[Federal Register Volume 74, Number 59 (Monday, March 30, 2009)]
[Rules and Regulations]
[Pages 14195-14456]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-6839]



[[Page 14195]]

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Part II





Department of Transportation





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National Highway Traffic Safety Administration



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



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Average Fuel Economy Standards Passenger Cars and Light Trucks Model 
Year 2011; Final Rule

Federal Register / Vol. 74, No. 59 / Monday, March 30, 2009 / Rules 
and Regulations

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DEPARTMENT OF TRANSPORTATION

National Highway Traffic Safety Administration

49 CFR Parts 523, 531, 533, 534, 536 and 537

[Docket No. NHTSA-2009-0062]
RIN 2127-AK29


Average Fuel Economy Standards Passenger Cars and Light Trucks 
Model Year 2011

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

ACTION: Final rule; record of decision.

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SUMMARY: The future of this country's economy, security, and 
environment are linked to one key challenge: energy. To reduce fuel 
consumption, NHTSA has been issuing Corporate Average Fuel Economy 
(CAFE) standards since the late 1970's under the Energy Policy and 
Conservation Act (EPCA). However, the principal effects of these 
standards are broader than their statutory purpose. Reducing fuel 
consumption conserves petroleum, a non-renewable energy source, saves 
consumers money, and promotes energy independence and security by 
reducing dependence on foreign oil. It also directly reduces the motor 
vehicle tailpipe emissions of carbon dioxide (CO2), which is 
the principal greenhouse gas emitted by motor vehicles.
    The Energy Independence and Security Act (EISA) amended EPCA by 
mandating that the model year (MY) 2011-2020 CAFE standards be set 
sufficiently high to ensure that the industry-wide average of all new 
passenger cars and light trucks, combined, is not less than 35 miles 
per gallon by MY 2020. This is a minimum requirement, as NHTSA must set 
standards at the maximum feasible level in each model year. NHTSA will 
determine, based on all of the relevant circumstances, whether that 
additional requirement calls for establishing standards that reach the 
35 mpg goal earlier than MY 2020.
    NHTSA published a proposal in May 2008 to begin implementing EISA 
by establishing CAFE standards for MYs 2011-2015. A draft final rule 
for those model years was completed, but not issued.
    In the context of his calls for the development of new national 
policies to prompt sustained domestic and international actions to 
address the closely intertwined issues of energy independence, energy 
security and climate change, the President issued a memorandum on 
January 26, 2009, requesting NHTSA to divide its rulemaking into two 
parts. First, he requested the agency to issue a final rule adopting 
CAFE standards for MY 2011 only. Given the substantial time and 
analytical effort involved in developing CAFE standards and the limited 
amount of time before the statutory deadline of March 30, 2009 for 
establishing the MY 2011 standards, the agency has necessarily based 
this one year final rule almost wholly on the information available to 
it and the analysis performed by it in support of the draft final rule 
completed last fall.
    Second, the President requested NHTSA to establish standards for MY 
2012 and later after considering the appropriate legal factors, the 
comments filed in response to the May 2008 proposal, the relevant 
technological and scientific considerations, and, to the extent 
feasible, a forthcoming report by the National Academy of Sciences, 
mandated under section 107 of EISA, assessing existing and potential 
automotive technologies and costs that can practicably be used to 
improve fuel economy. The deferral of action on standards for the later 
model years provides the agency with an opportunity to review its 
approach to CAFE standard setting, including its methodologies, 
economic and technological inputs and decisionmaking criteria, so as to 
ensure that it will produce standards that contribute, to the maximum 
extent possible within the limits of EPCA/EISA, to meeting the energy 
and environmental challenges and goals outlined by the President.
    NHTSA estimates that the MY 2011 standards will raise the industry-
wide combined average to 27.3 mpg, save 887 million gallons of fuel 
over the lifetime of the MY 2011 cars and light trucks, and reduce 
CO2 emissions by 8.3 million metric tons during that period.

DATES: This final rule is effective May 29, 2009.
    Petitions for reconsideration must be received by May 14, 2009.

ADDRESSES: Petitions for reconsideration must be submitted to: 
Administrator, National Highway Traffic Safety Administration, 1200 New 
Jersey Avenue, SE., Washington, DC 20590.

FOR FURTHER INFORMATION CONTACT: For policy and technical issues: Ms. 
Julie Abraham or Mr. Peter Feather, Office of Rulemaking, National 
Highway Traffic Safety Administration, 1200 New Jersey Avenue, SE., 
Washington, DC 20590. Telephone: Ms. Abraham (202) 366-1455; Mr. 
Feather (202) 366-0846.
    For legal issues: Mr. Stephen Wood or Ms. Rebecca Yoon, Office of 
the Chief Counsel, National Highway Traffic Safety Administration, 1200 
New Jersey Avenue, SE., Washington, DC 20590. Telephone: (202) 366-
2992.

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Executive overview
    A. The President's January 26, 2009 Memorandum on CAFE Standards 
for Model Years 2011 and Beyond
    1. Rulemaking Background
    2. Requests in the President's Memorandum
    (a) CAFE Standards for Model Year 2011
    (b) CAFE Standards for Model Years 2012 and Beyond
    3. Implementing the President's Memorandum
    B. Energy Independence and Security Act of 2007
    C. Notice of Proposed Rulemaking for MYs 2011-2015 and Request 
for New Product Plans
    1. Key Economic Values for Benefits Computations and Standard 
Setting
    2. Standards
    (a) Classification of Vehicles
    (b) Stringency
    (c) Benefits and Costs
    (i) Benefits
    (ii) Costs
    (d) Effect of Flexibilities on Benefits and Costs
    3. Credits
    4. Preemption
    D. Brief Summary of Public Comments on the NPRM
    E. New Information Received or Developed by NHTSA Between the 
NPRM and Final Rule
    1. New Manufacturer Product Plans
    2. Revised Assessment of Technology Effectiveness and Costs
    3. Final Environmental Impact Statement
    F. Final Rule for MY 2011
    1. Introduction
    2. Key Economic Values for Benefits Computations
    3. Standards
    (a) Classification
    (b) Stringency
    (c) Benefits and Costs
    (i) Benefits
    (ii) Costs
    (d) Flexibilities
    4. Credits
    5. Preemption
II. Background
    A. Role of Fuel Economy Improvements in Promoting Energy 
Independence, Energy Security, and a Low Carbon Economy
    B. Contributions of Fuel Economy Improvements to CO2 
Tailpipe Emission Reductions Since 1975
    C. Chronology of Events Since the National Academy of Sciences 
Called for Reforming and Increasing CAFE Standards
    1. National Academy of Sciences Issues Report on Future of CAFE 
Program (February 2002)
    (a) Significantly Increasing CAFE Standards Without Making Them

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Attribute-Based Would Adversely Affect Safety
    (b) Climate Change and Other Externalities Justify Increasing 
the CAFE Standards
    2. NHTSA Issues Final Rule Establishing Attribute-Based CAFE 
Standards for MY 2008-2011 Light Trucks (March 2006)
    3. Supreme Court Issues Decision in Massachusetts v. EPA (April 
2007)
    4. NHTSA and EPA Coordinate on Development of Rulemaking 
Proposals (Summer-Fall 2007)
    5. Ninth Circuit Issues Decision Re Final Rule for MY 2008-2011 
Light Trucks (November 2007)
    6. Congress Enacts Energy Security and Independence Act of 2007 
(December 2007)
    7. NHTSA Proposes CAFE Standards for MYs 2011-2015 and Requests 
New Product Plans for Those Years (April 2008)
    8. NHTSA Contracts With ICF International To Conduct Climate 
Modeling and Other Analyses in Support of Draft and Final 
Environmental Impact Statements (May 2008)
    9. Manufacturers Submit New Product Plans (June 2008)
    10. NHTSA Contracts With Ricardo To Aid in Assessing Public 
Comments On Cost and Effectiveness of Fuel Saving Technologies (June 
2008)
    11. Ninth Circuit Revises Its Decision Re Final Rule for MY 
2008-2011 Light Trucks (August 2008)
    12. NHTSA Releases Final Environmental Impact Statement (October 
2008)
    13. Office of Information and Regulatory Affairs Completes 
Review of a Draft MY 2011-2015 Final Rule (November 2008)
    14. Department of Treasury Extends Loans to General Motors and 
Chrysler (December 2008)
    15. Department of Transportation Decides Not To Issue MY 2011-
2015 Final Rule (January 2009)
    16. The President Requests NHTSA To Issue Final Rule for MY 2011 
Only (January 2009)
    17. General Motors and Chrysler Submit Restructuring Reports to 
Department of Treasury (February 2009)
    D. Energy Policy and Conservation Act, as Amended
    1. Vehicles Subject to Standards for Automobiles
    2. Mandate To Set Standards for Automobiles
    3. Attribute-Based Standards
    4. Factors Considered in the Setting of Standards
    (a) Factors That Must Be Considered
    (i) Technological Feasibility
    (ii) Economic Practicability
    (iii) The Effect of Other Motor Vehicle Standards of the 
Government on Fuel Economy
    (iv) The Need of the United States To Conserve Energy
    1. Fuel Prices and the Value of Saving Fuel
    2. Petroleum Consumption and Import Externalities
    3. Air Pollutant Emissions
    (v) Other Factors--Safety
    (b) Factors That Cannot Be Considered
    (c) Weighing and Balancing of Factors
    5. Consultation in Setting Standards
    6. Test Procedures for Measuring Fuel Economy
    7. Enforcement and Compliance Flexibility
III. The Anticipated Vehicles in the MY 2011 Fleets and NHTSA's 
Baseline Market Forecast
    A. Why does NHTSA establish a baseline market forecast?
    B. How does NHTSA develop the baseline market forecast?
    1. NHTSA first asks manufacturers for updated product plan data
    (a) Why does NHTSA use manufacturer product plans to develop the 
baseline?
    (b) What product plan data did NHTSA use in the NPRM?
    (c) What product plan data did NHTSA receive for the final rule?
    (d) How is the product plan data received for the final rule 
different from what the agency used in the NPRM analysis, and how 
does it impact the baseline?
    2. Once NHTSA has the product plans, how does it develop the 
baseline?
    3. How does NHTSA's market forecast reflect current market 
conditions?
IV. Fuel Economy-Improving Technologies
    A. NHTSA Analyzes What Technologies Can Be Applied Beyond Those 
in the Manufacturers' Product Plans
    B How NHTSA Decides Which Technologies To Include
    1. How NHTSA Did This Historically, and How for the NPRM
    2. NHTSA's Contract With Ricardo for the Final Rule
    C. What technology assumptions has NHTSA used for the final 
rule?
    1. How do NHTSA's technology assumptions in the final rule 
differ from those used in the NPRM?
    2. How are the technologies applied in the model?
    3. Technology Application Decision Trees
    4. Division of Vehicles Into Subclasses Based on Technology 
Applicability, Cost and Effectiveness
    5. How did NHTSA develop technology cost and effectiveness 
estimates for the final rule?
    6. Learning Curves
    7. Technology Synergies
    8. How does NHTSA use full vehicle simulation?
    9. Refresh and Redesign Schedule
    10. Phase-In Caps
    D. Specific Technologies Considered for Application and NHTSA's 
Estimates of Their Incremental Costs and Effectiveness
    1. What data sources did NHTSA evaluate?
    2. Individual Technology Descriptions and Cost/Effectiveness 
Estimates
    (a) Gasoline Engine Technologies
    (i) Overview
    (ii) Low Friction Lubricants (LUB)
    (iii) Engine Friction Reduction (EFR)
    (iv) Variable Valve Timing (VVT)
    1. Intake Cam Phasing (ICP)
    2. Coupled Cam Phasing (CCPS and CCPO)
    3. Dual Cam Phasing (DCP)
    (v) Discrete Variable Valve Lift (DVVLS, DVVLD, DVVLO)
    (vi) Continuously Variable Valve Lift (CVVL)
    (vii) Cylinder Deactivation (DEACS, DEACD, DEACO)
    (viii) Conversion to Double Overhead Camshaft Engine With Dual 
Cam Phasing (CDOHC)
    (ix) Stoichiometric Gasoline Direct Injection (SGDI)
    (x) Combustion Restart (CBRST)
    (xi) Turbocharging and Downsizing (TRBDS)
    (xii) Cooled Exhaust Gas Recirculation Boost (EGRB)
    (b) Diesel Engine Technologies
    (i) Diesel Engine With Lean NOX Trap (LNT) Catalyst 
After-Treatment
    (ii) Diesel Engine With Selective Catalytic Reduction (SCR) 
After-Treatment
    (c) Transmission Technologies
    (i) Improved Transmission Controls and Externals (IATC)
    (ii) Automatic 6-, 7- and 8-Speed Transmissions (NAUTO)
    (iii) Dual Clutch Transmissions/Automated Manual Transmissions 
(DCTAM)
    (iv) Continuously Variable Transmission (CVT)
    (v) 6-Speed Manual Transmissions (6MAN)
    (d) Hybrid and Electrification/Accessory Technologies
    (i) Overview
    (ii) Hybrid System Sizing and Cost Estimating Methodology
    (iii) Electrical Power Steering (EPS)
    (iv) Improved Accessories (IACC)
    (v) 12V Micro Hybrid (MHEV)
    (vi) High Voltage/Improved Alternator (HVIA)
    (vii) Integrated Starter Generator (ISG)
    (viii) Power Split Hybrid
    (ix) 2-Mode Hybrid
    (x) Plug-In Hybrid
    (e) Vehicle Technologies
    (i) Material Substitution (MS1, MS2, MS5)
    (ii) Low Drag Brakes (LDB)
    (iii) Low Rolling Resistance Tires (ROLL)
    (iv) Front or Secondary Axle Disconnect for Four-Wheel Drive 
Systems (SAX)
    (v) Aerodynamic Drag Reduction (AERO)
    (f) Technologies Considered But Not Included in the Final Rule 
Analysis
    (i) Camless Valve Actuation
    (ii) Lean-Burn Gasoline Direct Injection Technology
    (iii) Homogeneous Charge Compression Ignition
    (iv) Electric Assist Turbocharging
    E. Cost and Effectiveness Tables
V. Economic Assumptions Used in NHTSA's Analysis
    A. Introduction: How NHTSA Uses the Economic Assumptions in Its 
Analysis
    B. What economic assumptions does NHTSA use in its analysis?
    1. Determining Retail Price Equivalent
    2. Potential Opportunity Costs of Improved Fuel Economy
    3. The On-Road Fuel Economy `Gap'
    4. Fuel Prices and the Value of Saving Fuel
    5. Consumer Valuation of Fuel Economy and Payback Period
    6. Vehicle Survival and Use Assumptions
    7. Growth in Total Vehicle Use
    8. Accounting for the Rebound Effect of Higher Fuel Economy
    9. Benefits From Increased Vehicle Use
    10. Added Costs From Congestion, Crashes, and Noise

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    11. Petroleum Consumption and Import Externalities
    12. Air Pollutant Emissions
    (a) Impacts on Criteria Pollutant Emissions
    (b) Reductions in CO2 Emissions
    (c) Economic Value of Reductions in CO2 Emissions
    13. The Value of Increased Driving Range
    14. Discounting Future Benefits and Costs
    15. Accounting for Uncertainty in Benefits and Costs
VI. How NHTSA Sets the CAFE Standards
    A. Which attributes does NHTSA use to determine the standards?
    B. Which mathematical function does NHTSA use to set the 
standards?
    C. What other types of standards did commenters propose?
    D. How does NHTSA fit the curve and estimate the stringency that 
maximizes net benefits to society?
    E. Why has NHTSA used the Volpe model to support its analysis?
VII. Determining the Appropriate Level of the Standards
    A. Analyzing the Preferred Alternative
    B. Alternative Levels of Stringency Considered for Establishment 
as the Maximum Feasible Level of Average Fuel Economy
    C. EPCA Provisions Relevant to the Selection of the Final 
Standards
    1. 35 in 2020
    2. Annual Ratable Increase
    3. Maximum Feasibility and the Four Underlying EPCA 
Considerations
    (a) Technological Feasibility
    (b) Economic Practicability
    (c) Effect of Other Motor Vehicle Standards of the Government on 
Fuel Economy
    (d) Need of the United States To Conserve Energy
    (i) Consumer Cost
    (ii) National Balance of Payments
    (iii) Environmental Implications
    (iv) Foreign Policy Considerations
    4. Comparison of Alternatives
    5. Other Considerations Under EPCA
    (a) Safety
    (b) AMFA Credits
    (c) Flexibility Mechanisms: Credits, Fines
    D. Analysis of Environmental Consequences in Selecting the Final 
Standards
    E. Picking the Final Standards
    1. Eliminating the Alternatives Facially Inconsistent With EPCA
    (a) No-Action Alternative
    (b) Technology Exhaustion Alternative
    2. Choosing Among the Remaining Alternatives
    (a) Difficulty and Importance of Achieving a Reasonable 
Balancing of the Factors
    (b) The Correct Balancing of the Factors for Setting the MY 2011 
Standards Is To Maximize Societal Net Benefits
VIII. Safety
    A. Summary of NHTSA's Approach in This Final Rule
    B. Background
    1. NHTSA's Early Studies
    2. The 2002 National Academy of Sciences Study
    3. NHTSA's updated 2003 Study
    4. Summary of Studies Prior to This Rulemaking
    B. Response to Comments in This Rulemaking on Safety and Vehicle
    Weight
    1. Views of Other Government Agencies
    2. Comments From Other Parties
    C. Comments on Other Issues Related to Safety
    1. Vehicle Compatibility Design Issues
    2. Whether Manufacturers Downweight in Response to Increased 
CAFE Stringency
    3. Whether Flat Standards Are More or Less Harmful to Safety 
Than Footprint-Based Standards
    4. Whether NHTSA Should Set Identical Targets for Passenger Cars 
and Light Trucks for Safety Reasons
    5. Whether NHTSA Should Have Considered the 2002 NAS Report 
Dissent in Deciding Not To Apply Material Substitution for Vehicles 
Under 5,000 Pounds
IX. The Final Fuel Economy Standards for MY 2011
    A. Final Passenger Car Standard
    B. Final Light Truck Standard
    C. Energy and Environmental Backstop
    D. Combined Fleet Performance
    E. Costs and Benefits of Final Standards
    1. Benefits
    2. Costs
    F. Environmental Impacts of Final Standards
X. Other Fuel Economy Standards Required by EISA
XI. Vehicle Classification
    A. Summary of Comments
    B. Response to Comments
    1. This Rule Substantially Tightens NHTSA's Vehicle 
Classification Definitions
    (a) Under Sec.  523.5(b), Only Vehicles That Actually Have 4WD 
Will Be Classified as 4WD Vehicles
    (b) The Final Rule Amends Sec.  523.5(a)(4) To Prevent Gaming 
That Might Jeopardize Fuel Savings Created by NHTSA's Clarified 
Position on 2WD Vehicles
    2. Especially as Tightened by This Rule, NHTSA's Classification 
Definitions Are More Difficult to Game Than Commenters Suggest
    3. Additional Changes in NHTSA's Classification Definitions 
Would Not Result in Greater Fuel Savings and Lower CO2 
Emissions
    4. The Vehicle Classification Definitions Embodied in This Final 
Rule Are Consistent With NHTSA's Statutory Authority and Respond to 
the Ninth Circuit's Opinion
XII. Flexibility Mechanisms and Enforcement
    A. NHTSA's Request for Comment Regarding Whether the Agency 
Should Consider Raising the Civil Penalty for CAFE Non-Compliance
    B. CAFE Credits
    C. Extension and Phasing Out of Flexible-Fuel Incentive Program
XIII. Test Procedure for Measuring Wheelbase and Track Width and 
Calculating Footprint
    A. Test Procedure Execution
    B. Measured Value Tolerances
    C. Administrative and Editorial Issues
XIV. Sensitivity and Monte Carlo Analysis
XV. NHTSA's Record of Decision
XVI. Regulatory Notices and Analyses
    A. Executive Order 12866 and DOT Regulatory Policies and 
Procedures
    B. National Environmental Policy Act
    1. Clean Air Act (CAA)
    2. National Historic Preservation Act (NHPA)
    3. Executive Order 12898 (Environmental Justice)
    4. Fish and Wildlife Conservation Act (FWCA)
    5. Coastal Zone Management Act (CZMA)
    6. Endangered Species Act (ESA)
    7. Floodplain Management (Executive Order 11988 & DOT Order 
5650.2)
    8. Preservation of the Nation's Wetlands (Executive Order 11990 
& DOT Order 5660.1a)
    9. Migratory Bird Treaty Act (MBTA), Bald and Golden Eagle 
Protection Act (BGEPA), Executive Order 13186
    10. Department of Transportation Act (Section 4(f))
    C. Regulatory Flexibility Act
    D. Executive Order 13132 (Federalism)
    E. Executive Order 12988 (Civil Justice Reform)
    F. Unfunded Mandates Reform Act
    G. Paperwork Reduction Act
    H. Regulation Identifier Number (RIN)
    J. Executive Order 13045
    K. National Technology Transfer and Advancement Act
    L. Executive Order 13211
    M. Department of Energy Review
    N. Privacy Act
XVII. Regulatory Text

I. Executive Overview

A. The President's January 26, 2009 Memorandum on CAFE Standards for 
Model Years 2011 and Beyond

1. Rulemaking Background
    On May 2, 2008, NHTSA published a Notice of Proposed Rulemaking 
entitled Average Fuel Economy Standards, Passenger Cars and Light 
Trucks; Model Years 2011-2015, 73 FR 24352. In mid-October, the agency 
completed and released a final environmental impact statement in 
anticipation of issuing standards for those years. Based on its 
consideration of the public comments and other available information, 
including information on the financial condition of the automotive 
industry, the agency adjusted its analysis and the standards and 
prepared a final rule for MYs 2011-2015. On November 14, the Office of 
Information and Regulatory Affairs (OIRA) of the Office of Management 
and Budget cleared the rule as consistent with the Order.\1\ However, 
issuance of the final rule was held in abeyance. On January 7, 2009,

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the Department of Transportation announced that the final rule would 
not be issued, saying:
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    \1\ Record of OIRA's action can be found at http://www.reginfo.gov/public/do/eoHistReviewSearch (last visited March 8, 
2009). To find the report on the clearance of the draft final rule, 
select ``Department of Transportation'' under ``Economically 
Significant Reviews Completed'' and select ``2008'' under ``Select 
Calendar Year.''

