[Federal Register Volume 69, Number 33 (Thursday, February 19, 2004)]
[Rules and Regulations]
[Pages 7689-7703]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-3595]


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DEPARTMENT OF TRANSPORTATION

National Highway Traffic Safety Administration

49 CFR Part 538

[Docket No.: NHTSA-2001-10774; Notice 3]
RIN 2127-AI41


Automotive Fuel Economy Manufacturing Incentives for Alternative 
Fueled Vehicles

AGENCY: National Highway Traffic Safety Administration (NHTSA), 
Department of Transportation (DOT).

ACTION: Final rule.

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SUMMARY: Consistent with the Alternative Motor Fuels Act of 1988, this 
final rule extends the incentive created by that Act to encourage the 
continued production of motor vehicles capable of operating on 
alternative fuels. The incentive, originally enacted to begin the 
process of moving the nation toward the use of alternative fuels and 
away from petroleum dependence, has resulted in the creation of a fleet 
of vehicles able to operate on alternative fuel. To continue the 
process of moving the nation toward energy independence and to remain 
dedicated to the policies underlying the enactment of the Act, this 
final rule extends the alternative fuel CAFE incentive as contemplated 
in the NPRM for four additional model years.

[[Page 7690]]


DATES: Effective Date: The amendments made in this final rule are 
effective October 1, 2004.
    Petition Date: Any petitions for reconsideration must be received 
by NHTSA no later than April 5, 2004.

ADDRESSES: Any petitions for reconsideration should refer to the docket 
and notice number of this notice and be submitted to: Administrator, 
National Highway Traffic Safety Administration, 400 Seventh Street, 
SW., Washington, DC 20590.

FOR FURTHER INFORMATION CONTACT: The following persons at the National 
Highway Traffic Safety Administration, 400 Seventh Street, SW., 
Washington, DC 20590: For non-legal issues: Mr. Kenneth Katz, Fuel 
Economy Division, Office of Planning and Consumer Standards, NVS-132, 
Room 5320, telephone (202) 366-0846, facsimile (202) 493-2290. For 
legal issues: Otto Matheke, Office of the Chief Counsel, NCC-20, Room 
5219, telephone (202) 366-5263, facsimile (202) 366-3820.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Summary of Final Rule
II. Statutory Background
III. Regulatory Background
IV. March 2002 Report to Congress
V. Notice of Proposed Rulemaking
VI. Summary of Comments
VII. Resolution of the ``Chicken and Egg'' Problem
VIII. Extending the CAFE Incentive
IX. Conclusion
X. Regulatory Analyses

I. Summary of Final Rule

    This Final Rule completes the agency's implementation of a 
statutory requirement to consider the continuation of credits accorded 
to dual fueled automobiles pursuant to the Alternative Motor Fuels Act 
of 1988 (AMFA; Pub. L. 100-494). As part of that Act, Congress provided 
that motor vehicles subject to corporate average fuel economy (CAFE) 
standards are accorded special consideration if they are capable of 
running either flexibly (dual fueled) or exclusively (dedicated) on 
fuel other than petroleum.\1\ AMFA encourages the production of these 
vehicles by providing a specified credit toward the calculation of a 
manufacturer's CAFE performance. Congress provided this incentive to 
enhance the nation's energy independence. Congress ensured that the 
incentive is not negated through the setting of more stringent CAFE 
standards by prohibiting the agency from considering the AMFA CAFE 
incentive when determining maximum feasible CAFE standards.
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    \1\ There are two classes of alternative fuel motor vehicles. 
Dedicated alternative fuel motor vehicles are motor vehicles 
designed to run only on alternative fuel. Vehicles that are capable 
of operating on a conventional fuel (either gasoline or diesel) as 
well as on an alternative fuel are considered to be ``dual fuel'' or 
``flexible fuel'' motor vehicles.
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    AMFA sets certain parameters for the amount and duration of the 
incentive program. For model years 1993 through 2004, the maximum 
allowable credit toward a manufacturer's average fuel economy is 1.2 
miles per gallon (mpg). The statute then provides that the Department 
of Transportation (through NHTSA) must either extend the incentive 
program for dual fueled vehicles beyond the 2004 model year or issue a 
Federal Register notice justifying termination of the program. The 
statute limits any extension to no more than four model years and the 
amount of credit during any such extension to 0.9 mpg per manufacturer. 
Congress also required that NHTSA provide it with a report discussing 
the progress of the program, apparently to help Congress determine 
whether any further legislative initiatives would be necessary.
    This final rule completes the agency's implementation of the 
statutory mandate by extending the program as authorized by the 
statute. The agency's decision comes after a considered review of the 
public comments solicited in anticipation of preparing the Report to 
Congress, the public comments filed in response to the agency's March 
2002 Notice of Proposed Rulemaking, and the legislative history 
surrounding the enactment of AMFA.
    The agency's Report to Congress found that the results of the AMFA 
incentive program to date have been mixed in that the program led to 
the development and production of vehicles capable of operating on 
alternative fuels but has not yet generated an infrastructure to 
support fully the use of alternative fuels in such vehicles. The Report 
did not recommend abandoning the AMFA incentive program. On the 
contrary, the Report concluded that continuation of the program should 
include additional measures to ensure its success, and in particular 
measures aimed at encouraging the increased use of alternative fuels 
and the expansion of an alternative fuel infrastructure.
    The agency finds that continuation of the AMFA incentive program, 
consistent with existing statutory limits, best serves the 
Congressional intent underlying AMFA and best serves the nation's 
continuing public policy interest in encouraging energy security. In 
enacting AMFA, Congress sought to solve the so-called ``chicken and the 
egg'' problem inherent in the development of an alternative fuel 
infrastructure. Vehicle manufacturers could not justify producing 
vehicles capable of operating on alternative fuels if people would not 
buy them or be able to use them, and energy companies could not justify 
investing in developing fueling infrastructure for fuels of unknown 
consumer acceptance and utility.
    As Congress intended, the CAFE credits accorded through AMFA have 
induced the creation of a fleet of approximately 3.4 million dual-
fueled vehicles through the 2003 model year which, in turn, has begun 
to spur investment in alternative fuel stations and other 
infrastructure development. Congress specifically did not choose any 
particular alternative fuel when enacting AMFA. Instead, Congress 
provided a sufficient amount of time for experimenting with different 
fuels, for creating a fleet of vehicles capable of using one or more of 
those fuels and for beginning the development of an infrastructure to 
support that fleet. Recognizing that more time may be needed to 
accomplish the end result, Congress mandated that the agency extend the 
CAFE incentive through rulemaking (with specified limitations) or 
publish a Federal Register notice explaining why it chose not to do so.
    In providing for special CAFE incentives to help create that fleet, 
Congress recognized in 1988 that its action was just a beginning toward 
energy security. The legislative history does not suggest that Congress 
believed the CAFE incentive provided to these vehicles would, in and of 
itself, lead to infrastructure supporting alternative fuel use and 
energy independence. Rather, the legislative history is replete with 
references to the initiation of a process to ``begin'' such 
development. If NHTSA were to terminate the incentive program now, the 
gains that have been made would be lost and there would be no 
possibility of obtaining the benefits yet to be gained through the 
continued development of a light vehicle transportation system capable 
of operating on domestically produced alternative transportation fuels.

II. Statutory Background

    Recognizing the substantial energy use by the transportation 
sector, the need to conserve the Nation's energy resources, and the 
need to reduce the Nation's dependence upon foreign energy sources, 
Congress passed the Energy Policy and Conservation Act of 1975 (Pub. L. 
94-163). That Act amended the Motor Vehicle Information

[[Page 7691]]

and Cost Savings Act (Pub. L. 92-513) by adding provisions for 
improving the fuel efficiency of light-duty motor vehicles. Standards 
based on Corporate Average Fuel Economy (``CAFE''), the production 
weighted average of a manufacturer's fleet of new passenger cars and 
light duty trucks, were mandated for newly manufactured passenger cars 
produced after 1977 and light trucks after 1978. Congress authorized 
the Department of Transportation's National Highway Traffic Safety 
Administration (NHTSA) to promulgate these CAFE standards.
    Along with the improvements in light transportation fleet fuel 
efficiency, Congress undertook a strategy to encourage, and ultimately 
implement, the use of alternative fuels to reduce the nation's 
dependence on petroleum. Congress chose not to mandate any particular 
energy source, but rather to create market incentives to break the 
``chicken and the egg'' problem plaguing any movement away from the 
developed petroleum infrastructure. AMFA was enacted to initiate a 
process to encourage the production of a fleet of vehicles that would 
in turn give rise to consumer acceptance and ultimately lead to the 
development of infrastructure to distribute and make alternative fuel 
available.
    Section 6 of AMFA provided new incentives for the manufacture of 
``dual fueled'' vehicles that can operate on either an alternative fuel 
or a petroleum-based fuel such as gasoline or diesel. Under the special 
procedures for calculating the fuel economy of those vehicles contained 
in that section, dual fueled vehicles are assigned a higher fuel 
economy value for CAFE purposes in recognition of the fact that they 
can displace gasoline or diesel fuel use, and therefore reduce 
dependence on foreign oil. This special CAFE calculation procedure 
encourages the production of dual fueled vehicles by helping 
manufacturers who build them to meet CAFE standards.
    Congress considered the incentive to manufacture dual fueled 
vehicles so important that it took steps to ensure its continued 
effectiveness by providing that the agency could not consider the 
availability of the AMFA credits when determining the maximum feasible 
fuel economy level for any particular fleet in any particular model 
year. As Congressman Dingell pointed out during the House debate on the 
AMFA Conference Report (H. REP. No. 100-929), adjusting CAFE levels to 
account for the AMFA incentive would negate the incentive:

    A provision is included in the legislation to ensure that the 
incentives provided by this bill are not erased by the Secretary's 
setting the CAFE standard for cars or trucks at a level that assumes 
a certain penetration of alternative fueled vehicles. The conferees 
are aware that the statute requires CAFE standards to be set at the 
``maximum feasible'' level, and that DOT traditionally has 
determined that level in connection with examining the individual 
fuel economy capabilities of the larger manufacturers. It is 
intended that this examination will be conducted without regard to 
the penetration of alternative fuel vehicles in any manufacturer's 
fleet, in order to ensure that manufacturers taking advantage of the 
incentives offered by this bill do not find DOT including those 
incentive increases in the manufacturer's ``maximum fuel economy 
capability.'' This, of course, would wipe out the benefits 
associated with the increases if it resulted in commensurate 
increases in the CAFE standard. 134 CONG. REC. 8091 (1988).

