the information necessary to derive its implied value is commonly reported. NHTSA has been unable to locate other published research that reports the likely future rate of growth in damage costs from

CO2emissions or the information required to derive it.

NHTSA understands that other researchers may be using alternative growth rates. The agency may revise the estimated rate of growth it uses in its future analyses based on emerging estimates in the literature and on interagency coordination with the EPA, DOE and other federal agencies.

\347\ Hope, C.W. (2006), The Marginal Impact of CO2 from PAGE2002: An Integrated Assessment Model Incorporating the

IPCC's Five Reasons for Concern, Integrated Assessment Journal, 6,

(1), 19-56; and Hope, Chris, and David Newbery (2006), Calculating the social cost of carbon, University of Cambridge, May 2, 2006.

For the purposes of this rulemaking, NHTSA used the 2.4 percent annual growth rate to calculate the future increases in its estimates of both the domestic ($2/metric ton in 2007) and global ($33/metric ton and $80/metric ton in 2007) values of reducing CO2 emissions. Over the lifetimes of cars and light trucks subject to the

CAFE standards it is establishing for model year 2011, these values average nearly $4, $61, and $157 per ton of CO2emissions, approximately twice their estimated values during 2007. The agency is unaware of the basis for EDF's assertion that the 2.4 percent growth rate is to be used only in conjunction with an intergenerational discount rate with a maximum of 3 percent. Although the agency's analysis did follow EDF's suggestion in any case, NHTSA selected the growth rate in the future value of reducing CO2emissions and the discount rate applied to these benefits for separate reasons, as discussed in detail previously.

Insensitivity of MY 2011 Standards to Different Values of SCC

NHTSA examined the sensitivity of alternative CAFE standards for MY 2011 to the choice among three different estimates of the value of reducing CO2emissions from fuel production and use: (1) The mean estimate of the global value of reducing emissions derived as discussed previously from Tol's 2008 survey--$33 per ton; (2) a value one standard deviation above this mean estimate--$80 per ton; and (3) the estimate of the value of U.S. domestic benefits from lower emissions derived as discussed above--$2 per ton.\348\

\348\ In all analyses that employ its estimated value of the global benefits from reducing CO2emissions, NHTSA reduces the value of the savings in monopsony costs from lower U.S. petroleum consumption and imports to zero. This is consistent with the fact that when viewed from the same global perspective that justifies the use of a global value for reducing emissions, these monopsony payments represent a transfer of economic resources from consumers of petroleum products to petroleum producers, rather than an actual savings in economic resources, and thus do not constitute a real economic benefit.

The agency tested the sensitivity of its ``optimized'' CAFE standards for MY 2011 passenger cars and light trucks to

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the choice among those three alternative values for reducing

CO2emissions. The agency's analysis revealed that the optimized CAFE standards for MY 2011 cars and light trucks were unaffected by the choice among those values for reducing CO2 emissions from fuel production and use. The detailed results of this analysis are reported in the agency's previously-released Final

Environmental Impact Statement for MY 2011-15 CAFE standards.

There are several reasons for the insensitivity of the MY 2011 standards to the different values of the SCC. First, not more than 15 percent of all models are being redesigned for MY 2011, thus limiting the changes that can be made. Second, in any year, the value of gasoline has a far greater effect on the potential level of the CAFE standards than the SCC. Third, in the analyses that employ the $33 or

$80 per ton global values of the benefits from reducing CO2 emissions, NHTSA reduces the savings in monopsony costs from lower U.S. petroleum consumption and imports to zero.\349\ This is done in order to be consistent with the fact that monopsony payments are a transfer rather than a real economic benefit when viewed from the same global perspective. This reduction partly offsets the effect of the higher

CO2value on the optimized CAFE standards and resulting benefits. It does not do so completely, however, because the value of reducing CO2emissions continues to grow at the assumed 2.4 percent rate over the period spanned by the analysis, nearly doubling over the lifetimes of MY 2011 vehicles.

\349\ As noted above earlier in the discussion of SCC, NHTSA plans to review this practice in the next CAFE rulemaking.

Decision Regarding the Value of SCC

Given the insensitivity of the potential standards to the various values of SCC used in the above analysis, NHTSA concludes that it is unnecessary for the agency to select a single estimate of the value of reducing CO2emissions for inclusion in its analysis as part of this rulemaking. For that reason and in view of the significance that announcing the selection of either a domestic or global value in this rulemaking might have in the context of ongoing legislative activities and international negotiations, we are deferring the choice between a domestic SCC and a global SCC and, for the appropriate choice, the monetized value for the benefit of reduction, until the next CAFE rulemaking. This will provide the time necessary for more refined analysis and for the various affected federal agencies to work together and identify a consistent value for use in their respective regulatory and policy-making activities. NHTSA expects to participate actively in the process of developing an appropriate range of estimates for that value. By the time we issue a proposal this summer for MY 2012 and beyond, we anticipate those activities and efforts will have progressed sufficiently to enable the federal agencies to make an informed choice that we can use as a basis for that rulemaking. NHTSA expects that the economic value of reducing CO2emissions will play an important role in developing and analyzing standards in the next CAFE rulemaking which, unlike this rulemaking, we expect to be a five-year rulemaking. 13. The Value of Increased Driving Range

NHTSA also considered the fact that improving vehicles' fuel economy may increase their driving range before they require refueling.

By reducing the frequency with which drivers typically refuel their vehicles, and by extending the upper limit of the range they can travel before requiring refueling, improving fuel economy provides some additional benefits to drivers. Alternatively, if manufacturers respond to improved fuel economy by reducing the size of fuel tanks to maintain a constant driving range, the resulting savings in manufacturing costs will presumably be reflected in lower vehicle sales prices.

NHTSA stated in the NPRM that no direct estimates of the value of extended vehicle range are readily available, so NHTSA's analysis calculates the reduction in the annual number of refueling cycles that results from improved fuel economy, and applies DOT-recommended values of travel time savings to convert the resulting time savings to their economic value.\350\ The NPRM provided the following illustration of how the value of extended refueling range is estimated: A typical small light truck model has an average fuel tank size of approximately 20 gallons. Assuming that drivers typically refuel when their tanks are 20 percent full (i.e., 4 gallons in reserve), increasing this model's actual on-road fuel economy from 24 to 25 mpg would extend its driving range from 384 miles (16 gallons x 24 mpg = 384 miles) to 400 miles (16 gallons x 25 mpg = 400 miles). Assuming that the truck is driven 12,000 miles per year, this reduces the number of times it needs to be refueled from 31.3 (12,000 miles per year / 384 miles per refueling) to 30.0 (12,000 miles per year / 400 miles per refueling), or by 1.3 refuelings per year.

\350\ See Department of Transportation, Guidance Memorandum,

``The Value of Saving Travel Time: Departmental Guidance for

Conducting Economic Evaluations,'' Apr. 9, 1997. Available at http:/

/ostpxweb.dot.gov/policy/Data/VOT97guid.pdf (last accessed August 20, 2008); update available at http://ostpxweb.dot.gov/policy/Data/

VOTrevision1_2-11-03.pdf (last accessed August 20, 2008).

Weighted by the nationwide mix of urban (about 2/3) and rural

(about 1/3) driving and average vehicle occupancy for all driving trips

(1.6 persons), the DOT-recommended value of travel time per vehicle- hour is slightly below $24.00 (in 2006 dollars).\351\ Assuming that locating a station and filling up requires ten minutes, the annual value of time saved as a result of less frequent refueling amounts to

$5.20 (calculated as 1.3 refuelings/year x 10/60 hours/refueling x

$24.00/hour). This calculation is repeated for each future calendar year that vehicles affected by the alternative CAFE standards evaluated in this rule would remain in service. Like fuel savings and other benefits, however, the total value of this benefit for vehicles produced during a model year declines over their expected lifetime, because a smaller number of those vehicles remain in service each year, and those remaining in service are driven fewer miles.

\351\ The average hourly wage rate during 2006 was estimated to be approximately $25.00 per hour. For urban travel, the DOT guidance recommends that personal travel (which accounts for 94.4 percent of urban automobile travel) be valued at 50 percent of the hourly wage rate, while business travel (5.6 percent of urban auto travel) should be valued at 100 percent of the hourly wage rate. For intercity travel, personal travel (which represents 87 percent of intercity automobile travel) is valued at 70 percent of the wage rate, while business travel (the remaining 13 percent) is valued at 100 percent of the wage rate. The resulting average values of travel time are $13.20 for urban travel and $18.48 for intercity travel.

Multiplying these by average vehicle occupancy (1.6) produces estimates of $21.12 and $29.56 for the value of time per vehicle- hour in urban and rural travel. Using the fractions of urban and rural travel reported above, the weighted average of these values is

$23.91 per hour. Departmental Guidance for Valuation of Travel Time in Economic Analysis, 1997. Available at http://ostpxweb.dot.gov/ policy/Data/VOT97guid.pdf (last accessed Nov. 2, 2008).

NHTSA received comments only from the Alliance regarding the benefits that drivers receive from increased driving range. The

Alliance stated that ``NHTSA incorrectly assumes that its new fuel economy standards will improve vehicle range and thus reduce the number of times a vehicle owner would have to refill the tank (creating consumer benefits).'' The Alliance comments focused on two points: first, that analysis by Sierra Research demonstrates ``the complete absence of

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any relationship between fuel economy and range in the light truck fleet,'' and second, that manufacturers ``design fuel-storage capacity to achieve the basic range requirements consumers demand,'' and will reduce the space necessary for fuel tanks in order to devote it to other uses (such as increasing cargo space) if fuel economy levels rise. The Alliance argued that NHTSA's assumption that raising fuel economy levels will improve vehicle range and thus result in more miles driven (i.e., the rebound effect) are ``not supported by existing data'' and contradicted by the Sierra Research analysis. For example,

Sierra Research found that the driving range for the Chevrolet Suburban has decreased from 588 to 527 miles as its fuel economy has improved from 1992 to 1999, because the gas tank capacity was decreased in the new body from 42 gallons to 31 gallons.