    The Bush Administration will not finalize its rulemaking on 
Corporate Fuel Economy Standards. The recent financial difficulties 
of the automobile industry will require the next administration to 
conduct a thorough review of matters affecting the industry, 
including how to effectively implement the Energy Independence and 
Security Act of 2007 (EISA). The National Highway Traffic Safety 
Administration has done significant work that will position the next 
Transportation Secretary to finalize a rule before the April 1, 2009 
deadline.\2\
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    \2\ The statement can be found at http://www.dot.gov/affairs/dot0109.htm (last accessed February 11, 2009).
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2. Requests in the President's Memorandum
    In light of the requirement to prescribe standards for MY 2011 by 
March 30, 2009 and in order to provide additional time to consider 
issues concerning the analysis used to determine the appropriate level 
of standards for MYs 2012 and beyond, the President issued a memorandum 
on January 26, 2009, requesting the Secretary of Transportation and 
Administrator \3\ of the National Highway Traffic Safety Administration 
NHTSA to divide the rulemaking into two parts: (1) MY 2011 standards, 
and (2) standards for MY 2012 and beyond.
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    \3\ Currently, the National Highway Traffic Safety 
Administration does not have an Administrator. Ronald L. Medford is 
the Acting Deputy Administrator.
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(a) CAFE Standards for Model Year 2011
    The request that the final rule establishing CAFE standards for MY 
2011 passenger cars and light trucks be prescribed by March 30, 2009 
was based on several factors. One was the requirement that the final 
rule regarding fuel economy standards for a given model year must be 
adopted at least 18 months before the beginning of that model year (49 
U.S.C. 32902(g)(2)). The other was that the beginning of MY 2011 is 
considered for the purposes of CAFE standard setting to be October 1, 
2010. As part of that final rule, the President requested that NHTSA 
consider whether any provisions regarding preemption are consistent 
with the EISA, the Supreme Court's decision in Massachusetts v. EPA and 
other relevant provisions of law and the policies underlying them.
(b) CAFE Standards for Model Years 2012 and Beyond
    The President requested that, before promulgating a final rule 
concerning the model years after model year 2011, NHTSA

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

    In addition, the President requested that NHTSA further consider 
whether any provisions regarding preemption are appropriate under 
applicable law and policy.
3. Implementing the President's Memorandum
    In keeping with the President's remarks on January 26 for new 
national policies to address the closely intertwined issues of energy 
independence, energy security and climate change, and for the 
initiation of serious and sustained domestic and international action 
to address them, NHTSA will develop CAFE standards for MY 2012 and 
beyond only after collecting new information, conducting a careful 
review of technical and economic inputs and assumptions, and standard 
setting methodology, and completing new analyses.
    For MY 2011, however, time limitations precluded the adoption of 
this approach. As noted above, EPCA requires that standards for that 
model year be established by the end of March of this year. Thus, 
immediate decisions had to be made about the establishment of the MY 
2011 standards. There was insufficient time between the issuance of the 
President's memorandum in late January and the end of March to revisit 
and, if and as appropriate, revise the extensive and complex analysis 
in any substantively significant way. This is particularly so given the 
requirement under EPCA to consult with the Environmental Protection 
Agency and the Department of Energy on these complicated and important 
technical matters. Decisions regarding those matters potentially affect 
not just NHTSA's CAFE rulemaking, but also programs of other 
departments and agencies. Accordingly, the methodologies, economic and 
technological inputs and decisionmaking criteria used in this rule are 
necessarily largely those developed by NHTSA in the fall of 2008.
    In looking ahead to the next CAFE rulemaking, the agency emphasizes 
that while the methodologies, economic and technological inputs and 
decisionmaking criteria used in this rule were well-supported choices 
for the purposes of the MY 2011 rulemaking, they were not the only 
reasonable choices that the agency could have made for that purpose. 
Many of the key aspects of this rulemaking reflect decisions among 
several reasonable alternatives. The choices made in the context of 
last fall may or may not be the choices that will be made in the 
context of the follow-on rulemaking.
    The deferral of action on the CAFE standards for the years after MY 
2011 provides the agency with an opportunity to review its approach to 
CAFE standard setting, including its methodologies, economic and 
technological inputs, and decisionmaking criteria. It is reasonable to 
anticipate that this process may lead to changes, given the further 
review and analysis that will be conducted pursuant to the President's 
request, and given the steady and potentially substantial evolution in 
technical and policy factors relevant to the next CAFE rulemaking. 
These factors include, but are not limited to, energy and climate 
change needs and policy choices regarding goals and approaches to 
achieving them, developments in domestic legislation and international 
negotiations regarding those goals and approaches, the financial health 
of the industry, technologies for reducing fuel consumption, fuel 
prices, and climate change science and damage valuation.
    The goal of the review and re-evaluation will be to ensure that the 
approach used for MY 2012 and thereafter produces standards that 
contribute, to the maximum extent possible under EPCA/EISA, to meeting 
the energy and environmental challenges and goals outlined by the 
President. We will seek to craft our program with the goal of creating 
the maximum incentives for innovation, providing flexibility to the 
regulated parties, and meeting the goal of making substantial and 
continuing reductions in the consumption of fuel. To that end, we are 
committed to ensuring that the CAFE program for beyond MY 2011 is based 
on the best scientific, technical, and economic information available, 
and that such information is developed in close coordination with other 
federal agencies and our stakeholders, including the states and the 
vehicle manufacturers.
    We will also re-examine EPCA, as amended by EISA, to consider 
whether additional opportunities exist for achieving the President's 
goals. For example, EPCA authorizes, within relatively narrow limits 
and subject to making specified findings, for increasing the amount of 
civil penalties

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for violating the CAFE standards.\4\ Further, while EPCA prohibits 
updating the test procedures used for measuring passenger car fuel 
economy, it places no such limitation on the test procedures for light 
trucks.\5\ If the test procedures used for light trucks were revised to 
provide for the operation of air conditioning during fuel economy 
testing, vehicle manufacturers would have a regulatory incentive to 
increase the efficiency and reduce the weight of air conditioning 
systems, thereby reducing fuel consumption and tailpipe emissions of 
CO2.
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    \4\ Under 49 U.S.C. 32904(c), EPA must ``use the same procedures 
for passenger automobiles the Administrator used for model year 1975 
(weighted 55 percent urban cycle and 45 percent highway cycle), or 
procedures that give comparable results.''
    \5\ 49 U.S.C. 32912(c).
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    In response to the President's request that NHTSA consider whether 
any provisions regarding preemption are consistent with EISA, the 
Supreme Court's decision in Massachusetts v. EPA and other relevant 
provisions of law and the policies underlying them, NHTSA has decided 
not to include any provisions addressing preemption in the Code of 
Federal Regulations at this time. The agency will re-examine the issue 
of preemption in the content of its forthcoming rulemaking to establish 
Corporate Average Fuel Economy standards for 2012 and later model 
years.

B. Energy Independence and Security Act of 2007

    The mandates in the Energy Independence and Security Act of 2007 
(EISA) \6\ for reducing fuel consumption by motor vehicles and 
expanding the production of renewable fuels represent major steps 
forward in promoting energy independence and security and in addressing 
climate change risks by reducing CO2 emissions. EISA 
requires the first statutory increase in fuel economy standards for 
passenger automobiles (referred to below as ``passenger cars'') since 
those standards were originally mandated in 1975. It also includes an 
important reform--switching to ``attribute-based standards.'' This 
switch will help to ensure that increased fuel efficiency does not come 
at the expense of automotive safety.
---------------------------------------------------------------------------

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

    More specifically, EISA made a number of important changes to EPCA. 
EISA:
     Establishes a statutory mandate to establish passenger car 
standards for each model year at the maximum feasible level and 
eliminates the old statutory default standard of 27.5 mpg for passenger 
cars and the provision giving us discretion to amend that default 
standard. Thus, given that there will no longer be a default standard, 
the agency must act affirmatively to establish a new passenger car 
standard for each model year.
     Retains the requirement to establish separate standards 
for passenger cars and light trucks and to set them at the maximum 
feasible level, but sets forth special requirements for the MY 2011-
2020 standards.
     The standards must increase ratably each year and, at a 
minimum, be set sufficiently high to ensure that the average fuel 
economy of the combined industry-wide fleet of all new passenger cars 
and light trucks sold in the United States during MY 2020 is at least 
35 mpg.\7\
---------------------------------------------------------------------------

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

     Mandates the reforming of CAFE standards for passenger 
cars by requiring that all CAFE standards be based on one or more 
vehicle attributes related to fuel economy (like size or weight). Fuel 
economy targets are set for individual vehicles and increase as the 
attribute decreases and vice versa. For example, size-based (i.e., 
size-indexed) standards assign higher fuel economy targets to smaller 
vehicles and lower ones to larger vehicles. Use of this approach helps 
to ensure that the improvements in fuel economy do not come at the 
expense of safety. NHTSA pioneered that approach in its last rulemaking 
on CAFE standards for light trucks.
     Requires that for each model year, beginning with MY 2011, 
each manufacturer's domestically-manufactured passenger car fleet must 
achieve a measured average fuel economy that is not less than 92 
percent of the average fuel economy of the combined industry-wide fleet 
of domestic and non-domestic passenger cars sold in the United States 
in that model year.
     Limits to five the number of model years for which 
standards can be established in a single rulemaking.
     Provides greater flexibility for automobile manufacturers 
by (a) increasing from three to five the number of years that a 
manufacturer can carry forward the compliance credits it earns by 
exceeding CAFE standards, (b) allowing a manufacturer to transfer the 
credits it has earned from one of its compliance categories of 
automobiles to another class, and (c) authorizing the trading of 
credits between manufacturers.

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

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

    \8\ 73 FR 24352, May 2, 2008. In a separate notice published on 
the same day, the agency requested automobile manufacturers to 
submit new product plans for MYs 2011-15. 73 FR 24190.
    \9\ Although Table V-3 Economic Values for Benefits Computations 
in the NPRM indicated that all of the values in that table were 
2006$, several values were actually in 2005$. Thus, the monopsony 
component, which was shown in that table as $0.176, should have been 
shown as $0.182. Likewise, the price shock component should have 
been $0.113, instead of $0.109. The sum of those two values should 
have been $0.295, not $0.285.

  Table I-1--NPRM Key Economic Values for Benefits Computations (2006$)
                                   \9\
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Fuel Prices (average retail gasoline price per gallon, 2011-       $2.34
 30).........................................................
Discount Rate Applied to Future Benefits.....................         7%
Economic Costs of Oil Imports ($/gallon):
    ``Monopsony'' Component..................................     $0.182

[[Page 14201]]

 
    Price Shock Component....................................     $0.113
    Military Security Component..............................  .........
                                                              ----------
        Total Economic Costs.................................     $0.295
Emission Damage Costs:
    Carbon Dioxide ($/metric ton)............................      $7.00
    Annual Increase in CO2 Damage Cost.......................       2.4%
------------------------------------------------------------------------

2. Standards
(a) Classification of Vehicles
    In the NPRM, the agency classified the vehicles subject to the 
proposed standards as passenger cars or as light trucks in the same way 
that the vehicles had been traditionally classified under the CAFE 
program. In particular, sport utility vehicles (SUVs), mini-vans and 
pickup trucks were classified as light trucks. However, the agency 
raised the possibility of reclassifying many of the two-wheel drive 
SUVs as passenger cars for the purposes of the final rule.
(b) Stringency
    We proposed setting separate attribute-based fuel economy standards 
for passenger cars and light trucks consistent with the size-based 
approach that NHTSA used in establishing the light truck standards for 
MY 2008-2011 light trucks.
    Compared to the April 2006 final rule that established those 
attribute-based standards, the NPRM more thoroughly evaluated the value 
of the costs and benefits of setting CAFE standards. This was important 
because assumptions regarding projected gasoline prices, along with 
assumptions about the value of reducing the negative externalities 
(economic and environmental) from producing and consuming fuel, were 
based on changed economic, environmental, and energy security 
conditions. These environmental externalities include, among other 
things, an estimation of the value of reducing tailpipe emissions of 
CO2.\10\
---------------------------------------------------------------------------

    \10\ The externalities included in our analysis do not, however, 
include those associated with the reduction of the other GHG emitted 
by automobiles, i.e., methane (CH4), nitrous oxide 
(N2O), and hydroflurocarbons (HFCs). Actual air 
conditioner operation is not included in the test procedures used to 
obtain both (1) emission rates for purposes of determining 
compliance with EPA criteria pollutant emission standards and (2) 
fuel economy values for purposes of determining compliance with 
NHTSA CAFE standards, although air conditioner operation is included 
in ``supplemental'' federal test procedures used to determine 
compliance with corresponding and separate EPA criteria pollutant 
emission standards. As noted above, EPCA precludes basing passenger 
car standards on those other test procedures, but places no such 
limit on the test procedures used as the basis for light truck 
standards.
---------------------------------------------------------------------------

    In light of EISA and the need to balance the statutory 
considerations in a way that reflects the current need of the nation to 
conserve energy, including the current assessment of climate change 
risks, the agency revisited the various assumptions used to determine 
the level of the standards. Specifically, the agency used higher 
gasoline prices and higher estimates for energy security values ($0.29 
per gallon instead of $0.09 per gallon). The agency also monetized 
carbon dioxide (at $7.00/ton), which it did not do in the previous 
rulemaking, and expanded the list of technologies it used in assessing 
the capability of manufacturers to improve fuel economy. In addition, 
the agency used cost estimates that reflect economies of scale and 
estimated ``learning''-driven reductions in the cost of technologies as 
well as quicker penetration rates for advanced technologies.
    The agency could not set out the exact level of CAFE that each 
manufacturer would be required to meet for each model year under the 
passenger car or light truck standards since the levels would depend on 
information that would not be available until the end of each of the 
model years, i.e., the final actual production figures for each of 
those years. The agency could, however, project what the industry-wide 
level of average fuel economy would be for passenger cars and for light 
trucks if each manufacturer produced its expected mix of automobiles 
and just met its obligations under the proposed ``optimized'' standards 
for each model year. Adjacent to each average fuel economy figure in 
the NPRM was the estimated associated level of tailpipe emissions of 
CO2 that would be achieved.\11\
---------------------------------------------------------------------------

    \11\ Given the contributions made by CAFE standards to 
addressing not only energy independence and security, but also to 
reducing tailpipe emissions of CO2, fleet performance was 
stated in the above discussion both in terms of fuel economy and the 
associated reductions in tailpipe emissions of CO2 since 
the CAFE standards would have the practical effect of limiting those 
emissions approximately to the indicated levels during the official 
CAFE test procedures established by EPA. The relationship between 
fuel consumption and carbon dioxide emissions is discussed 
ubiquitously, such as at www.fueleconomy.gov, a fuel economy-related 
web site managed by DOE and EPA (see http://www.fueleconomy.gov/feg/contentIncludes/co2_inc.htm, which provides a rounded value of 20 
pounds of CO2 per gallon of gasoline). (Last accessed 
March 8, 2009.) The CO2 emission rates shown were based 
on gasoline characteristics. Because diesel fuel contains more 
carbon (per gallon) than gasoline, the presence of diesel engines in 
the fleet--which NHTSA expects to increase in response to the 
proposed CAFE standards--will cause the actual CO2 
emission rate corresponding to any given CAFE level to be slightly 
higher than shown here. (The agency projected that 4 percent of the 
MY 2015 passenger car fleet and 10 percent of the MY 2015 light 
truck fleet would have diesel engines.) Conversely (and 
hypothetically), applying the same CO2 emission standard 
to both gasoline and diesel vehicles would discourage manufacturers 
from improving diesel engines, which show considerable promise as a 
means to improve fuel economy.
---------------------------------------------------------------------------

    For passenger cars:

MY 2011: 31.2 mpg (285 g/mi of tailpipe emissions of CO2)
MY 2012: 32.8 mpg (271 g/mi of tailpipe emissions of CO2)
MY 2013: 34.0 mpg (261 g/mi of tailpipe emissions of CO2)
MY 2014: 34.8 mpg (255 g/mi of tailpipe emissions of CO2)
MY 2015: 35.7 mpg (249 g/mi of tailpipe emissions of CO2)

    For light trucks:

MY 2011: 25.0 mpg (355 g/mi of tailpipe emissions of CO2)
MY 2012: 26.4 mpg (337 g/mi of tailpipe emissions of CO2)
MY 2013: 27.8 mpg (320 g/mi of tailpipe emissions of CO2)
MY 2014: 28.2 mpg (315 g/mi of tailpipe emissions of CO2)
MY 2015: 28.6 mpg (310 g/mi of tailpipe emissions of CO2)

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

MY 2011: 27.8 mpg (2.5 mpg increase above MY 2010; 320 g/mi 
CO2)
MY 2012: 29.2 mpg (1.4 mpg increase above MY 2011; 304 g/mi 
CO2)
MY 2013: 30.5 mpg (1.3 mpg increase above MY 2012; 291 g/mi 
CO2)
MY 2014: 31.0 mpg (0.5 mpg increase above MY 2013; 287 g/mi 
CO2)
MY 2015: 31.6 mpg (0.6 mpg increase above MY 2014; 281 g/mi 
CO2)

    The annual average increase during this five year period was 
approximately

[[Page 14202]]

4.5 percent. Due to the uneven distribution of new model introductions 
during this period and to the fact that significant technological 
changes could be most readily made in conjunction with those 
introductions, the annual percentage increases were greater in the 
early years in this period.
(c) Benefits and Costs
(i) Benefits
    We estimated that the proposed standards for the five-year period 
would save approximately 54.7 billion gallons of fuel (18.7 billion 
gallons for passenger cars and 36 billion gallons for light trucks) and 
reduce tailpipe CO2 emissions by 521 million metric tons 
(178 million metric tons for passenger cars and 343 million metric tons 
for light trucks) over the lifetime of the vehicles sold during those 
model years, compared to the fuel use and emissions reductions that 
would occur if the standards remained at the adjusted baseline (i.e., 
the higher of manufacturer's plans and the manufacturer's required 
level of average fuel economy for MY 2010).
    We estimated that the value of the total benefits of the proposed 
standards would be approximately $88 billion ($31 billion for passenger 
cars and $57 billion for light trucks) over the lifetime of the 
vehicles sold during those model years.
(ii) Costs
    The total costs for manufacturers to comply with the standards for 
the five-year period would be approximately $47 billion ($16 billion 
for passenger cars and $31 for light trucks) compared to the costs they 
would incur if the standards remained at the adjusted baseline.
(d) Effect of Flexibilities on Benefits and Costs
    The above benefit and cost estimates did not reflect the 
availability and use of flexibility mechanisms, such as compliance 
credits and credit trading, because EPCA prohibits NHTSA from 
considering the effects of those mechanisms in setting CAFE standards. 
However, the agency noted that, in reality, manufacturers were likely 
to rely to some extent on flexibility mechanisms provided by EPCA and 
would thereby reduce the cost of complying with the proposed standards 
to a meaningful extent.
3. Credits
    NHTSA also proposed a new Part 536 on trading and transferring 
``credits'' earned for exceeding applicable CAFE standards.\12\ Under 
the proposed Part 536, credit holders (including, but not limited to, 
manufacturers) would have credit accounts with NHTSA, and would be able 
to hold credits, apply them to compliance with CAFE standards, transfer 
them to another ``compliance category'' for application to compliance 
there, or trade them. Traded credits would be subject to an 
``adjustment factor'' to ensure total oil savings are preserved, as 
required by EISA. EISA also prohibits credits earned before MY 2011 
from being transferred, so NHTSA developed several regulatory 
restrictions on trading and transferring to facilitate Congress' intent 
in this regard.
---------------------------------------------------------------------------

    \12\ Congress required that DOT establish a credit 
``transferring'' regulation, to allow individual manufacturers to 
move credits from one of their fleets to another (e.g., using a 
credit earned for exceeding the light truck standard for compliance 
in the domestic passenger car standard). Congress allowed DOT to 
establish a credit ``trading'' regulation, so that credits may be 
bought and sold between manufacturers and other parties.
---------------------------------------------------------------------------

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

D. Brief Summary of Public Comments on the NPRM

    Standard stringency: Automobile manufacturers argued that the 
standards, especially those for light trucks in the early years, should 
be lower. Environmental and consumer groups and states wanted higher 
standards throughout the five-year period.
    Footprint attribute: Commenters generally supported the agency's 
choice of footprint as an attribute, although several urged 
consideration of additional attributes and a few argued for different 
attributes.
    Setting standards at levels at which net benefits are projected to 
be maximized (optimized standards) vs. using other decision-making 
formulae: A consumer group urged setting standards at the optimized + 
50% alternative level, while some environmental groups favored setting 
them at levels at which total benefits equal total costs. Manufacturers 
contended that the optimized approach does not assure economic 
practicability, especially for manufacturers needing to borrow at high 
interest rates to finance design changes. A manufacturer association 
and other commenters said agency did not assess the ability of the 
manufacturers to raise the capital necessary to develop and implement 
sufficient technologies.
    Front-loading/ratable increase: Some commenters, especially the 
manufacturers, argued that the statutory requirement for ``ratable'' 
increases in standards means that the increases must be proportional or 
at least must not be disproportionately large or small in relation to 
one another. They did not discuss how that requirement is to be read 
together with either the statutory requirement to set standards for 
each model year at the level that is the maximum feasible level for 
that model year, or the separate statutory requirement for the overall 
fleet to achieve at least 35 mpg.
    Key economic and other assumptions affecting stringency--
     Technology costs and effectiveness--The manufacturers said 
that NHTSA underestimated the costs. A manufacturer association 
submitted a study by Sierra Research challenging the cost and 
effectiveness estimates developed by NHTSA and EPA for the NPRM.
     Fuel prices--A manufacturer association and dealer 
associations said that Energy Information Administration's (EIA) 
reference case should be used. Environmental and consumer groups, 
states and some members of Congress said NHTSA should use at least the 
EIA high price case. The EIA Administrator stated at a June 2008 
Congressional hearing that the then current prices were at or above 
EIA's high case and that he would use that case in the CAFE rulemaking.
     Discount rate--The manufacturers said the rate should be 
at least 7%, while environmental and consumer groups and states said it 
should not be greater than 3 percent.
     Military costs--Many commenters argued that NHTSA should 
place a value other than zero on military security externalities.
     Social cost of carbon--Some commenters said the domestic 
value of reducing CO2 emissions should be lower than the 
NPRM value of $7; environmental and consumer groups and states said it 
should be much higher. The former tended to favor a value reflecting 
damage to the U.S. only, while the latter favored a global value.
     Weight reduction--States and environmental and consumer 
groups said that NHTSA should consider downweighting for vehicles under 
5,000 lbs; an insurance safety research group supported the proposal 
not to consider that.
    Rate of application of advanced technologies (diesels and hybrids):