    AMFA established the eligibility criteria and procedures for 
calculation of the incentive benefits, and further provided that in 
establishing maximum feasible fuel economy levels, the Secretary ``may 
not consider the fuel economy of dedicated automobiles and shall not 
consider dual fueled automobiles to be operated only on gasoline or 
diesel fuel.'' 49 U.S.C. 32902(h). AMFA then provided for a special 
calculation for determining actual CAFE performance that provides 
special consideration for the fact that the vehicles can, and may, 
operate on alternative fuel sources.
    The Senate version of the bill, and ultimately AMFA itself, 
balanced the need to encourage the development of a fleet of 
alternative fueled vehicles against concerns that the fuel economy 
program would be unduly hindered by placing limits on the amount of the 
CAFE credit available to any manufacturer and by including partial and 
ultimate sunset provisions. The program was to be in effect through the 
2004 model year, and could be continued on more limited terms by the 
Secretary for up to an additional four years. These limits were 
specifically aimed at addressing the possibility that dual fueled 
vehicles might be run entirely on gasoline. (House Debate on Conference 
Report, Section 6, Vol. 134, Congressional Record, Sept. 23, 1988); 
(Senate Debate on Conference Report, Section 6, Vol. 134 Congressional 
Record (Sept. 20, 1988). Indeed, the Senate Committee Report on S. 
1518, the Senate version of AMFA (S. REP. No. 100-271) explained that: 
``Recognizing that the dual fuel vehicle is a transitional vehicle that 
might often operate on gasoline, the Committee established reasonable 
caps in the increase in CAFE so that the broader purposes of CAFE would 
remain intact.''
    In enacting AMFA, Congress undertook to encourage the development 
of a fleet of vehicles capable of running on alternative fuels in order 
to create the incentive for the development of an infrastructure to 
support it. Congress recognized that motor vehicle makers were 
``reluctant to produce automobiles unless there is a demand for them, 
consumers will not purchase cars for which there is an inadequate fuel 
supply, and an adequate fuel supply is unlikely to be developed until 
there are a significant number of alternative fuel vehicles.''
    Congress recognized that the special CAFE incentive contained in 
AMFA would be a facilitating factor in the development of a 
transportation system incorporating alternative fuels. The legislative 
history makes clear that Congress did not expect these CAFE credits 
solely to drive the development of such a transportation system. 
Indeed, the legislative history is replete with comments expressing 
Congress' belief that AMFA, and its CAFE credit, would ``begin'' a 
process and that it may well be necessary to continue that process 
beyond its initial statutory timeframe. For example:
    [sbull] The incentives provided under this bill are modest yet 
sufficient to begin this important program. The bill is important, 
however, both as a step toward increasing our energy options and as a 
reflection of a new recognition of a need for action on the economic 
front. 134 CONG. REC. 4101 (statement of Sen. Rockefeller).
    [sbull] In my judgment, we need to begin an effort to convert a 
portion of our automotive fleet to methanol and other alternative 
fuels. Id. at 4102 (statement by Senator Danforth).
    [sbull] This bill begins to solve the [chicken and the egg] dilemma 
* * * in ways that should help to instill consumer confidence, gain 
valuable experience, encourage the development, production and sale of 
vehicles capable of operating on both conventional fuels (gasoline and 
diesel) and alternative fuels (alcohols and natural gas), and encourage 
the development of alternative fuel retail pumps for consumer use. H.R. 
REP. No. 100-476 at 9 (1987).
    [sbull] We also do not believe that this bill and the opportunities 
offered by it, including the CAFE incentive, will be a panacea. We have 
a healthy skepticism about when and how these vehicles will be 
developed. We are not optimistic that foreign and domestic automakers 
will transform many lines of passenger cars

[[Page 7692]]

in the early 1990s to alternative fueled vehicles. Id. at 12.
    [sbull] The importance of this bill is to provide a beginning and 
to emphasize the importance of developing now an alternative fuels 
transportation network for the benefit of present and future 
generations. Id.
    [sbull] Alternative fuels will not be universally or even widely 
available, however, when the new vehicles are first available. Except 
for fleets with a central fueling location many of the early 
alternative fuel vehicles will need to be capable of running on both 
the alternative fuel and gasoline. 134 CONG. REC. 8090 (1988) 
(statement of Rep. Sharp).
    [sbull] So this really is a very important step forward. It is a 
very powerful incentive for the automakers to produce automobiles that 
can consume alternative fuels. Id. at 12,916 (statement of Sen. 
Danforth).
    Congress provided that the Secretary of Transportation could extend 
the CAFE credit program for not more than four consecutive model years 
and explain the basis on which the extension would be granted (49 
U.S.C. 32905(f)). Should the Secretary choose not to extend the 
program, the statute requires the publication of a Federal Register 
notice explaining the reasons for that decision. The statute imposes no 
particular criteria to be applied in making that determination, but 
rather leaves the decision to the discretion of the Secretary.

III. Regulatory Background

A. Fuel Economy Standards

    Congress enacted the Energy Policy and Conservation Act (EPCA) in 
December 1975 to help address the nation's dependence on foreign oil. 
EPCA provided for the issuance of CAFE standards for passenger 
automobiles and for automobiles that are not passenger automobiles 
(light trucks). The CAFE standards set minimum performance requirements 
in terms of an average number of miles a vehicle travels per gallon of 
gasoline or diesel fuel. By statute, Congress set passenger car 
standards for model years 1978 (18 mpg), 1979 (19 mpg), 1980 (20 mpg) 
and 1985 and thereafter (27.5 mpg). Those standards remained effective 
by statute unless the Secretary of Transportation changed them through 
rulemaking. In contrast to passenger cars, Congress did not specify 
CAFE standards for light trucks. Instead, it provided authority to the 
Secretary to establish those standards administratively. The Secretary 
delegated the authority to promulgate CAFE standards to NHTSA.
    Market conditions in the mid and late 1980s led the agency to 
reconsider established CAFE fuel economy standards to account for 
consumer preferences that had rendered the standards economically 
impracticable, despite manufacturers' good faith efforts to comply. 
Accordingly, passenger car CAFE standards were reduced to 26.0 mpg for 
the 1986 through 1988 model years and to 26.5 mpg for 1989. Light truck 
CAFE standards set at 20.5 mpg for the 1987 through 1989 model years 
were reduced to 20.0 mpg for the 1990 model year. Meanwhile, Congress 
enacted AMFA in 1988 in an attempt to further reduce the Nation's 
dependence on foreign oil by encouraging the development of a fleet of 
vehicles capable of running on alternative fuel.
    The passenger car CAFE standard returned to the statutory level of 
27.5 mpg between model years 1990 and 1996, while light truck CAFE 
standards rose slightly through those years from 20.0 mpg to 20.7 mpg. 
In April 1994, NHTSA issued an Advanced Notice of Proposed Rulemaking 
stating its intent to increase the light truck CAFE standards for some 
or all of model years 1998 to 2006. Congress acted to restrain the 
agency from acting further on this intention.
    In enacting the Department of Transportation and Related Agencies 
Appropriations Act for FY 1996 (Pub. L. 104-50) in November 1995, 
Congress included a provision prohibiting the agency from using any 
funds to prescribe corporate average fuel economy standards for 
automobiles ``in any model year that differs from standards promulgated 
for such automobiles prior to enactment of this section.'' This same 
prohibition was included in the appropriations acts for each of the 
1997 through 2001 fiscal years, effectively foreclosing NHTSA from 
acting to change the passenger car and light truck CAFE standards 
applicable to the 1999-2003 model years. During those years, Congress 
kept the CAFE incentive for dual fuel vehicles intact, making no effort 
during those years to restrict the incentives despite having mandated 
stability in CAFE standards.
    While the Department of Transportation and Related Agencies 
Appropriations Act for FY 2001 (Pub. L. 106-346) was similar to the 
prior appropriations acts in that it contained a identical restriction 
on CAFE rulemaking, the conference committee report for that Act 
directed that NHTSA fund a study by NAS to evaluate the effectiveness 
and impacts of CAFE standards (H.R. Conf. Rep. No. 106-940, at 117-
118). The NAS submitted its report to the Department of Transportation 
on July 30, 2001.
    One of the recommendations in the NAS report was that ``CAFE 
credits for dual-fuel vehicles should be eliminated, with a long enough 
lead time to limit adverse financial impacts on the automotive 
industry.'' (at 114) The NAS report stated that, ``the provision 
creating extra credits for multifuel vehicles has had, if any, a 
negative effect on fuel economy, petroleum consumption, greenhouse gas 
emissions, and cost.'' (at 111) The report also indicated that the 
production of these dual-fuel vehicles enables ``automakers to increase 
the production of less fuel efficient vehicles.'' (at 111)
    In a letter dated July 10, 2001, Secretary of Transportation Mineta 
asked the House and Senate Appropriations Committees to lift the 
restriction on the agency's ability to spend funds for the purpose of 
setting and modifying CAFE standards. In response, Congress enacted the 
Department of Transportation and Related Agencies Appropriations Act 
for FY 2002 (Pub. L. 107-87 (December 18, 2001)) without any provision 
restricting the Secretary's authority to prescribe fuel economy 
standards.
    On March 31, 2003, NHTSA established new fuel economy standards for 
light trucks applicable to model years 2005-2007. These new standards 
represent the largest increase in light truck fuel economy standards in 
20 years and will result in substantial savings in petroleum 
consumption over the lifetime of the vehicles manufactured in those 
model years. In issuing these standards, the agency discussed the 
Nation's continuing need to conserve energy and noted the various 
public and private efforts underway to develop advanced technology 
vehicles.

B. Other Initiatives to Promote Energy Independence

    The CAFE incentive program contained in AMFA is part of the 
Administration's comprehensive approach to energy security. While the 
incentive program encourages the mass production of dual-fuel vehicles 
and the use of alternative fuel, other programs exist to address 
longer-term technologies and the introduction of fuel-efficient vehicle 
technologies. Last year, President Bush announced a Hydrogen Fuel 
Initiative to support for active research and development of 
commercially viable hydrogen-powered fuel cells for transportation and 
stationary power applications, and the

[[Page 7693]]

infrastructure to support them. As the President indicated in his 2003 
State of the Union address, successful execution of this Hydrogen Fuel 
Initiative would mean that the first car driven by a child born today 
could be powered by fuel cells, and pollution-free. The President's 
Hydrogen Fuel Initiative complements the Department of Energy's 
FreedomCAR initiative, a partnership with the U.S. auto industry aimed 
at developing technologies needed for mass production of safe and 
affordable hydrogen fuel cell vehicles. Together, these initiatives 
will enable automobile manufacturers to decide to offer affordable and 
technologically viable hydrogen fuel cell vehicles in the mass consumer 
market by 2015 and the ability to produce and deliver such vehicles to 
the market by 2020.
    The private sector is also responding to the Nation's need to 
improve energy security through efficient transportation options. On 
January 6, 2003, General Motors announced that it would offer an 
optional hybrid (gasoline/electric) powertrain on several of its most 
popular models, including light trucks. While pointing out that its 
plans involve ``relatively low volumes,'' General Motors also stated 
that its initiative would make it ``well positioned to meet market 
demand as it develops.'' Similarly, Ford Motor Company will introduce 
an optional hybrid electric powertrain in its Escape Sport Utility 
Vehicle (SUV), beginning in model year 2005. As Ford explained:

    While a few automakers have introduced small, low-volume hybrid-
electric cars, Ford is introducing its first HEV on a family-sized 
sport utility to increase mass customer appeal. The hybrid-electric 
powertrain also has been developed with additional applications and 
vehicles in mind to expand the potential impact of the 
environmentally responsible technology.