Agency response: In response to the Alliance's comments, NHTSA notes that the most likely explanation for the absence of a relationship between fuel economy and refueling range is that manufacturers adjust fuel tank size to achieve some target level of refueling range. If by doing so, manufacturers are able to reduce the space occupied by fuel tanks and devote it to increased passenger or cargo carrying capacity, as the Alliance asserts, this presumably reflects manufacturers' view that those attributes are more valuable to vehicle owners than increased refueling range, or that the resulting savings in vehicle production costs are more valuable to buyers than extended refueling range. If manufacturers respond in either of these ways, they apparently estimate that the resulting increase in the vehicle's utility to potential buyers is more valuable than the increase in refueling range that would result from holding tank size fixed. Thus, NHTSA's estimate of the value of increased refueling range is likely to underestimate the true benefits from the resulting changes in vehicle attributes or prices. As a consequence, the agency has chosen not to modify the procedure it uses to estimate the economic value of this benefit. 14. Discounting Future Benefits and Costs

The discount rate applied to future benefits and costs of reduced fuel consumption has a significant effect on the stringency of the final standards. Discounting converts the economic values of benefits and costs that are expected to occur in the future to their equivalent values today (or present values), to account for the reduction in their value when they are deferred until some later date rather than received immediately. Discounting reflects the fact that most people view economic outcomes that are not expected to occur until some future date as less valuable than equivalent outcomes that occur sooner.

Discounting is particularly important to enable consistent comparison of economic costs and benefits that are expected to occur in the future to those occurring in the present, or when the future time profiles of benefits and costs are not expected to be similar. The discount rate expresses the percent decline in the value of future benefits or costs--as viewed from today's perspective--for each year they are deferred into the future.

In the NPRM, NHTSA proposed to use a rate of 7 percent per year to discount the value of future fuel savings and other benefits when analyzing the potential impacts of alternative CAFE standards. NHTSA relied primarily on the 7 percent discount rate for two reasons. First,

OMB guidance states that 7 percent reflects the economy-wide opportunity cost of capital, and that it ``is the appropriate discount rate whenever the main effect of a regulation is to displace or alter the use of capital in the private sector.'' \352\ NHTSA believes that much of the cost of CAFE compliance to manufacturers is likely to come at the expense of other investments the auto manufacturers might otherwise make, for example, in research and development of new technologies. Second, NHTSA's analysis in the NPRM determined that 7 percent is a reasonable estimate of the interest rate that vehicle buyers who finance their purchases are currently willing to pay to defer the added costs of purchasing vehicles with higher fuel economy.\353\

\352\ Office of Management and Budget, Circular A-4,

``Regulatory Analysis,'' September 17, 2003, at 33. Available at http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf (last accessed

November 13, 2008).

\353\ See NPRM discussion at 73 FR 24415-16 (May 2, 2008).

However, the agency also performed an analysis of benefits from alternative increases in CAFE standards using a 3 percent discount rate, and sought comment on whether the final rule standards should be set using a 3 percent rate instead of a 7 percent rate. OMB guidance also states that when a regulation primarily and directly affects private consumption (e.g., through higher consumer prices for goods and services), instead of primarily affecting the allocation of capital, a lower discount rate may be more appropriate. OMB argues that the consumption rate of time preference would be the most appropriate discount rate in this situation, since it reflects the rate at which consumers discount future consumption to determine its value at the present time. One measure of the consumption rate of time preference is the rate at which savers are willing to defer consumption into the future when there is no risk that the borrower will fail to repay them, and a readily available source of this measure is the real rate of return on long-term government debt. After adjusting to remove the effect of inflation, OMB reports that this rate has averaged about 3 percent over the past 30 years.

The NPRM analyzed and sought comment on both the 7 percent and 3 percent discount rates because in the context of CAFE standards for motor vehicles, the appropriate discount rate depends on one's view of how the costs of complying with more stringent standards are ultimately distributed between vehicle manufacturers and consumers. Compared to the proposed standards set with the 7 percent discount rate, NHTSA determined that using a 3 percent discount rate would raise the combined passenger car and light truck standards by about 2 mpg in MY 2015 (to 33.6 mpg from 31.6 mpg), and would reduce lifetime

CO2emissions of the vehicles affected by the proposed standards for MY 2011-15 by an additional 29 percent (to 672 mmt, instead of 521 mmt). However, NHTSA estimated that complying with the higher standards would cost an additional 89 percent more in technology outlays over the five model years ($85 billion versus of $45 billion).

Commenters Calling for NHTSA To Use a Lower Discount Rate

Several commenters, including environmental and consumer groups, state agencies and Attorneys General, and three individuals, called for lower discount rates than 7 percent. The commenters' argument for lower discount rates is essentially two-fold. First, commenters argued that the proposed CAFE standards actually affect private consumption and not capital investments, so consistency with OMB guidance requires NHTSA to use a discount rate lower than 7 percent. Second, commenters argued that because reducing CO2emissions and thus the pace or degree of climate change is an important component of the benefits from higher CAFE standards, the fact that these benefits are likely to occur in the distant future--and thus to be experienced by future generations--requires NHTSA to apply a lower ``intergenerational'' discount rate. Commenters were unclear about

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whether this lower discount rate should also be applied to the other components of benefits resulting from higher CAFE standards, which are expected to occur within 25-35 years.

UCS, EDF, NRDC, CARB, and the Attorneys General commented that

NHTSA should use a discount rate of 3 percent or less for setting the

CAFE standards. Some commenters, like UCS, based their comments on OMB

Circular A-4. UCS commented that although manufacturers will absorb some of the costs of the standards by reallocating capital from other potential uses, ``the amounts involved will be markedly smaller than the benefits realized by private consumers,'' specifically, the benefits due to reduced ``private consumption of vehicle fuels.'' Thus,

UCS argued, the standards ``primarily and directly affect private consumption'' much more than the allocation of capital, so a discount rate of 3 percent should be used. CARB similarly stated that the fuel economy standards will affect private consumption over the long-term, so OMB guidance indicates that 3 percent is a more appropriate discount rate. EDF also drew on OMB guidance, but emphasized the increased costs to consumers of more-expensive passenger cars and light trucks as justification for using a 3 percent discount rate, rather than the benefits from reduced fuel consumption. Comments from the Attorneys

General included both points in favor of a 3 percent discount rate according to OMB guidance--that consumers would face higher vehicle costs, but also gain benefits like reduced fuel consumption, a better environment, and a more secure energy future.

Other comments made in favor of a 3 percent discount rate focused on the ``intergenerational benefits'' of reducing climate change by raising fuel economy standards. OMB Circular A-4 suggests that it may be appropriate to use a lower discount rate than those used for intra- generational analysis when comparing costs and benefits that are likely to be experienced by different generations. Specifically, Circular A-4 notes that ``Special ethical considerations arise when comparing benefits and costs across generations. Although most people demonstrate time preference in their own consumption behavior, it may not be appropriate for society to demonstrate a similar preference when deciding between the well-being of current and future generations.''

(p. 35) On this basis, OMB advises that ``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.'' (p. 36)

EDF commented that ``The benefits from mitigating climate change will occur over decades or even centuries; as a result, CAFE's implications for carbon dioxide emissions should trigger EPA and OMB guidelines for estimating costs or benefits that affect multiple generations.'' EDF cited EPA's draft ANPRM on greenhouse gas regulation under the Clean Air Act as stating that ``[w]hen there are important benefits or costs that affect multiple generations of the population,

EPA and the Office of Management and Budget (OMB) allow for low but positive discount rates (e.g. 0.5-3 percent noted by US EPA, 1-3 percent by OMB). Rates of three percent or lower are consistent with long-run uncertainty in economic growth and interest rates, considerations of issues associated with the transfer of wealth between generations, and the risk of high impact climate damages.'' \354\ EDF also stated that using a discount rate of 3 percent or lower ``is also in full agreement with the guidance with the blue ribbon panel of economists, including a Nobel laureate, who recommended that the rate at which future benefits and costs should be discounted to present values will generally not equal the rate of return on private investment.'' \355\ Thus, EDF argued that NHTSA should use a 3 percent discount rate, with a sensitivity analysis using 0.5 and 1 percent.

\354\ EPA's ANPRM is available at 73 FR 44354 (July 30, 2008).

EDF also cited OMB Circular A-4 and EPA ``Guidelines for Preparing

Economic Analyses,'' EPA 240-R-00-003 (2000), available at http:// yosemite.epa.gov/EE/epa/eed.nsf/pages/Guidelines.html (last accessed

August 6, 2008).

\355\ EDF cited Kenneth J. Arrow et al., Is there a Role for

Benefit-Cost Analysis in Environmental, Health, and Safety

Regulation?, 272 Science 173, 221-222 (April 12, 1996).

NRDC offered a similar comment, arguing that this is a multi- generational rulemaking because it impacts climate change, and that therefore an ``intergenerational discount rate'' must be used of not more than 3 percent. NRDC argued that ``The discount rate is often the single most important parameter in benefit cost analyses of environmental regulations, due to the fact that high discount rates disadvantage projects whose benefits accrue in the future but whose costs are borne up front.'' NRDC's comment included four reasons why the intergenerational discount rate must be 3 percent or less. First,

NRDC argued that a ``social'' discount rate must be used when there are

``social (i.e., non-private) costs and benefits.'' The CAFE standards will reduce fuel consumption, which means that society will experience the benefits of reduced global warming and other air pollution. Second,

NRDC stated that the proper rate is the ``net national welfare'' or

NNW, which represents ``the real rate of growth in the economy, which takes GDP and subtracts from it depreciation of natural and man made capital, pollution abatement expenses, and negative externalities, and then adds to it the value of non-market goods, such as household labor.'' NRDC asserted that this rate is likely to range from 0 to 1 percent. Third, NRDC argued that because CAFE standards are

``precautionary'' in nature and ``reduce the likelihood of potentially catastrophic climate change or serious military security costs,'' society may be willing to pay more to avoid these extreme risks, such that a negative social discount rate may be appropriate. And finally,

NRDC argued that ``the use of a declining discount rate is the newly supported method for climate damages.'' For these reasons, NRDC argued that NHTSA should use a discount rate no higher than 3 percent for setting CAFE standards, and should conduct a sensitivity analysis using lower rates.