[[Page 14203]]

Manufacturers argued that NHTSA was overly optimistic; environmental/
consumer groups and states argued that NHTSA relied too much on 
manufacturer product plans and should require manufacturers to improve 
fuel economy more quickly.
    Fitting of standard curve to data: A manufacturer association and 
two manufacturers questioned the empirical and technical bases for the 
shape of the curves.
    Steepness of car standard curve: The two manufacturer associations 
and several environmental groups said that the proposed car curves were 
too steep: manufacturers did so because of impracticability; 
environmental groups, because of what they saw as an incentive to 
increase vehicle size.
    Backstop standard: Environmental and consumer groups argued that 
NHTSA must establish absolute backstop standards for all vehicles. 
Manufacturers argued that anti-backsliding features of the attribute-
based standards function as a backstop.
    ``SUV loophole'': In general, manufacturers agreed with the 
agency's decision to reclassify 2 WD SUVs from the light truck fleet to 
the passenger car fleet, as long as this change would take effect after 
MY 2010. Environmental and consumer groups argued that the 
classification system should be further revised to address ``gaming'' 
and did not address the agency's justification for the proposed 
revisions.
    Credits: Manufacturers argued that earned carry forward/back 
credits, as long as they were not acquired by transfer or trade, should 
be available to meet the minimum standard for domestic cars. 
Manufacturers also requested flexibility to manage their own credit 
shortfalls, instead of having the agency automatically decide upon and 
implement plans for them. One manufacturer asked that the new statutory 
provision giving credits a 5 year life be applied to all existing 
credits, instead of only those credits earned in model year 2009 or 
thereafter.
    Impact on small/limited-line manufacturers: Small/limited-line 
manufacturers argued that the proposed standards impact them more than 
full-line manufacturers, and requested either that the car standards be 
set based on the plans of all car manufacturers, instead of just the 
seven largest, or that some alternative form of standard be set for 
them.
    Preemption: Manufacturers argued that the effects of state 
regulation of CO2 emissions are ``related to'' the 
regulation of fuel economy within the meaning of section 32919(a) of 
EPCA; environmental and consumer groups and states argued that the 
purpose of regulating CO2 emissions may overlap with, but is 
different from the purpose of regulating fuel economy

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

    There were a number of changes after the NPRM that made possible 
analytical improvements for the final rule. These changes also caused 
the CAFE levels, fuel savings, and CO2 emissions that are 
attributable to each alternative and scenario examined for this final 
rule to differ from those presented in the NPRM.
1. New Manufacturer Product Plans
    As discussed in the NPRM, the agency requested new product plans 
from manufacturers to aid in determining appropriate standards for the 
final rule. The product plans submitted in May 2007 naturally did not 
take into consideration the later passage of EISA and its minimum 35 
mpg combined fleet requirement by 2020. In addition, during that time, 
the fuel prices rose substantially.
    The new product plans submitted in the summer of 2008 in response 
to the NPRM reflect those new realities in a couple of ways. First, 
companies provided product plans that reflected the manufacturers' 
implementation of some of the cost-effective technologies that the 
agency had projected in the NPRM. This increased the baseline against 
which the fuel saving from the standards are calculated. As a result, 
some of the savings and CO2 emission reductions that were 
attributed in the NPRM to the rulemaking action are now attributed to 
actions taken ``independently by the manufacturers, as reflected in the 
improved product plans. Second, the size of the overall fleet had 
declined from the time of the NPRM to the final rule, resulting in 
fewer vehicle miles traveled.
2. Revised Assessment of Technology Effectiveness and Costs
    With the aid of an expert consulting firm, NHTSA revised the 
technology assumptions in the NPRM based on comments and new 
information received during the comment period and used those revised 
assumptions for analyzing alternatives and scenarios for the Final 
Environmental Impact Assessment (FEIS) and final rule. In several 
cases, the agency concluded on the basis of analysis of that additional 
information that the costs in the NPRM and Draft EIS were 
underestimated and benefits overestimated, and in most cases, these 
estimates were not well differentiated by vehicle class. The agency 
also revised its phase-in schedule of the technologies to account more 
fully for needed lead time.
3. Final Environmental Impact Statement
    With the aid of an expert consulting firm, the agency completed a 
final environmental impact statement (FEIS), the first FEIS prepared by 
a federal agency to examine climate change issues comprehensively.\13\ 
The FEIS examines the climate change and other environmental effects of 
the changes in emissions of greenhouse gases and criteria air 
pollutants resulting from a wide variety of alternative standards. For 
this purpose, the agency relied extensively on the 2007 reports of the 
Intergovernmental Panel on Climate Change and contracted with ICF 
International to perform climate modeling. That impact statement also 
carefully assesses the cumulative impacts of past, present and future 
CAFE rulemakings.
---------------------------------------------------------------------------

    \13\ The Final Environmental Impact Statement can be found on 
the NHTSA website at http://www.nhtsa.gov/staticfiles/DOT/NHTSA/Rulemaking/Rules/Associated%20Files/CAFE%20FEIS.pdf (last accessed 
March 8, 2009).
---------------------------------------------------------------------------

F. Final Rule for MY 2011

1. Introduction
    As discussed above, and at length later in this rule, NHTSA's 
review and analysis of comments on its proposal have led the agency to 
make many changes to its methods for analyzing potential MY 2011 CAFE 
standards, as well as to the data and other information to which the 
agency has applied these methods. The following are some of the more 
prominent changes:
     After receiving, reviewing, and integrating updated 
product plans from vehicle manufacturers, NHTSA has revised its 
forecast of the future light vehicle market.
     NHTSA has changed the methods and inputs it uses to 
represent the applicability, availability, cost, and effectiveness of 
future fuel-saving technologies.
     NHTSA has based its fuel price forecast on the AEO 2008 
High Case price scenario instead of the AEO 2008 Reference Case.
     NHTSA has reduced mileage accumulation estimates (i.e., 
vehicle miles traveled) to levels consistent with this increased fuel 
price forecast.
     NHTSA has applied increased estimates for the value of oil 
import externalities.
     NHTSA has now included all manufacturers--not just the 
largest

[[Page 14204]]

seven--in the process used to fit the curve and estimate the stringency 
at which societal net benefits are maximized.
     NHTSA has tightened its application of the definition of 
``nonpassenger automobiles,'' causing a reassigning of over one million 
vehicles from the light truck fleet to the passenger car fleet.
     NHTSA has now fitted the shape of the curve based on 
``exhaustion'' of available technologies instead of on manufacturer-
level optimization of CAFE levels.
    These changes affected both the shape and stringency of the 
attribute-based standards. Taken together, the last three of the above 
changes reduced the steepness of the curves defining fuel economy 
targets for passenger cars, and also less significantly reduced the 
steepness of the light truck curves.
    NHTSA recognizes that, when considered in isolation, some of the 
above changes might, on an ``intuitive'' basis, be expected to result 
in higher average required fuel economy levels. For example, setting 
aside other changes, the increase in estimated fuel prices and oil 
import externalities might be expected to result in higher average fuel 
economy requirements. On the other hand, again setting aside other 
changes, the updated characterization of fuel-saving technologies, the 
reassignment of over one million vehicles to the passenger car fleet, 
the reduction in mileage accumulation, and the inclusion of all 
manufacturers in the standard setting process might intuitively be 
expected to result in lower average fuel economy requirements.
    However, there are theoretical reasons for which even such isolated 
expectations might not be met. For example, if a change in inputs 
caused societal net benefits to increase equally at all stringencies, 
the level of stringency that maximized societal net benefits would 
remain unchanged, although it would produce greater net benefits after 
the change in inputs. Further, some of the changes listed above are 
interdependent, making it difficult, if not impossible, to isolate the 
effect attributable to every change. For example, NHTSA applied the 
reduced mileage accumulation, which reduces the benefits of adding 
technology, in conjunction with applying increased fuel prices, which 
increase the benefits of adding technology.
    There is no obvious way to determine reliably the net effect of all 
these (and other) changes short of applying all of the revised values 
to the model and looking at the results. We devote a good deal of the 
preamble discussion to these changes and their net implications for the 
standards in this rule.
    The final rule reflects the combined effect of all of these 
changes, as well as minor changes not listed above.
2. Key Economic Values for Benefits Computations
    NHTSA's analysis of the final standards and alternative CAFE 
standards for MYs 2011 relied on an expanded range of information and 
revised economic estimates and input parameters. These economic 
assumptions played a role in the determination of the level of the 
standards, with some having greater impacts than others. The agency, 
following discussions with other agencies of the U.S. government, 
updated its estimate of the global value of the social cost of carbon 
(i.e., the value of reducing CO2 emissions) and developed a 
domestic value, as well as updated its estimates for other 
externalities based on comments and updated information received during 
the comment period. Specifically, the final standards are based the 
following revised economic assumptions:

   Table I-2--Final Rule Key Economic Values for Benefits Computations
                                 (2007$)
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Fuel Prices (average retail gasoline price per gallon, 2011-       $3.33
 30)........................................................
Discount Rates Applied to Future Benefits:
    Reductions in CO2 Emissions.............................          3%
    Other Benefits..........................................          7%
Economic Costs of Oil Imports ($/gallon):
     ``Monopsony'' Component................................       $0.27
    Price Shock Component...................................       $0.12
    Military Security Component.............................  ..........
                                                             -----------
        Total Economic Costs................................       $0.39
Emission Damage Costs:
    Carbon Dioxide ($/metric ton):
        (U.S. domestic value)...............................    14 $2.00
        (Mean global value from Tol (2008)).................      $33.00
        (One standard deviation above mean global value)....      $80.00
    Annual Increase in CO2 Damage Cost......................        2.4%
------------------------------------------------------------------------

3. Standards
(a) Classification
    In the NPRM, the two-wheel drive sport-utility vehicles (2WD SUVs) 
were classified in the same way they were classified by their 
manufacturers in their May 2007 product plans. For the purposes of this 
final rule, however, they were reclassified in accordance with the 
discussion in the NPRM of the proper classification of those vehicles. 
This resulted in the shifting of over one million two-wheel drive 
vehicles from the truck fleet to the car fleet. This shift had the 
effect of lowering the average fuel economy for cars due to the 
inclusion of vehicles previously categorized as trucks, and lowered 
average fuel economy for trucks because the truck category now has a 
larger proportion of heavier trucks. Following our careful 
consideration of the public comments on that discussion, we reaffirm 
the reasoning and conclusions of that discussion.
---------------------------------------------------------------------------

    \14\ Derived from NHTSA's $33 per metric ton estimate of the 
global value of reducing CO2 emissions.
---------------------------------------------------------------------------

(b) Stringency
    This final rule establishes footprint-based fuel economy standards 
for MY 2011 passenger cars and light trucks.
    Each vehicle manufacturer's required level of CAFE is based on 
target levels of average fuel economy set for vehicles of different 
sizes and on the distribution of that manufacturer's vehicles among 
those sizes. Size is defined by vehicle footprint. The curves defining 
the performance target at each footprint reflect the technological and 
economic capabilities of the industry. The target for each footprint is 
the same for all

[[Page 14205]]

manufacturers, regardless of differences in their overall fleet mix. 
Compliance will be determined by comparing a manufacturer's 
harmonically averaged fleet fuel economy levels in a model year with a 
required fuel economy level calculated using the manufacturer's actual 
production levels and the targets for each footprint of the vehicles 
that it produces.
    The standards were developed with the aid of a computer model 
(known as the ``Volpe Model''). NHTSA uses the Volpe model as a tool to 
inform its consideration of potential CAFE standards for MY 2011. The 
Volpe model requires the following types of information as inputs: (1) 
A forecast of the future vehicle market, (2) estimates of the 
availability, applicability, and incremental effectiveness and cost of 
fuel-saving technologies, (3) estimates of vehicle survival and mileage 
accumulation patterns, the rebound effect, future fuel prices, the 
social cost of carbon, and many other economic factors, (4) fuel 
characteristics and vehicular emissions rates, and (5) coefficients 
defining the shape and level of CAFE curves to be examined. These 
inputs are selected by the agency based on best available information 
and data.
    The agency analyzed seven regulatory alternatives, one of which 
maximizes net benefits within the limits of available information and 
is known as the ``optimized standards.'' The optimized standards are 
set at levels, such that, considering all of the manufacturers 
together, no other alternative is estimated to produce greater net 
benefits to society. Those net benefits reflect the difference between 
(1) the present value of all monetized benefits of the standards, and 
(2) the total costs of all technologies applied in response to the 
standards. Many of the other alternative standards exceed the level at 
which the estimated net benefits are maximized, including one 
alternative in which standards are set at a level at which total costs 
equal total benefits and another alternative set at a level of maximum 
technology application without regard to cost. For each alternative, 
the model estimates the costs associated with additional technology 
utilization, as well as accompanying changes in travel demand, fuel 
consumption, fuel outlays, emissions, and economic externalities 
related to petroleum consumption and other factors. These comprehensive 
analyses, which also included scenarios with different economic input 
assumptions as presented in the Final Environmental Impact Statement 
(FEIS) and the Final Regulatory Impact Analysis (FRIA), informed and 
contributed to the agency's consideration of the ``need of the United 
States to conserve energy,'' as well as the other statutory factors in 
49 U.S.C. 32902(f), and safety impacts. In addition, they informed the 
agency's consideration of environmental impacts under NEPA. The agency 
identified the optimized standards as its preferred alternative in the 
FEIS.
    NHTSA considered the results of analyses conducted on alternative 
standards for MY 2011 by the Volpe model and analyses conducted outside 
of the Volpe model, including analysis of the impacts of emissions of 
carbon dioxide and criteria pollutants, and analysis of which 
technologies are available now and which will not be available until 
the longer term, and analysis of the extent to which changes in vehicle 
prices and fuel economy might affect vehicle production and sales. 
Further, NHTSA considered whether it could expedite the entry of any 
technologies into the market through these standards. Using all of this 
information, the agency considered the governing statutory factors, 
along with environmental issues and other relevant societal issues such 
as safety, and is promulgating the maximum feasible standards based on 
its best judgment on how to balance these factors.
    Upon a considered analysis of all information available, including 
all information submitted to NHTSA in comments, the agency is adopting 
the ``optimized standard'' alternative as the final standards for MY 
2011.\15\ We note that we used the Volpe Model in the last two light 
truck rulemakings and that we adopted ``optimized standards'' in the 
last light truck rulemaking. We believe that use of the Volpe model is 
a valid and objective way to establish attribute-based standards under 
EPCA. Further, by limiting the standards to levels that can be achieved 
using technologies each of which are estimated to provide benefits that 
at least equal its costs, the net benefit maximization approach helps 
to assure the marketability of the manufacturers' vehicles and thus 
economic practicability of the standards.
---------------------------------------------------------------------------

    \15\ The agency notes, for NEPA purposes, that the ``optimized 
standard'' alternative adopted as the final standards corresponds to 
the ``Optimized Mid-2'' scenario described in Section 2.2.2 of the 
FEIS.
---------------------------------------------------------------------------

    Providing this assurance assumes increased importance in view of 
current and anticipated conditions in the industry in particular and 
the economy in general. As has been widely reported in the public 
domain throughout this rulemaking, and as shown in public comments, the 
national and global economies raise serious concerns. Even before those 
recent developments, the automobile manufacturers were already facing 
substantial difficulties. Together, these problems have made NHTSA's 
economic practicability analysis particularly important and challenging 
in this rulemaking.
    The agency cannot set out the exact level of CAFE that each 
manufacturer will be required to meet for MY 2011 under the passenger 
car or light truck standards because the levels will depend on 
information that will not be available until the end of that model 
year, i.e., the final actual production figures for that year. The 
agency can, however, project what the industry-wide level of average 
fuel economy will be for passenger cars and for light trucks if each 
manufacturer produced its expected mix of automobiles and just met its 
obligations under the ``optimized'' standards. Adjacent to each average 
fuel economy figure is the estimated associated level of tailpipe 
emissions of CO2 that will be achieved.\16\
---------------------------------------------------------------------------

    \16\ See supra note 6.

MY 2011 passenger cars: 30.2 mpg (294 g/mi of tailpipe emissions of 
CO2)
MY 2011 light trucks: 24.1 mpg (369 g/mi of tailpipe emissions of 
CO2)

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

MY 2011: 27.3 mpg (2.0 mpg increase above MY 2010; 326 g/mi 
CO2)

    In addition, per EISA, each manufacturer's domestic passenger fleet 
is required in MY 2011 to achieve 27.5 mpg or 92 percent of the CAFE of 
the industry-wide combined fleet of domestic and non-domestic passenger 
cars \17\ for that model year, whichever is higher. This requirement 
results in the following alternative minimum standard (not attribute-
based) for domestic passenger cars:
---------------------------------------------------------------------------

    \17\ Those numbers set out several paragraphs above.

MY 2011: 27.8 mpg (320 g/mi of tailpipe emissions of CO2)
(c) Benefits and Costs
(i) Benefits
    We estimate that the MY 2011 standards will save approximately 887 
million gallons of fuel and reduce tailpipe emissions of CO2 
by 8.3 million metric tons.

[[Page 14206]]

    For passenger cars, the standards will save approximately 463 
million gallons of fuel and reduce tailpipe CO2 emissions by 
4.3 million metric tons over the lifetime of the MY 2011 passenger 
cars, compared to the fuel savings and emissions reductions that would 
occur if the standards remained at the adjusted baseline (i.e., the 
higher of manufacturer's plans and the manufacturer's required level of 
average fuel economy for MY 2010). The value of the total benefits of 
the passenger car standards are estimated to be slight over $1 billion 
\18\ over the lifetime of the MY 2011 cars. This estimate of societal 
benefits includes direct impacts from lower fuel consumption as well as 
externalities and also reflects offsetting societal costs resulting 
from the rebound effect.
---------------------------------------------------------------------------

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

    We estimate that the standards for light trucks will save 
approximately 424 million gallons of fuel and prevent the tailpipe 
emission of 4.0 million metric tons of CO2 over the lifetime 
of the light trucks sold during those model years, compared to the fuel 
savings and emissions reductions that would occur if the standards 
remained at the adjusted baseline. The value of the total benefits of 
the light truck standards will be approximately $921 million \19\ over 
the lifetime of the MY 2011 light trucks. This estimate of societal 
benefits includes direct impacts from lower fuel consumption as well as 
externalities and also reflects offsetting societal costs resulting 
from the rebound effect.
---------------------------------------------------------------------------

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

(ii) Costs
    NHTSA estimates that, as a result of the final standards for MY 
2011, manufacturers will incur costs of approximately $1.460 billion 
for additional fuel-saving technologies, compared to the costs they 
would incur if the standards remained at MY 2010 levels.
    For passenger cars, we estimate that manufacturers will incur costs 
of approximately $595 million for additional fuel-saving technologies, 
compared to the costs they would incur if the standards remained at MY 
2010 levels. Our estimate is that the resulting vehicle price increases 
to buyers of MY 2011 passenger cars will be recovered or paid back \20\ 
in additional fuel savings in an average of 4.4 years (53 months), 
assuming fuel prices ranging from $2.95 per gallon in 2011 to $3.62 per 
gallon in 2030.\21\
---------------------------------------------------------------------------

    \20\ See Section V.B.5 below for discussion of payback period.
    \21\ The fuel prices (shown here in 2007 dollars) used to 
calculate the length of the payback period are those projected 
(Annual Energy Outlook 2008) by the Energy Information 
Administration over the life of the MY 2011 light trucks, not 
current fuel prices.
---------------------------------------------------------------------------