    DaimlerChrysler will introduce an optional diesel engine in the 
Jeep Liberty SUV, also beginning with the 2004 model year. The company 
claimed in December 2002 that American consumers could save about 800 
million gallons of oil annually if they chose to purchase clean diesel 
engines at the same rate as purchased by European consumers. According 
to DaimlerChrysler: ``Today's modern diesel vehicles should be part of 
the solution to improving fuel efficiency and reducing carbon dioxide 
emissions. Diesels lead to up to 30 percent improvement in fuel 
economy, while reducing carbon dioxide emissions an average of 20 
percent.''

IV. March 2002 Report to Congress

    AMFA required the Secretary of Transportation, in consultation with 
the Secretary of Energy and the Administrator of the EPA, to complete a 
study ``of the success of the policy'' of the CAFE incentive for dual 
fuel vehicles and to report on the results of the study, including 
preliminary conclusions on whether the CAFE incentive should be 
extended for up to four more model years. The study and conclusions 
were to consider the availability to the public of alternative fueled 
automobiles and alternative fuel, energy conservation and security, 
environmental considerations and other relevant factors.
    NHTSA published a Request for Comments on May 9, 2000 (65 FR 26805) 
(Docket No. NHTSA-2000-7087), seeking public input on the success of 
the program. The agency received a number of comments on the published 
notice: from automotive manufacturers (General Motors Corporation, 
DaimlerChrysler Corporation and Ford Motor Company), an automotive 
association (Alliance of Automobile Manufacturers), alternate fuels 
coalitions (National Ethanol Vehicle Coalition, Clean Fuels Development 
Coalition and Members of the Renewable Fuels Association), and State 
governments.\2\ All of these commenters expressed support for extending 
the CAFE incentive program.
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    \2\ On March 23, 2001, the Governors' Ethanol Coalition sent a 
letter to Secretary Norman Mineta strongly urging DOT to extend the 
CAFE credit incentive.
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    Subsequent to the closing of the comment period, additional letters 
in support of extending the CAFE incentive program were received from 
several Members of Congress. Also, subsequent to the closing of the 
comment period, a joint letter expressing opposition to the extension 
was received from the Sierra Club, the American Council for an Energy-
Efficient Economy, the Center for Auto Safety and the U.S. Public 
Interest Research Group.
    All of these submissions are docketed in the DOT Docket Management 
System, Docket No. 7087. They may be found by conducting a search under 
that number at http://dms.dot.gov/.
    The agency gathered information from other sources as well. These 
included the DOE Alternative Fuels Data Center (AFDC) and publications 
from the Energy Information Administration (DOE/EIA), the Center for 
Transportation Research at Argonne National Laboratory, and the Oak 
Ridge National Laboratory (ORNL). The AFDC was created to facilitate 
implementation of the directives of AMFA, to gather and analyze 
information on the fuel consumption, emissions, operation, and 
durability of alternative fuel vehicles, and to provide information on 
alternative fuel vehicles to government agencies, private industry, 
research institutions and other related organizations. The agency also 
used data from EPA's National Vehicle and Fuel Emissions Laboratory, 
the California Energy Commission, the General Accounting Office, the 
American Petroleum Institute and the American Methanol Institute.
    Based on consideration of the comments, other information and the 
factors specified in AMFA, the agency submitted a report in March 2002 
Report that concluded that the CAFE incentive program had succeeded in 
incentivizing the development of a fleet of vehicles capable of 
operating on alternative fuels, but had not yet succeeded in creating 
the necessary infrastructure to support the actual use of alternative 
fuels. The Report also found that the success of the program could be 
further enhanced through the identification of additional policies and 
programs to encourage more use of alternative fuels in the vehicle 
fleet that has been built to accommodate them. The Report did not 
recommend any suspension or termination of the CAFE incentive program.

V. Notice of Proposed Rulemaking

    On March 11, 2002, the agency published a Notice of Proposed 
Rulemaking (NPRM) in the Federal Register (67 FR 10873) (Docket No. 
NHTSA-2001-10774; Notice 2) proposing to extend the dual fuel incentive 
program through the end of the 2008 model year. As we explained in the 
NPRM, this proposal was based on our tentative conclusion that granting 
the extension would preserve the opportunities for promoting energy 
security and decreasing reliance on foreign petroleum by encouraging 
continued production of dual fuel vehicles while other efforts to 
increase the growth of a dual fuel infrastructure could be undertaken. 
We also noted our concern that any extension of less than four years 
would be insufficient given the relatively recent influx of large 
numbers of dual fuel vehicles in the marketplace.\3\
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    \3\ We said that, in light of this recent influx, ``(i)t is, 
therefore, not yet clear whether the continuing presence of these 
vehicles, their ability to use alternative fuels, programs intended 
to increase the use and production of alternative fuels and other 
conditions will stimulate the expansion of the alternative fuel 
infrastructure as envisioned by Congress in creating the dual fuel 
incentive program.'' (at 10874) (Emphasis added.)

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[[Page 7694]]

    The NPRM reflected our initial conclusion that the benefits of 
extending the incentive provisions are justified by its potential 
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benefits:

    The agency's tentative decision to extend the incentive program 
for four years is based on its assessment that the energy and other 
costs of the incentive program are justified by the potential 
benefits. We are unable to predict with certainty how much 
alternative fuel use, which is a critical element to the realization 
of benefits, will increase. Adoption of the proposed four-year 
extension entails a risk that manufacturers might be producing dual-
fuel vehicles that operate only on petroleum fuel. On the other 
hand, if the agency were to allow the program to terminate, there 
would be an equal risk that late-blooming alternative fuel 
technology and production would be wasted and the opportunities for 
eventual reductions in petroleum use would be lost. A four-year 
extension is, in NHTSA's view, a reasonable reconciling of those 
risks. Such an extension will provide opportunities for further 
development of measures to encourage alternative fuel use and, if 
those policies are successful, result in the development of a 
domestic fuel supply and infrastructure with either little or no 
increase in petroleum use.'' (at 10881)

    As the NPRM pointed out, benefits arising from the CAFE incentive 
program include the development of a fleet of vehicles that can use 
alternative fuels, reduce dependence on foreign oil and help lessen 
demand for conventional fuels, thereby helping to keep fuel prices 
lower than they otherwise would be in the absence of the incentive 
program. We also observed that if sufficient numbers of dual fuel 
vehicles exist and spur development of an alternative fuel 
infrastructure, the nation would (to a degree) be further insulated 
from the impacts of ``oil shocks'' resulting from sudden disruptions to 
the petroleum supply, as the Nation's transportation system would be 
less dependent on oil supply, and therefore, less vulnerable to such 
disruptions.

VI. Summary of Comments

    We received numerous comments, responding both to our solicitation 
of views before preparing the March 2002 Report to Congress and our 
proposal to extend the AMFA dual fuel incentive. Comments were received 
from environmental and safety advocacy organizations such as the 
Alliance to Save Energy (ASE), Environmental Defense (ED), Renewable 
Fuels Association (RFA), American Council for an Energy Efficient 
Economy (ACEEE), Natural Resources Defense Council (NRDC), Union of 
Concerned Scientists (UCS), Sierra Club, Public Citizen, and Center for 
Auto Safety (CAS).
    We also received comments from automobile manufacturers and trade 
associations--including Ford Motor Company (Ford), General Motors 
Corporation (GM), DaimlerChrysler Corporation (DC), and the Alliance of 
Automobile Manufacturers (the Alliance)--and alternative fuel groups 
and grain producers--including the National Ethanol Vehicle Coalition 
(NEVC), National Corn Growers Association (NCGA), Colorado Corn 
Administrative Committee (CCAC), Maryland Grain Producers Association 
(MGPA) and Minnesota Corn Growers Association (MCGA). Comments were 
also received from two individuals--Edward Parker and Joseph Darling.
    In general, commenters expressed either complete support or 
complete opposition to the proposed four-year extension. None of the 
commenters indicated that they believed changing the duration of the 
proposed extension was appropriate. Automobile manufacturers, 
automotive trade groups, grain producers, and alternative fuel groups 
favored the extension. Environmental and automobile safety advocacy 
groups did not support the agency's proposal. The two private citizens 
did not support the extension.
    Those supporting the extension argued that the CAFE incentive 
program was successful in achieving the goal of increasing the number 
of dual fuel vehicles. They indicated that the infrastructure 
supporting the use of alternative fuel in these vehicles is also 
continuing to grow. Noting that public awareness of the existence of 
alternative fuel vehicles and the fuels they use continues to increase, 
they pointed out that the infrastructure to support alterative fuels 
(in particular E85, a blend of 85% ethanol and 15% gasoline) has grown 
in recent years and continues to expand. They argued that Congress 
would not have intended the substantial investment in alternative fuel 
vehicles and the burgeoning infrastructure to be terminated just as the 
incentive is starting to show benefits.
    The automobile manufacturers listed the vehicles they have built 
capable of running on ethanol and the various efforts they have made, 
and continue to make, to build awareness and support for alternative 
fuel use. Since the late 1990s, they have produced approximately 3.4 
million dual fuel vehicles capable of running on alternative fuel.\4\ 
They further pointed out that having this fleet of dual fuel vehicles 
improves the Nation's energy security by creating the potential for 
using non-petroleum fuels if a crisis in petroleum supply develops and 
encourages continued research into the development of cheaper and 
cleaner alternative fuels and the infrastructure to support their use.
---------------------------------------------------------------------------

    \4\ Automakers have also been working toward the widespread 
application of advanced technologies, such as hybrid electric and 
modern diesel engines, that may substantially enhance the nation's 
energy security and overall fuel economy. The Administration and 
private industry are also supporting the development of fuel cell 
technology, which over the long run, presents even more potential 
for substantial fuel economy savings. All of these efforts, 
including AMFA, are part of a broad array of efforts to encourage 
development of technologies and infrastructure that collectively and 
individually will help to reduce the nation's dependence on foreign 
oil as a primary energy source.
---------------------------------------------------------------------------

    The ethanol community and its supporters argued that the investment 
in alternative fuel vehicles has begun to spur the anticipated 
investment in an infrastructure to support actual fuel use. Both 
investments would be lost were the agency not to continue implementing 
the public policy encouraging alternative fuels and their use. The 
ethanol community and numerous government representatives outlined the 
strides currently being made to enhance the availability of E85 and to 
educate consumers on its potential. They urged the agency not to 
abandon the program during this investment stage by eliminating the 
incentive provided to automakers to produce and sell vehicles capable 
of operating on alternative fuel.
    Many of those who commented on the NPRM had also provided 
submissions in response to the Request for Comments. Others expressed 
their views on the merits only at that time. For example, we heard from 
numerous Members of Congress: Senators Grassley, Bond, Bayh, Allard, 
Hagel, Ashcroft and Levin all expressed unconditional support for 
extending the incentive. Similarly, the members of the Congressional 
Auto Caucus (Congressmen Upton, Oxley, Bonilla, Kildee, Dingell, Frost, 
Ewing, Camp, Buyer, Hoekstra, Manzullo, LaTourette, Knollenberg, 
Stupak, Barcia, Kilpatrick, Kaptur and Stabenow) made clear their 
position that more alternative fuel vehicles would be built only if the 
incentive were continued. Senator Daschle urged the agency to extend 
the incentive, noting, however, that ``in the end, the success of the 
program should be measured not only by the number of flexible fuel 
vehicles produced, but by the actual use of alternative fuels by

[[Page 7695]]

those vehicles.'' Senator Daschle suggested looking ``for ways to 
encourage the establishment of additional alternative fuel refueling 
stations around the country.''
    State governments also supported extending the incentive. The 
Governors of Kansas, Wisconsin, New Mexico, and Missouri each urged the 
agency to extend the incentive. The Governor of Wisconsin pointed out:

    The flex-fuel vehicle credit program for auto manufacturers is 
essential for maintaining support for a cleaner environment through 
the use of alternative fuels. Until a substantial network for 
infrastructure is developed, the flex-fuel vehicle credit will 
assist advancing improvements in infrastructure and enhance the 
status of alternative fuels. Nationally, the U.S. will gain energy 
independence from foreign oil and individually gain a cleaner fuel.
    Wisconsin is currently assisting in an effort to expand the 
availability of alternative fuel infrastructure. Until that 
infrastructure matures, the use of bi-fuel and flex-fuel vehicles 
will be necessary as a bridge fuel to meet the requirements of the 
Energy Policy Act and create a demand side draw for the necessary 
infrastructure to support an all dedicated fuel fleet.