An individual commenter, Mark Eads, also stated that the choices made primarily involve long-term inter-generational environmental benefits and costs rather than intra-generational benefits and costs.

Mr. Eads presented his summary and comparison of a number of scholarly papers considering discount rate over the past several years, and suggested that NHTSA apply a declining discount rate that begins at 2.6 percent in year one and declines to 0.6 percent in year 300.

UCS, EDF, NRDC, CARB, the Attorneys General, and Mr. Eads did not address the issue of whether a lower intergenerational discount rate should also be applied to the other components of benefits resulting from higher CAFE standards, which are likely to be experienced by current generations.

Other commenters urged NHTSA to use discount rates besides 7 or 3 percent. CBD commented that both 7 percent and 3 percent are too high, arguing that they ``artificially reduce'' the value of future benefits from improved fuel efficiency, and that using a lower discount rate will result in higher standards. Although CBD did not specify what discount rate would be preferable, other than to recommend a lower one,

CBD appeared to approve of Stern's use of a discount rate below 1 percent. CFA and NESCAUM, in contrast, both supported NHTSA's use

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of a 5 percent discount rate. CFA argued that NHTSA should have

``picked the middle road'' between 3 percent and 7 percent, to avoid

``emphasizing the importance of economic factors and capital goods at the expense of the need to conserve energy,'' and used 3 and 7 percent for sensitivity analyses. NESCAUM argued that a 7 percent discount rate

``inappropriately devalues the technologies designed to achieve increased fuel economy,'' and stated that EPA had used a 5 percent discount rate in its 2000 rulemaking on Tier 2 emissions standards.\356\

\356\ EPA calculated the value of a statistical life year for the Tier 2 benefits analysis by amortizing the $5.9 million mean value of a statistical life (VSL) estimate over the 35 years of life expectancy associated with subjects in the labor market studies, discounting it at 5 percent to get $360,000 per life-year saved in 1999 dollars. See 68 FR 6698, 6784, fn. 107 (Feb. 10, 2000).

Professor Michael Hanemann commented that NHTSA's decision to use a discount rate of 7 percent was ``utterly unfounded in the climate change context,'' and that NHTSA should use a discount rate of no higher than 4 percent, although even 4 percent had been criticized in recent articles on climate change economics. Thus, Prof. Hanemann argued, NHTSA should use a discount rate of no higher than 4 percent, and conduct sensitivity analyses with lower numbers, like 2 percent.

The Attorneys General commented that NHTSA should take account of

Professor Hanemann's suggestion of 4 percent as an example of ``the discount rates that scholars and economists are using to evaluate the costs and benefits related to global warming.''

Professor Gary Yohe commented that the appropriate discount rate for benefits from public investments in an economy where returns to private capital investment are taxed should be lower than the rate of return on private capital, in order to reflect the fact that public investment can increase returns to private investment by reducing distortions caused by the corporate profits tax. Although they are not specifically public investments, Prof. Yohe noted that investments that reduce GHG emissions by improving vehicle fuel economy are likely to increase returns to a broad range of private investments, including investments in mechanisms that facilitate adaptation to climate change.

Although he did not recommend a specific discount rate, Prof. Yohe clearly suggested that the appropriate rate should be below 7 percent.

He also noted that OMB's definition and 3 percent estimate of the social rate of time preference did not correspond to the conventional definition of that concept, which is a constant-utility rather than a constant-consumption discount rate.

Commenters Calling for NHTSA To Use a 7 Percent or Higher Discount Rate

Other commenters, including manufacturers and dealers, as well as one individual, called for NHTSA to use a discount rate of 7 percent or higher. AIAM commented simply that it ``support[s] the discount rates used by NHTSA as reasonable for analytical purposes.'' David Montgomery of CRA International also commented that NHTSA's use of a 7 percent discount rate was reasonable, arguing that ``the correct discount rate to use [for CAFE purposes] is the marginal social return on investment, which measures what society would have earned on other investment foregone in order to make the investment in more costly motor vehicles with higher fuel economy.'' Mr. Montgomery stated that ``The chosen 7% real discount is a reasonable, and probably conservative, estimate of the long run, real, pre-tax return on investment in the U.S.''

Ford commented that the discount rate ``should represent society's opportunity cost of money, which should be close to a `risk-free' rate such as that of the U.S. Treasury.'' However, Ford then argued that the short-term costs to invest in technology are very high for domestic manufacturers, and that manufacturers must ``borrow the necessary capital for such investment.'' Thus, Ford stated, it did not support the use of a 3 percent discount rate, although it did not recommend an alternative discount rate.

NADA commented that NHTSA should use a discount rate of at least 7 percent or higher to estimate the future costs and benefits of the proposed standards. NADA stated that ``financing rates on motor vehicle loans are indicative of appropriate discount rates since they reflect the real-world opportunity costs faced by consumers when buying vehicles'' with higher fuel economy, but argued that NHTSA had not

``generated accurate historical loan rates, let alone justified projections for what those rates will be in MY 2015.'' NADA further stated that a too-low discount rate ``will result in overly costly CAFE standards, decreased new motor vehicle sales, and lower than projected fuel savings and greenhouse gas reduction benefits.''

The Alliance commented that NHTSA should use a discount rate closer to 12 percent, although it urged NHTSA to rely on a ``nested logit'' model developed by NERA for ``modeling consumer behavior instead of the ad hoc analysis NHTSA performs of private benefits without attempting to explain whether there is a market failure.'' The Alliance argued that OMB Circular A-4 allows the use of a higher discount rate than 7 percent in certain cases if appropriate, and that ``other prominent studies relevant to this issue have settled on much higher interest rates than seven percent,'' including the Congressional Budget Office, which ``discounts consumers' fuel savings at a rate of 12 percent per year,'' and Sierra Research's study submitted by the Alliance in support of its comments, which used a rate of 12.4 percent. A discount rate of 12 percent makes sense, the Alliance argued, because

``Consumers can be expected to discount the value of future fuel savings at a rate at least as high as their cost of borrowing funds,'' so they ``would be unwilling to spend an extra dollar on fuel economy improvements that would lower their fuel costs by ten cents per year because the cost savings would be less than the annual interest on that dollar.''

Responding to the Alliance's assertion that rates as high as 12 percent might be appropriate for discounting future benefits from fuel savings, the Attorneys General noted in a supplemental comment that a more recent study of vehicle buyer's tradeoffs between higher purchase prices and savings in operating expenses than that relied upon by NERA estimates that buyers discount future fuel savings using nominal rates that average 9 percent. After adjusting it to remove the effect of expected future inflation, the Attorneys General estimated that the corresponding real discount rate was 5.4 percent, and urged NHTSA to use this rate in its analysis of future benefits from fuel savings and other consequences of higher CAFE standards.\357\

\357\ The agency has reviewed the study relied upon by the

Attorneys General in its comment recommending a 5.4 percent discount rate, and notes that the estimates of vehicle buyers' implicit discount rates it reports average 10.2 percent before adjusting for inflation, rather than the 9 percent reported by the Attorneys

General. Adjusting this average rate to remove the effects of actual inflation over the most recent decade produced a value of 7.5 percent, rather than the 5.4 percent reported in the recent comment by the Attorneys General.

Agency response: In response to the extensive comments it received to the NPRM and the DEIS on this issue, NHTSA has carefully reviewed published research and OMB guidance on appropriate discount rates, including discount rates that should be applied to benefits that are expected to occur in the distant future and thus be experienced

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mainly by future generations, and discount rates that buyers of new vehicles apply to savings in fuel costs from higher fuel economy. For purposes of this final rule, the agency has elected to apply separate discount rates to the benefits resulting from reduced CO2 emissions, which are expected to reduce the rate or intensity of climate change that will occur in the distant future, and the economic value of fuel savings and other benefits resulting from lower fuel consumption, which will be experienced over the limited lifetimes of newly purchased vehicles. Specifically, NHTSA has decided to discount future benefits from reducing CO2emissions using a 3 percent rate, but to discount all other benefits resulting from higher

CAFE standards for MY 2011 cars and light trucks at 7 percent.

As some commenters pointed out, OMB guidance on discounting permits the use of lower rates to discount benefits that are expected to occur in the distant future, and will thus be experienced by future generations.\358\ The main rationale for doing so is that although most individuals demonstrate a strong preference for current consumption over consumption they expect to occur later within their own lifetimes, it may not be appropriate for society to exercise a similarly strong preference for consumption by current generations over consumption opportunities for future generations, particularly when it is contemplating actions that affect the relative income levels of current and future generations. In addition, while market interest rates provide useful guidance about the rates that should be used to discount future benefits that will be experienced by current generations, no comparable market rates are available to guide the choice of rates for discounting benefits that will be received by future generations.

\358\ White House Office of Management and Budget, Circular A-4,

September 17, 2003, pp. 35-36.

For this final rule, NHTSA has elected to use a rate of 3 percent to discount the future economic benefits from reduced emissions of

CO2that are projected to result from decreased fuel production and consumption. These benefits, which include reductions in the expected future economic damages caused by increased global temperatures, a rise in sea levels, and other projected impacts of climate change, are anticipated to extend over a period from approximately fifty to two hundred or more years after the impact of this rule on emissions by MY 2011 cars and light trucks occurs, and will thus be experienced primarily by generations that are not now living. As indicated previously, studies of the economic cost of GHG emissions select a rate to discount economic damages from increased emissions. These damages are typically projected to occur over an extended time span beginning many years after the future date when emissions increase, and the chosen rate is used to discount these distant future damages to their present values as of the date when the increased emissions that cause them were assumed to occur.

This procedure yields estimates of the damage costs from increased

GHG emissions during specific future years, which NHTSA uses to value the reductions in emissions that would occur each year over the lifetimes of vehicles affected by higher CAFE standards. For example, higher CAFE standards for MY 2011 cars and light trucks would reduce

GHG emissions each year from 2011 through approximately 2047, and the estimated value of avoiding each ton of emissions rises each year over that span. In turn, the estimated economic values of the reductions in

GHG emissions during each of those future years must be discounted to their present values as of today, so that they can be compared with the present values of other benefits from higher CAFE standards, and with vehicle manufacturers' costs for meeting higher CAFE standards.