    The agency further estimates that, in response to the final 
standards for MY 2011 light trucks, manufacturers will incur costs of 
approximately $865 million for additional fuel-saving technologies, 
compared to the costs they would incur if the standards remained at MY 
2010 levels. We estimate that the resulting vehicle price increases to 
buyers of MY 2011 light trucks will be paid back in additional fuel 
savings in an average of 7.7 years (92 months), assuming the same fuel 
prices as mentioned above.
(d) Flexibilities
    Manufacturers are likely to rely extensively on flexibility 
mechanisms provided by EPCA (as described in Section XII) and will 
thereby reduce the costs (and benefits) of complying with the standards 
to a meaningful extent. However, the benefit and compliance cost 
estimates used by the agency in determining the maximum feasible level 
of the CAFE standards and shown above assume that manufacturers will 
rely solely on the installation of fuel economy technology to achieve 
compliance with the standards. The estimates do not reflect the 
availability and use of flexibility mechanisms, such as compliance 
credits and credit trading. The reason for this is because EPCA 
prohibits NHTSA from considering the effects of those mechanisms in 
setting CAFE standards. EPCA has precluded consideration of the FFV 
adjustments ever since it was amended to provide for those adjustments. 
The prohibition against considering compliance credits was added by 
EISA.
4. Credits
    NHTSA is also adopting a new Part 536 on use of ``credits'' earned 
for exceeding applicable CAFE standards. Part 536 will implement the 
provisions in EISA authorizing NHTSA to establish by regulation a 
credit trading program and directing it to establish by regulation a 
credit transfer program.\22\ Since its enactment, EPCA has permitted 
manufacturers to earn credits for exceeding the standards and to apply 
those credits to compliance obligations in years other than the model 
year in which it was earned. EISA extended the ``carry-forward'' period 
to five model years, and left the ``carry-back'' period at three model 
years. Under Part 536, credit holders (including, but not limited to, 
manufacturers) will have credit accounts with NHTSA, and will be able 
to hold credits, apply them to compliance with CAFE standards, transfer 
them to another ``compliance category'' for application to compliance 
there, or trade them. A credit may also be cancelled before its expiry 
date, if the credit holder so chooses. Traded and transferred credits 
will be subject to an ``adjustment factor'' to ensure total oil savings 
are preserved, as required by EISA. EISA also prohibits credits earned 
before MY 2011 from being transferred, so NHTSA has developed several 
regulatory restrictions on trading and transferring to facilitate 
Congress' intent in this regard. Additional information on Part 536 is 
available in Section XII below.
---------------------------------------------------------------------------

    \22\ Congress required that DOT establish a credit 
``transferring'' regulation, to allow individual manufacturers to 
move credits from one of their fleets to another (e.g., using a 
credit earned for exceeding the light truck standard for compliance 
with the domestic passenger car standard). Congress allowed DOT to 
establish a credit ``trading'' regulation, so that credits may be 
bought and sold between manufacturers and other parties.
---------------------------------------------------------------------------

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

II. Background

A. Role of Fuel Economy Improvements in Promoting Energy Independence, 
Energy Security, and a Low Carbon Economy

    Improving vehicle fuel economy has been long and widely recognized 
as one of the key ways of achieving energy independence, energy 
security, and a low carbon economy.\23\ Most recently,

[[Page 14207]]

the United Nations Environment Programme, International Energy Agency, 
International Transport Forum and FIA Foundation released a report \24\ 
in March 2009 calling for a 50 percent increase in fuel economy in 
response to predictions by the IEA that fuel consumption and 
CO2 emissions from the global light duty fleet will 
otherwise roughly double between 2000 and 2050.
---------------------------------------------------------------------------

    \23\ Among the reports and studies noting this point are the 
following:
    John Podesta, Todd Stern and Kim Batten, ``Capturing the Energy 
Opportunity; Creating a Low-Carbon Economy,'' Center for American 
Progress (November 2007), pp. 2, 6, 8, and 24-29, Available at: 
http://www.americanprogress.org/issues/2007/11/pdf/energy_chapter.pdf (last accessed March 8, 2009).
    Sarah Ladislaw, Kathryn Zyla, Jonathan Pershing, Frank 
Verrastro, Jenna Goodward, David Pumphrey, and Britt Staley, ``A 
Roadmap for a Secure, Low-Carbon Energy Economy; Balancing Energy 
Security and Climate Change,'' World Resources Institute and Center 
for Strategic and International Studies (January 2009), pp. 21-22; 
Available at: http://pdf.wri.org/secure_low_carbon_energy_economy_roadmap.pdf. (last accessed March 7, 2009).
    Alliance to Save Energy et al., ``Reducing the Cost of 
Addressing Climate Change Through Energy Efficiency (2009). 
Available at: http://Aceee.org/energy/climate/leg.htm. (last 
accessed March 7, 2009).
    John DeCicco and Freda Fung, ``Global Warming on the Road; The 
Climate Impact of America's Automobiles,'' Environmental Defense 
(2006) pp. iv-vii; available at: http://www.edf.org/documents/5301_Globalwarmingontheroad.pdf. (last accessed March 7, 2009).
    ``Why is Fuel Economy Important?,'' a Web page maintained by the 
Department of Energy and Environmental Protection Agency, Available 
at http://www.fueleconomy.gov/feg/why.shtml (last accessed February 
17, 2009);
    Robert Socolow, Roberta Hotinski, Jeffery B. Greenblatt, and 
Stephen Pacala, ``Solving The Climate Problem: Technologies 
Available to Curb CO2 Emissions,'' Environment, volume 
46, no. 10, 2004. pages 8-19. Available at: http://
www.princeton.edu/~cmi/resources/CMI--Resources--new--files/
Environ--08-21a.pdf. (last accessed March 7, 2009).
    \24\ ``50BY50 Global Fuel Economy Initiative, Making Cars 50% 
More Fuel Efficient by 2050 Worldwide,'' Available at: http://www.fiafoundation.org/50by50/Documents/50BY50_report.pdf (last 
accessed March 7, 2009).
---------------------------------------------------------------------------

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

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

    Further, using vehicle technology to improve fuel economy, thereby 
reducing tailpipe emissions of CO2, is one of the three main 
measures of reducing those tailpipe emissions of CO2.\26\ 
The two other measures for reducing the tailpipe emissions of 
CO2 are switching to vehicle fuels with lower carbon content 
and changing driver behavior, i.e., inducing people to drive less.
---------------------------------------------------------------------------

    \26\ Podesta et al., p. 25; Ladislaw et al. p. 21; DeCicco et 
al. p. vii; ``Reduce Climate Change,'' a Web page maintained by the 
Department of Energy and Environmental Protection Agency at http://www.fueleconomy.gov/feg/climate.shtml (last accessed March 7, 2009).
---------------------------------------------------------------------------

    In order to reduce the amount of tailpipe emissions of 
CO2 per mile, either the amount of fuel consumed per mile 
must be reduced or lower carbon intensive fuels must be used. While 
there are emission control technologies that can capture or destroy the 
pollutants (e.g., carbon monoxide) that are produced by imperfect 
combustion of fuel, there is no current or anticipated control 
technology for CO2. Thus, the technologies for reducing 
tailpipe emissions of CO2 are the technologies that reduce 
fuel consumption and thereby reduce CO2 emissions as well, 
as well as the technologies for accommodating the use of alternative 
fuels. Consequently, substantially reducing fuel use through using 
automotive technology to improve fuel economy is indispensable if 
automobile manufacturers are to make substantial and continuing 
progress in reducing those emissions.
    The relationship between improving fuel economy and reducing 
CO2 tailpipe emissions is a very direct and close one. 
CO2 is the natural by-product of the combustion of fuel in 
motor vehicle engines. The more fuel efficient a vehicle is, the less 
fuel it burns to travel a given distance. The less fuel it burns, the 
less CO2 it emits in traveling that distance.\27\ Since the 
amount of CO2 emissions is essentially constant per gallon 
combusted of a given type of fuel, the amount of fuel consumption per 
mile is directly related to the amount of CO2 emissions per 
mile. Thus, requiring improvements in fuel economy necessarily has the 
effect of requiring reductions in tailpipe emissions of CO2 
emissions.
---------------------------------------------------------------------------

    \27\ Panel on Policy Implications of Greenhouse Warming, 
National Academy of Sciences, National Academy of Engineering, 
Institute of Medicine, ``Policy Implications of Greenhouse Warming: 
Mitigation, Adaptation, and the Science Base,'' National Academies 
Press, 1992. p. 287.
---------------------------------------------------------------------------

    This can be seen in the graph \28\ and table below. The graph shows 
how the amount of CO2 emitted by a vehicle per year varies 
according to the vehicle's fuel economy. The table shows the limit that 
a CAFE standard would indirectly place on tailpipe CO2 
emissions. To take the first value of fuel economy from the table below 
as an example, a standard of 21.0 mpg would indirectly place 
substantially the same limit on tailpipe CO2 emissions as a 
tailpipe CO2 emission standard of 423.2 g/mi of 
CO2, and vice versa.\29\
---------------------------------------------------------------------------

    \28\ The graph is the same as the one shown on Reduce Climate 
Change, a Web page maintained by the Department of Energy and 
Environmental Protection Agency. Available at: http://www.fueleconomy.gov/feg/climate.shtml (last accessed March 8, 2009).
    \29\ To the extent that manufacturers comply with a CAFE 
standard with diesel automobiles instead of gasoline ones, the level 
of CO2 tailpipe emissions would be higher. As noted 
above, the agency projects that 4 percent of the MY 2015 passenger 
car fleet and 10 percent of the MY 2015 light truck fleet will have 
diesel engines. The CO2 tailpipe emissions of a diesel 
powered passenger car are 15 percent per mile higher than those of a 
comparable gasoline powered-passenger car achieving the same mpg.

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

[[Page 14208]]

[GRAPHIC] [TIFF OMITTED] TR30MR09.000

    The relationship between improving fuel economy and reducing 
tailpipe emissions of CO2 is so strong that EPA determines 
fuel economy by the simple expedient of measuring the amount of 
CO2 emitted from the tailpipe, not by attempting to measure 
directly the amount of fuel consumed during a vehicle test, a difficult 
task to accomplish with precision. EPA then uses the carbon content of 
the test fuel \30\ to calculate the amount of fuel that had to be 
consumed per mile in order to produce that amount of CO2. 
Finally, EPA converts that fuel figure into a miles-per-gallon figure.
---------------------------------------------------------------------------

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

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

[[Page 14209]]

B. Contribution of Fuel Economy Improvements to CO2 Tailpipe 
Emission Reductions Since 1975

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

    \31\ IPCC (2007): Climate Change 2007: Mitigation of Climate 
Change. Contribution of Working Group III to the Fourth Assessment 
Report of the Intergovernmental Panel on Climate Change [B. Metz, O. 
Davidson, P. Bosch, R. Dave, and L. Meyer (eds.)]. Cambridge 
University Press, Cambridge, United Kingdom and New York, NY, USA.
---------------------------------------------------------------------------

    First, improving fuel economy is the only method available to motor 
vehicle manufacturers for making substantial and continuing reductions 
in the CO2 tailpipe emissions of motor vehicles and thus 
must be the core element of any effort to achieve those reductions.
    Second, the significant improvements in fuel economy since 1975, 
due to the CAFE standards and other market conditions as well, have 
directly caused reductions in the rate of CO2 tailpipe 
emissions per vehicle.
    In 1975, passenger cars manufactured for sale in the U.S. averaged 
only 15.8 mpg (562.5 grams of CO2 per mile or 562.5 g/mi of 
CO2). By 2007, the average fuel economy of new passenger 
cars had increased to 31.3 mpg, causing the emission of CO2 
to fall to 283.9 g/mi.\32\ Similarly, in 1975, light trucks produced 
for sale in the U.S. averaged 13.7 mpg (648.7 g/mi of CO2). 
By 2007, the average fuel economy of new light trucks had risen to 23.1 
mpg, causing emission of CO2 to fall to 384.7 g/mi.
---------------------------------------------------------------------------

    \32\ These figures are not real world fuel economy figures. They 
are based on the laboratory figures fuel economy test procedures 
used for the CAFE program. Real world fuel economy figures would be 
less (and CO2 emission figures higher).
[GRAPHIC] [TIFF OMITTED] TR30MR09.001


[[Page 14210]]


If fuel economy had not increased above the 1975 level, cars and light 
trucks would have emitted an additional 11 billion metric tons of 
CO2 into the atmosphere between 1975 and 2005. That is 
nearly the equivalent of emissions from all U.S. fossil fuel combustion 
for two years (2004 and 2005). The figure below shows the amount of 
CO2 emissions avoided due to increases in fuel economy.
BILLING CODE 4910-59-P
[GRAPHIC] [TIFF OMITTED] TR30MR09.002


[[Page 14211]]


BILLING CODE 4910-59-C
    Some commenters on the NPRM argued that some of improvements in 
fuel economy, and thus some of the reductions in CO2, shown 
in that figure would have occurred in the absence of any CAFE 
standards. We agree. Similarly, and to the same extent, some of the 
improvements in fuel economy and accompanying reductions in 
CO2 that would occur under a regulation directly regulating 
CO2 would occur in the absence of any such regulation. We 
note that no published research has isolated the contribution of CAFE 
standards themselves to historical increases in fuel economy from those 
of the many other factors that can affect fuel economy.

C. Chronology of Events Since the National Academy of Sciences Called 
for Reforming and Increasing CAFE Standards

1. National Academy of Sciences Issues Report on Future of CAFE Program 
(February 2002)
(a) Significantly Increasing CAFE Standards Without Making Them 
Attribute-Based Would Adversely Affect Safety
    In the 2002 congressionally-mandated report entitled 
``Effectiveness and Impact of Corporate Average Fuel Economy (CAFE) 
Standards,'' \33\ a committee of the National Academy of Sciences (NAS) 
(``2002 NAS Report'') concluded that the then-existing form of 
passenger car and light truck CAFE standards permitted vehicle 
manufacturers to comply in part by downweighting and even downsizing 
their vehicles and that these actions had led to additional fatalities. 
The committee explained that this safety problem arose because, at that 
time, the CAFE standards were not attributed-based and thus subjected 
all passenger cars to the same fuel economy target and all light trucks 
to the same target, regardless of their weight, size, or load-carrying 
capacity.\34\ The committee said that this experience suggests that 
consideration should be given to developing a new system of fuel 
economy targets that reflects differences in such vehicle attributes.
---------------------------------------------------------------------------

    \33\ National Research Council, ``Effectiveness and Impact of 
Corporate Average Fuel Economy (CAFE) Standards,'' National Academy 
Press, Washington, DC (2002). Available at  http://www.nap.edu/openbook.php?isbn=0309076013 (last accessed March 8, 2009). The 
conference committee report for the Department of Transportation and 
Related Agencies Appropriations Act for FY 2001 (Pub. L. 106-346) 
directed NHTSA to fund a study by NAS to evaluate the effectiveness 
and impacts of CAFE standards (H. Rep. No. 106-940, p. 117-118). In 
response to the direction from Congress, NAS published this lengthy 
report.
    \34\ NHTSA formerly used this approach for CAFE standards. EISA 
prohibits its use after MY 2010.
---------------------------------------------------------------------------

    Looking to the future, the committee made a critical distinction 
between possible ways of improving fuel economy and the ways likely to 
be chosen for doing so. It said that while it was technically feasible 
and potentially economically practicable for manufacturers to improve 
fuel economy without reducing vehicle weight or size and, therefore, 
without significantly affecting the safety of motor vehicle travel, the 
actual strategies chosen by manufacturers to improve fuel economy would 
depend on a variety of factors. In the committee's judgment, the 
extensive downweighting and downsizing that occurred after fuel economy 
requirements were established in the 1970s suggested that the 
likelihood of a similar response to further increases in fuel economy 
requirements must be considered seriously. Any reduction in vehicle 
size and weight would have safety implications.
    The committee said, ``to the extent that the size and weight of the 
fleet have been constrained by CAFE requirements * * * those 
requirements have caused more injuries and fatalities on the road than 
would otherwise have occurred.'' \35\ Specifically, it noted: ``the 
downweighting and downsizing that occurred in the late 1970s and early 
1980s, some of which was due to CAFE standards, probably resulted in an 
additional 1300 to 2600 traffic fatalities in 1993.'' \36\
---------------------------------------------------------------------------

    \35\ NAS, p. 29.
    \36\ NAS, p. 3 (Finding 2).
---------------------------------------------------------------------------

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

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

    The committee concluded that if an increase in fuel economy were 
implemented pursuant to standards that were structured so as to 
encourage either downsizing or the increased production of smaller 
vehicles, some additional traffic fatalities would be expected. It said 
that the larger and faster the required increases, the more likely 
adverse impacts. Without a thoughtful restructuring of the program, 
there would be the trade-offs that must be made if CAFE standards were 
increased by any significant amount.\38\
---------------------------------------------------------------------------

    \38\ NAS, p. 9.
---------------------------------------------------------------------------

    In response to these conclusions, NHTSA issued attribute-based CAFE 
standards for light trucks and sought legislative authority to issue 
attribute-based CAFE standards for passenger cars before undertaking to 
raise the car standards. Congress went a step further in enacting EISA, 
not only authorizing the issuance of attribute-based standards, but 
also mandating them.
(b) Climate Change and Other Externalities Justify Increasing the CAFE 
Standards
    The 2002 NAS report also concluded that the CAFE standards have 
increased fuel economy, which in turn has reduced dependence on 
imported oil, improved the nation's terms of trade, and reduced 
emissions of carbon dioxide, (a principal GHG), relative to what they 
otherwise would have been. If fuel economy had not improved, gasoline 
consumption (and crude oil imports) in 2002 would have been about 2.8 
million barrels per day (mmbd) greater than it was then.\39\ As noted 
above, reducing fuel consumption in vehicles also reduces carbon 
dioxide emissions. If the nation were using 2.8 mmbd more gasoline in 
2002, carbon emissions would have been more than 100 million metric 
tons of carbon (mmtc) higher. Thus, improvements in light-duty vehicle 
(4 wheeled motor vehicles under 10,000 pounds gross vehicle weight 
rating) fuel economy reduced overall U.S. emissions by about 7 percent 
as of 2002.\40\
---------------------------------------------------------------------------

    \39\ NAS, pp. 3 and 20.
    \40\ NAS, p. 20.
---------------------------------------------------------------------------

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

[[Page 14212]]

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

    \41\ NAS, p. 3 (Finding 5).
    \42\ NAS, p. 4 (Finding 5).
---------------------------------------------------------------------------

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

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

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

    \44\ NAS, pp. 8-9.
---------------------------------------------------------------------------

    The committee said that there are two compelling concerns that 
justify a government-mandated increase in fuel economy, both relating 
to externalities. The first and most important concern, it argued, is 
the accumulation in the atmosphere of greenhouse gases, principally 
carbon dioxide.\45\
---------------------------------------------------------------------------

    \45\ NAS, pp. 2, 13, and 83.
---------------------------------------------------------------------------

    A second concern is that petroleum imports have been steadily 
rising because of the nation's increasing demand for gasoline without a 
corresponding increase in domestic supply. The high cost of oil imports 
poses two risks: downward pressure on the strength of the dollar (which 
drives up the cost of goods that Americans import) and an increase in 
U.S. vulnerability to macroeconomic shocks that cost the economy 
considerable real output.
    To determine how much the fuel economy standards should be 
increased, the committee urged that all social benefits be considered. 
That is, it urged not only that the dollar value of the saved fuel be 
considered, but also that the dollar value to society of the resulting 
reductions in greenhouse gas emissions and in dependence on imported 
oil should be calculated and considered. The committee said that if it 
is possible to assign dollar values to these favorable effects, it 
becomes possible to make at least crude comparisons between the 
socially beneficial effects of measures to improve fuel economy on the 
one hand, and the costs (both out-of-pocket and more subtle) on the 
other. The committee chose a value of about $0.30/gal of gasoline for 
the externalities associated with the combined impacts of fuel 
consumption on greenhouse gas emissions and on world oil market 
conditions.\46\
---------------------------------------------------------------------------

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

    The report expressed concerns about increasing the standards under 
the CAFE program as currently structured. While raising CAFE standards 
under the existing structure would reduce fuel consumption, doing so 
under alternative structures ``could accomplish the same end at lower 
cost, provide more flexibility to manufacturers, or address inequities 
arising from the present'' structure.\47\
---------------------------------------------------------------------------

    \47\ NAS, pp. 4-5 (Finding 10).
---------------------------------------------------------------------------

    To address those structural problems, the report suggested various 
possible reforms. The report found that the ``CAFE program might be 
improved significantly by converting it to a system in which fuel 
targets depend on vehicle attributes.'' \48\ The report noted further 
that under an attribute-based approach, the required CAFE levels could 
vary among the manufacturers based on the distribution of their product 
mix. NAS stated that targets could vary among passenger cars and among 
trucks, based on some attribute of these vehicles such as weight, size, 
or load-carrying capacity. The report explained that a particular 
manufacturer's average target for passenger cars or for trucks would 
depend upon the fractions of vehicles it sold with particular levels of 
these attributes.\49\
---------------------------------------------------------------------------

    \48\ NAS, p. 5 (Finding 12).
    \49\ NAS, p. 87.
---------------------------------------------------------------------------

2. NHTSA Issues Final Rule Establishing Attribute-Based CAFE Standards 
for MY 2008-2011 Light Trucks (March 2006)
    The 2006 final rule reformed the structure of the CAFE program for 
light trucks by introducing an attribute-based approach and using that 
approach to establish higher CAFE standards for MY 2008-2011 light 
trucks.\50\ Reforming the CAFE program enables it to achieve larger 
fuel savings, while enhancing safety and preventing adverse economic 
consequences.
---------------------------------------------------------------------------

    \50\ 71 FR 17566; April 6, 2006.
---------------------------------------------------------------------------

    As noted above, under Reformed CAFE, fuel economy standards were 
restructured so that they are based on a vehicle attribute, a measure 
of vehicle size called ``footprint.'' It is the product of multiplying 
a vehicle's wheelbase by its track width. A target level of fuel 
economy was established for each increment in footprint (0.1 ft\2\). 
Trucks with smaller footprints have higher fuel economy targets; 
conversely, larger ones have lower targets. A particular manufacturer's 
compliance obligation for a model year is calculated as the harmonic 
average of the fuel economy targets for the manufacturer's vehicles, 
weighted by the distribution of the manufacturer's production volumes 
among the footprint increments. Thus, each manufacturer is required to 
comply with a single overall average fuel economy level for each model 
year of production.
    The approach for determining the fuel economy targets was to set 
them just below the level where the increased cost of technologies that 
could be adopted by manufacturers to improve fuel economy would first 
outweigh the added benefits that would result from those technologies. 
These targets translate into required levels of average fuel economy 
that are technologically feasible because manufacturers can achieve 
them using technologies that are or will become available. Those levels 
also reflect the need of the nation to reduce energy consumption 
because they reflect the economic value of the savings in resources, as 
well as of the reductions in economic and environmental externalities 
that result from producing and using less fuel.
    We carefully balanced the estimates costs of the rule with the 
estimated benefits of reducing energy consumption. Compared to 
Unreformed (non-attributed-based) CAFE, Reformed CAFE enhances overall 
fuel savings while providing vehicle manufacturers with the flexibility 
they need to respond to changing market conditions. Reformed CAFE also 
provides a more equitable regulatory framework by creating a level 
playing field for manufacturers, regardless of whether they are full-
line or limited-line manufacturers. We were particularly encouraged 
that Reformed CAFE will confer no compliance advantage if vehicle 
makers choose to downsize

[[Page 14213]]

some of their fleet as a CAFE compliance strategy, thereby reducing the 
adverse safety risks associated with the Unreformed CAFE program.
3. Supreme Court Issues Decision in Massachusetts v. EPA (April 2007)
    On April 2, 2007, the U.S. Supreme Court issued its opinion in 
Massachusetts v. EPA,\51\ a case involving a 2003 order of the 
Environmental Protection Agency (EPA) denying a petition for rulemaking 
to regulate greenhouse gas emissions from motor vehicles under the 
Clean Air Act.\52\ The Court ruled that the state of Massachusetts had 
standing to sue EPA because it had already lost an amount of land and 
stood to lose more due to global warming-induced increases in sea 
level; that some portion of this harm was traceable to the absence of a 
regulation issued by EPA requiring reductions in GHG emissions 
(CO2 emissions, most notably) by motor vehicles; and that 
EPA's issuance of such a regulation would reduce the risk of further 
harm to Massachusetts.\53\ On the merits, the Court ruled that 
greenhouse gases are ``pollutants'' under the Clean Air Act and that 
the Act therefore authorizes EPA to regulate greenhouse gas emissions 
from motor vehicles if that agency makes the necessary findings and 
determinations under section 202 of the Act.
---------------------------------------------------------------------------

    \51\ 127 S.Ct. 1438 (2007).
    \52\ 68 FR 52922, September 8, 2003.
    \53\ As noted above, a CAFE standard and its mathematically 
equivalent CO2 tailpipe emission standard would each have 
the same effect on those emissions and thus on the risk of further 
harm except to the extent, as noted in a footnote above, diesel 
engines are used to comply with the CAFE standards.
---------------------------------------------------------------------------

    The Court considered EPCA briefly, stating

    [T]hat DOT sets mileage standards in no way licenses EPA to 
shirk its environmental responsibilities. EPA has been charged with 
protecting the public's ``health'' and ``welfare,'' 42 U.S.C. 
7521(a)(1), a statutory obligation wholly independent of DOT's 
mandate to promote energy efficiency. See Energy Policy and 
Conservation Act, Sec.  2(5), 89 Stat. 874, 42 U.S.C. 6201(5). The 
two obligations may overlap, but there is no reason to think the two 
agencies cannot both administer their obligations and yet avoid 
inconsistency.