    Those opposing the extension of the incentive program voiced common 
themes in their arguments. They argued principally that the program 
should not be deemed a success because it has not yet resulted in the 
widespread use of alternative fuels. Instead, they stated out that, by 
allowing extra credit toward CAFE requirements, the program so far has 
allowed the production of more vehicles that are less fuel-efficient 
than would have been produced had manufacturers met their CAFE 
obligations without the incentives. Thus, they contended, the result of 
the incentive is greater fuel consumption and exhaust emissions without 
substantial offsetting benefit.
    Because the incentive provides additional CAFE credit to vehicles 
capable of running on alternative fuel, but which in fact have largely 
been using gasoline, those opposed to the incentive argue that its 
extension will actually increase dependence on foreign oil.\5\ 
Accordingly, these commenters also believe that continuation of the 
incentive will have adverse environmental consequences and argued that 
the adverse effects of higher gasoline use overwhelm the benefits of 
the smaller amount of alternative fuel used to date.
---------------------------------------------------------------------------

    \5\ The ACEEE also questioned whether some dual fuel vehicles in 
fact qualified for the incentive taken by the manufacturers. 
According to ACEEE, the energy efficiency for some vehicles 
qualifying for the dual fuel credit program is less when operating 
on alternative fuel than on conventional fuel, even when the varying 
heating values for each fuel are considered.
---------------------------------------------------------------------------

    Some commenters also consider it unlikely that a fleet of dual fuel 
vehicles might be useful in the event of sudden disruption in oil 
supply. ACEEE and NRDC stated that such a crisis is likely to arise so 
quickly that sufficient time would not be available for existing 
ethanol production capability to meet demand or for new ethanol 
production capacity to be built. NRDC argued that ethanol could be 
added to conventional gasoline to make gasohol blends burned by 
conventional vehicles, rendering a fleet of dual fuel vehicles 
unnecessary.
    The Sierra Club and UCS raised concerns that if ethanol were used 
as a MTBE substitute, there might not be sufficient ethanol for use as 
an alternative fuel. Both organizations noted that the phasing out of 
MTBE in California and the Northeast could require the use of all of 
the current projected expansion in ethanol production to meet the 
refining industry's need for an MTBE substitute.
    CAS argued that a difference in tax treatment makes 10 percent 
ethanol (referred to as gasohol or E10) more preferred by the ethanol 
industry than E85 blends. According to CAS, E10 blends qualify for a 
5.3[cent] per gallon exemption from the motor fuel excise tax, which is 
the equivalent value of 53[cent] per gallon.\6\ CAS questioned whether 
the ethanol industry would support the continued expansion of E85 
because the ethanol used in E85 blends qualifies for a 53[cent] per 
gallon tax credit, which is less attractive than the up-front tax 
exemption provided for E10.
---------------------------------------------------------------------------

    \6\ Since January 1, 2003, these incentives have been 5.2 cents 
and 52 cents respectively. They are scheduled to drop to 5.1 cents 
and 51 cents on January 1, 2005.
---------------------------------------------------------------------------

    Commenters disagreed on whether continuation of the incentive is 
likely to spur the development of an infrastructure that has not yet 
reached critical mass. Many argued that consumer demand remains focused 
on gasoline and that unless a demand develops for alternative fuels, 
fuel suppliers will have no incentive to increase the supply or expand 
the number of alternative fuel outlets currently in existence. Some 
argued that given the cost to consumers of extending this program, 
energy conservation efforts would be better directed toward improving 
fuel economy or installing ethanol stations to fuel the E85 dual-fuel 
vehicles already produced.
    On the other hand, the automobile industry and the ethanol 
community pointed to their efforts to begin the development of an 
infrastructure to support ethanol use in the ethanol-capable dual fuel 
vehicles built since the late 1990s. They cited evidence of continued 
growth of alternative fuel infrastructure. For example, Minnesota had 
recently experienced a 70% increase in the number of E85 fueling 
stations. The Minnesota Corn Growers Association, Colorado Corn 
Administrative Committee and Maryland Grain Producers Association, Inc. 
indicated that the number of E85 stations in their states had recently 
increased. The Alliance cited a number of initiatives being pursued by 
automobile manufacturers to promote the expanded use of E85 fuel and 
increase the number of E85 outlets.
    Contending that the present alternative fuel fleet is reaching 
``critical mass,'' the supporters of the CAFE incentive program argued 
that discontinuing the incentive now would waste the substantial 
investment already made in a dual fuel vehicle fleet and result in the 
abandonment of the burgeoning infrastructure of E85 fueling stations. 
The National Ethanol Vehicle Coalition specifically credited the dual 
fuel incentive program for the existence of a growing fleet of dual 
fuel vehicles. Although development of the fueling infrastructure has 
not progressed as rapidly as the growth of this fleet, the existence 
and size of the dual-fuel vehicle fleet is clearly linked to the 
incentive program. Discontinuing the CAFE incentive program now, 
thereby foreclosing the continued growth of the dual fuel fleet and 
potential demand for and use of alternative fuels, would also foreclose 
the potential for alternative fuels to contribute significantly to the 
nation's energy security.
    On June 18, 2003, the Energy Future Coalition \7\ issued a 
comprehensive set of energy policy recommendations in a report entitled 
``Challenge And Opportunity: Charting A New Energy Future'' (http://www.energy futurecoalition.com/full_ report/index.shtm).\8\ Officials 
from a number of

[[Page 7696]]

environmental organizations that commented on this rulemaking serve on 
the Coalition's Steering Committee or Advisory Council. Among the 
recommendations contained in the Coalition's report was the one 
concerning the future of the CAFE incentives for dual fueled vehicles:
---------------------------------------------------------------------------

    \7\ On its Web site (http://www.energy futurecoalition.com/about.shtm), the Coalition describes itself as follows:
    The Energy Future Coalition is a broad-based, nonpartisan 
alliance that seeks to bridge the differences among business, labor, 
and environmental groups and identify energy policy options with 
broad political support. The coalition aims to bring about changes 
in U.S. energy policy to address the economic, security and 
environmental challenges related to the production and use of fossil 
fuels with a compelling new vision of the economic opportunities 
that will be created by the transition to a new energy economy.
    \8\ A lengthy article on the report appears under the title of 
``The Future of Energy Policy'' in the July-August issue of Foreign 
Affairs. The authors are three members of the Coalition's Steering 
Committee: John Podesta, former chief of staff to former President 
Clinton, C. Boyden Gray, former counsel to former President G. H. W. 
Bush, and Timothy Wirth, former U.S. Senator.

    Several million cars and trucks already in the U.S. fleet are 
fuel-flexible--capable of using gasoline or ethanol interchangeably. 
Automakers should continue to receive incentives under federal fuel 
economy standards for the production and sale of these vehicles, and 
the program should be modified to ensure greater use of alternative 
fuels, such as high-ethanol blends. (at 22)

VII. Resolution of the ``Chicken and Egg'' Problem

    As noted above, Congress created the CAFE incentive in order to 
solve what it considered to be a ``chicken and egg'' problem with the 
development of a light vehicle transportation system capable of 
operating on domestically produced alternative fuels. As noted in 
AMFA's legislative history, Congress sought to address this ``problem'' 
by encouraging the development of an infrastructure to support 
alternative transportation fuels by first promoting the creation of a 
fleet of vehicles capable of operating on such fuels, then enhancing 
public awareness and acceptance of such fuels, which in turn would 
encourage the construction of alternative fuel stations and other 
infrastructure to support wider use of such fuels.
    Congress chose neither to specify a preferred alternative fuel 
choice nor to impose an absolute timetable for the program to achieve 
full success. As noted above, the legislative history makes clear that 
Congress intended to begin the process towards the development of a 
domestically self-sufficient energy environment through the incentive 
program. It did not necessarily expect the program to achieve all of 
its ultimate goals during the first 10 years. Indeed, Congress 
expressly mandated that the Secretary consider extending the program--
albeit on more restricted specified terms--at the end of the first 10 
model years and further provided a mechanism for the agency to provide 
information to Congress from which it could determine whether further 
legislative action is needed.
    In comments submitted in June 2000, as well as those submitted in 
response to the NPRM, the automobile manufacturers outlined the 
technical difficulties they initially faced in producing a large volume 
of alternative fuel vehicles in the early to mid-1990s. Manufacturers' 
initial efforts focused both on methanol and ethanol fueled vehicles 
capable of using fuels containing as much as 95 percent alternative 
fuel. These vehicles were initially provided for fleet applications.
    All three major U.S. manufacturers have been producing dual fuel 
vehicles since 1992, with Ford and General Motors producing those 
vehicles as early as 1987 and 1988, respectively:
    [sbull] Starting with the 1987 model year and continuing to the 
1989 model year, Ford produced approximately 200 methanol dual fuel 
Crown Victoria models. These vehicles were used in various public fleet 
demonstration programs.
    [sbull] In model year 1991, Ford introduced its methanol dual fuel 
Taurus, which was produced until model year 1998, the last model year 
in which Ford produced methanol flexible fuel vehicles (FFVs).
    [sbull] In model year 1994, Ford added the ethanol dual fuel 
Taurus, which it continues to produce today. From model year 1999 to 
model year 2002, Ford produced ethanol dual fueled versions of the 
Ranger and the Mazda B3000 pickup. In addition, Ford produced an 
ethanol dual fuel version of its popular Explorer SUV in the 2001 and 
2002 model years.
    [sbull] GM produced test fleets of methanol dual fuel 1988 Corsicas 
and methanol dual fuel 1991 Luminas. GM redesigned the Lumina for the 
1994 model year and did not offer a methanol dual fuel version in 1994 
and 1995.
    [sbull] After the conclusion of its methanol dual fuel test fleet 
program, GM embarked on a test fleet program for ethanol flexible fuel 
vehicles, starting with the production of 50 ethanol dual fuel Luminas 
in model year 1992. These were followed by a production run of 320 
ethanol dual fuel Luminas in the 1993 model year.
    [sbull] Due to technical problems with these vehicles, GM did not 
produce another ethanol dual fuel vehicle until model year 2000, when 
the company produced approximately 100,000 ethanol dual fuel S-10s and 
Sonomas. A similar quantity of these vehicles was produced in model 
year 2001. Starting with the 2002 model year, GM has been producing 
full-size pickups and SUVs with 5.3 L V8 ethanol dual fuel engines.
    [sbull] Chrysler produced 2,500 methanol dual fuel Plymouth 
Acclaims and Dodge Spirits in the 1992 model year, which were sold to 
fleets and the public. Chrysler continued offering methanol Acclaims/
Spirits until model year 1994, when the company started producing its 
large passenger cars as methanol dual fuel vehicles.
    [sbull] Since model year 1999, DaimlerChrysler has mass-produced 
ethanol dual fuel minivans by equipping these minivans with engines 
capable of operating on E85.
    These early fleet introductions led to the identification of 
several technological problems with the operation of dual fueled 
vehicles when using alternative fuels. These included the corrosive 
nature of the fuels, their effect on engine cylinders, and the need for 
alcohol compatible materials for fuel lines, hoses, gaskets, valves, 
fuel pumps, fuel injectors and fuel tanks. Ultimately, these problems 
were overcome by substituting parts that were more compatible with 
alcohol-based alternative fuels. With the resolution of these problems, 
and the movement toward ethanol as the primary source of alternative 
fuel, the growth of a fleet capable of operating on alternative fuel 
and the development of an infrastructure to support it began in 
earnest.
    Two main issues eventually led to the discontinuation of methanol 
flexible fueled vehicle production: (1) Methanol's being more corrosive 
than ethanol; and (2) the shift in focus by the methanol industry away 
from providing methanol for M85 to providing methanol for MTBE. Because 
methanol is more corrosive than ethanol, engineers were faced with 
challenges more difficult with methanol than those faced with ethanol. 
The challenges created by ethanol were overcome by 1997, which resulted 
in a mass influx of E85 vehicles into the market, which continues to 
this day. These technical solutions enabled E85 vehicles to be mass-
produced and reduced their incremental price to such a level that these 
vehicles are now sold at no additional cost to the consumer. 
Additionally, methanol producers rapidly altered their focus from 
developing an M85 infrastructure to providing methanol and MTBE to the 
refining industry.
    Automobile manufacturers have joined with state and local 
governments and other ethanol supporters to help develop public 
awareness about E85 and to encourage its use in dual fuel vehicles 
capable of operating on E85. Other corporations, such as the United 
Parcel Service, have also embraced alternative fuel vehicles (Fortune 
Magazine, ``Corporate Responsibility: Tree Huggers, Soy Lovers, and 
Profits,'' June 23, 2003, noting that the UPS fleet