The 3 percent rate is consistent with OMB guidance on appropriate discount rates for benefits experienced by future generations, as well as with those used to develop many of the estimates of the economic costs of future climate change that form the basis for NHTSA's estimate of economic value of reducing CO2emissions.\359\ Of the 125 peer-reviewed estimates of the social cost of carbon included in Tol's 2008 survey, which provides the basis for NHTSA's estimated value of reducing CO2emissions, 83 used assumptions that imply discount rates of 3 percent or higher.

\359\ Richard S.J. Tol, The social cost of carbon: trends, outliers, and catastrophes, Economics Discussion Papers, July 23, 2008.

Moreover, the 3 percent rate is consistent with widely-used estimates in economic analysis of climate change of the appropriate rate of time preference for current versus distant future consumption, expected future growth in real incomes, and the rate at which the additional utility provided by increased consumption declines as income increases.\360\ The Ramsey discounting rule is widely employed in studies of potential economic damages from climate changes in the distant future. The Ramsey rule states that -r = [delta] + [eta]g, where r is the consumption discount rate, [delta] is the pure rate of time preference (or the marginal rate of substitution between current and future consumption under the assumption that they are initially equal), g is the expected (percentage) rate of growth in future consumption, and [eta] is the elasticity of the marginal utility of consumption with respect to changes in the level of consumption itself.

Commonly used values of these parameters in climate studies are [delta]

= -1 percent per year, [eta] = -1, and g = 2 percent per year, which yield a value for r of 3 percent per year.\361\

\360\ EPA notes that ``In this inter-generational context, a three percent discount rate is consistent with observed interest rates from long-term intra-generational investments (net of risk premiums) as well as interest rates relevant for monetary estimates of the impacts of climate change that are primarily consumption effects.'' See U.S. EPA, Technical Support Document on Benefits of

Reducing GHG Emissions, June 12, 2008, p. 9.

\361\ See Tol (2008), p. 3.

The remaining future benefits and costs anticipated to result from higher fuel economy are projected to occur within the lifetimes of vehicles affected by the CAFE standards for MY 2011, which extend up to a maximum of 35 years from the dates those vehicles that are produced and sold. Because the vehicles originally produced during this model year will gradually be retired from service as they age, and those that remain in service will be driven progressively less, most of these benefits will occur over the period from 2011 through approximately 2025. Thus, a conventional or ``intra-generational'' discount rate is appropriate to use in discounting these benefits and costs to their present value when analyzing the economic impacts of establishing higher CAFE standards.\362\

\362\ NHTSA acknowledges that using different rates to discount the distant and nearer-term future benefits from higher CAFE standards presents a potential problem of time inconsistency, which arises from the much greater uncertainty that surrounds long-term future rates of growth in investment, economic output, and consumption than is associated with near-term estimates of these variables. However, the agency believes that this problem is less serious than those that would result from using a single rate to discount benefits that occur over the next 25-35 year sand those that are likely to occur over a 100-200 year time frame.

The correct discount rate to apply to these nearer-term benefits and costs depends partly on how costs to vehicle manufacturers for improving fuel economy to comply with higher CAFE standards will ultimately be distributed. If manufacturers are unable to recover their costs for increasing fuel economy in the form of higher selling prices for new vehicles, those outlays will

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displace or alter other productive investments that manufacturers could make, and the appropriate discount rate is their opportunity cost of capital investment. In contrast, if manufacturers are able to raise selling prices for new vehicles sufficiently to recover all their costs for improving fuel economy, those costs will ultimately affect private consumption decisions rather than capital investment opportunities.

Under this second assumption, economic theory and OMB guidance suggest that a consumption discount rate, which reflects the time preferences of consumers rather than those of lenders or investors, is appropriate for discounting future benefits. Since the time preferences of savers and investors are probably similar, financial intermediation would be expected to equalize investment and consumption discount rates. In the presence of corporate income taxation, however, consumption discount rates are generally thought to be lower than the opportunity cost of investment capital. Finally, if competitive conditions in the new vehicle market manufacturers and potential buyers' valuation of higher fuel economy permit manufacturers to recover only part of their costs for meeting higher CAFE standards through higher prices for new vehicles, a rate between an investment discount rate and the lower consumption discount rate may be appropriate, with the exact rate depending on the distribution of compliance costs between vehicle manufacturers and buyers.

OMB estimates that the real before-tax rate of return on private capital investment in the U.S. economy averages approximately 7 percent per year, and generally recommends this figure for use as a real discount rate in cases where the primary effect of a regulation is to displace private capital investment.\363\ However, this figure represents an economy-wide average estimate of the return on private investment, which incorporates no risk premium other than that associated with uncertainty about future growth in total economic output. As a consequence, it may understate the opportunity cost of capital for corporations facing firm- or market-specific risks on future investment returns. In addition, domestic motor vehicle manufacturers currently have little or no accumulated earnings available to re-invest, and may be required to enter private capital markets to finance the investments necessary to allow them to comply with higher CAFE standards.

\363\ White House Office of Management and Budget, Circular A-4,

September 17, 2003, p. 33.

OMB guidance estimates that an appropriate current value for the consumer rate of time preference--and thus the discount rate that should be used if the costs of complying with a regulation are borne by consumers--is approximately 3 percent. However, this estimate is derived from rates of return demanded by consumers on highly liquid investments, and is intended to apply to situations where there is little or no risk that consumers will actually realize the future benefits resulting from a proposed regulation. In the case of CAFE standards, buyers face considerable uncertainty about future fuel prices, and thus about the value of fuel savings resulting from higher fuel economy. Uncertainty about their future levels of vehicle use and the actual lifetimes of new vehicles also contribute to buyers' uncertainty about the value of future fuel savings that is likely to result from purchasing a vehicle with higher fuel economy. In addition, buyers' initial investments in higher fuel economy are illiquid, and the extent to which they will be able recover the remaining value of an initial investment in a new vehicle that achieves higher fuel economy in the used vehicle market is uncertain. Finally, unlike most of the regulations that OMB Circular A-4 is intended to address, most (75-80 percent) of the benefits from higher CAFE standards accrue directly to the parties they affect--vehicle buyers--rather than to society at large. Taken together, these circumstances may make the use of a riskless consumption discount rate, which is intended for use in discounting the economy-wide effects of a proposed regulation on consumption, inappropriate for discounting the future benefits that result from requiring higher fuel economy.

Empirical studies of the discount rates that new vehicle buyers reveal by trading off the higher purchase prices for more fuel- efficient vehicles against future savings in fuel costs resulting from higher fuel economy, which capture the effects of these uncertainties, conclude that buyers apply real discount rates well above the 3 percent rate recommended by OMB for riskless situations. Dreyfus and Viscusi estimate that, when adjusted to reflect differences between the current interest rate environment and rates at the time the data for their study were drawn, U.S. buyers apply real discount rates in the range of 12 percent when weighing expected future fuel savings against higher purchase prices.\364\ Verboven estimates that European buyers' nominal discount rates for fuel savings resulting from buying more fuel- efficient new vehicle models range from 5 to 13 percent, with an average estimate of slightly above 10 percent. Verboven's estimate corresponds to a real discount rate of approximately 7 percent when adjusted to reflect current and recent U.S. inflation rates.\365\ These studies may provide more reliable estimates of the appropriate consumption rate for discounting benefits from higher fuel economy than the 3 percent figure recommended in OMB guidance.

\364\ See Dreyfus, Mark K. and W. Kip Viscusi. 1995. ``Rates of

Time Preference and Consumer Valuations of Automobile Safety and

Fuel Efficiency.'' Journal of Law and Economics. 38: 79-98; and the adjustment of discount rates reported in that source discussed in

NERA, ``Discount Rates for Private Costs,'' pp. 4-5, attachment to

Alliance of Automobile Manufacturers comment on NPRM, Docket Item

NHTSA-2008-0089-50.

\365\ See Verboven, Frank, ``Implicit Interest Rates in Consumer

Durables Purchasing Decisions--Evidence for Automobiles,'' p. 22, attachment to California Department of Justice, comment on NPRM,

Docket Item NHTSA-2008-0089-0495.

Uncertainty about future developments in the international oil market, the U.S. economy, and the U.S. market for new cars and light trucks make it extremely difficult to anticipate the extent to which vehicle manufacturers will be able to recover costs for complying with higher CAFE standards in the form of higher selling prices for new vehicles. If new vehicle buyers expect fuel prices to remain higher than those used by NHTSA to establish CAFE standards for MY 2011, they may be willing to pay the higher prices necessary for manufacturers to recover their costs for complying with those standards.\366\ However, potential buyers who expect future fuel prices to be lower than the forecast NHTSA relies upon are likely to resist manufacturers' efforts to raise new vehicle prices sufficiently to recover all of their CAFE compliance costs, since those buyers' assessment of the value of higher fuel economy will be lower than that reflected in the CAFE standards

NHTSA establishes.

\366\ Whether they will be willing to do so, however, depends partly on how the combined value of the economic and environmental externalities used to determine CAFE standards compares to current fuel taxes. It also depends on whether new vehicle buyers take account of the value of fuel savings resulting from higher fuel economy over the entire expected lifetimes of the vehicles they purchase, or over only some part of that lifetime (such as the period they expect to own new vehicles).

From the manufacturer perspective, the current financial condition of some car and light truck producers suggests

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that they are likely to find it difficult to absorb the full cost of complying with higher CAFE standards. Because CAFE standards apply to all manufacturers, establishing higher standards may provide a ready opportunity for all producers to raise car and light truck prices.

However, this opportunity may be restricted if producers that face very low incremental costs for complying with higher CAFE standards because of higher fuel economy levels in their planned model offerings compete aggressively with others that face significant costs for increasing fuel economy levels in their product plans to comply with higher CAFE standards.