127 S.Ct. at 1462.

    The Supreme Court did not address or define the nature or extent of 
the overlap or explore the types of benefits considered in establishing 
the levels of the CAFE standards. Further, the Court did not address 
the express preemption provision in EPCA.
4. NHTSA and EPA Coordinate on Development of Rulemaking Proposals 
(Summer-Fall 2007)
    In the wake of the Supreme Court's decision, on May 14, 2007, 
President Bush responded to the Supreme Court's opinion, stating

* * * I'm directing the EPA and the Departments of Transportation, 
Energy, and Agriculture to take the first steps toward regulations 
that would cut gasoline consumption and greenhouse gas emissions 
from motor vehicles * * *

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

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

    The Executive Order goes on to require coordination among the 
agencies when taking action to directly regulate (or substantially and 
predictably affect) greenhouse gas emissions from motor vehicles, 
nonroad vehicles, and use of motor vehicle fuels. Such action is to be 
undertaken jointly ``to the maximum extent permitted by law and 
determined by the head of the agency to be practicable.''
    Consistent with these directives, NHTSA and EPA took the first 
steps toward regulations that would cut gasoline consumption and 
greenhouse gas emissions from motor vehicles pursuant to Presidential 
directive. NHTSA and EPA staff jointly assessed which technologies 
would be available and their effectiveness and cost. They also jointly 
assessed the key economic and other assumptions affecting the 
stringency of future standards. Finally, they worked together in 
updating and further improving the Volpe model that had been used to 
help determine the stringency of the MY 2008-2011 light truck CAFE 
standards. Much of the work between NHTSA and EPA staff was reflected 
in rulemaking proposals being developed by NHTSA prior to the enactment 
of EISA and was substantially retained when NHTSA revised its proposals 
to be consistent with that legislation. Ultimately, the NPRM published 
by the agency in May and today's final rule are based on NHTSA's 
assessments of how they meet EPCA, as amended by EISA.
5. Ninth Circuit Issues Decision Re Final Rule for MY 2008-2011 Light 
Trucks (November 2007)
    On November 15, 2007, the United States Court of Appeals for the 
Ninth Circuit issued its decision in Center for Biological Diversity v. 
NHTSA,\54\ the challenge to the MY 2008-11 light truck CAFE rule. The 
Court rejected the petitioners' argument that EPCA precludes the use of 
a marginal cost-benefit analysis that attempted to weigh all of the 
social benefits (i.e., externalities as well as direct benefits to 
consumers) of improved fuel savings in determining the stringency of 
the CAFE standards.
---------------------------------------------------------------------------

    \54\ 508 F.3d 508.
---------------------------------------------------------------------------

    The Court found that NHTSA had been arbitrary and capricious in the 
following respects:
     NHTSA's decision that it could not monetize the benefit of 
reducing CO2 emissions for the purpose of conducting its 
marginal benefit-cost analysis based on its view that the value of the 
benefit of CO2 emission reductions resulting from fuel 
consumption reductions was too uncertain to permit the agency to 
determine a value for those emission reductions; \55\
---------------------------------------------------------------------------

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

     NHTSA's lack, in the Court's view, of a reasoned 
explanation for its decision not to establish a ``backstop'' (i.e., a 
fixed minimum CAFE standard applicable to manufacturers); \56\
---------------------------------------------------------------------------

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

     NHTSA's lack, again in the Court's view, of a reasoned 
explanation for its decision not to revise the regulatory definitions 
for the passenger car and light truck categories of automobiles so that 
some vehicles currently classified as light trucks are instead 
classified as passenger cars; \57\
---------------------------------------------------------------------------

    \57\ In this final rule, NHTSA has moved 1.4 million 2 wheel 
drive SUVs from the light truck class to the passenger car class. It 
re-examined the legislative history of the statutory definitions of 
``automobile'' and ``passenger automobile'' and the term 
``nonpassenger automobile'' and analyzed the impact of that moving 
any vehicles out of the nonpassenger automobile (light truck) 
category into the passenger automobile (passenger car) category 
would have the level of standards for both groups of automobiles. 
For further discussion, see Section XI of this preamble.
---------------------------------------------------------------------------

     NHTSA's decision not to subject most medium- and heavy-
duty pickups and most medium- and heavy-duty cargo vans (i.e., those 
between 8,500 and 10,000 pounds gross vehicle weight

[[Page 14214]]

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

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

     NHTSA's decision to prepare and publish an Environmental 
Assessment (EA) and making a finding of no significant impact 
notwithstanding what the Court found to be an insufficiently broad 
range of alternatives, insufficient analysis of the climate change 
effects of the CO2 emissions, and limited assessment of 
cumulative impacts in its EA under the National Environmental Policy 
Act (NEPA).\59\
---------------------------------------------------------------------------

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

    The Court did not vacate the standards, but instead said it would 
remand the rule to NHTSA to promulgate new standards consistent with 
its opinion ``as expeditiously as possible and for the earliest model 
year practicable.\60\ Under the decision, the standards established by 
the April 2006 final rule would remain in effect unless and until 
amended by NHTSA. In addition, it directed the agency to prepare an 
Environmental Impact Statement.
---------------------------------------------------------------------------

    \60\ The deadline in EPCA for issuing a final rule establishing, 
for the first time, a CAFE standard for a model year is 18 months 
before the beginning of that model year. 49 U.S.C. 32902(g)(2). The 
same deadline applies to issuing a final rule amending an existing 
CAFE standard so as to increase its stringency. Given that the 
agency has long regarded October 1 as the beginning of a model year, 
the statutory deadline for increasing the MY 2009 standard was March 
30, 2007, and the deadline for increasing the MY 2010 standard is 
March 30, 2008. Thus, the only model year for which there was 
sufficient time at the time of the Court's decision to gather all of 
the necessary information, conduct the necessary analyses and 
complete a rulemaking was MY 2011. As noted earlier in this notice, 
however, EISA requires that a new standard be established for that 
model year. This rulemaking was conducted pursuant to that 
requirement.
---------------------------------------------------------------------------

    As of the date of the issuance of this final rule, the Court has 
not yet issued its mandate in this case.
6. Congress Enacts Energy Security and Independence Act of 2007 
(December 2007)
    As noted above in Section I.B., EISA significantly changed the 
provisions of EPCA governing the establishment of future CAFE 
standards. These changes made it necessary for NHTSA to pause in its 
efforts so that it could assess the implications of the amendments made 
by EISA and then, as required, revise some aspects of the proposals it 
had been developing (e.g., the model years covered and credit issues).
7. NHTSA Proposes CAFE Standards for MYs 2011-2015 and Requests New 
Product Plans for Those Years (April 2008) \61\
---------------------------------------------------------------------------

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

8. NHTSA Contracts With ICF International To Conduct Climate Modeling 
and Other Analyses in Support of Draft and Final Environmental Impact 
Statements (May 2008)
    NHTSA contracted with ICF International (ICF) to support it in 
conducting its environmental analyses and preparing the draft and final 
environmental impact statements. ICF provides consulting services and 
technology solutions in energy, climate change, environment, 
transportation, social programs, health, defense, and emergency 
management.
9. Manufacturers Submit New Product Plans (June 2008)
    These product plans identify which vehicle models manufacturers 
intend to build and which technologies the manufacturers intend to 
apply and when to their vehicles. NHTSA began its analysis of the MY 
2011 CAFE standards with the product plans and used them to establish a 
baseline, which is then used to evaluate different potential levels of 
future CAFE stringency.
10. NHTSA Contracts With Ricardo To Aid in Assessing Public Comments on 
Cost and Effectiveness of Fuel Saving Technologies (June 2008)
    NHTSA received numerous public comments on the types of potential 
fuel saving technologies that we discussed in the NPRM, their costs and 
effectiveness in improving fuel economy, and in which model year and to 
which vehicles they may be applied. To aid the agency in analyzing and 
responding to these comments, and to ensure that the analysis for the 
final rule is thorough and robust, NHTSA contracted with Ricardo, a 
highly reputable and neutral source of outside expertise in the areas 
of powertrain and vehicle technologies. NHTSA chose Ricardo because of 
its extensive experience and expertise in working with both government 
and industry on fuel economy-improving technology issues.
11. Ninth Circuit Revises Its Decision Re Final Rule for MY 2008-2011 
Light Trucks (August 2008)
    In response to the Government petition for rehearing, the Ninth 
Circuit modified its decision by replacing its direction to prepare an 
EIS with a direction to prepare either a new EA or, if necessary, an 
EIS.\62\
---------------------------------------------------------------------------

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

12. NHTSA Releases Final Environmental Impact Statement (October 2008)
    On October 17, 2008, EPA published a notice announcing the 
availability of NHTSA's final environmental impact statement (FEIS) for 
this rulemaking.\63\ Throughout the FEIS, NHTSA relied extensively on 
findings of the United Nations Intergovernmental Panel on Climate 
Change (IPCC) and the U.S. Climate Change Science Program (USCCSP). In 
particular, the agency relied heavily on the most recent, thoroughly 
peer-reviewed, and credible assessments of global climate change and 
its impact on the United States: the IPCC Fourth Assessment Report 
Working Group I4 and II5 Reports, and reports by the USCCSP that 
include Scientific Assessments of the Effects of Global Climate Change 
on the United States and Synthesis and Assessment Products.
---------------------------------------------------------------------------

    \63\ 73 FR 61859.
---------------------------------------------------------------------------

    In the FEIS, NHTSA compared the environmental impacts of its 
preferred alternative and those of reasonable alternatives. It 
considered direct, indirect, and cumulative impacts and describes these 
impacts to inform the decisionmaker and the public of the environmental 
impacts of the various alternatives.
    Among other potential impacts, NHTSA analyzed the direct and 
indirect impacts related to fuel and energy use, emissions, including 
carbon dioxide and its effects on temperature and climate change, air 
quality, natural resources, and the human environment. Specifically, 
the FEIS used a climate model to estimate and report on four direct and 
indirect effects of climate change, driven by alternative scenarios of 
GHG emissions, including:
    1. Changes in CO2 concentrations;
    2. Changes in global mean surface temperature;
    3. Changes in regional temperature and precipitation; and
    4. Changes in sea level.
    NHTSA also considered the cumulative impacts of the proposed 
standards for MY 2011-2015 passenger cars and light trucks, together 
with

[[Page 14215]]

estimated impacts of NHTSA's implementation of the CAFE program through 
MY 2010 and NHTSA's future CAFE rulemaking for MYs 2016-2020.
    NHTSA intends to review all analyses for model years after MY 2011 
in connection with the rulemaking for MY 2012 and thereafter, 
consistent with the President's Memorandum of January 26, 2009.
13. Office of Information and Regulatory Affairs Completes Review of a 
Draft MY 2011-2015 Final Rule (November 2008)
    The Office of Information and Regulatory Affairs of the Office of 
Management and Budget completed review of the rule under Executive 
Order 12866, Regulatory Planning and Review, on November 14, 2008.\64\
---------------------------------------------------------------------------

    \64\ http://www.reginfo.gov/public/do/eoHistReviewSearch (last 
visited March 8, 2009). To find the report on the clearance of the 
draft final rule, select ``Department of Transportation'' under 
``Economically Significant Reviews Completed'' and select ``2008'' 
under ``Select Calendar Year.''
---------------------------------------------------------------------------

14. Department of Treasury Extends Loans to General Motors and Chrysler 
(December 2008)
    The Department of the Treasury established the Automotive Industry 
Financing Program ``to prevent a significant disruption of the American 
automotive industry that poses a systemic risk to financial market 
stability and will have a negative effect on the real economy of the 
United States.'' \65\ Under that program, initial loans were made to 
General Motors and Chrysler.
---------------------------------------------------------------------------

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

15. Department of Transportation Decides Not To Issue MY 2011-2015 
Final Rule (January 2009)
    On January 7, 2009, the Department of Transportation announced that 
the Bush Administration would not issue the final rule.
16. The President Requests NHTSA To Issue Final Rule for MY 2011 Only 
(January 2009)
    As explained above, in his memorandum of January 26, 2009, the 
President requested the agency to issue a final rule adopting CAFE 
standards for MY 2011 only. Further, the President requested NHTSA to 
establish standards for MY 2012 and later after considering the 
appropriate legal factors, the comments filed in response to the May 
2008 proposal, the relevant technological and scientific 
considerations, and, to the extent feasible, a forthcoming report by 
the National Academy of Sciences assessing automotive technologies that 
can practicably be used to improve fuel economy.
17. General Motors and Chrysler Submit Restructuring Reports to 
Department of the Treasury (February 2009)
    The reports were required under the terms of the loans made 
available to these companies in December to assist the domestic auto 
industry in becoming financially viable.

D. Energy Policy and Conservation Act, as Amended

    EPCA, which was enacted in 1975, mandates a motor vehicle fuel 
economy regulatory program to meet the various facets of the need to 
conserve energy, including ones having environmental and foreign policy 
implications. EPCA allocates the responsibility for implementing the 
program between NHTSA and EPA as follows: NHTSA sets CAFE standards for 
passenger cars and light trucks; EPA establishes the procedures for 
testing, test vehicles, collects and analyzes manufacturers' data, and 
calculates the average fuel economy of each manufacturer's passenger 
cars and light trucks; and NHTSA enforces the standards based on EPA's 
calculations.
    We have summarized below EPCA, as amended by EISA.
1. Vehicles Subject to Standards for Automobiles
    With two exceptions specified in EPCA, all four-wheeled motor 
vehicles with a gross vehicle weight rating of 10,000 pounds or less 
will be subject to the CAFE standards, beginning with MY 2011. The 
exceptions will be work trucks \66\ and multi-stage vehicles. Work 
trucks are defined as vehicles that are:
---------------------------------------------------------------------------

    \66\ While EISA excluded work trucks from ``automobiles,'' it 
did not exclude them from regulation under EPCA. As amended by EISA, 
EPCA requires that work trucks be subjected to average fuel economy 
standards (49 U.S.C. 32902(b)(1)(C)), but only after first the 
National Academy of Sciences completes a study and then NHTSA 
completes a follow-on study. Congress thus recognized and made 
allowances for the practical difficulties that led NHTSA to decline 
to include work trucks in its final rule for MY 2008-11 light 
trucks.

--Rated at between 8,500 and 10,000 pounds gross vehicle weight; and
--Are not a medium-duty passenger vehicle (as defined in section 
86.1803-01 of title 40, Code of Federal Regulations, as in effect on 
the date of the enactment of the Ten-in-Ten Fuel Economy Act).\67\
---------------------------------------------------------------------------

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

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

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

    Under EPCA, as it existed before EISA, the agency had discretion 
whether to regulate vehicles with a GVWR between 6,000 lb and 10,000 
GVWR. It could regulate the fuel economy of vehicles with a GVWR within 
that range under CAFE if it determined that (1) standards were feasible 
for these vehicles, and (2) either (a) that these vehicles were used 
for the same purpose as vehicles rated at not more than 6,000 lbs. 
GVWR, or (b) that their regulation would result in significant energy 
conservation.
    EISA eliminated the need for administrative determinations in order 
to subject vehicles between 6,000 and 10,000 lb. GVWR to the CAFE 
standards for automobiles. Congress did so by making the determination 
itself that all vehicles within that GVWR range should be included, 
with the exceptions noted above.
2. Mandate To Set Standards for Automobiles
    For each future model year, EPCA requires that the agency establish 
standards for all new automobiles at the maximum feasible levels for 
that model year. EISA made no change in this requirement. A 
manufacturer's individual passenger cars and light trucks are not 
required to meet a particular fuel economy level. Instead, EPCA 
requires that the average fuel economy of a manufacturer's fleet of 
passenger cars (or light trucks) in a particular model year must meet 
the standard for those automobiles for that model year.
    For MYs 2011-2020 and for MYs 2021-2030, EPCA specifies additional 
requirements regarding standard setting. Each of those requirements and 
the maximum feasible requirement must be interpreted in the context of 
the other requirements. For MYs 2011-2020, separate standards for 
passenger cars and for light trucks must be set at high enough levels 
to ensure that the CAFE of the industry-wide combined fleet of new 
passenger cars and light trucks for MY 2020 is not less than 35 mpg.