[[Page 7697]]

includes 1,800 alternative-fuel vehicles and that Federal Express 
announced plans to convert all its trucks to hybrid electric-diesel 
engines).
    GM has been involved with a variety of efforts focused on promoting 
the use of E85 in flexible fuel vehicles, including supporting 
university research and sponsoring programs such as the Ethanol 
Challenge, an engineering competition focused on E85 vehicles. GM's 
efforts in the infrastructure area include joint sponsorship with BP 
Amoco to develop E85 fueling stations and encouraging, through letters 
and GM's internal website, its employees to refuel their FFVs with E85. 
GM also provides a list of E85 refueling locations on its GM 
alternative fuel vehicle Web site, www.gmaltfuel.com.
    In February 2003, GM announced a new, multi-million dollar campaign 
to promote the use of corn-based E85 as an alternative to gasoline. As 
announced, this campaign will be a 2-year partnership with the non-
profit National Ethanol Vehicle Coalition (NEVC) and will be focused on 
increasing ethanol use in flexible fuel vehicles. The ethanol promotion 
effort will begin in six key states: Missouri, Wisconsin, Colorado, 
Minnesota, Michigan and Illinois.\9\ Methods will include making 
information available at dealerships and through direct mail, 
advertising and on-line activities.
---------------------------------------------------------------------------

    \9\ Representatives of many of these States (as well as others) 
expressed their support in the rulemaking record for extending the 
CAFE incentive to help in their efforts to ensure the continuation 
of a fleet capable of using E85 and to encourage the use of E85 to 
service that fleet.
---------------------------------------------------------------------------

    Since the early 1990's, Ford has been a contributor to the effort 
to develop the E85 infrastructure and increase public awareness of the 
benefits of E85 use. Ford has recently completed an effort to expand 
the number of E85 stations in the Chicago area, and has initiated the 
installation of E85 stations in Denver and Milwaukee, which should be 
completed this summer. Ford also was able to install an E85 station in 
the Detroit area to service both public and company owned vehicles.
    As part of the Minnesota E85 Team, Ford has assisted with the 
establishment of 30 additional E85 stations in the Minneapolis/St. Paul 
area. As a result, there are now 62 E85 refueling outlets in Minnesota, 
which has enabled the use of E85 in the Minneapolis/St. Paul area to 
grow by 70 percent in recent years. Ford also was an advertising 
sponsor for the Minnesota Timberwolves NBA team, with an E85 and clean 
air theme, which included a Taurus FFV as a prize. In recognition of 
these achievements, the Environmental Protection Agency awarded Ford, 
as a participant in the Minnesota E85 Team, with its 2002 ``Clean Air 
Excellence Award.''
    Ford has also been involved in promoting public awareness of E85 
and flexible fuel vehicles. In its comments, Ford noted it plans to 
hand out approximately 50,000 ethanol/FFV brochures at events, include 
FFV's in its full-line product brochure (approximately 70,000 were 
distributed last year), and to mail approximately 55,000 CD's 
containing ethanol and FFV information to interested customers. Ford 
also committed to continuing the dissemination of information about 
ethanol and FFV's on its Web site, and promote ethanol and FFV's in 
their regional merchandising kits and product presentations.
    DaimlerChrysler also has been involved in activities to promote the 
use of E85 in flexible fuel vehicles. DaimlerChrysler distributes the 
``AFV Quarterly'' every three months to 35,000 customers, dealers, 
corporate executives and alternative fuel vehicle industry personnel. 
This publication contains articles related to alternative fuels, the 
company's AFVs and promotes the purchase of AFVs including E85 
vehicles. Since 1992, DaimlerChrysler has placed ads in a variety of 
magazines and publications promoting its AFVs and E85 vehicles.
    As set forth in its comments, DaimlerChrysler supports and 
participates in the DOE Clean Cities program, including membership in 
many Clean Cities coalitions, and participation in many events, 
meetings and conferences. DaimlerChrysler also actively sponsors and 
participates in a multitude of conferences and events designed to 
promote the use of AFVs, and alternative fuel, including E85.
    In addition to corporate activities, the ethanol community and 
state and local governments are actively encouraging the use of E85 in 
the alternative fuel fleet. In June 2003, representatives from 
industry, government and public interest groups announced the launch of 
a nationwide public education, information and outreach campaign to 
advance the production and use of renewable ethanol. The program, 
entitled ``Ethanol Across America,'' is designed to generate awareness 
and build support for ethanol.
    U.S. Senators Conrad Burns (R-Mont.) and Ben Nelson (D-Neb.) will 
serve as co-chairmen of the new effort, which is directed by the Clean 
Fuels Foundation, a 501(c)(3) non-profit organization and supported by 
the U.S. Department of Energy. Ethanol Across America will use a wide 
range of methods to educate the public, including educational 
publications, conferences and workshops, consumer brochures (e.g., the 
Ethanol Fact Book and Flexible Fuel Vehicle Fact Book) and an already-
released curriculum guide for a high school course on ethanol. Ethanol 
Across America also will serve as an information clearinghouse by 
creating a national services directory database and a national speakers 
bureau. In addition, the campaign will include a unique nationwide 
radio component on approximately 400 stations called the 'Ethanol 
Minute' during which spokespersons from all walks of life, including 
elected officials, celebrities, energy and environmental experts, will 
discuss various aspects of ethanol.
    Although not yet completed, a light vehicle transportation system 
capable of incorporating E85 is developing and investment in that 
system is growing. The March 2002 Report to Congress recommended 
building on the foundation that has been laid to date by the incentive 
program. It did not recommend that the incentive be terminated or that 
the program be halted. To the contrary, it recommended that further 
efforts be made to enhance the actual use of E85 and to encourage the 
already occurring investment in order to achieve the ultimate success 
of more widespread use of alternative fuels.

VIII. Extending the CAFE Incentive

    The agency has decided to continue the CAFE incentive program 
consistent with AMFA and our proposal in the NPRM. Our review of the 
legislative history has led us to conclude that, when AMFA was enacted 
in 1988, Congress intended the incentive to be extended if the policy 
underlying it had begun to work, but the purposes had not yet been 
fully achieved. That is the situation in which we find the nation as we 
consider whether to extend the dual fuel vehicle incentive. As AMFA 
sought, the incentive has led to a growing fleet of dual fuel vehicles, 
currently more than 3 million strong, capable of using alternative 
fuels. But, since the development of that fleet occurred only in the 
late 1990s and early 2000s, an infrastructure for alternative fuel (and 
particularly for ethanol) has only begun to develop.
    Congress gave the agency the authority to extend the CAFE incentive 
in order to allow the continued development of a dual fuel fleet, an 
alternative fuel infrastructure, and, ultimately, the implementation of 
alternative fuels into daily use. Congress itself considered the 
implications of extending the credits on the overall

[[Page 7698]]