After considering the comments received and various arguments about the ultimate incidence of manufacturers' costs for complying with higher CAFE standards, NHTSA has concluded that the costs for complying with higher MY 2011 CAFE standards are likely to be shared by manufacturers and purchasers of new vehicles, but that the exact distribution fraction of these costs between manufacturers and buyers is extremely difficult to anticipate. Generally, NHTSA believes that manufacturers are likely to be able to raise prices only to the extent justified by potential buyers' assessments of the value of future fuel savings that will result from higher fuel economy, but the agency recognizes that buyers' valuations of fuel savings are inherently uncertain, and undoubtedly vary widely among individual buyers. As a consequence, price increases for new cars and light trucks are likely to allow manufacturers to recoup some fraction of their costs for complying with higher CAFE standards, while the remainder of those costs are likely to displace other investment opportunities that would otherwise be available to them.

Regardless of the ultimate incidence of costs for complying with higher CAFE standards, however, both manufacturers' opportunity costs for capital investment and empirical estimates of the discount rates that buyers of new vehicles apply to future fuel savings suggest that a rate in the range of 7 percent is an appropriate rate for discounting the nearer-term benefits from increased fuel economy that will occur over the lifetimes of MY 2011 cars and light trucks. Thus for purposes of establishing the CAFE standards adopted in this final rule and estimating their economic benefits, NHTSA has continued to employ a 7 percent rate to discount future benefits from higher CAFE standards other than those resulting from reduced CO2 emissions. Recognizing the uncertainty surrounding this assumption, NHTSA has also tested the sensitivity of the level of the optimized CAFE standards and their resulting economic benefits to the use of a 3 percent discount rate for all categories of benefits.

NHTSA will consider whether to revise the discount rates used in this analysis when it analyzes the consequences of future CAFE standards. At that time, the agency will consider whether to apply a lower discount rate than 3 percent to the benefits from reducing future emissions of CO2and other greenhouse gases, as well as whether to use a rate different from 7 percent to discount the nearer- term benefits from raising CAFE standards. In making these decisions, the agency will consider guidance on discounting future benefits-- particularly those from reducing the threat of climate-related economic damages--issued by OMB, EPA, and other government agencies, and will also consider the discount rates used by other federal agencies in similar regulatory proceedings. NHTSA will also consider recent research on appropriate rates for discounting future benefits from reducing the threat of climate-related economic damages, as well as on the discount rates that buyers of new vehicles apply to the fuel savings they obtain from purchasing models with higher fuel economy, since such research is particularly relevant to its choice of discount rates. Beyond these things, the agency will also review the discount rate issue for future rulemakings in light of the changing economic situation, in terms of manufacturers' capabilities and consumers' preferences as fuel prices fluctuate and concern for the effects of climate change increases. 15. Accounting for Uncertainty in Benefits and Costs

NHTSA explained in the NPRM that in analyzing the uncertainty surrounding its estimates of benefits and costs from alternative CAFE standards, NHTSA considered alternative estimates of those assumptions and parameters likely to have the largest effect. NHTSA stated that these include the projected costs of fuel economy-improving technologies and their expected effectiveness in reducing vehicle fuel consumption, forecasts of future fuel prices, the magnitude of the rebound effect, the reduction in external economic costs resulting from lower U.S. oil imports, the value to the U.S. economy of reducing carbon dioxide emissions, and the discount rate applied to future benefits and costs. The range for each of these variables employed in the agency's uncertainty analysis is presented in the section of the

NPRM discussing each variable.

NHTSA explained that the uncertainty analysis was conducted by assuming independent normal probability distributions for each of these variables, using the low and high estimates for each variable as the values below which 5 percent and 95 percent of observed values are believed to fall. Each trial of the uncertainty analysis employed a set of values randomly drawn from each of these probability distributions, assuming that the value of each variable is independent of the others.

Benefits and costs of each alternative standard were estimated using each combination of variables. A total of 1,000 trials were used to establish the likely probability distributions of estimated benefits and costs for each alternative standard.

NHTSA received only one comment on its methodology for accounting for uncertainty in benefits and costs. The Alliance commented that the results presented by NHTSA of its sensitivity analysis indicated increasing levels of certainty in the ability of the proposed standards to create net benefits--specifically, NHTSA concluded that there was at least a 99.3 percent certainty that changes made to MY 2011 vehicles to achieve the higher CAFE standards would produce a net benefit; at least a 99.6 percent certainty for MY 2012 vehicles; and 100 percent certainty for MY 2014-15 vehicles. The Alliance argued that

``Traditional discounting analysis indicates that the effects of policy changes are more uncertain at points far into the future,'' and that

``NHTSA should recognize that its predictive abilities in the area of automotive technology dim the farther it attempts to peer out into the future.'' The Alliance commented that NHTSA should ``reevaluate its statistical model in this light.''

Agency response: NHTSA agrees that uncertainty regarding both costs and benefits from fuel enhancing technologies increases at points farther into the future. The Alliance comment seems to suggest the application of an increasingly wide spread of high and low value parameters for technology costs and effectiveness rates for each successive model year. However, recognizing this increasing uncertainty could either increase or decrease the probability that increases in

CAFE standards will produce net benefits. The agency has no basis for determining whether this increased uncertainty would be likely to result in a higher probability of net benefits or a higher probability of net costs. A variety of factors such as unforeseen technology

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breakthroughs or fluctuations in energy and materials prices could influence benefits and costs in the distant future, and we see little merit in adding additional assumptions about conditions distant in time without a reasonably solid basis for selecting such assumptions.

We could simply increase the range symmetrically by some arbitrary factor, but, assuming the same normal distribution that is employed for most of the variables in our uncertainty analysis, increasing the range of both costs and benefits proportionally would be unlikely to significantly impact the conclusions of the uncertainty analysis. Thus, the agency would not increase this range of uncertainty by progressively more for successive model years, were this a multi-year rulemaking. As it is not, the issue of changing levels of uncertainty over time is largely academic for purposes of this rulemaking.

VI. How NHTSA Sets the CAFE Standards

A. Which attributes does NHTSA use to determine the standards?

NHTSA explained in the NPRM that it had taken a fresh look for purposes of this rulemaking at the question of which attribute or attributes would be most appropriate for setting CAFE standards. NHTSA preliminarily concluded that a footprint-based function would be the most effective and efficient for both passenger car and light truck standards. NHTSA explained that unlike a weight-based function, a footprint-based function helps achieve greater fuel economy/emissions reductions without having a potentially negative impact on safety and is more difficult to modify than other attributes because it cannot be easily altered outside the design cycle in order to move a vehicle to a point at which it is subject to a lower fuel economy target. NHTSA also discussed other attributes on which functions could be based, including curb weight, engine displacement, interior volume, passenger capacity, and towing or cargo-hauling capability, but tentatively rejected those other attributes as being generally easier to game than footprint.

NHTSA nevertheless sought comment on whether the proposed standard should be based on vehicle footprint alone, or whether other attributes such as the ones described above should be considered. NHTSA requested that if any commenters advocated one or more additional attributes, that they supply a specific, objective measure for each attribute that is accepted within the industry and that can be applied to the full range of light-duty vehicles covered by this rulemaking. NHTSA noted that in addition to being able to be objectively measured on all light- duty vehicles, any attribute-based system needs to (1) minimize the potential for gaming (artificial manipulation of the attribute(s) to achieve a more favorable fuel economy target), (2) have an observable relationship to fuel economy, and (3) avoid adverse safety consequences and undue relative burden on full-line manufacturers.

The agency received many comments on its choice of attribute. The

Aluminum Association, Honda, IIHS, and UCS supported NHTSA's proposal of attribute-based standards depending upon footprint alone. Honda cited the use of footprint as a means of maintaining consumer choice and maintaining an incentive to make use of lightweight materials. The

Aluminum Association indicated that footprint-based standards would assure stability between model years. UCS claimed that footprint compared favorably to other attributes. Honda, the Aluminum

Association, and IIHS all argued that footprint-based standards would provide incentives well-aligned with highway safety objectives. Honda commented that incentives provided by a footprint-based system are such that footprint-based standards would be, from a public policy perspective, preferable to weight-based standards, even though fuel economy is more strongly related to weight.

On the other hand, some organizations questioned the agency's proposal to continue basing light truck CAFE standards on footprint and to adopt new footprint-based standards for passenger cars. Subaru (a subsidiary of Fuji Heavy Industries) and BMW expressed concern that footprint-based standards discourage the introduction of new ``small vehicle concepts'' encouraged by weight-based standards under development in Europe and Japan. Porsche suggested that rapid changes in the light vehicle fleet call into question the use of footprint as the basis for CAFE standards. Porsche also argued that footprint is not an ideal attribute for passenger car standards because passenger cars are less prone to rollover than light trucks and the steepness of the curves NHTSA proposed for passenger cars would provide an incentive for gaming. Ferrari also expressed concern regarding the potential to increase footprint by mounting larger wheels, but did not compare this risk to the risk of, for example, increasing vehicle weight under a weight-based standard. Wenzel and Ross questioned the agency's judgment regarding the safety benefits of discouraging manufacturers from responding to CAFE standards by selling smaller vehicles. Cummins argued that other attributes, in particular weight, would provide a better engineering relationship to fuel economy, but acknowledged that

NHTSA proposed to rely on footprint as a means to best ``balance public policy concerns.''

GM expressed general support for footprint-based standards, but also proposed that the agency adopt a two-attribute system that would adjust targets applicable to vehicles capable of towing heavy loads.

The Alliance, which also supported this concept, indicated that such vehicles ``generally achieve about five percent lower fuel economy than similar vehicles not designed for such duty cycles.'' Other commenters supporting adjustments for ``tow-capable'' vehicles included Chrysler,

Cummins, Ford, NADA, RVIA, and several members of Congress. RVIA suggested that without such an adjustment, RV owners will ``have no choice but to attempt to pull travel trailers with undersize vehicles,'' thereby compromising highway safety. Honda and Toyota both opposed the concept based on concerns that such adjustments would compromise progress toward EISA's requirement that NHTSA ensure the new vehicle fleet reaches an average of at least 35 mpg by MY 2020.