[[Page 14216]]

    In light of the evident confusion of some commenters about the 35 
mpg requirement, we want to emphasize that that figure is not the CAFE 
level that any individual manufacturer's combined CAFE will be required 
to meet. The 35 mpg requirement applies solely to the agency's standard 
setting and concerns the required combined effect that the separate MY 
2020 standards for passenger cars and light trucks must achieve with 
respect to the single fleet containing the MY 2020 passenger cars and 
light trucks of all manufacturers. That single industry-wide fleet must 
have a CAFE of at least 35 mpg. If that requirement were exactly met, 
we anticipate that manufacturers with relatively larger proportions of 
smaller automobiles would be required to achieve combined CAFEs greater 
than 35 mpg, while manufacturers with relatively largely proportions of 
larger automobiles would be required to achieve combined CAFEs that 
might in that year be somewhat below 35 mpg. EISA does not specify 
precisely how compliance with this minimum requirement is to be ensured 
or how or when the CAFE of the industry-wide combined fleet for MY 2020 
is to be calculated for purposes of determining the agency's 
compliance.
    If the current gap between passenger car CAFE and light truck CAFE 
persists, the standard for MY 2020 passenger cars would likely, as a 
practical matter, need to be set high enough to ensure that the 
industry-wide level of average fuel economy for passenger cars is not 
less than 40 mpg in order for the CAFE of the combined industry-wide 
fleet to reach 35 mpg,. The standard for MY 2020 light trucks could be 
somewhat below 35 mpg. Again, these are the levels of stringency 
necessary to meet the minimum requirement of an industry-wide combined 
average of at least 35 mpg in MY 2020. Reaching 35 mpg earlier than MY 
2020 would require even higher car and light truck standards in MY 
2020. In addition, the CAFE of each manufacturer's fleet of domestic 
passenger cars must meet a sliding, absolute minimum level in each 
model year: 27.5 mpg or 92 percent of the projected CAFE of the 
industry-wide fleet of new domestic and non-domestic passenger cars for 
that model year.
    The standards for passenger cars and those for light trucks must 
increase ratably each year. We interpret this requirement, in 
combination with the requirement to set the standards for each model 
year at the level determined to be the maximum feasible level for that 
model year, to mean that the annual increases should not be 
disproportionately large or small in relation to each other.
    EPCA, as it existed before EISA, required that light truck 
standards be set at the maximum feasible level for each model year, but 
simply specified a default standard of 27.5 mpg for passenger cars for 
MY 1985 and thereafter. It permitted, but did not require that NHTSA 
establish a higher or lower standard for passenger cars if the agency 
found that the maximum feasible level of fuel economy is higher or 
lower than 27.5 mpg. Henceforth, the agency must establish a standard 
for each model year at the maximum feasible level.
3. Attribute-Based Standards
    The standards for passenger cars and light trucks must be based on 
one or more vehicle attributes, like size or weight, that correlate 
with fuel economy and must be expressed in terms of a mathematical 
function. Fuel economy targets are set for individual vehicles and 
increase as the attribute decreases and vice versa. For example, size-
based (i.e., size-indexed) standards assign higher fuel economy targets 
to smaller (and generally, but not necessarily lighter) vehicles and 
lower ones to larger (and generally, but not necessarily heavier) 
vehicles. The fleet wide average fuel economy that a particular 
manufacturer must achieve depends on the size mix of its fleet, i.e., 
the proportion of the fleet that is small-, medium- or large-sized.
    This approach can be used to require virtually all manufacturers to 
increase significantly the fuel economy of a broad range of both 
passenger cars and light trucks. Further, this approach can do so 
without creating an incentive for manufacturers to make small vehicles 
smaller or large vehicles larger, with attendant implications for 
safety.
4. Factors Considered in the Setting of Standards
    In determining the maximum feasible level of average fuel economy 
for a model year, EPCA requires that the agency consider four factors: 
Technological feasibility, economic practicability, the effect of other 
standards of the Government on fuel economy, and the need of the nation 
to conserve energy. EPCA does not define these terms or specify what 
weight to give each concern in balancing them; thus, NHTSA defines them 
and determines the appropriate weighting based on the circumstances in 
each CAFE standard rulemaking.
(a) Factors That Must Be Considered
(i) Technological Feasibility
    ``Technological feasibility'' refers to whether a particular method 
of improving fuel economy can be available for commercial application 
in the model year for which a standard is being established. Thus, the 
agency is not limited in a CAFE rulemaking to technology that is 
already being commercially applied at that time.
(ii) Economic Practicability
    ``Economic practicability'' refers to whether a standard is one 
``within the financial capability of the industry, but not so stringent 
as to'' lead to ``adverse economic consequences, such as a significant 
loss of jobs or the unreasonable elimination of consumer choice.'' \69\ 
In an attempt to ensure the economic practicability of attribute based 
standards, the agency considers a variety of factors, including the 
annual rate at which manufacturers can increase the percentage of its 
fleet that has a particular type of fuel saving technology, and cost to 
consumers. Since consumer acceptability is an element of economic 
practicability, the agency, in this rule, has limited its consideration 
of fuel saving technologies to be added to vehicles to those that 
provide benefits that match their costs. The agency believes this 
approach is reasonable for the MY 2011 standards in view of the facts 
before it at this time. The agency is aware, however, that facts 
relating to a variety of key issues in CAFE rulemaking are steadily 
evolving and will review its balancing of these factors in light of the 
facts before it in the next rulemaking proceeding.
---------------------------------------------------------------------------

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

    At the same time, the law does not preclude a CAFE standard that 
poses considerable challenges to any individual manufacturer. The 
Conference Report for EPCA, as enacted in 1975, makes clear, and the 
case law affirms, ``(A) determination of maximum feasible average fuel 
economy should not be keyed to the single manufacturer which might have 
the most difficulty achieving a given level of average fuel economy.'' 
\70\ Instead, the agency is compelled ``to weigh the benefits to the 
nation of a higher fuel economy standard against the difficulties of 
individual automobile manufacturers.'' Id. The law permits CAFE 
standards exceeding the projected capability of any particular 
manufacturer as long as the standard is economically practicable for 
the industry as a whole. Thus, while

[[Page 14217]]

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

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

(iii) The Effect of Other Motor Vehicle Standards of the Government on 
Fuel Economy
    ``The effect of other motor vehicle standards of the Government on 
fuel economy'' means, according to the agency's longstanding view, 
``the unavoidable adverse effects on fuel economy of compliance with 
emission, safety, noise, or damageability standards.'' \71\ The purpose 
of this provision was to ensure that any adverse effects of other 
standards on fuel economy were taken into consideration in connection 
with the fuel economy standards. The concern about adverse effects is 
evident in a 1974 report, entitled ``Potential for Motor Vehicle Fuel 
Economy Improvement,'' prepared and submitted to Congress by the 
Department of Transportation and Environmental Protection Agency.\72\ 
That report noted that the weight added by safety standards would 
reduce, and one set of emissions standards might temporarily reduce, 
the level of achievable fuel economy.\73\ The same concern can also be 
found in the congressional committee reports on the bills that became 
EPCA.\74\
---------------------------------------------------------------------------

    \71\ 42 FR 63184, 63188; Dec. 15, 1977. See also 42 FR 33534, 
33537; June 30, 1977.
    \72\ This report was prepared in compliance with Section 10 of 
the Energy Supply and Environmental Coordination Act of 1974, Public 
Law 93-319.
    \73\ See pages 6-8 and 91-93.
    \74\ See page 22 of Senate Report 94-179, pages 88 and 90 of 
House Report 94-340, and pages 155-7 of the Conference Report, 
Senate Report 94-516.
---------------------------------------------------------------------------

    In the case of emission standards, this includes standards adopted 
by the Federal government and can include standards adopted by the 
States as well, since in certain circumstances the Clean Air Act allows 
States to adopt and enforce State standards different from the Federal 
ones.
(iv) The Need of the United States To Conserve Energy
    ``The need of the United States to conserve energy'' means ``the 
consumer cost, national balance of payments, environmental, and foreign 
policy implications of our need for large quantities of petroleum, 
especially imported petroleum.'' \75\ Environmental implications 
principally include reductions in emissions of criteria pollutants and 
carbon dioxide. A prime example of foreign policy implications are 
energy independence and security concerns.
---------------------------------------------------------------------------

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

1. Fuel Prices and the Value of Saving Fuel
    Projected future fuel prices are a critical input into the 
preliminary economic analysis of alternative CAFE standards, because 
they determine the value of fuel savings both to new vehicle buyers and 
to society. In this rule, NHTSA relies on fuel price projections from 
the U.S. Energy Information Administration's (EIA) Annual Energy 
Outlook (AEO) for this analysis.
2. Petroleum Consumption and Import Externalities
    U.S. consumption and imports of petroleum products impose costs on 
the domestic economy that are not reflected in the market price for 
crude petroleum, or in the prices paid by consumers of petroleum 
products such as gasoline. These costs include (1) higher prices for 
petroleum products resulting from the effect of U.S. oil import demand 
on the world oil price; (2) the risk of disruptions to the U.S. economy 
caused by sudden reductions in the supply of imported oil to the U.S.; 
and (3) expenses for maintaining a U.S. military presence to secure 
imported oil supplies from unstable regions, and for maintaining the 
strategic petroleum reserve (SPR) to cushion against resulting price 
increases. Higher U.S. imports of crude oil or refined petroleum 
products increase the magnitude of these external economic costs, thus 
increasing the true economic cost of supplying transportation fuels 
above the resource costs of producing them. Conversely, reducing U.S. 
imports of crude petroleum or refined fuels or reducing fuel 
consumption can reduce these external costs.
3. Air Pollutant Emissions
    While reductions in domestic fuel refining and distribution that 
result from lower fuel consumption will reduce U.S. emissions of 
various pollutants, additional vehicle use associated with the rebound 
effect from higher fuel economy will increase emissions of these 
pollutants. Thus, the net effect of stricter CAFE standards on 
emissions of each pollutant depends on the relative magnitudes of its 
reduced emissions in fuel refining and distribution, and increases in 
its emissions from vehicle use.
    Fuel savings from stricter CAFE standards also result in lower 
emissions of CO2, the main greenhouse gas emitted as a 
result of refining, distribution, and use of transportation fuels. 
Lower fuel consumption reduces carbon dioxide emissions directly, 
because the primary source of transportation-related CO2 
emissions is fuel combustion in internal combustion engines.
    The agency has considered environmental issues, both within the 
context of EPCA and the National Environmental Policy Act, in making 
decisions about the setting of standards from the earliest days of the 
CAFE program. As courts of appeal have noted in three decisions 
stretching over the last 20 years,\76\ the agency defined the ``need of 
the Nation to conserve energy'' in the late 1970s as including ``the 
consumer cost, national balance of payments, environmental, and foreign 
policy implications of our need for large quantities of petroleum, 
especially imported petroleum.'' \77\ Pursuant to that view, the agency 
declined in the past to include diesel engines in determining the 
maximum feasible level of average fuel economy for passenger cars and 
for light trucks because particulate emissions from diesels were then 
both a source of concern and unregulated.\78\
---------------------------------------------------------------------------

    \76\ Center for Auto Safety v. NHTSA, 793 F.2d 1322, 1325 n. 12 
(D.C. Cir. 1986); Public Citizen v. NHTSA, 848 F.2d 256, 262-3 n. 27 
(D.C. Cir. 1988) (noting that ``NHTSA itself has interpreted the 
factors it must consider in setting CAFE standards as including 
environmental effects''); and Center for Biological Diversity v. 
NHTSA, 508 F.3d 508, 529 (9th Cir. 2007).
    \77\ 42 FR 63,184, 63,188 (Dec. 15, 1977) (emphasis added).
    \78\ For example, the final rules establishing CAFE standards 
for MY 1981-84 passenger cars, 42 FR 33533, 33540-1 and 33551; June 
30, 1977, and for MY 1983-85 light trucks, 45 FR 81593, 81597; 
December 11, 1980.
---------------------------------------------------------------------------

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

    \79\ 53 FR 39275, 39302; October 6, 1988.
    \80\ 54 FR 21985,
---------------------------------------------------------------------------

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

[[Page 14218]]

balancing of the EPCA factors and aided by the 2007 reports of the 
United Nations Intergovernmental Panel on Climate Change \81\ and other 
information, NHTSA has monetized the reductions in tailpipe emissions 
of CO2 that will result from the CAFE standards and is 
adopting CAFE standards for MY 2011 at levels that reflect an estimated 
value of those reductions in CO2 as well as the value of 
other benefits of those standards. In setting these CAFE standards, 
NHTSA also considered environmental impacts under NEPA, 42 U.S.C. 4321-
4347.
---------------------------------------------------------------------------

    \81\ The IPCC 2007 reports can be found at http://www.ipcc.ch/. 
(Last accessed March 8, 2009.)
---------------------------------------------------------------------------

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

    \82\ See, e.g., Center for Auto Safety v. NHTSA (CAS), 793 F. 2d 
1322 (D.C. Cir. 1986) (Administrator's consideration of market 
demand as component of economic practicability found to be 
reasonable); Public Citizen 848 F.2d 256 (Congress established broad 
guidelines in the fuel economy statute; agency's decision to set 
lower standard was a reasonable accommodation of conflicting 
policies). As the United Staets Court of Appeals pointed out in 
upholding NHTSA's exercise of judgment in setting the 1987-1989 
passenger car standards, ``NHTSA has always examined the safety 
consequences of the CAFE standards in its overall consideration of 
relevant factors since its earliest rulemaking under the CAFE 
program.'' Competitive Enterprise Institute v. NHTSA (CEI I), 901 
F.2d 107, 120 at n.11 (D.C. Cir. 1990).
---------------------------------------------------------------------------

(b) Factors That Cannot be Considered
    EPCA provides that in determining the level at which it should set 
CAFE standards for a particular model year, NHTSA may not consider the 
ability of manufacturers to take advantage of several EPCA provisions 
that facilitate compliance with the CAFE standards and thereby reduce 
the costs of compliance.\83\ As noted below in Section XII, 
manufacturers can earn compliance credits by exceeding the CAFE 
standards and then use those credits to achieve compliance in years in 
which their measured average fuel economy falls below the standards. 
Manufacturers can also increase their CAFE levels through MY 2019 by 
producing alternative fuel vehicles. EPCA provides an incentive for 
producing these vehicles by specifying that their fuel economy is to be 
determined using a special calculation procedure that results in those 
vehicles being assigned a high fuel economy level.
---------------------------------------------------------------------------

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

(c) Weighing and Balancing of Factors
    EPCA did not define the factors or specify the relative weight to 
be given the factors in weighing and balancing them. Instead, EPCA gave 
broad guidelines within which the agency is to exercise discretion in 
determining what level of stringency is the maximum feasible level of 
stringency. Thus, the agency has substantial discretion in defining and 
weighing the terms and accommodating conflicting priorities consistent 
with the purposes of EPCA.
5. Consultation in Setting Standards
    EPCA provides that NHTSA is to consult with the Department of 
Energy (DOE) and Environmental Protection Agency prior to prescribing 
CAFE standards. It specifies further that NHTSA is to provide DOE with 
an opportunity to provide written comments on draft proposed and final 
CAFE standards.\84\
---------------------------------------------------------------------------

    \84\ In addition, Executive Order No. 13432 provides that a 
Federal agency undertaking a regulatory action that can reasonably 
be expected to regulate emissions directly, or to substantially and 
predictably affect emissions, of greenhouse gases from motor 
vehicles, shall act jointly and consistently with other agencies to 
the extent possible and to consider the views of other agencies 
regarding such action.
---------------------------------------------------------------------------

6. Test Procedures for Measuring Fuel Economy
    EPA's fuel economy test procedures specify equations for 
calculating fuel economy. These equations are based on the carbon 
balance technique which allows fuel economy to be determined from 
measurement of exhaust emissions. As noted above, this technique relies 
upon the premise that the quantity of carbon in a vehicle's exhaust gas 
is equal to the quantity of carbon consumed by the engine as fuel.
    After measuring the amount of CO2 emitted from the 
tailpipe of a test vehicle, as well as the amount of carbon in 
hydrocarbon (HC) and carbon monoxide (CO), EPA then uses the carbon 
content of the test fuel to calculate the amount of fuel that had to be 
consumed per mile in order for the vehicle to produce that amount of 
carbon containing emissions.\85\ Finally, EPA converts that fuel figure 
into a miles-per-gallon figure.
---------------------------------------------------------------------------

    \85\ Under the procedures established by EPA, compliance with 
the CAFE standards is based on the rates of emission of 
CO2, CO, and hydrocarbons from covered vehicles, but 
primarily on the emission rates of CO2. In the 
measurement and calculation of a given vehicle model's fuel economy 
for purposes of determining a manufacturer's compliance with federal 
fuel economy standards, the role of CO2 is approximately 
100 times greater than the combined role of the other two relevant 
carbon exhaust gases. Given that the amount of CO2, CO, 
and hydrocarbons emitted by a vehicle varies directly with the 
amount of fuel it consumes, EPA can reliably and accurately convert 
the amount of those gases emitted by that vehicle into the miles per 
gallon achieved by that vehicle.
---------------------------------------------------------------------------

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

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

    When NHTSA finds that a manufacturer is not in compliance, it 
notifies the manufacturer. Surplus credits generated from the five 
previous years can be used to make up the deficit. The amount of credit 
earned is determined by multiplying the number of tenths of a mpg by 
which a manufacturer exceeds a standard for a particular category of 
automobiles by the total volume of automobiles of that category 
manufactured by the manufacturer for a given model year. If there are 
no (or not enough) credits available, then the manufacturer can either 
pay the fine, or submit a carry back plan to the agency. A carry back 
plan describes what the manufacturer plans to do in the following three 
model years to earn enough credits to make up for the deficit. NHTSA 
must examine and determine whether to approve the plan.
    In the event that a manufacturer does not comply with a CAFE 
standard, even after the consideration of credits, EPCA provides for 
the assessing of civil penalties, unless, as provided below, the 
manufacturer has earned credits for exceeding a standard in an earlier 
year or expects to earn credits in a later year. The Act specifies a 
precise formula for determining the amount of civil penalties for such 
a noncompliance. The penalty, as adjusted for inflation by law, is 
$5.50 for each tenth of a mpg that a manufacturer's average fuel 
economy falls short of the standard for a given model year multiplied 
by the total volume of those vehicles in the affected fleet (i.e., 
import or domestic passenger car, or light truck), manufactured for 
that model year. The amount of the penalty may not be reduced except 
under the unusual or extreme circumstances specified in the statute.

[[Page 14219]]

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

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

    In contrast, a CAFE standard applies to a manufacturer's entire 
fleet for a model year. It does not require that a particular 
individual vehicle be equipped with any particular equipment or feature 
or meet a particular level of fuel economy. It does require that the 
manufacturer's fleet, as a whole, comply. Further, although under the 
attribute-based approach to setting CAFE standards fuel economy targets 
are established for individual vehicles based on their footprints, the 
vehicles are not required to comply with those targets. However, as a 
practical matter, if a manufacturer chooses to design some vehicles so 
that fall below their target levels of fuel economy, it will need to 
design other vehicles so that exceed their targets if the 
manufacturer's overall fleet average is to meet the applicable 
standard.
    Thus, under EPCA, there is no such thing as a noncompliant vehicle, 
only a noncompliant fleet. No particular vehicle in a noncompliant 
fleet is any more, or less, noncompliant than any other vehicle in the 
fleet.

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

    NHTSA has a long-standing practice of analyzing regulatory options 
in fuel economy rulemakings based on the best available information, 
including information regarding the future vehicle market and future 
fuel economy technologies. The passenger cars and light trucks 
currently sold in the United States, and which are anticipated to be 
sold in MY 2011, are highly varied and satisfy a wide range of consumer 
needs. From the two-seater Mercedes Benz Smart (produced by Daimler) to 
the Ford F-150 pickup truck, from the Honda CR-V to the Chrysler Town 
and Country to the GMC Savana, American consumers have a great number 
of vehicle options to accommodate their needs and preferences.
    Automobile manufacturers generally attempt to plan their motor 
vehicle production several years in advance. When a new vehicle is 
introduced, it is the product of several years of design, testing, 
product-specific tooling investment, and regulatory certification. In 
order to minimize costs, manufacturers generally attempt to place large 
automotive parts supply contracts years in advance. Manufacturers must 
therefore attempt to predict the types, characteristics, and quantities 
of vehicles that consumers will wish to purchase a few years hence. 
These plans include what is currently known about the salability and 
marketability of these future vehicles, and hence consider the future 
state of prices facing the consumer, including that of gasoline. These 
plans also contain not only the specific vehicle models which 
manufacturers intend to build and their planned annual production, but 
also information about specific design features and configurations as 
well as the fuel-efficient technologies they are planning to 
incorporate in these vehicles. Manufacturer's plans rapidly become 
embodied in special tooling and production configurations in factories 
and advance orders for component parts. NHTSA requests, and 
manufacturers provide, product plan information to the agency during 
rulemaking. NHTSA begins its analysis with the submitted product plans 
and uses them to establish a baseline, which is used to analyze varying 
levels of future CAFE standards.
    In anticipation of the analysis to support today's final rule, 
NHTSA issued a request in May 2008 that manufacturers provide the 
agency with updated product plans, as well as estimates of the 
availability, effectiveness, and cost of fuel-saving technologies.\88\ 
Considering its past experiences integrating manufacturers' product 
plans, reviewing the content of those plans, and seeking clarification 
and appropriate correction of those plans, the agency provided 
manufacturers with updated tools to facilitate manufacturers' quality 
control efforts. NHTSA also tripled the number of agency engineers 
assigned to reviewing manufacturers' plans.
---------------------------------------------------------------------------

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

A. Why does NHTSA establish a baseline market forecast?

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

B. How does NHTSA develop the baseline market forecast?

1. NHTSA First Asks Manufacturers for Updated Product Plan Data
    NHTSA relies on product plans from manufacturers to help the agency 
determine the composition of the future fleets. The product plan 
information is provided in response to NHTSA's request for information 
from the manufacturers, and responds to very detailed questions about 
vehicle model characteristics that influence fuel economy.\89\ The 
baseline market forecast that NHTSA uses in its analysis is based 
significantly on this confidential product plan information. Individual 
manufacturers are better able than any other entity to anticipate what 
mix of products they are likely to sell in the future. In this 
rulemaking as in prior rulemakings, some commenters requested that 
NHTSA make product plan information public to allow members of the 
public to comment more fully on the baseline developed by the agency. 
For example, the Attorneys General commented that ``the agency should 
provide sufficient summaries or aggregations of this information or 
make special arrangements so that interested parties such as the state 
Attorneys General can view this confidential information under a 
confidentiality agreement.''
---------------------------------------------------------------------------

    \89\ Id.
---------------------------------------------------------------------------

    NHTSA cannot make public the entire contents of the product plans. 
The submitted product plans contain confidential business information, 
which the agency is prohibited by federal law from disclosing; \90\ 
making

[[Page 14220]]

this information publicly available would cause competitive harm to 
manufacturers. See 5 U.S.C. 552(b)(4); 18 U.S.C. 1905; 49 U.S.C. 
30167(a); 49 CFR part 512; Critical Mass Energy Project v. Nuclear 
Regulatory Comm'n, 975 F.2d 871 (D.C. Cir. 1992). In its publicly 
available rulemaking documents the agency does, however, provide 
aggregated information compiled from individual manufacturer 
submissions regarding its forecasts of the future vehicle market in 
such a way that confidential business information is not disclosed. 
This aggregated information, such as appears below and in the 
accompanying Regulatory Impact Analysis (RIA), includes vehicle fleet 
size and composition (passenger cars versus light trucks), overall fuel 
economy baseline and major technology applications and design trends.
---------------------------------------------------------------------------