CAFE program, and created the balance it deemed appropriate by limiting 
the application of the incentive and the terms on which it could be 
extended.
    We do not believe Congress expected the agency to continue the 
incentive only if the vehicle fleet it created had led to substantial 
alternative fuel use. If that were the case, the incentive would serve 
no ongoing purpose, having already achieved its objective, and there 
would have been no reason for Congress to have placed statutory limits 
on the time and scope of the extension. Nor do we believe Congress 
expected the agency to continue the incentive if the automakers had not 
developed vehicles capable of running on alternative fuels or if no 
infrastructure seemed likely to develop. Indeed, the legislative 
history is clear that Congress believed that it was beginning a process 
toward the use of domestically produced fuel, with the full knowledge 
that the limited time table set forth in AMFA may not be sufficient to 
spur the investment into alternative fuels it sought to achieve.
    While the infrastructure to support E85 is in its infancy, the 
availability of approximately 3.4 million vehicles to use that fuel 
has, as set forth in the comments in this record, provided the 
necessary encouragement to begin investment in E85 refueling stations. 
As an example, as of January 19, 2004, there are 182 E85 refueling 
stations in the country. This includes 56 more stations than existed in 
March of 2002 when the Report to Congress was completed. Private 
industry is working with public entities (and, in particular, with 
state governments) to educate the public about the utility of 
domestically produced alternative fuels and to encourage consumers to 
use it. Many commenters argued that were we to discontinue the 
incentive now, and thereby remove the government's policy support for 
these efforts, the efforts they are making would likely cease and the 
gains they have made, and will make, would likely be lost.
    The NRDC argued that the agency cannot continue the CAFE incentive 
without first considering: (1) The availability to the public of 
alternative fueled automobiles and alternative fuel; (2) energy 
conservation and security; (3) environmental considerations; and (4) 
other relevant factors. These are the matters that Congress mandated be 
considered by the agency when preparing the Report to Congress required 
by 49 U.S.C. 32905(g).
    The NRDC argued that the program has failed in these regards, 
asserting that dual fuel vehicles do not use alternative fuels, that an 
extension of the incentive would harm energy conservation and that an 
extension would have negative environmental effects. The NRDC believes 
the program should be terminated because, in its view, the primary 
result of the program to date has been to allow automobile 
manufacturers the opportunity to enhance their CAFE numbers without yet 
a corresponding actual reduction in petroleum use. And, to be sure, 
NHTSA's Report to Congress in March 2002 described the possibility that 
the AMFA program had, as of that time, resulted in a slight increase in 
petroleum use (1%) and greenhouse gas emissions (well less than 1%).
    However, we note that it is not clear from the statute whether 
Congress intended the agency to base its administrative decision on the 
matters required to be considered in the Report to Congress. Had 
Congress intended that to be the case, it could easily have included 
those considerations in the statutory provision governing the extension 
(49 U.S.C. 32905(f)), rather than just the Report to Congress (49 
U.S.C. 32905(g)). Nor did Congress specify whether the nation's 
continuing need to conserve energy and to reduce dependence on foreign 
oil should militate for or against an extension when, as now, the 
incentive program established by AMFA has begun to work but not yet 
achieved its ultimate objective.
    As described above, we believe that the most consistent application 
of Congressional intent is to extend the CAFE incentive contained in 
AMFA based on data indicating that the program envisioned by Congress 
has begun but not yet been fully achieved. We believe Congress would 
not have expected the program to be extended if no fleet of alternative 
fuel vehicles had arisen or if infrastructure development had yet to 
begin, nor if the program had been so successful that the acceptance 
and use of an alternative fuel was self-supporting and needed no 
further assistance.
    Since Congress did not include these criteria in the statutory 
provision governing the extension, nor provided any guidance on how to 
apply them, we do not believe that Congress intended there be any legal 
requirement for the agency to make specific findings with regard to 
those criteria when considering whether to extend the dual fuel 
incentive. We believe it more likely that Congress sought information 
in the Report to Congress from which it could determine whether further 
legislative action was necessary or desirable. The criteria are 
accordingly set forth in the statutory section governing the Report to 
Congress and appropriately provide no guidance as to how or whether to 
apply the criteria when making preliminary conclusions about whether 
the incentive should be extended.\10\
---------------------------------------------------------------------------

    \10\ Indeed, subsequent to the submittal of the Report to 
Congress, both Houses of the Congress passed bills last year that 
would have extended the dual fuel vehicle incentive.
---------------------------------------------------------------------------

    While we do not believe there to be any legal requirement that we 
make findings relating to those criteria before deciding whether to 
continue the incentive as provided in 49 U.S.C. 32905(f), we do believe 
those criteria to be relevant to our consideration of an extension. In 
contrast to the analysis suggested by NRDC and other advocacy groups, 
we believe that these criteria support further extension of the CAFE 
incentive for dual fuel vehicles.
    First, on March 31, 2003, the agency issued corporate average fuel 
economy levels for light trucks for model years 2005-2007 (68 FR 16868; 
April 7, 2003). The agency's analysis concluded that the Nation's 
continuing need to conserve energy and to enhance energy security 
justified increased fuel economy levels representing the maximum 
technologically feasible and economically practicable standards. The 
public policy needs that led Congress to enact AMFA remains vital 
today--energy security remains a serious public policy concern. As 
recent Congressional debate on comprehensive energy legislation has 
made clear, the development of a light vehicle transportation system 
based on a domestically produced transportation fuel remains an 
important energy policy objective. As Congress recognized might be the 
case, continuation of the AMFA incentive is essential to continue the 
development of such a system. Without it, the investment already made 
may be lost and the continuing investment underway may well cease.
    The availability of vehicles capable of operating on alternative 
fuels, and the growing but as yet not commercially developed system to 
support such a system, argue for (not against) the continuation of the 
incentive providing the impetus for the development of the vehicle 
fleet and the infrastructure to support it. The availability of 
vehicles that can use alternative fuel, and the beginnings of an 
infrastructure to support it, trumpet the need to continue the 
incentive to further the fleet and to further spur the implementation 
of refilling stations and other necessary infrastructure to further use 
of non-petroleum fuel.
    It is worth noting, however, that the Report to Congress described 
an analysis performed by the

[[Page 7699]]

Environmental Protection Agency (EPA) comparing a baseline case in 
which no incentive program existed with a case where the incentive 
program was in place, but in which dual fuel vehicles would use an 
alternative fuel source only one percent of the time. Not surprisingly, 
this analysis indicated that when dual fuel vehicles are operated on 
alternative fuel only 1% of the time, petroleum use would increase 
slightly because the incentive program would discourage, rather than 
encourage, the production of more fuel-efficient vehicles. In analyzing 
the results of the analysis, the Report to Congress stated:

    The results of the analysis indicate that the incentive has 
resulted in an increase in alternative fuel use (almost all E85), 
and some slight increase (about one percent) in petroleum 
consumption and greenhouse gas emissions for 1996 through 2000. The 
effects beyond 2000 will depend almost entirely on the amount of E85 
fuel used by FFVs. Unless actions are taken to significantly expand 
the availability and use of alternative fuels, the CAFE credit 
incentive program will not result in any reduced petroleum 
consumption or greenhouse gas emissions in the future. (at xii)

    Rather than argue for termination of the CAFE incentive (as 
suggested by some commenters), EPA's analysis demonstrates that the 
real benefits of the CAFE incentive have not yet been realized, and 
further extension of the CAFE incentive is needed to expand the 
alternative fuel infrastructure and realize substantial gains in 
replacement fuel use and petroleum displacement. Only by extending the 
CAFE incentive can we take full advantage of the existing (and future) 
investment in the Nation's alternative fuel vehicle fleets and 
infrastructure. As many commenters have made clear, abandoning that 
investment today would likely result in the contraction of the dual 
fuel vehicle fleet, reversal of the upward trend in the construction of 
refueling stations and reduced public education concerning and 
acceptance of alternative fuels.
    In enacting AMFA, Congress determined that a vehicle fleet capable 
of operating on alternative fuels was the best approach to encouraging 
investment in domestic energy sources. As evident in the Report to 
Congress, the incentive program has resulted in the development of a 
vehicle fleet, but has only begun to spur the investment necessary for 
that fleet actually to use alternative fuel. The Report to Congress 
also emphasizes that increasing the use of domestic alternative fuels 
in lieu of imported petroleum will have beneficial environmental and 
energy effects. To abandon the program at this juncture would not allow 
those benefits to be realized. That is why the Report to Congress 
concludes that further efforts should be made to encourage the use of 
alternative fuel, but does not offer a preliminary conclusion 
suggesting that the program be terminated.
    Second, the agency does not agree with the comments of several 
groups that the CAFE incentive program should be abandoned because 
manufacturers have used it to enhance their CAFE performance. Several 
of the advocacy groups claim this has resulted in reducing, rather than 
enhancing, energy security by permitting the development of a less 
fuel-efficient vehicle fleet than would have been permitted without the 
incentive. We believe that argument to be contrary to the policies and 
objectives underlying the legislative program. Congress specifically 
decided to use a special dual fuel CAFE calculation to promote the 
production of dedicated and dual fuel vehicles. To ensure that the 
incentive is not subsumed within higher CAFE standards, Congress 
expressly prohibits the agency from acknowledging the incentive when 
determining maximum feasible average fuel economy levels. Moreover, 
because Congress recognized that the CAFE incentive could potentially 
lead to lower overall fleet fuel economy, Congress placed express 
limitations on the scope of the incentive and the term of any necessary 
extension specifically to strike the appropriate balance between 
encouraging alternative fuel system development and providing relief 
from CAFE obligations.
    Third, the view that extension of the CAFE incentive should be 
premised on the existence of a well-developed alternative fuel 
infrastructure misinterprets the intent of Congress with respect to the 
``chicken and egg'' problem and its actions to provide the agency with 
the option to extend the CAFE incentive. Were there a well-developed 
alternative fuel infrastructure and a corresponding substantial use of 
alternative fuels, there would be no need for an extension of the CAFE 
incentive. Similarly, had there been no movement toward a fleet capable 
of operating on alternative fuels, or no movement toward the growth of 
infrastructure to that fleet, there would not be any basis for 
extending the CAFE incentive.
    As it is, however, after initially experimenting with methanol and 
working through technological issues with alternative fuels, in the mid 
to late 1990s, automobile manufacturers created a fleet of vehicles (as 
Congress intended) and States and local governments began to encourage 
investment in infrastructure to support that fleet. As we observed in 
the NPRM, while no liquid fuel dual-fueled light duty vehicles were 
produced prior to 1996, approximately 3.4 million dual-fueled light 
duty vehicles were produced in the 1998 through 2003 model years. 
Indeed, about one million of these vehicles were produced in the 2003 
model year alone. Termination of the incentive now would likely 
discourage the further growth of the dual fuel vehicle fleet, as well 
as the further development of the growing infrastructure to support 
this fleet. This would, in effect, stamp out the gains toward energy 
security that the CAFE incentive has already produced and will produce 
in the future. Further, as stated in the Report to Congress, the 
Nation's long-term energy security must be given considerable weight 
when balanced against possible short-term petroleum consumption and 
environmental impacts.
    Fourth, commenters who supported the agency's proposal noted that 
manufacturers would not have developed and produced these dual fuel 
vehicles in the absence of the incentive. In addition, these commenters 
indicated the importance of the fact that the dual fuel fleet had only 
begun to grow in size in recent years, reaching a ``critical mass'' of 
vehicles to support investments in alternative fuel infrastructure. In 
contrast, those commenters opposed to the extension argued that the 
continued lack of meaningful development of an alternative fuel 
infrastructure indicated the existence of the dual fuel vehicles 
themselves has had no impact on demand for alternative fuels. Instead, 
these commenters, notably Public Citizen, argued that the presence of 
the growing dual fuel fleet is meaningless if not accompanied by a 
corresponding growth in demand for alternative fuel. Without such 
demand, they contend, an alternative fuel infrastructure will not fully 
develop.
    Congress recognized it was unlikely that an alternative fuel 
vehicle fleet, consumer demand for such vehicles and infrastructure to 
support such vehicles all would develop contemporaneously. Congress 
created the incentive in order to spur the necessary investment to 
create an alternative fuel vehicle fleet, which would drive consumer 
demand for alternative fuels and, ultimately, the necessary 
infrastructure to support such demand. Congress further recognized the 
likelihood that an extension could be necessary to complete the process 
it had started. Accordingly, the agency does not agree with those 
commenters that suggest that the credit should be