Similarly, the Alliance, Chrysler, and NADA proposed that the agency adjust targets for ``off-road capable'' vehicles including, but not limited to vehicles with four-wheel drive. The Alliance and

Chrysler proposed downward adjustments of 10 percent and 1 mpg, respectively, based on past performance of such vehicles. Toyota expressed concern regarding the competitive effects of such an adjustment.

In addition to these two-attribute proposals, the agency also received a proposal from Porsche for a three-attribute concept under which vehicle targets would depend on footprint, weight, and maximum torque. Subaru and Volkswagen expressed support for this concept.

Porsche and Subaru argued that this three-attribute concept would provide a better statistical relationship to fuel economy and would help to reduce the steepness of the curves NHTSA proposed for passenger cars. Volkswagen indicated that the concept would be less burdensome for manufacturers with fleet mix ``challenged by'' a footprint-based system. Ferrari also commented that, considering the characteristics and fuel

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economy of performance vehicles, the agency should adopt a two- or three-attribute system that also incorporates curb weight, maximum power, maximum torque, and/or engine displacement.

Conversely, some organizations expressed strong opposition regarding standards that would rely on more than one attribute. UCS questioned whether any dual-attribute approach could ``deliver the benefits'' of a system based on footprint alone. Honda argued that

NHTSA should ``automatically reject'' the inclusion of any additional attribute that could decrease overall fuel savings achieved by CAFE standards. Similarly, as mentioned above, Toyota expressed concern that inclusion of additional attributes could compromise progress toward

EISA's requirements.

Agency response: Having considered the comments submitted to the agency on what attribute(s) should be included in attribute-based CAFE standards for passenger cars and light trucks, NHTSA is promulgating MY 2011 standards that depend on vehicle footprint.

As discussed in Section VIII, in the agency's judgment, from the standpoint of highway safety, it is important that the agency promulgate CAFE standards that do not encourage manufacturers to respond by selling vehicles that are in any way less safe. While the agency's research also indicates that reductions in vehicle mass tend to compromise highway safety, footprint-based standards provide an incentive to use advanced lightweight materials and structures that would be discouraged by weight-based standards.

Further, although NHTSA recognizes that weight is better correlated with fuel economy than is footprint, the agency continues to believe that there is less risk of ``gaming'' by increasing footprint under footprint-based CAFE standards than by increasing vehicle mass under weight-based CAFE standards. The agency also agrees with concerns raised by some commenters that there would be greater potential for gaming under multi-attribute CAFE standards, such as standards under which targets would also depend on attributes such as weight, torque, power, towing capability, and/or off-road capability. Standards that incorporate such attributes in conjunction with footprint would not only be significantly more complex, but by providing degrees of freedom with respect to more easily-adjusted attributes, they would make it less certain that the future fleet would actually achieve the average fuel economy levels projected by the agency.

Although NHTSA recognizes that any change in the structure of the

CAFE standards changes the relative challenge posed by those standards to each manufacturer, the agency notes that compliance with CAFE standards is determined based on average performance, such that no specific vehicle model need necessarily achieve its fuel economy target. NHTSA disagrees, therefore, that RV owners will be forced to use ``undersize'' vehicles as suggested by RVIA; rather, the agency expects that manufacturers will continue to provide a range of vehicles with capabilities sought by vehicle buyers.\367\

\367\ In any event, the agency doubts that RV owners would, as asserted by RVIA, be likely to violate guidelines and laws concerning towing capacity.

Furthermore, changes--discussed below--to NHTSA's procedure for determining the shape and stringency of CAFE standards for MY 2011 more fully incorporate the capabilities of high-performance vehicles, tow- capable vehicles, and off-road-capable vehicles. In developing the CAFE standards promulgated today, the agency has included all vehicles produced by all manufacturers, including the high-performance vehicles produced by companies such as Ferrari and Porsche. Also, as discussed in Section IV, for purposes of analyzing potential fuel economy improvements to specific vehicle models, the agency has developed estimates specific to performance vehicles of the availability, cost, and effectiveness of different fuel-saving technologies. The final passenger car standards thus give appropriate weight to the capabilities of these vehicles.

Also, as discussed below and in sections III and XI, the agency is tightening its definition of ``nonpassenger automobile'' such that many vehicles will be newly classified as passenger cars. Most of these changes involve two-wheel drive vehicles with relatively modest towing capacity, such that vehicles with off-road capabilities and/or more substantial towing capacity comprise an even greater share of the vehicles that will still be classified as light trucks. Therefore,

NHTSA has established final light truck CAFE standards that appropriately account for the capabilities of such vehicles.

B. Which mathematical function does NHTSA use to set the standards?

As discussed above, Congress also recently mandated that NHTSA set attribute-based fuel economy standards ``and express each standard in the form of a mathematical function.'' \368\ As proposed in the NPRM,

NHTSA is finalizing CAFE standards that use a continuous, constrained logistic function for expressing the MY 2011 passenger car and light truck standards, which takes the form of an S-curve, and is defined according to the following formula:

\368\ 49 U.S.C. 32902(a)(3)(A).

GRAPHIC

TIFF OMITTED TR30MR09.050

Here, TARGET is the fuel economy target (in mpg) applicable to vehicles of a given footprint (FOOTPRINT, in square feet), b and a are the function's lower and upper asymptotes (also in mpg), e is approximately equal to 2.718,\369\ c is the footprint (in square feet) at which the inverse of the fuel economy target falls halfway between the inverses of the lower and upper asymptotes, and d is a parameter

(in square feet) that determines how gradually the fuel economy target transitions from the upper toward the lower asymptote as the footprint increases. Figure VI-1 below shows an example of a logistic target function, where b = 20 mpg, a = 30 mpg, c = 40 square feet, and d = 5 square feet:

\369\ e is the irrational number for which the slope of the function y = number xis equal to 1 when x is equal to zero. The first 8 digits of e are 2.7182818.

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GRAPHIC

TIFF OMITTED TR30MR09.051

NHTSA is not required to use a constrained logistic function and, as discussed below, the agency may consider defining future CAFE standards in terms of a different mathematical function.

Continuous function:

NHTSA explained in the NPRM that it examined the relative merits of both step functions and continuous functions in its rulemaking for MY 2008-2011 light trucks, and described the agency's rationale for choosing a continuous function for the CAFE program. A step function, in the CAFE context, would separate the vehicle models along the spectrum of attribute magnitudes into discrete groups, and each group would be assigned a single fuel economy target, so that the average of the groups would be the average fleet fuel economy. A continuous function, in contrast, would assign each vehicle model (and indeed, any potential vehicle model at any point along the spectrum) its own unique fuel economy target, based on its particular attribute magnitude. Thus, two vehicle models built by different manufacturers could have the same fuel economy target, but only if they had identical magnitudes of the relevant attribute. In other words, a continuous function is a mathematical function that defines attribute-based targets across the entire range of possible attribute values. These targets are then applied through a harmonically-weighted formula to derive regulatory obligations for fleet averages.

NHTSA decided against a step function for several reasons. First, there would be a strong incentive for manufacturers to game the system at the ``edges'' of the steps, by increasing the magnitude of a vehicle model's attribute only slightly in order to receive the lower target of the next step. A continuous function tends to reduce this incentive because on an uninterrupted spectrum, the vehicle model's magnitude of the attribute must be increased much more in order to gain a significantly lower fuel economy target--i.e., the necessary change in the vehicle model must be greater in order to receive the same level of benefit. Second, the continuous function minimizes the incentive to downsize a vehicle, since any downsizing would result in higher (or the same, at the upper end of the curve) targets being applicable. And finally, the continuous function provides manufacturers with greater regulatory certainty, since under a step function, the boundaries of categories (i.e., the size of the steps) could be redefined in future rulemakings. Thus, NHTSA tentatively concluded that a continuous function was the best choice for setting CAFE standards.

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NHTSA received only three comments regarding its use of the continuous function. Ferrari commented that it supports ``the choice to use a continuous function instead of a step function, because for each vehicle model is associated the corresponding fuel economy target, regardless of whether the attribute is the footprint alone or another one or a combination of two or more.''

Fuji/Subaru commented that ``In general, Subaru conceptually supports the NHTSA proposal to carryover the attribute and continuous logistic function structure from the prior 2008-2011 light truck fuel economy rulemaking.''

IIHS commented that it ``strongly supports the extension of an attribute-based system to cars and the agency's proposal to index fuel economy to a continuous function.'' IIHS stated that a step function gives manufacturers an incentive ``to redesign vehicles with minimally larger footprints to achieve lower fuel economy targets or to downsize vehicles to achieve weight reductions within footprint categories.''

This incentive exists, IIHS argued, because of the fact that ``By minimally boosting the footprint of a vehicle near an upper boundary, an automaker can gain a large benefit in meeting fuel economy targets,'' and that ``By the same token, an automaker can significantly decrease a vehicle's size and weight as long as the changes do not place the vehicle below the lower boundary of its current step,'' which

IIHS argued presented significant safety concerns. IIHS further stated that the continuous function presented an added benefit over a step function insofar as ``car buyers would be more likely to notice design changes incorporated to achieve a substantial CAFE benefit in a continuous function system.''

Agency response: Notwithstanding concerns regarding the steepness of an attribute-based function--concerns that are addressed below in

Section VI.E--these comments support the agency's decision to promulgate a final rule that uses a continuous function to specify fuel economy targets that depend on a vehicle attribute.

Constrained Logistic Function

NHTSA explained in the NPRM that there are a variety of mathematical forms available to estimate the relationship between an attribute and fuel economy that could be used as a continuous function, including simple linear (straight-line) functions, quadratic (U-shaped) functions, exponential (curves that continuously become steeper or shallower) functions, and unconstrained logistic (S-shaped) functions.