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

(a) Why does NHTSA use manufacturer product plans to develop the 
baseline?
    In order to analyze potential new CAFE standards in a way that 
tries to simulate how manufacturers could comply with them, NHTSA 
develops a forecast of the future vehicle market on a model-by-model, 
engine-by-engine, and transmission-by-transmission basis, such that 
each defined vehicle model refers to a separately-defined engine and a 
separately-defined transmission. For the 2011 model year covered by 
this final rule, the light vehicle (passenger car and light truck) 
market forecast included almost 1,400 vehicle models, 400 specific 
engines, and 300 specific transmissions. NHTSA believes that this level 
of detail in the representation of the vehicle market is important both 
to an accurate analysis of manufacturer-specific costs and to the 
analysis of attribute-based CAFE standards. Because CAFE standards 
apply to the average fuel economy performance of each manufacturer's 
fleets of cars and light trucks, the impact of potential standards on 
individual manufacturers is effectively estimated through analysis of 
manufacturers' planned fleets. NHTSA has used this level of detail in 
CAFE analysis throughout the history of the program. Furthermore, 
because required CAFE levels under an attribute-based CAFE standard 
depend on manufacturers' fleet composition, the stringency of an 
attribute-based standard is effectively predicted by performing 
analysis at this level of detail.
    EPCA does not require NHTSA to use manufacturers' product plans in 
order to develop a baseline for purposes of analyzing potential new 
CAFE standards. The agency could use exclusively non-confidential 
information to develop a market forecast at the same level of detail as 
mentioned above, and has done exactly so for purposes of analytical 
development and testing, and to represent manufacturers that have not 
provided product plans to NHTSA. However, as discussed above, the 
agency believes that one of the most valuable sources of information 
about future product mix projections is the product plan information 
provided by individual manufacturers, because individual manufacturers 
are in a unique position to anticipate what mix of products they are 
likely to sell in the future.
    Manufacturers generally support NHTSA's use of product plan data in 
developing the baseline. Other commenters such as CFA and Public 
Citizen, in contrast, stated that the product plans relied upon in the 
NPRM are outdated because they were developed before EISA was enacted, 
and that the agency should develop its own projections of the vehicle 
fleets, which could be made public, instead of relying on confidential 
industry plans, which could bias the standards in favor of the 
industry. CFA suggested that NHTSA's analysis was based on only ``a 
very thin body of knowledge about the veracity, relevance and 
predictive value of auto manufacturer product plans, recent changes in 
fuel economy and the practices of automakers in adopting fuel economy 
technologies.'' Public Citizen stated that because the product plans 
are confidential, ``This significantly biases the standards in favor of 
industry by shutting the public out of the process,'' and that 
``Consumers must essentially trust that NHTSA has set standards in 
their interest using information provided by industry.'' Public Citizen 
argued that ``In the past, * * * NHTSA has done its own research and 
evaluation of these factors which was more transparent.''
    NHTSA's analysis of product plan data is much more rigorous than 
commenters suggest. NHTSA engineers carefully examine the information 
submitted by manufacturers, and upon discovering what appear to be 
errors or inconsistencies, request and receive manufacturers' 
explanations and, as appropriate, corrections. For example, the 
agency's analysis in preparation for the final rule revealed systematic 
errors in plans submitted by two major manufacturers, both of which 
resubmitted their plans with corrections.\91\ In addition, the agency 
found that two manufacturers inappropriately planned to have some 2-
wheel drive sport-utility vehicles (2WD SUVs) classified as light 
trucks, even though the agency explained in the NPRM that, for 
enforcement purposes, it planned to classify such vehicles as passenger 
cars, and other manufacturers submitted product plans consistent with 
the agency's intentions. As discussed below and in Section IX, NHTSA 
performed its analysis with these vehicles reassigned to the passenger 
car fleet.
---------------------------------------------------------------------------

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

    NHTSA also disagrees with Public Citizen's suggestion that the 
agency's use of product plans precludes public participation in the 
rulemaking process. As discussed, analysis of confidential product 
plans has long been a core feature of developing the CAFE standards, 
and the agency is fully transparent in providing aggregated information 
about the plans as well as detailed information about the agency's 
technology and economic assumptions and the process the agency 
undertakes to evaluate and set the standards.
    NHTSA could potentially conduct rulemaking analysis as Public 
Citizen suggests using exclusively public information, (including 
commercially available information). Indeed, the agency has done 
exactly so for purposes of development and testing, and to develop 
forecasts of fleets likely to be produced by manufacturers that have 
not responded to the agency's request for product plans. However, the 
agency currently believes that an analysis based exclusively on 
publicly- and commercially-available information would be less 
accurate--in terms of its representation of the future light vehicle 
market--than an analysis based in large measure on product plan data. 
Most publicly available information about vehicles and vehicle 
technologies concerns the current fleet, not potential future fleets. 
In many cases, manufacturers are prepared to provide far more detail in 
confidential submissions then they are prepared to provide in public. 
This detail may include the manufacturer's expectation of sales for 
particular future models; which technologies are being applied to 
particular vehicles; and the manufacturer's expectation of fuel

[[Page 14221]]

economy for future vehicles. This information is typically considered 
business confidential by the manufacturer, but is helpful in more 
accurately ascertaining both the baseline technology level and fuel 
economy of manufacturer's future sales as well as the extent of 
opportunities for improving fuel economy.
    NHTSA notes that manufacturers' public statements about future 
vehicles have been very optimistic recently with regard to fuel 
economy-enhancing technologies, and NHTSA takes these statements into 
account when evaluating the submitted product plans. When manufacturer 
statements about future vehicles differ substantially from the 
submitted product plans, NHTSA generally contacts the manufacturer to 
determine the reason for the discrepancy. However, manufacturers 
frequently make announcements regarding vehicles or technologies they 
hope to produce in the future. Often, they are conditional statements 
and plans, and whether they reach the point of commercialization 
depends greatly on how circumstances, including public acceptance, 
evolve. Thus, for purposes of analyzing the MY 2011 CAFE standards, the 
agency currently concludes that information manufacturers provide 
confidentially to NHTSA is more reliable than the information appearing 
in public sources such as press reports and speeches by manufacturers' 
employees, especially given the short time period between the 
submission of this information in 2008 and when manufacturers will 
begin building their MY 2011 vehicles.
    Nevertheless, EPCA does not require NHTSA to use manufacturers' 
confidential business information when evaluating the maximum feasible 
levels for new CAFE standards. The agency will base its analysis for 
future rulemakings on information--public, commercially-available, or 
confidential--it considers most accurate.
    NHTSA recognizes that automobile manufacturers are facing a period 
of uncertainty with respect to demand for their products that is 
without parallel. Recent swings in prices for fuel have altered demand 
patterns, while commodity prices have impacted costs of production. 
Concurrently, turmoil in the credit markets and recent upswings in 
unemployment also affect the vehicle market. The short and long term 
implications of such volatility for future sales will not be known for 
some time. In light of such conditions, reliance on product plans in 
this rulemaking helps to align the analysis with the best available 
information.
    NHTSA further recognizes that, in connection with their recent 
requests for federal assistance, some manufacturers made statements in 
December 2008 regarding future technologies and fuel economy levels, 
and that some of these statements indicated plans to achieve CAFE 
levels considerably higher than reflected in the product plans 
submitted to NHTSA in mid-2008.\92\ The information provided in these 
submissions to Congress reflects a level of detail much less than NHTSA 
typically receives in the confidential product plan submissions, so it 
is difficult for NHTSA to determine whether these manufacturer 
statements and submissions reflect the same underlying assumptions as 
manufacturers' mid-2008 product plans.
---------------------------------------------------------------------------

    \92\ Available on the Internet at http://financialservices.house.gov/autostabilization.html (last accessed 
February 15, 2009).
---------------------------------------------------------------------------

    More recently, in mid-February, Chrysler and General Motors 
submitted restructuring plans to the U.S. Department of the Treasury to 
support those companies' requests for federal loans. Like the 
information these companies provided in December, these plans do not 
contain complete and detailed forecasts of the volume and 
characteristics of specific vehicle models Chrysler and General Motors 
plan to produce. However, the restructuring plans do contain specific 
information regarding the CAFE levels that these manufacturers expect 
to achieve.
    Chrysler's plan shows that, during MYs 2008-2015, Chrysler plans to 
exceed required CAFE levels in some model years and to apply credits it 
earns in doing so toward shortfalls in other model years.\93\ The 
charts in Chrysler's plans specifically reference the ``Dec 2008 Draft 
Rule'' (presumably, the final standards NHTSA submitted to OMB in 
November 2008), and indicate that Chrysler appears to believe that 
attribute-based CAFE standards for those model years will result in 
required CAFE levels for Chrysler similar to those originally estimated 
by NHTSA for MYs 2011-2015 based on the product plan information that 
Chrysler submitted to NHTSA in July 2008.
---------------------------------------------------------------------------

    \93\ Chrysler's submission to the Treasury Department, p. 117. 
Available at http://www.treasury.gov/initiatives/eesa/agreements/auto-reports/ChryslerRestructuringPlan.pdf, (last accessed Feb. 19, 
2009).
---------------------------------------------------------------------------

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

    \94\ GM's submission to the Treasury Department, p. 21. 
Available at, http://www.treasury.gov/initiatives/eesa/agreements/auto-reports/GMRestructuringPlan.pdf (last accessed Feb. 19, 2009).
---------------------------------------------------------------------------

    Considering the context for and generality of the Chrysler and GM 
restructuring plans, and the lack of such plans from other 
manufacturers, and notwithstanding the considerable uncertainties 
currently surrounding the future market for light vehicles, NHTSA 
believes that its market forecast for MY 2011, as informed by product 
plans submitted to the agency in mid-2008, remains the most useful 
available point of reference for the establishment of MY 2011 
standards, and the evaluation of the costs and benefits of these new 
standards.
(b) What product plan data did NHTSA use in the NPRM?
    For the NPRM, NHTSA received product plan information from 
Chrysler, Ford, GM, Honda, Nissan, Mitsubishi, Porsche and Toyota 
covering multiple model years. The agency did not receive any product 
plan information from BMW, Ferrari, Hyundai, Mercedes (Daimler) or VW. 
However, only Chrysler and Mitsubishi provided us with product plans 
that showed differing production quantities, vehicle introductions, 
vehicle redesign/refresh changes, without any carryover production 
quantities through MY 2015. For the other companies that provided data, 
the agency carried over production quantities for their vehicles, 
allowing for growth, starting with the year after their product plan 
data showed changes in production quantities or showed the introduction 
or redesign/refresh of vehicles.
    Product plan information was provided through MY 2013 by Ford and 
Toyota, thus the first year that the agency carried over production 
quantities for those companies was MY 2014. Product plan information 
was provided through MY 2012 for GM and Nissan, thus the first year 
that the agency carried over production quantities for those companies 
was MY 2013. Product plan information was

[[Page 14222]]

provided by Honda through MY 2008. Honda asked the agency to carry over 
those plans and also provided data for the last redesign of a vehicle 
and asked the agency to carry them forward. Product plan information 
was provided through MY 2008 for Porsche, thus the first year that the 
agency carried over production quantities for Porsche was MY 2009.
    Because Hyundai was one of the seven largest vehicle manufacturers, 
and thus factored explicitly into the optimization process, and NHTSA 
desired to conduct this process using the best and most complete 
forecast of the future vehicle market, NHTSA used Hyundai's mid-year 
2007 data contained in the agency's CAFE database to establish the 
baseline models and production quantities for their vehicles.\95\ For 
the other manufacturers that did not submit product plans, NHTSA used 
the 2005 information from the database, the latest complete data set 
that NHTSA had available for use.
---------------------------------------------------------------------------

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

    As mentioned above, NHTSA received comments that the product plans 
it relied upon in the NPRM were out of date and not reflective of 
recent announcements from manufacturers regarding new products. CFA 
referred to NHTSA's discussion in the NPRM of the relative completion 
of various manufacturers' product plans to argue that the product plans 
were incomplete and inaccurate. Public Citizen argued that the product 
plans were out of date. The Attorneys General and NRDC argued that 
NHTSA should update the product plans, the baseline, and the technology 
inputs to the Volpe model in light of recent manufacturer statements 
about their intent to introduce advanced technologies, such as plug-in 
hybrid vehicles, in the near future.
    In response, as noted above, NHTSA published a request for comments 
seeking updated information from manufacturers regarding their future 
product plans in a companion notice to the NPRM. In examining the 
updated product plans received in response to the request for 
information, and as discussed more fully below, NHTSA has determined 
that the product plans for MY 2011 provided incorporate these 
announcements and reflect changes to planned product introduction by 
manufacturers in response to the recent market shift towards more fuel-
efficient vehicles, particularly the shift towards increased production 
of smaller cars.
(c) What product plan data did NHTSA receive for the final rule?
    For the final rule, NHTSA received product plan information from 
Chrysler, Ford (Ford's product plans included separate plans for Jaguar 
and Land Rover vehicles, both of which are now owned by Tata Motors and 
are thus attributed to that company in the final rule), GM, Honda, 
Hyundai, Mitsubishi, Nissan, Porsche, Subaru, and Toyota, covering 
multiple model years. The agency did not receive product plan 
information from BMW, Daimler (Mercedes), Ferrari, Suzuki or VW. 
Chrysler, Ford, Hyundai and Mitsubishi provided us with product plans 
that showed changes in production quantities, vehicle introductions, 
and vehicle redesigns/refreshes changes, without any carryover 
production quantities through MY 2015. For the other companies that 
provided data, the agency was careful to carry over production 
quantities for their vehicles, allowing for growth, starting with the 
year after their product plan data showed changes in production 
quantities or showed the introduction or redesign/refresh of vehicles.
    Further, NHTSA used the pre-model year 2008 CAFE reports as the 
basis for the future MY 2011 product plans and filled in gaps in the 
data (e.g., engine specifications, wheelbase, track width, etc.) for 
those manufacturers with information gathered from the Web sites of the 
individual manufacturers and from general automotive Web sites such as 
Edmunds.com, Cars.com, and Wards.com.
(d) How is the product plan data received for the final rule different 
from what the agency used in the NPRM analysis, and how does it impact 
the baseline?
    Informed by the overall fleet size and market share estimates 
applied by the agency (and discussed below), manufacturers' plans 
changed considerably between 2007 and 2008. NHTSA's forecast, based on 
the Energy Information Administration's (EIA's) Annual Energy Outlook 
(AEO) 2008, of the total number of light vehicles likely to be sold 
during MY 2011 through MY 2015 dropped from 85 to 83 million vehicles--
about 16.5 million vehicles annually.\96\ Also, due in part to the 
reclassification of roughly 1.4 million 2WD SUVs, the share of MY 2011 
vehicles expected to be classified as light trucks fell from 49 percent 
in NHTSA's 2007 market forecast to 42 percent in the agency's current 
forecast.
---------------------------------------------------------------------------

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

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

[[Page 14223]]

[GRAPHIC] [TIFF OMITTED] TR30MR09.003


[[Page 14224]]


[GRAPHIC] [TIFF OMITTED] TR30MR09.004


[[Page 14225]]


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

    \97\ As explained below, although NHTSA normalized each 
manufacturer's overall market share to produce a realistically-sized 
fleet, the product mix for each manufacturer that submitted product 
plans was preserved. The agency has reviewed manufacturers' product 
plans in detail, and understands that manufacturers do not sell the 
same mix of vehicles in every model year.
[GRAPHIC] [TIFF OMITTED] TR30MR09.006

    Additionally, for some advanced technologies, the updated product 
plans submitted by manufacturers for the final rule include higher 
quantities in MY 2011 and beyond than the older product plans used for 
the NPRM had indicated. These changes are consistent with most 
manufacturers' indications that their product planning was informed by 
expectations that fuel prices considerably higher than those in EIA's 
AEO 2008 reference case forecast would prevail during the first half of 
the next decade. Most recently, the restructuring plans submitted by 
General Motors and Chrysler offer additional information on changes to 
product plans, albeit at an aggregate level, that are deemed necessary 
to achieve ``operational and functional viability.''
    Manufacturers' most recently submitted detailed plans (i.e., those 
submitted to NHTSA in July 2008) show significant application of the 
following engine technologies in MY 2011 (percent of the entire fleet 
having that technology is shown in the parentheses): Intake cam phasing 
(34 percent), dual cam phasing (35 percent), stoichiometric gasoline 
direction injection (11 percent), and turbocharging and engine 
downsizing (6 percent). Regarding transmission technologies, 
manufacturers' plans show significant application of the following 
technologies by MY 2011: 6-, 7-, or 8-speed automatic transmissions (27 
percent), and strong hybrids (4 percent). Manufacturers' plans also 
show significant application of electric power steering (3 percent) and 
integrated starter/generators (34 percent) by MY 2011.
    Though not applicable to today's rulemaking, and while updated 
product plans may reflect different rates of technology application, 
manufacturers' July 2008 plans also indicated expectations that the use 
of some of these and other technologies would continue to increase 
after MY 2011. For example, manufacturers' product plans indicated at 
the time that use of stoichiometric gasoline direction injection would 
increase from 11 percent of the fleet in MY 2011 to 15 percent of the 
fleet in MY 2015, and that use of turbocharging and engine downsizing 
would increase from 6 percent of the fleet in MY 2011 to 13 percent of 
the fleet in MY 2015. These plans further indicated that use of dual 
cam phasing, combustion restart, and integrated starter/generators 
would increase to 49 percent, 10 percent, and 49 percent, respectively, 
by MY 2015.
    The restructuring plans Chrysler and GM submitted to the Department 
of the Treasury in February 2009 both indicate intentions to increase 
the rate of technology adoption and alter the mix towards higher 
numbers of flexible fuel, alternative fuel and electric vehicles. 
Chrysler's restructuring plan shows plans to introduce three new 
electric or hybrid-electric vehicle models in MYs 2010-2011, and an 
additional seven such models during MYs 2012-2015.\98\ As mentioned 
above, Chrysler's restructuring plan is clearly informed by and 
responsive to NHTSA's 2008 draft final standards for MYs 2011-2015. 
Though less clear in terms of specific requirements to the company, 
GM's restructuring plan also appears to be responsive to those MYs 
2011-2015 standards. GM's restructuring plan indicates that in MY 2012, 
the company plans greater deployment of 2-step variable valve timing, 
new 4-cylinder gasoline engines, dry dual clutch transmissions, ``Gen 
2'' strong hybrids, extended range electric vehicles, and possibly 
compressed natural gas.\99\ The plan further indicates that in MY 2015, 
GM expects to introduce ``Gen 3'' hybrids, lean-burn homogeneous charge 
compression ignition (HCCI) gasoline engines, and fuel cell vehicles.
---------------------------------------------------------------------------

    \98\ Chrysler, p. 135.
    \99\ GM, p. 21.
---------------------------------------------------------------------------

    Manufacturers' July 2008 product plans also show increasing numbers 
of mid-size ladder-frame SUVs being planned for redesign as unibody 
SUVs/crossover vehicles. Additionally, some ladder-frame SUVs and mid-
size pickup

[[Page 14226]]

trucks are planned to be discontinued altogether and replaced with 
totally new products that have unibody construction. Some of the trend 
for mid-size SUVs being replaced by unibody vehicles is already visible 
in the marketplace and reflected in NHTSA's forecast of the MY 2011 
light vehicle market.
    Concerning engine trends, the manufacturers' plans show a 
significant amount of engine downsizing. This downsizing is of two 
major types: first, replacing existing engines with smaller 
displacement engines while keeping the same number of cylinders per 
engine; second, replacing existing engines with engines having a 
smaller number of cylinders (e.g., 6-cylinder engines instead of 8-
cylinder engines and 4-cylinder engines instead of 6-cylinder engines). 
The plans indicate that for many of the engines being downsized, the 
replacement engines have some form of advanced valve actuation (e.g., 
variable valve lift) combined with other technologies, such as engine 
friction reduction or direct injection. When such changes occur the 
replacement engines appear to provide higher fuel economy, with maximum 
power and torque similar to the engines they are replacing. It is not 
clear from manufacturers' product plans whether and, if so, how vehicle 
prices and other performance measures (e.g., launch, gradeability) will 
be affected.
    When engines are planned to be replaced with fewer-cylinder engines 
(e.g., smaller V6 engines instead of large V8 engines), the plans show 
some of these engines having some form of advanced valve actuation, 
combined with direct injection and turbocharging. Some of these engines 
also have combustion restart. These engines also provide maximum power 
and torque similar to the engines they are replacing while delivering 
higher fuel economy, although impacts on price and performance measures 
are also uncertain.
    For some selected technologies, Table III-2 compares MY 2011 
penetration rates in manufacturers' product plans from the 2007 plans 
to those from the 2008 plans. This comparison reveals both increases 
and decreases in planned technology application for MY 2011, including 
a doubling in the planned production of hybrid electric vehicles (here, 
including only ``strong'' hybrids such as power-split hybrids and plug-
in hybrids). Because this comparison is limited to MY 2011, it does not 
evidence manufacturers' plans--discussed above--to redesign many 
vehicles in MY 2012 (and later years) and, in doing so, to increase 
further the use of some fuel-saving technologies. This also holds true 
for the GM and Chrysler restructuring plans, which describe limits to 
attaining anticipated MY 2011 targets, in particular for GM trucks in 
that year, but at the same time differ markedly in terms of the 
estimates of the total number of vehicles sold. Information on the 
impact of penetration rates is of course conditioned on sales volumes, 
which vary for MY 2011 from 11.1 million for Chrysler to 14.3 million 
for GM. While information regarding these later technology improvements 
was provided to NHTSA, it did not form the basis for the establishment 
of the MY 2011 CAFE standards.
[GRAPHIC] [TIFF OMITTED] TR30MR09.007

    Manufacturers have also, in 2008, indicated plans to sell more 
dual-fuel or flexible-fuel vehicles (FFVs) than indicated in the plans 
they submitted to NHTSA in 2007. FFVs create a potential market for 
alternatives to petroleum-based gasoline and diesel fuel. For purposes 
of determining compliance with CAFE standards, the fuel economy of a 
FFV is, subject to limitations, adjusted upward to account for this 
potential.\100\ However, NHTSA is precluded from ``taking credit'' for 
the compliance flexibility by accounting for manufacturers' ability to 
earn and use credits in determining what standards would be ``maximum 
feasible.''\101\ Some manufacturers plan to produce a considerably 
greater share of FFVs than can earn full credit under EPCA. The 
projected average FFV share of the market in MY 2011 is 14 percent for 
the NPRM and 17 percent for the final rule.
---------------------------------------------------------------------------

    \100\ See 49 U.S.C. 32905 and 32906.
    \101\ 49 U.S.C. 32902(h).
---------------------------------------------------------------------------