[[Page 7700]]

terminated because consumer demand and infrastructure have not yet 
developed to an extent that an alternative fuel system is self-
sustaining.
    Fifth, we believe that the existence of a significant fleet of dual 
fueled vehicles is meaningful even in the absence of substantial 
current demand for alternative fuels. Maintaining the CAFE incentive 
program, and thus continuing to spur the production of dual fuel 
vehicles, will help attenuate the potential impacts of ``oil shocks'' 
caused by rapid changes in the petroleum supply. In the event of an oil 
shock, dual fuel vehicles could--in those areas where infrastructure is 
already developed or rapidly expanding--use a domestically produced 
alternative fuel to reduce the nation's overall petroleum consumption. 
We do not agree with those commenters who argued that continuing the 
incentive is unnecessary because manufacturers could reinstitute 
production of dual fuel vehicles if the need arose, as the technology 
to build vehicles capable of operating on alternative fuels must be 
incorporated into the design and manufacture of those vehicles, a 
process which requires several years lead time.
    Sixth, a number of commenters suggested that the supply of ethanol 
might be a limiting factor in expanding E85 use, the largest component 
of growth in alternative fuel use. Current U.S. ethanol production is 
approximately 3.6 billion gallons per year. A substantial percentage of 
this production capacity is used to produce additives for conventional 
gasoline or to produce gasohol (90 percent gasoline/10 percent 
ethanol). Ethanol production capacity has essentially doubled in recent 
years and, based on the comments showing increased investment in both 
infrastructure and consumer education, appears likely to continue to 
grow so that there will be more than enough ethanol to meet the demand 
for additives and provide E85 fuel. The March 2002 Report to Congress 
estimated that there were 400 million gallons of ethanol available for 
use in E85 for the year 2000. By 2002, the amount available for E85 use 
had grown to slightly over 1 billion gallons.
    Recent experience with using ethanol as a replacement for methyl 
tertiary butyl ether (MTBE) indicates that the ethanol industry has the 
ability to increase production capacity quite rapidly in response to 
increased demand. The Report to Congress indicated that if ethanol 
production remained at a constant rate, production in 2010 would be 
approximately 2.6 billion gallons per year. However, the California 
Energy Commission now projects that U.S. ethanol production capacity 
will exceed 5 billion gallons per year by December 2004\11\. Therefore, 
the Nation's experience with MTBE's replacement by ethanol has thus far 
demonstrated that the ethanol industry has the capability to expand 
production capability rather quickly. The move by some States to phase-
out MTBE has also had other salutary effects in terms of improvements 
in the production, transportation, distribution and blending of 
ethanol. Therefore, while this MTBE phase-out has significantly 
increased demand for ethanol, it has also established that ethanol 
production can be expanded to meet that increased demand.
---------------------------------------------------------------------------

    \11\ Schremp, Gordon. ``California's Phaseout of MTBE--
Background and Current Status'' http://www.energy.ca.gov/mtbe/
documents/2003-03-17--SCHREMP--AT--EPA.PPT
---------------------------------------------------------------------------

    The existence of the capability to rapidly expand ethanol 
production underscores the need to have and maintain an ethanol dual 
fuel vehicle fleet. The presence of an alternative fuel fleet would, in 
the event of significant changes in the availability of petroleum 
fuels, provide a ready market for a domestically produced fuel. While 
the Alliance and Ford both indicated their support for this contention, 
ACEEE and the NRDC indicated that sudden changes to the petroleum 
supply might not allow sufficient time for the development of 
additional ethanol production to allow dual fuel vehicles to use E85 
fuel. Rapid changes to ethanol production capacity--i.e., taking less 
than in six months to a year--are not likely and probably not useful in 
ameliorating the impact of a sudden oil crisis or ``shock.'' Similarly, 
if sufficient ethanol production capacity exists in such a situation, 
or is rapidly developed thereafter, the ethanol produced could be used 
in an E10 blend as well as E85. However, if restrictions to the 
petroleum supply persist over a longer term, the ethanol industry's 
recently demonstrated ability to rapidly expand production indicates 
that more ethanol could become available. The use of E85 fuels in E85 
vehicles is likely to occur simply because much less petroleum would be 
available. In such an instance, the existence of a dual fuel fleet 
could be an important asset to the Nation's energy security.
    Seventh, we note that the Department of Energy (DOE) has recently 
published a final rule determining that it is not necessary to require 
private and local government fleets to acquire alternative fuel 
vehicles. (69 FR 4219; January 29, 2004). The statutory authority under 
which DOE issued its final rule specifies that DOE may adopt such a 
requirement only if it is able to determine that doing so is 
``necessary'' to meet the statutory goal of replacing 30 percent of 
motor vehicle petroleum use by 2010.
    DOE concluded that a private and local government fleet mandate was 
not necessary because, under current conditions, the limited number of 
fleets that would be covered and of alternative fuel vehicles that 
would be acquired under a mandate, coupled with the statutory 
constraints on such a mandate, would mean that the mandate would not 
appreciably increase the use of replacement fuels by motor vehicles. 
DOE also pointed out that even if the number of fleets and acquired 
alternative fuel vehicles were larger, there was no assurance that 
acquired vehicles would actually use alternative fuels.
    DOE's final rule is consistent with our approach in today's final 
rule. DOE has merely decided not to impose a mandate on private and 
local government fleets in the absence of appreciable benefits from 
such a mandate. Moreover, of course, DOE's action is under a different 
statute and subject to different statutory requirements than is our 
rulemaking today. DOE's statute expressly conditions a determination of 
necessity, and thus the adoption of a mandate, upon that Department's 
being able to make twin findings: that the 2010 goal of replacement 
fuel use is not expected to be achieved by voluntary means or pursuant 
to any law without a mandate, and that that goal is practicable and 
actually achievable through the adoption of a mandate in combination 
with voluntary means and any other relevant programs. It would not have 
been enough for DOE simply to find that a private and local government 
fleet AFV acquisition mandate would increase the level of alternative 
or replacement fuel used; rather, in order for a mandate to be 
promulgated, DOE would have had to find that the 2010 goal actually is 
achieved ``through implementation of such a fleet requirement program 
in combination with voluntary means and the application of other 
programs * * *.'' (42 U.S.C. 13257(e).) In contrast, our decision to 
extend the incentive is not conditioned upon making any findings. This 
affords us greater discretion in determining what decision is 
appropriate.
    Eighth, we note that CAS observed that the respective tax 
treatments of E10 and E85 militate against producers choosing to make 
E85 instead of E10, stating that E10 blends qualify for a 5.3[cent] per 
gallon exemption from the motor fuel excise tax, which is the 
equivalent

[[Page 7701]]

value of 53[cent] per gallon, while the ethanol used in E85 blends 
qualifies for a 53[cent] per gallon tax credit. Gasohol, or E10, 
benefits from direct reduction of taxation while E85 is subject to the 
equivalent reduction in taxation through operation of a credit. The two 
tax treatments are equal in their impact, if not in their operation, 
and we have no data on which to base a conclusion that the differing 
approaches to taxing the fuels will affect the production level of 
either.
    Finally, we note that ACEEE indicated that it did not understand 
how certain dual fuel vehicles, which are required to provide equal or 
greater energy efficiency when operating on alternative fuel than when 
using gasoline or diesel fuel, could be classified as such. The agency 
calculates the relative energy efficiency of a dual fuel vehicle by 
dividing the vehicle's combined fuel economy (miles/gallon) when 
operating on gasoline or diesel fuel by the net heating value of the 
gasoline or diesel fuel (BTU/gallon). We then divide the vehicle's 
combined fuel economy (miles/gallon) when operating on alternative fuel 
by the net heating value of the alternative fuel (BTU/gallon). This 
results in two values, expressed in miles/BTU, which provides the 
energy efficiency of that vehicle while operating on alternative fuels 
and the energy efficiency of the vehicle while operating on gasoline or 
diesel fuel.
    The relative energy efficiency of that vehicle can be expressed by 
a ratio of the energy efficiency of the vehicle while operating on 
alternative fuels to the energy efficiency of the vehicle while 
operating on gasoline or diesel fuel. If that ratio, called the energy 
efficiency ratio, is equal to or greater than one, then that dual fuel 
vehicle provides equal or greater energy efficiency while operating on 
the alternative fuel than that vehicle operating on gasoline or diesel 
fuel. Our review indicates that vehicles currently classified as dual 
fuel vehicles have, when the method described above is used, energy 
efficiency ratios indicating that they qualify as dual fuel vehicles.

IX. Conclusion

    For the reasons set forth above, we have determined that the 
extension of the AMFA CAFE incentive program for dual fuel vehicles is 
necessary to carry out the Congressional aim of encouraging development 
and use of alternative motor fuels. AMFA envisioned the alternative 
fuel program as a series of steps: the production of a vehicle fleet 
capable of operating on alternative fuel that, in turn, would increase 
consumer demand for alternative fuels to use in those vehicles, which 
would then spur the growth of infrastructure (such as refueling 
stations) to support such demand. Combined with a public education and 
awareness campaign to generate acceptance of alternative fuels as a 
replacement for conventional fuels, this Congressional program can 
result in significant economic and energy security benefit as 
alternative fuel becomes increasingly available and its use gains 
public acceptance and becomes more widespread.
    The extension is consistent with the clear Congressional intent to 
continue the program if, after a fixed period of time, the CAFE 
incentive had initially generated some success in the creation of a 
vehicle fleet, but had not yet resulted in enough infrastructure to 
create a self-sustaining alternative fuel system. In enacting AMFA, 
Congress decided to permit a slight short-term reduction in fleet fuel 
economy in order to encourage long-term energy security through the 
development of an alternative fuel automobile fleet. The agency has 
found that the incentive has led to the creation of such a vehicle 
fleet, and more recently has led to expanded investment in 
infrastructure and public education campaigns to develop the actual use 
of alternative fuel in that fleet.
    We have determined that extension of the CAFE incentive 
appropriately balances the Nation's need to continue to encourage 
investment in alternative fuel infrastructure and the risk that the 
Nation's alternative fuels system may never become self-sustaining. The 
recent proliferation of E85 refueling stations, the recent 
Congressional support for ethanol as an alternative fuel, and the 
recent expansion of public awareness and acceptance campaigns to 
encourage ethanol use all imply a continuing increase in E85 use and 
the ultimate success of the program created by Congress in AMFA, at 
least as far as ethanol-based fuels are concerned. The current status 
of the program does not support its abandonment by terminating the CAFE 
incentive that has sparked its development to date.