NHTSA examined these alternative mathematical forms in the MY 2008-2011 light truck CAFE rulemaking,\370\ but concluded that none of those functional forms as presented would be appropriate for the CAFE program because they tended toward excessively high stringency levels at the smaller end of the footprint range, excessively low stringency levels at the larger end of the footprint range, or both. Too-high stringency levels for smaller vehicles could potentially result in target values beyond the technological capabilities of manufacturers, while too-low levels for larger vehicles would reduce fuel savings below that of the optimized fleet. NHTSA determined that a constrained logistic function, shaped like an S-curve with plateaus at the top and bottom rather than increasing/decreasing to infinity, provided a relatively good fit to the data points without creating problems associated with some or all of the other forms. The constrained logistic function also limited the potential for the curve to be disproportionately influenced by outlier vehicles.

\370\ See 71 FR 17600-17607 (Apr. 6, 2007) for a fuller discussion of the agency's analysis in that rule.

NHTSA defined the constrained logistic functions for the CAFE standards using four parameters. Two parameters, a and b, established the function's upper and lower bounds (asymptotes), respectively. A third parameter, c, specified the footprint at which the function was halfway between the upper and lower bounds. The last parameter, d, established the rate or ``steepness'' of the function's transition between the upper (at low footprint) and lower (at high footprint) boundaries. The resulting curve was an elongated reverse ``S'' shape, with fuel economy targets decreasing as footprint increased. The definitions of the constrained logistic functions and NHTSA's process for fitting the curves is described in much more detail in Section VI.E below.

NHTSA tentatively concluded in the NPRM that a constrained logistic function was appropriate for setting CAFE standards for both passenger cars and light trucks, but sought comment on whether another mathematical function might result in improved standards consistent with EPCA and EISA.

Although NHTSA received a number of comments requesting alternative standards for certain manufacturers, which are discussed in Section

VI.D, only Ferrari commented specifically regarding the constrained logistic function. Ferrari stated that it agreed with NHTSA ``about the use of a constrained logistic function to avoid a too high standard for smaller vehicles, and too low for larger vehicles, being the attribute the footprint.'' Ferrari further stated that ``the almost flattened tails of the curve (i.e., asymptotes) are helpful to avoid either vehicle downsizing or over sizing which could produce negative effects for safety and vehicle compatibility in case of accidents.''

Agency response: As a potential alternative to the constrained logistic function, NHTSA did also present information regarding a constrained linear function. As shown in the NPRM, a constrained linear function has the potential to avoid creating a localized region (in terms of vehicle footprint) over which the slope of the function is relatively steep. However, NHTSA did not receive comments on this option, and the agency remains concerned about possible unintended consequences of the ``corners'' in such a function. Therefore, the agency is promulgating standards for MY 2011 that, as proposed in the

NPRM, use a constrained logistic function to specify attribute-based fuel economy targets. The agency still believes a linear function constrained by upper (on a gpm basis) and possibly lower limits may merit reconsideration in future CAFE rulemakings.

C. What other types of standards did commenters propose?

In the NPRM, NHTSA explained that it is obligated under 49 U.S.C. 32902(a)(3)(A), recently added by Congress, to set attribute-based fuel economy standards for passenger cars and light trucks.\371\ NHTSA stated that it welcomed Congress' affirmation through EISA of the value of setting attribute-based fuel economy standards, because the agency believes that an attribute-based structure is preferable to a single- industry-wide average standard in the context of CAFE for several reasons. First, attribute-based standards increase fuel savings and reduce emissions when compared to an equivalent industry-wide standard under which each manufacturer is subject to the same numerical

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requirement. Under such a single industry-wide average standard, there are always some manufacturers that are not required to make any improvements for the given year because they already exceed the standard. Under an attribute-based system, in contrast, every manufacturer is more likely to be required to continue improving each year. Because each manufacturer produces a different mix of vehicles, attribute-based standards are individualized for each manufacturer's different product mix. All manufacturers must ensure that they have used available technologies to enhance the fuel economy levels of the vehicles they sell. Therefore, fuel savings and CO2 emissions reductions will always be higher under an attribute-based system than under a comparable industry-wide standard.

\371\ The statutory section states as follows:

(3) Authority of the Secretary.--The Secretary shall--

(A) prescribe by regulation separate average fuel economy standards for passenger and non-passenger automobiles based on 1 or more vehicle attributes related to fuel economy and express each standard in the form of a mathematical function * * *.

Second, attribute-based standards eliminate the incentive for manufacturers to respond to CAFE standards in ways harmful to safety.\372\ Because each vehicle model has its own target (based on the attribute chosen), attribute-based standards provide no incentive to build smaller vehicles simply to meet a fleet-wide average, because the smaller vehicles will be subject to more stringent fuel economy targets.

\372\ The 2002 NAS Report described at length and quantified the potential safety problem with average fuel economy standards that specify a single numerical requirement for the entire industry. See

NAS Report at 5, finding 12.

Third, attribute-based standards provide a more equitable regulatory framework for different vehicle manufacturers.\373\ A single industry-wide average standard imposes disproportionate cost burdens and compliance difficulties on the manufacturers that need to change their product plans and no obligation on those manufacturers that have no need to change their plans. Attribute-based standards spread the regulatory cost burden for fuel economy more broadly across all of the vehicle manufacturers within the industry.

\373\ Id. at 4-5, finding 10.

And fourth, attribute-based standards respect economic conditions and consumer choice, instead of having the government mandate a certain fleet mix. Manufacturers are required to invest in technologies that improve the fuel economy of the vehicles they sell, regardless of size.

All commenters recognized that NHTSA must set attribute-based standards per Congress' mandate in EISA, but several commenters, mostly small and limited-line manufacturers, requested that NHTSA develop some kind of alternative standard besides the attribute-based passenger car and light truck standards proposed in the NPRM.\374\ These manufacturers generally argued that the proposed passenger car standards were set without regard to 15 percent of the passenger car market and were disproportionately burdensome to them (NHTSA notes, however, that full-line manufacturers argued to the contrary that the proposed standards were disproportionately burdensome to them). Most requested that the agency set an alternative standard that required them to raise their CAFE levels by a certain set percentage each year, rather than at the rate required by the proposed standards. Commenters generally reasoned that these alternative standards would improve fuel savings, because otherwise small and limited-line manufacturers will be unable to meet the proposed standards and will just pay fines.

\374\ The Alliance comment on this issue simply stated that

``For some manufacturers, whose model proliferation may not correlate well with footprint-based CAFE standards, the burden of required fuel economy increases is particularly high,'' and suggested that ``NHTSA should consider the appropriateness of implementing an alternative fuel economy standard option'' for those manufacturers, but left it to the individual manufacturers to comment further.

Several manufacturers suggested alternative standards that increase at set percentages each year. BMW suggested, and Mitsubishi supported, an alternative passenger car standard allowing manufacturers for which the ratio of the fleet standard to the manufacturer's average footprint is higher than average to have the option of using a flat standard.

This flat standard would increase at 4.5 percent per year, which was the same annualized increase as NHTSA's proposed passenger car standards. BMW argued that the suggested approach would be consistent with EISA because it would be derived from the attribute-based standards.

Ferrari also suggested that small manufacturers (which it argued should be re-defined as either producing less than 5,000 vehicles annually for sale in the U.S. or selling less than 15,000 vehicles annually in the U.S.) should be provided an option to improve their fuel economy by a certain percentage each year. Ferrari did not suggest a particular percentage by which standards should increase. At the very least, Ferrari argued that small manufacturers should be given more lead-time than full-line manufacturers for making CAFE improvements.

Volkswagen also commented that NHTSA should consider a percent increase option for the manufacturers (like Volkswagen) with fleets that ``exhibit an unbalanced correlation to the footprint attribute,'' a concept which Volkswagen suggested could be applied to both passenger cars and light trucks. If NHTSA declined to adopt such a suggestion,

Volkswagen requested that manufacturers be allowed to comply with the industry average target for each model year.

Ford also argued in favor of passenger car and light truck standards that increase at a set percentage each year, specifically at 3.8 percent per year, which Ford estimated would achieve similar CAFE levels by MY 2015. Ford's comment was based on its construction of the

EISA requirement that standards ``increase ratably'' between MY 2011 and MY 2020, and was discussed in the section above addressing other comments made regarding that requirement.

Fuji/Subaru suggested that smaller-volume manufacturers should have the option of either meeting the average on the proposed passenger car curve for the fleet as a whole, or paying civil penalties based on the target assigned through the proposed passenger car curve. These alternative options would be available in the early years of the rulemaking for manufacturers not able to meet rapidly-increasing standards. Fuji/Subaru argued that smaller manufacturers could not feasibly meet the proposed standards and that an alternative option would be consistent with EISA, because the fleet average would be derived from the attribute-based standards.

Similar to Fuji/Subaru, Porsche argued that smaller limited-line manufacturers should be allowed the option to meet a fleet average equivalent to the midpoint of the compliance curve for the overall fleet in a given model year, ``rather than being forced to leave the market, restrict product or pay exorbitant civil penalties.'' Porsche argued that such a CAFE obligation would be ``challenging but achievable,'' and given the rate of increase in passenger car CAFE standards between 2007 and 2011, would be preferable to paying

``skyrocketing civil penalties.'' Porsche additionally argued that

EPCA/EISA prohibits NHTSA from excluding manufacturers in setting the

CAFE standards, because NHTSA must ``prescribe by regulation average fuel economy standards for automobiles manufactured by a manufacturer in that model year'' according to 49 U.S.C. Sec. 32902(a). Porsche argued that NHTSA cannot set standards without reference to a manufacturer's fleet, and then subject that manufacturer to

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enforcement penalties under those standards.

Mercedes Benz also argued that ``manufacturers not included in the analysis'' for passenger car standards, i.e., limited-line manufacturers, should be allowed either to meet the average fuel economy specified for the vehicle fleet, or ``to improve their fleet fuel economy by a percentage equal to the percentage improvement NHTSA estimates for the fleet as a whole.'' Mercedes Benz suggested that

NHTSA could require manufacturers to comply with the higher of the two options. The commenter further argued that such an approach would be legal under EPCA/EISA because it ``would be based on the attribute based continuous function curve,'' and would be fairer because the proposed attribute-based standards did not take into account what the fleet as a whole could achieve in terms of fuel economy.