X. Regulatory Analyses

A. Executive Order 12866 and DOT Regulatory Policies and Procedures

    Executive Order 12866, ``Regulatory Planning and Review'' (58 FR 
51735, October 4, 1993), provides for making determinations whether a 
regulatory action is ``significant'' and therefore subject to Office of 
Management and Budget (OMB) review and to the requirements of the 
Executive Order. The Order defines a ``significant regulatory action'' 
as one that is likely to result in a rule that may:
    (1) Have an annual effect on the economy of $100 million or more or 
adversely affect in a material way the economy, a sector of the 
economy, productivity, competition, jobs, the environment, public 
health or safety, or State, local, or Tribal governments or 
communities;
    (2) Create a serious inconsistency or otherwise interfere with an 
action taken or planned by another agency;
    (3) Materially alter the budgetary impact of entitlements, grants, 
user fees, or loan programs or the rights and obligations of recipients 
thereof; or
    (4) Raise novel legal or policy issues arising out of legal 
mandates, the President's priorities, or the principles set forth in 
the Executive Order.
    This final rule is economically significant. While final rule does 
not require the production of alternative fuel vehicles, it allows 
manufacturers producing dual-fuel vehicles to produce less efficient 
conventionally fueled vehicles. The impact of the production of these 
less efficient vehicles may result in additional annual fuel costs of 
more than $100 million. Accordingly, it was reviewed under Executive 
Order 12866. The rule is also significant within the meaning of the 
Department of Transportation's Regulatory Policies and Procedures.
    Because this final rule is economically significant, the agency has 
prepared a Final Economic Assessment (FEA), as required by E.O. 
12866.\12\ Among the estimates and conclusions in the FEA are the 
following:
---------------------------------------------------------------------------

    \12\ As we noted in IX. Conclusion above, we have determined 
that the extension of the AMFA CAFE incentive program for dual fuel 
vehicles based on our conclusion that doing so is necessary to carry 
out the Congressional aim of encouraging development and use of 
alternative motor fuels. Combined with a public education and 
awareness campaign to generate acceptance of alternative fuels as a 
replacement for conventional fuels, this Congressional program can 
result in significant economic and energy security benefit as 
alternative fuel becomes increasingly available and its use gains 
public acceptance and becomes more widespread.
---------------------------------------------------------------------------

    [sbull] The incentive program has stimulated a significant increase 
in the availability of dual fuel vehicles (about 3.4 million E85 
vehicles were sold through MY 2003, mostly light trucks).
    [sbull] Even under the most pessimistic assumption regarding the 
use of E85 fuel (1% usage) in dual fuel vehicles, overall increases in 
gasoline consumption are relatively small--less that one percent.
    [sbull] The average consumer cost of adding dual fuel capability to 
a vehicle is $100 to $200 (in $2000).

[[Page 7702]]

    [sbull] The ability of GM, Ford and DaimlerChrysler to rely on the 
incentive credits during the extension will decrease the extent to 
which those companies would otherwise need to increase the fuel economy 
of their conventional vehicles, with a resulting average savings, from 
the manufacturer's perspective, ranging from $34 for MY 2005 light 
trucks to about $85 for MY 2007 light trucks.
    The full FEA is available in the docket and has been placed on the 
agency's Web site along with the final rule itself.

B. Regulatory Flexibility Act

    Pursuant to the Regulatory Flexibility Act (5 U.S.C. 601 et seq., 
as amended by the Small Business Regulatory Enforcement Fairness Act 
(SBREFA) of 1996), whenever an agency is required to publish a notice 
of rulemaking for any proposed or final rule, it must prepare and make 
available for public comment a regulatory flexibility analysis that 
describes the effect of the rule on small entities (i.e., small 
businesses, small organizations, and small governmental jurisdictions). 
The Small Business Administration's regulations at 13 CFR 121.105(a) 
define a small business, in part, as a business entity ``which operates 
primarily within the United States.'' No regulatory flexibility 
analysis is required if the head of an agency certifies the rule will 
not have a significant economic impact on a substantial number of small 
entities. SBREFA amended the Regulatory Flexibility Act to require 
Federal agencies to provide a statement of the factual basis for 
certifying that a rule will not have a significant economic impact on a 
substantial number of small entities.
    NHTSA has considered the effects of this final rule under the 
Regulatory Flexibility Act. I certify that this final rule does not 
have a significant economic impact on a substantial number of small 
entities. The rationale for this certification is that there are not 
currently any small motor vehicle manufacturers in the United States 
building vehicles that will be affected by the extension of the dual-
fuel incentive credit.

C. National Environmental Policy Act

    NHTSA has analyzed this rulemaking action for the purposes of the 
National Environmental Policy Act. The agency has performed an 
Environmental Assessment and determined that implementation of this 
final rule will not have a significant impact on the quality of the 
human environment. Adoption of this final rule could result in 
increased vehicle emissions and an increase in greenhouse gases, 
depending on the amount of alternative fuel consumed by dual-fueled 
vehicles manufactured in response to the rule. Such increases will stem 
largely from the production of larger, less fuel-efficient vehicles 
made possible by the extension. However, under any scenario, the amount 
of increased emissions represents a de minimis percentage of overall 
emissions resulting from the consumption of petroleum fuels by highway 
vehicles.

D. Executive Order 13132 (Federalism)

    Executive Order 13132 requires NHTSA to develop an accountable 
process to ensure ``meaningful and timely input by State and local 
officials in the development of regulatory policies that have 
federalism implications.'' ``Policies that have federalism 
implications'' is defined in the Executive Order to include regulations 
that have ``substantial direct effects on the States, on the 
relationship between the national government and the States, or on the 
distribution of power and responsibilities among the various levels of 
government.'' Under Executive Order 13132, the agency may not issue a 
regulation with federalism implications, that imposes substantial 
direct compliance costs, and that is not required by statute, unless 
the Federal government provides the funds necessary to pay the direct 
compliance costs incurred by State and local governments, the agency 
consults with State and local governments, or the agency consults with 
State and local officials early in the process of developing the 
proposed regulation. NHTSA also may not issue a regulation with 
federalism implications and that preempts State law unless the agency 
consults with State and local officials early in the process of 
developing the proposed regulation.
    The agency has analyzed this final rule in accordance with the 
principles and criteria set forth in Executive Order 13132 and has 
determined that it will not have sufficient federalism implications to 
warrant consultation with State and local officials or the preparation 
of a federalism summary impact statement. The extension of the 
incentive program through the 2008 model year might result in 
additional conventional fuel costs for State and local governments. At 
the same time, extension of the incentive program will ensure that dual 
fuel vehicles, which State and local governments might need to acquire 
to comply with other government mandates, will be available at lower 
costs. Any increased costs that will not be offset by the continued 
availability of lower cost dual fuel vehicles, however, are not direct 
costs. The agency's final rule will not otherwise have any substantial 
effects on the States, or on the current Federal-State relationship, or 
on the current distribution of power and responsibilities among the 
various local officials.

E. Civil Justice Reform

    This final rule will not have any retroactive effect. 49 U.S.C. 
30161 sets forth a procedure for judicial review of final rules 
establishing, amending, or revoking Federal motor vehicle safety 
standards. That section does not require submission of a petition for 
reconsideration or other administrative proceedings before parties may 
file suit in court.

F. Paperwork Reduction Act

    Under the Paperwork Reduction Act of 1995, a person is not required 
to respond to a collection of information by a Federal agency unless 
the collection displays a valid OMB control number. This final rule 
will not require any new collections of information as defined by the 
OMB in 5 CFR part 1320. Data regarding production of dual-fuel vehicles 
will be submitted to the agency under the existing procedures found in 
49 CFR part 537.

G. National Technology Transfer and Advancement Act

    Section 12(d) of the National Technology Transfer and Advancement 
Act of 1995 (NTTAA), Public Law 104-113, section 12(d) (15 U.S.C. 272) 
directs us to use voluntary consensus standards in our regulatory 
activities unless doing so would be inconsistent with applicable law or 
otherwise impractical. Voluntary consensus standards are technical 
standards (e.g., materials specifications, test methods, sampling 
procedures, and business practices) that are developed or adopted by 
voluntary consensus standards bodies, such as the Society of Automotive 
Engineers (SAE). The NTTAA directs us to provide Congress, through OMB, 
explanations when we decide not to use available and applicable 
voluntary consensus standards.
    There are no voluntary consensus standards available at this time. 
However, NHTSA will consider any such standards if they become 
available.

H. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) 
requires Federal agencies to prepare a written assessment of the costs, 
benefits,

[[Page 7703]]

and other effects of proposed or final rules that include a Federal 
mandate likely to result in the expenditure by State, local or tribal 
governments, in the aggregate, or by the private sector, of more than 
$109 million in any one year (adjusted for inflation with base year of 
1995). Before promulgating a rule for which a written statement is 
needed, section 205 of the UMRA generally requires NHTSA to identify 
and consider a reasonable number of regulatory alternatives and adopt 
the least costly, most cost-effective, or least burdensome alternative 
that achieves the objectives of the rule. The provisions of section 205 
do not apply when they are inconsistent with applicable law. Moreover, 
section 205 allows NHTSA to adopt an alternative other than the least 
costly, most cost-effective, or least burdensome alternative if the 
agency publishes with the final rule an explanation why that 
alternative was not adopted.
    This final rule is not a Federal mandate; instead, it provides an 
incentive for automobile manufacturers. Further, the rule is not 
estimated to result in expenditures by State, local or tribal 
governments, or by the private sector, of more than $109 million 
annually.

I. Regulation Identifier Number (RIN)

    The Department of Transportation assigns a regulation identifier 
number (RIN) to each regulatory action listed in the Unified Agenda of 
Federal Regulations. The Regulatory Information Service Center 
publishes the Unified Agenda in April and October of each year. You may 
use the RIN contained in the heading at the beginning of this document 
to find this action in the Unified Agenda.

List of Subjects in 49 CFR Part 538

    Energy conservation, Gasoline, Imports, Motor vehicles.

0
In consideration of the foregoing, NHTSA is amending 49 CFR part 538 as 
follows:

PART 538--MANUFACTURING INCENTIVES FOR ALTERNATIVE FUELED VEHICLES

0
1. The authority citation for part 538 of title 49 continues to read as 
follows:

    Authority: 49 U.S.C. 32901, 32905, and 32906; delegation of 
authority at 49 CFR 1.50.

0
2. Revise Sec.  538.1 to read as follows:


Sec.  538.1  Scope.

    This part establishes minimum driving range criteria to aid in 
identifying passenger automobiles that are dual-fueled automobiles. It 
also establishes gallon equivalent measurements for gaseous fuels other 
than natural gas. This part also extends the dual-fuel incentive 
program.

0
3. Revise Sec.  538.2 to read as follows:


Sec.  538.2  Purpose.

    The purpose of this part is to specify one of the criteria in 49 
U.S.C. chapter 329 ``Automobile Fuel Economy'' for identifying dual-
fueled passenger automobiles that are manufactured in model years 1993 
through 2004. The fuel economy of a qualifying vehicle is calculated in 
a special manner so as to encourage its production as a way of 
facilitating a manufacturer's compliance with the Corporate Average 
Fuel Economy Standards set forth in part 531 of this chapter. The 
purpose is also to establish gallon equivalent measurements for gaseous 
fuels other than natural gas. This part also specifies the model years 
after 2004 in which the fuel economy of dual-fueled automobiles may be 
calculated under the special incentive provisions found in 49 U.S.C. 
32905(b) and (d).

0
4. Add Sec.  538.9 to read as follows:


Sec.  538.9  Dual fuel vehicle incentive.

    The application of 49 U.S.C. 32905(b) and (d) to qualifying dual 
fuel vehicles is extended to the 2005, 2006, 2007, and 2008 model 
years.

    Issued on: February 13, 2004.
Jeffrey W. Runge,
Administrator.
[FR Doc. 04-3595 Filed 2-18-04; 8:45 am]
BILLING CODE 4910-59-P