Agency response: NHTSA disagrees that it has the authority to set such suggested standards for any manufacturers under EPCA and EISA for purposes of this rulemaking. An average standard that is ``based on'' an attribute-based standard is not itself attribute-based, as required by EISA. Many of the manufacturers arguing for an alternative standard were concerned that the agency had excluded them from consideration in developing the proposed standards. In response, the agency included all manufacturers subject to the standards (excluding low-volume manufacturers), to ensure that the curves reflected the capabilities of the entire fleet, and not just the seven largest manufacturers. NHTSA believes that this addresses many of the commenters' concerns.

D. How does NHTSA fit the curve and estimate the stringency that maximizes net benefits to society?

In the NPRM, NHTSA proposed attribute-based passenger car and light truck CAFE standards under which each vehicle model has a fuel economy target that is based on the vehicle model's footprint, and the CAFE levels required of each manufacturer's passenger car and light truck fleets are determined by calculating the sales-weighted harmonic averages of those targets. NHTSA proposed the following mathematical function relating fuel economy targets to footprint:

GRAPHIC

TIFF OMITTED TR30MR09.052 where

GRAPHIC

TIFF OMITTED TR30MR09.053 and

T(x) = fuel economy target (mpg) x = footprint (square feet)

A = highest mpg value of fuel economy target

B = lowest mpg value of fuel economy target

C = coefficient (in square feet) determining horizontal midpoint of f(x)

D = coefficient (in square feet) determining width of transition between A and B.

In the NPRM, NHTSA determined the curves relating footprint to fuel economy for a given model year and vehicle type (passenger car or light truck) for which the harmonic average of the functional values are the manufacturers' fuel economy targets, using the following five-step process. (In the discussion below, we shall refer to these ten curves-- one for each model year and vehicle type--as the ``fuel economy curves.'')

In Step 1, NHTSA determined the ``manufacturer-optimized'' fuel economies for each vehicle in the product plans, submitted to NHTSA prior to the NPRM, of the seven largest manufacturers (Chrysler, Ford,

General Motors, Honda, Hyundai, Nissan, Toyota). The ``manufacturer- optimized'' fuel economies were obtained by applying fuel economy technologies to a given manufacturer's fleet of a given vehicle type

(cars or trucks) and model year, until the incremental benefits are equal to the incremental costs. The resulting fuel economies were

``manufacturer-optimized'' in the sense that they maximize societal net benefits at the level of the manufacturer, model year, and vehicle type. This approach was used to push each manufacturer's fleet to a point of equal effort. NHTSA restricted data to the seven largest manufacturers because those manufacturers accounted for most of the market and because a number of other manufacturers did not submit product plan data and/or had histories of paying civil penalties rather than complying with CAFE standards.

In Step 2, NHTSA determined initial values for parameters A and B

(values revised in steps 4 and 5, described below) for each vehicle class (passenger car and light truck) and model year as follows. For passenger cars (and light trucks, respectively) in a given model year,

NHTSA set the initial value of the parameter A to be the harmonic average fuel economy among the vehicles of the given model year and vehicle type (produced by the seven largest manufacturers) comprising the lower third (respectively, eleventh) percentile of footprint values. NHTSA set the initial value of B to be the harmonic average fuel economy among the vehicles of the given model year and vehicle type (produced by the seven largest manufacturers) comprising the upper fourth (respectively, sixth) percentile of footprint values. NHTSA set

A and B in this manner, rather than fitting them, for example, through regression, in order to ensure that the upper and lower fuel economy values reflect the smallest and largest models in the fleet. NHTSA chose the percentile values it used by examining the fuel economies of the largest and smallest car and truck models, and determining its best assessment of appropriate cohorts, acknowledging that there are no canonical choices for the cohorts.

In Step 3, NHTSA determined initial values for parameters C and D for each vehicle type and model year as follows. (Their values were revised for MYs 2012-2014 in Step 5.) For a given model year and vehicle type, NHTSA set the initial values of C and D to be the values for which the average (equivalently, sum) of the absolute values of the differences between the manufacturer-optimized fuel consumptions for the given model year and vehicle type and the values obtained by applying the function f(x) (defined above) to the corresponding vehicle footprints is minimal, where the values of A and B

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are taken from those determined in Step 2 and where e denotes the base of the natural logarithm (which is approximately equal to 2.71828).

That is, NHTSA determined C and D by minimizing the average absolute residual, commonly known as the MAD (Mean Absolute Deviation) approach, of the corresponding constrained logistic curve. NHTSA fit the curve in fuel consumption space rather than fuel economy space because the manufacturer targets are in terms of the harmonic average fuel economy, and so it is more important that the curve fit the fuel consumption data well than that it fit the fuel economy data well. NHTSA also explained in the NPRM that it chose to use MAD in this Step instead of minimizing the sum of the square errors (``least squares,'' another common approach in curve fitting) in order to lessen the influence of outliers. NHTSA believed that it was more appropriate to use unweighted data in fitting the curve rather than weighting the data by sales because of large variations in model sales.

In Step 4, NHTSA determined for each model year and vehicle class the integer value of t that maximized the societal net benefits

(considering the seven largest manufacturers) achieved by a fuel economy standard under which fuel consumption targets were defined by the function

GRAPHIC

TIFF OMITTED TR30MR09.054 using the values of A and B determined in Step 2, and the values of C and D determined in Step 3.\375\ NHTSA reset the values of 1/A and 1/B to be 1/A + 0.0001t and 1/B + 0.0001t, respectively. (These were not the final values of A and B for model years 2012-2014, which were further adjusted in Step 5.) That is, NHTSA initially set the stringency of the curves to maximize societal net benefits.

\375\ This procedure uniformly shifts the upward and downward

(depending on whether t is positive or negative), but on the same gallon per mile basis corresponding to the harmonic averaging of fuel economy values.

In Step 5, NHTSA adjusted the values of A, B, C, and D for passenger cars and light trucks in MYs 2012-2014 as follows. NHTSA replaced the values of A, B, C, D for passenger cars (respectively, light trucks) in MYs 2012-2014 with the values obtained by making even annual steps between the values obtained for MYs 2011 and 2015 under

Step 4. For A and B, these steps were made evenly on a gallon per mile basis. For C and D, these steps were made evenly on a square foot basis. Having done so, NHTSA then repeated Step 4 beginning with these adjusted coefficients.

NHTSA explained in the NPRM that it performed Step 5 because the MY 2011 car curve crossed the MY 2012 car curve and the MY 2011 truck curve crossed the MY 2012 truck curve. This is undesirable because it implies that the fuel economy target for a MY 2012 car in a certain range of footprint values is lower than that for a MY 2011 car of the same size (and likewise with trucks). We note that no further curve crossings occurred. That is, the passenger car (respectively, light truck) curves for MYs 2011-2015 that resulted upon the completion of

Step 5 were mutually non-intersecting.

NHTSA thus set the fuel economy curve for a given model year and vehicle type to be

GRAPHIC

TIFF OMITTED TR30MR09.055 where A, B, C, and D assume the final values determined in Steps 1-5.

(Recall that the function f(x) above is in fuel consumption space, not fuel economy space.) The values of A, B, C, and D in the NPRM for each vehicle type and model year were as follows.

GRAPHIC

TIFF OMITTED TR30MR09.056

NHTSA noted in the NPRM that a manufacturer's CAFE standard may decrease in a given year, compared to the prior year, even though the passenger car (respectively, light truck) fuel economy curves increase in functional values with increasing model year. A manufacturer's standard may decrease as a result of increasing the

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footprints of the vehicles it produces in the later of the two years by a sufficiently large amount. (In the NPRM, NHTSA referred to the decrease in vehicle or manufacturer fuel economy targets from one year to the next as ``backsliding.'') However, as explained in the NPRM,

NHTSA believes it is unlikely that any manufacturer would take such a step in the final rule time frame, given what appears to be a growing consumer preference for smaller, higher-fuel economy vehicles.

NHTSA noted in the NPRM that the curves obtained for passenger cars might be undesirably steep near the inflection point, where small changes in footprint can lead to not so small changes in target fuel economy. NHTSA requested particular comment on this issue and a number of other issues, including the determination of cohorts used to set values for the asymptotes A and B, the manner in which C and D are determined, the treatment of outliers, and curve crossing.

NHTSA received several comments concerning the manner in which it fit the fuel economy curves.

Comments Regarding the Fact That the Car and Truck Curves Are Set

Independently

Three commenters (Honda, Wenzel and Ross, and Public Citizen) stated it would or might be better if rather than setting the car and truck curves independently, the car and truck fuel consumption data were pooled and a single curve fit to the pooled data. Honda commented that this would result in standards that treat cars and trucks more equally and could fix the steepness problem with the car curve. Wenzel and Ross argued that setting the same standards for passenger cars and light trucks would lead to manufacturers producing relatively fewer pickups and truck-based SUVs, compared to cars and crossover SUVs, and this would result in fewer deaths and injuries resulting from crashes of incompatibly-sized vehicles and greater fuel savings. Public Citizen simply stated that NHTSA failed to set ``one continuous standard for passenger cars and light trucks.''

Agency response: In the NPRM, NHTSA did examine the standards that would result from pooling the data in this manner. However, NHTSA is required by statute to set separate average fuel economy standards for cars and trucks, and upon further reflection we believe this requirement extends to how the agency develops the curves. Pooling data for both fleets would mean applying to passenger cars a standard based, in part, on the technological capabilities of light trucks, and vice versa. NHTSA is promulgating final standards for MY 2011 that, as proposed, base the curve applied to each fleet only on the capabilities of vehicles that would be covered the curve.

Comments Concerning the Manufacturers Whose Data to Which the Curves

Were Fit

BMW, Mercedes, Mitsubishi, Porsche, Subaru, and the Alliance commented that the fuel economy curves should be fit to data from all manufacturers to which the fuel economy standards apply, and not just to data from the seven largest manufacturers. Some commenters (BMW,

Mercedes, Mitsubishi, Porsche) argued that limiting to data from the seven largest manufacturers results in disproportionate burdens