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

[[Page 14227]]

increased fuel economy cannot be isolated with any certainty. To do so 
would require an apples-to-apples ``counterfactual'' fleet of vehicles 
that are, except for technology and fuel economy, identical--for 
example, in terms of fleet mix and vehicle performance and utility. As 
a result, NHTSA's baseline market forecast shows industry-wide average 
fuel economy levels somewhat higher than shown in the NPRM. Average 
fuel economy for MY 2011 is 26.0 mpg in the NPRM baseline forecast, and 
26.5 mpg in the final rule.
    These changes are shown in greater detail below in Table III-3a, 
which shows manufacturer-specific CAFE levels (not counting CAFE 
credits that some manufacturers expect to earn by producing flexible 
fuel vehicles) planned in 2007 for passenger cars and light trucks. 
Table III-3b shows the combined averages of these planned CAFE levels. 
Tables III-4a and III-4b show corresponding information from 
manufacturers' 2008 plans. These tables demonstrate that, with very few 
exceptions, manufacturers are planning to increase overall average fuel 
economy beyond the levels shown in the plans they submitted in 2007. In 
addition, according to the restructuring plans submitted to the 
Treasury Department, GM states that it will reach average fleet fuel 
economy of 32.5 mpg for passenger vehicles and 23.6 mpg for trucks in 
MY 2011, compared to the 30.3 and 21.4 reported in Table III-4a, 
below.\102\ Also, Chrysler's restructuring plan states that the company 
plans to accelerate its utilization of more fuel-efficient power 
trains, for example, to improve fuel efficiency on a remixed product 
line. In addition, Chrysler plans, according to the restructuring, to 
offer flexible fuel capability in half of its light trucks by 2012.
---------------------------------------------------------------------------

    \102\ Unlike the values shown in Table III-4a, the average fuel 
economy levels shown in GM's restructuring plan reflect ``full usage 
of all credit flexibilities under the CAFE program.'' It is not 
clear how much of the difference between Table III-4a and GM's 
February 2009 estimates is accounted for by such flexibilities.
[GRAPHIC] [TIFF OMITTED] TR30MR09.008


[[Page 14228]]


[GRAPHIC] [TIFF OMITTED] TR30MR09.009


[[Page 14229]]


[GRAPHIC] [TIFF OMITTED] TR30MR09.010

    Tables III-5 through III-7 summarize other changes in 
manufacturers' product plans between those submitted to NHTSA in 2007 
(for the NPRM) and 2008 (for the final rule). These tables present 
average vehicle footprint, curb weight, and power-to-weight ratios for 
each of the seven largest manufacturers, and for the overall industry. 
The tables do not identify manufacturers by name, and do not present 
them in the same sequence.
    Table III-5 shows that manufacturers' latest plans reflect a very 
slight (less than 0.1 square feet) increase in overall average 
passenger vehicle size, and suggests that manufacturers currently plan 
to sell larger trucks than they reported previously. However, these 
planned increases are, in the aggregate, attributable to the 
reassignment of vehicles from the light truck to the passenger car 
fleet. The average planned footprint among all planned passenger cars 
and light trucks remained unchanged.
[GRAPHIC] [TIFF OMITTED] TR30MR09.011

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

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

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

[[Page 14230]]

[GRAPHIC] [TIFF OMITTED] TR30MR09.012

    Table III-7 shows that manufacturers' latest plans reflect a small 
increase (about 1.7 percent) in overall average performance, and 
suggests that increases will mostly occur in the light truck fleet. 
Considering that this 3.5 percent increase in light truck performance 
is accompanied by a 2.7 percent increase in light truck curb weight, 
this suggests that (1) the vehicles being reassigned to the passenger 
car fleet are among the less powerful (per pound) of the vehicles 
previously assigned to the light truck fleet and (2) manufacturers are 
planning to install somewhat more powerful engines in many light trucks 
than previously reported to NHTSA. This trend is detectable by analysis 
of the detailed product plans, and is appears to be corroborated by the 
reported change in intended product mix that GM and Chrysler state in 
their restructuring plans.
[GRAPHIC] [TIFF OMITTED] TR30MR09.013

    These overall trends mask the fact that manufacturers' plans did 
not all change in the same ways. In terms of planned average footprint, 
changes in manufacturers' plans ranged from a 4 percent decrease to a 5 
percent increase. In terms of planned average curb weight and power-to-
weight ratio, these ranges covered -4 percent to 3 percent and -5 
percent to 15 percent, respectively.
    NHTSA recognizes that some manufacturers' plans to increase vehicle 
performance reflect an intention to apply some fuel-saving technologies 
in ways that do not hold performance and utility constant, and 
therefore do not achieve the same fuel economy increases that NHTSA 
would assume when estimating the effect of adding these technologies 
for the sole purpose of complying with CAFE standards. This continues 
what has long been standard practice in the industry. Vehicle 
performance, amenities, and utility have been generally increasing for 
more than a century, in response to consumer demand. Manufacturers have 
applied innumerable technological advances during that time, and 
although they have achieved significant fuel economy gains, they have 
not applied these technological advances for the sole purpose of 
increasing fuel economy. When applying a given technology to a given 
vehicle, a manufacturer does so in a way that balances multiple vehicle 
characteristics, including fuel economy. For example, while a 
manufacturer might make both a gasoline and diesel version of a given 
sedan, the diesel version might offer more weight-increasing amenities 
(e.g., luxury seating) and significantly better performance (e.g., 
torque). In this case, the diesel version would have greater value to 
the consumer, and would thus command a higher price.
    The Union of Concerned Scientists (UCS) and some other commenters 
suggested that manufacturers' product plans, and NHTSA's use of these 
plans, may have at least the appearance of wrongdoing.\104\ Such 
comments cite a ``lack of transparency'' ultimately traceable to the 
fact that the submitted product plans contain confidential business 
information, which the agency is prohibited by federal law from 
disclosing, as discussed above. However, NHTSA believes these 
perceptions may also arise because UCS and others realize that 
manufacturers often use technology to increase performance (and other 
vehicle characteristics), not just to increase fuel economy, and thus 
may assign a fuel economy ``effectiveness'' to a technology in their 
product plans that is lower than if the technology was used solely to 
increase fuel economy. If so, NHTSA rejects the notion that for 
manufacturers to do so constitutes any

[[Page 14231]]

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

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

    When NHTSA estimates the cost and effect of adding technologies in 
response to CAFE standards, the agency is treating these technologies 
as being applied solely for that purpose; therefore, the agency's 
analysis reflects an attempt to hold amenities, performance, and 
utility constant. Thus, NHTSA's analysis estimates means by which 
manufacturers could comply with CAFE standards. Manufacturers, however, 
determine how they actually will comply. As an example, if a 
manufacturer plans to apply technologies in ways that increase vehicle 
performance in addition to increasing fuel economy, NHTSA would have to 
find a way of accounting for the value that those performance increases 
represent. While the manufacturers seeking federal funds have reported 
plans to alter their product mix in favor of smaller, more fuel-
efficient vehicles, it is too soon to tell to what extent consumers 
will adapt to such a product mix for MY 2011 (which may, to a large 
extent, depend on fuel prices), or whether the rest of the industry 
will follow or instead decide to serve the market for larger 
performance vehicles left behind by GM and Chrysler.
    Expected model years in which each vehicle model will be redesigned 
or freshened constitute another important aspect of NHTSA's market 
forecast. As discussed in Section IV, NHTSA's analysis supporting 
today's rulemaking times the addition of most technologies to coincide 
with either a vehicle redesign or a vehicle freshening. Product plans 
submitted to NHTSA preceding both the NPRM and the final rule contained 
manufacturers' estimates of vehicle redesign and freshening schedules. 
However, as discussed in Section IV, NHTSA estimated that in the 
future, most vehicles would be redesigned on a five-year schedule, with 
vehicle freshening (i.e., refresh) occurring every two to three years 
after a redesign. After applying these estimates, the shares of 
manufacturers' passenger car and light truck estimated to be redesigned 
in MY 2011 were as summarized below for the seven largest 
manufacturers. Table III-8 shows the percentages of each manufacturer's 
fleets expected to be redesigned in MY 2011 from the market forecast 
used by NHTSA in the analysis documented in the NPRM. To protect 
confidential information, manufacturers are not identified by name. 
Table III-9 presents corresponding estimates from the analysis 
supporting today's final rule. To further protect confidential 
information, the numbering of individual manufacturers is different 
from that shown in Table III-8.
[GRAPHIC] [TIFF OMITTED] TR30MR09.014

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

[[Page 14232]]

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

    \105\ Chrysler plan, p. 135.
---------------------------------------------------------------------------

    NHTSA understands that a manufacturer may choose to time the 
application of technologies to coincide with planned redesigns, and 
elect in one model year to apply more technology than needed to meet 
its required CAFE level in that year. However, NHTSA has decided not to 
attempt to represent this type of manufacturer response to the MY 2011 
CAFE standards because it is not relevant for the current 
rulemaking.\106\ NHTSA will consider this issue further in future 
rulemaking analyses.
---------------------------------------------------------------------------

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

2. Once NHTSA has the product plans, how does it develop the baseline?
    In all cases, manufacturers' sales volumes were normalized to 
produce passenger car and light truck fleets which reflected each 
manufacturers' MY 2008 market shares within the aggregate vehicle sales 
volume forecast in EIA's 2008 Annual Energy Outlook. NHTSA does this in 
order to develop a market forecast that is realistic in terms of both 
its overall size as well as manufacturers' relative market shares. The 
product mix for each manufacturer that submitted product plans was 
preserved and, in the case of those than did not submit plans, the 
product mix used was the same as indicated in their pre-model year 2008 
CAFE data. As was discussed earlier, the manufacturers themselves are 
uncertain about future aggregate sales volumes. Although the market is 
facing a downturn of unprecedented magnitude, NHTSA currently expects 
that pent-up demand (driven, for example, by the continued use and 
eventual scrappage of existing vehicles) and an eventual economic 
recovery will, over time, bring sales back to more historic levels.
    CBD commented that this method of establishing the baseline fleet 
``has illegally constrained [NHTSA's] analysis by locking [NHTSA] into 
the assumption that a manufacturer's fleet mix need not, and will not, 
change in response to'' increasing consumer demand for vehicles with 
improved fuel economy. Whether NHTSA should incorporate market shifts 
in its modeling has been a theme in comments for the past several CAFE 
rulemakings. Comments with regard to market shift tend to address two 
different issues. First, commenters request that NHTSA assume a higher 
fuel economy baseline than manufacturer product plans indicate, due to 
market shifts occurring because consumers demand higher fuel economy 
even without CAFE standards. The Mercatus Center, for example, raised 
this point in comments to the NPRM. Second, commenters suggest that 
NHTSA should incorporate the market shifts that result due to CAFE 
regulation, as manufacturers adjust vehicle prices and fuel economy 
levels, and consumers respond to those changes. The Alliance 
recommended that NHTSA use NERA's nested logit model, for example, 
since it attempts to account for ``actual consumer demand behavior'' to 
address this issue.
    NHTSA agrees in principle that some kind of ``market shift'' model 
could provide useful information regarding the possible effects of 
potential new CAFE standards, and has researched how to integrate such 
a model into its stringency analysis. NHTSA recognizes that the product 
plans on which the agency relies to determine CAFE stringency represent 
a snapshot, and are subject to change in response to consumer demand, 
whether driven by CAFE or by extrinsic factors. Although NHTSA has now 
spent several years considering how to incorporate market shifts into 
its analysis of potential CAFE standards, the agency has still not been 
able to develop credible coefficients specifying such a model, and we 
have therefore continued to refrain in the final rule from integrating 
a market share model into the Volpe model.\107\ However, manufacturer 
product plans for MY 2011 do already, at a minimum, reflect whatever 
market shifts the manufacturers believe will occur in the absence of 
regulations. Additionally, the agency conducts a separate analysis of 
potential changes in manufacturers' overall sales volumes. NHTSA will 
continue to consider ways in which to incorporate market shift modeling 
into its analysis for future rulemakings. Recent upheavals in the 
economy, including historically quick run-ups in gasoline prices 
followed by as dramatic declines, greatly affect consumer demand for 
vehicles. Econometric models such as nested logit are necessarily 
calibrated on historic data and thus, while offering a consistent 
method for describing the future, are constrained to reflect behavior 
based on past reactions to events. The release of the restructuring 
plans for GM and Chrysler are cases in point. They show considerable 
alterations in product plans, including reduction of planned sales 
volumes and nameplates, along with introduction of new models and 
accelerated adoption of technology, that appear to reflect a break with 
historical trends.
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    \107\ NHTSA is aware that Resources for the Future (RFF) has 
drafted a report regarding its examination of consumer behavior 
modeling. Although a market share model, as currently envisioned by 
NHTSA, would also need to address manufacturer behavior (in 
particular, regarding pricing), NHTSA will consider RFF's work in 
evaluating future changes to NHTSA's analytical methods. NHTSA has 
met with EPA and RFF staff to discuss the status of RFF's efforts, 
and will consider any results RFF is able to develop.
---------------------------------------------------------------------------

    Thus, the baseline fleet for MY 2011, or the baseline market 
forecast, consists of the vehicles present in the normalized and 
completed product plans, before NHTSA applies technologies to them. 
Manufacturers typically provide product plans not only for the years 
covered by a CAFE rulemaking, but also for prior years--so, for 
purposes of this rulemaking, NHTSA has product plans from many 
manufacturers beginning with MY 2008. As discussed above, NHTSA uses 
the baseline market forecast as a way of gauging what manufacturer fuel 
economy levels would exist in the absence of new CAFE standards. In 
order to provide a point of reference for estimating the costs and 
benefits of new standards, NHTSA assumes that, without new standards, 
the fuel economy standards would remain at the level of the MY 2010 
standards.\108\ However, the baseline market forecast, which again, is 
based on the product plans, does not show all manufacturers in 
compliance with the MY 2010 standards. This results from manufacturers' 
ability to use compliance flexibilities, like credits (AMFA and 
otherwise) and fines, to meet the standards, which NHTSA is statutorily 
prohibited from considering in setting the standards.
---------------------------------------------------------------------------

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

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

[[Page 14233]]

product plans show fuel economy levels below the MY 2010 standards, 
NHTSA adjusts them upwards by adding technology to the manufacturer's 
fleet in order to get the manufacturer into compliance without use of 
credits or payment of fines. For manufacturers whose product plans meet 
or exceed the MY 2010 standards, NHTSA incorporates them as-is. NHTSA 
develops an adjusted baseline because the costs and benefits of 
reaching the MY 2010 standards were already accounted for in prior 
rulemakings, just as the costs and benefits of reaching the MY 2011 
standards are accounted for in the current rulemaking. To avoid double-
counting the costs to manufacturers or the benefits to society required 
to meet the MY 2010 standards, NHTSA develops this adjusted baseline, 
which the agency then uses in analyzing the MY 2011 standards.
    The Alliance commented that NHTSA should use an ``actual'' baseline 
instead of a ``projected'' baseline. The Alliance stated that ``NHTSA 
assumes that manufacturers were going to increase fuel economy 
significantly in numerous ways apart from a congressional or agency 
mandate to do so,'' and argued that ``by failing to consider the price 
increases needed to reach its `projected baseline,' NHTSA 
underestimates the increase in vehicle prices by about $260 per vehicle 
for cars and $920 per vehicle for trucks on average.''
    As explained, NHTSA would be double-counting to incorporate the 
costs of meeting the MY 2010 standards in the cost/benefit analysis for 
the current rulemaking. NHTSA discusses these costs, however, in the 
FRIA in Chapter I.
3. How does NHTSA's market forecast reflect current market conditions?
    NHTSA's market forecast for MY 2011, which is based significantly 
on confidential product plans provided to the agency by vehicle 
manufacturers, reflects the agency's best judgment at the time it was 
developed. Manufacturers submitted plans during the summer of 2008. In 
preceding months, the industry had begun to show signs of stress, and 
the agency believes manufacturers' revised plans submitted after the 
NPRM were informed by this. NHTSA is well aware that market conditions 
have deteriorated since late summer, just as the agency is aware that 
gasoline prices have fallen considerably in recent months.
    The agency notes, as mentioned above, that manufacturers' product 
plans were submitted along with manufacturers' indications that these 
plans were generally informed by expectations that relatively high fuel 
prices would prevail in the future. Although NHTSA did not request that 
manufacturers provide comprehensive and detailed forecasts of the world 
economy, including markets for credit and petroleum, the agency 
believes that manufacturers anticipated that, at least from MY 2011 
forward, the economic environment would look much less dire than more 
recent events would suggest. The agency believes these expectations 
were consistent with those embodied in the high price scenario in EIA's 
AEO 2008, upon which the agency has based the fuel prices and total 
light vehicle market size used in the analysis supporting today's final 
rule.
    NHTSA is cautiously hopeful that market conditions will rebound, 
and our market forecast remains consistent with that expectation. The 
recent restructuring plans submitted by Chrysler and GM, while 
diverging in absolute terms with respect to sales volumes, also 
anticipate significant sales growth by the middle part of the decade. 
In any event, were NHTSA to adopt more pessimistic expectations, those 
expectations would need to be reflected in other economic forecasts--in 
particular of petroleum prices. Were NHTSA to apply economic estimates 
that assume credit markets remain very constricted during MY 2011, it 
should, for internal consistency, apply considerably reduced estimates 
of the overall number of light vehicles sold in the U.S., and 
potentially lower estimates of gasoline and diesel fuel prices during 
the lifetimes of the vehicles covered by the standards.
    NHTSA has concluded that the forecasts it has applied in its 
current rulemaking for MY 2011 reflect the best internally consistent 
information available. The agency will, of course, update these 
forecasts in future rulemakings, and will base its analysis in those 
rulemakings on information--public, commercially-available, or 
confidential--that it considers most indicative of the fleets that 
manufacturers are likely to produce in future model years

IV. Fuel Economy-Improving Technologies

    As explained above, pursuant to the President's January 26, 2009 
memorandum, this final rule establishes passenger car and light truck 
CAFE standards for one year, MY 2011. Although this final rule 
establishes standards for that year alone, the agency undertook a 
comprehensive analysis of fuel economy-improving technologies with a 
time horizon similar to the one considered in the 2002 National Academy 
of Sciences (NAS) CAFE report. Like NAS, the agency considered 
technologies that are readily available, well known and could be 
incorporated into vehicles once production decisions are made (these 
are referred to as ``production intent'' technologies). Other 
technologies considered, called ``emerging'', are beyond the research 
phase and under development, but are not widely used at this time. The 
agency did not consider technologies in the research stage because 
their costs and/or performance are not presently well known.
    The agency has elected to include the full analysis in this final 
rule for several reasons. First, it supplements the analysis of fuel 
saving technology released by the 2002 NAS study. Second, it places in 
meaningful context the portion of the analysis that relates directly to 
MY 2011, showing which technologies are not available for that year and 
why. The agency typically evaluates technologies within a time context 
spanning more than a single model year, even if the rulemaking itself 
addresses only a single year as in the current rulemaking, because when 
manufacturers add technologies to vehicle models in order to meet CAFE 
standards, they tend to phase them in over several model years, 
consistent with vehicle redesign and refresh schedules, supplier 
contract procedures, the need for testing and validation of new 
technologies, and so forth. Consequently, although the final rule 
establishes standards for MY 2011 only, NHTSA believes that including 
the entire technology analysis will increase public understanding of 
the agency's estimates for MY 2011 of technology costs, effectiveness, 
and availability, as well as manufacturer vehicle freshening and 
redesign cycles.
    With that in mind, the following section details the cost and 
effectiveness estimates completed for technologies in the production 
intent or emerging technology phase timeline. The estimates are drawn 
from an analysis conducted in the summer of 2008. It relied as much as 
possible on published studies and confidential product plan data 
submitted by manufacturers on July 1, 2008 in response to the agency's 
NPRM request for comments published May 2, 2008. The analysis was 
conducted by engineers from DOT and Ricardo, an international 
consulting firm that specializes in automotive engineering consulting 
(discussed below). The engineering team used all data available at that 
time, along with their expert opinion to derive cost and effectiveness 
estimates for technologies

[[Page 14234]]

either in production or in the emerging stage of production for 
purposes of this rulemaking.
    The agency believes that the resulting estimates are the best 
available for MY 2011, given the information that existed at the time. 
NHTSA recognizes, however, that the analysis of and public debate over 
the cost and effectiveness of the various fuel saving technologies is 
an ongoing one. It recognizes too that aspects of its technology 
analysis will likely require updating or otherwise merit revision for 
the next CAFE rulemaking. As time progresses, new research occurs, new 
studies become available and product plan information changes. As with 
all CAFE rulemakings and pursuant to the President's memorandum, the 
agency will take a fresh look at all of its technology-related 
assumptions for the purpose of future rulemakings.

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

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

B. How NHTSA Decides Which Technologies to Include

1. How NHTSA Did This Historically, and How for the NPRM
    In the agency's last two CAFE rulemakings, which established light 
truck CAFE standards for MYs 2005-2007 and MYs 2008-2011, NHTSA relied 
on the 2002 National Academy of Sciences' report, ``Effectiveness and 
Impact of Corporate Average Fuel Economy Standards'' \109\ (``the 2002 
NAS Report'') for estimating potential fuel economy effectiveness 
values and associated retail costs of applying combinations of 
technologies in 10 classes of production vehicles. The NAS study was 
commissioned by the agency, at the direction of Congress, in order to 
provide independent and peer reviewed estimates of cost and 
effectiveness numbers. The NAS list was determined by a panel of 
experts formed by the National Academy of Sciences, and was then peer-
reviewed by individuals chosen for their diverse perspectives and 
technical expertise in accordance with procedures approved by the 
Report Review Committee of the National Research.
---------------------------------------------------------------------------

    \109\ National Research Council, ``Effectiveness and Impact of 
Corporate Average Fuel Economy (CAFE) Standards,'' National Academy 
Press, Washington, DC (2002). Available at http://www.nap.edu/openbook.php?isbn=0309076013 (last accessed October 11, 2008).
---------------------------------------------------------------------------

    In the NPRM for the MY 2011-2015 CAFE standards, NHTSA explained 
that there has been substantial advancement in fuel-saving automotive 
technologies since the publication of the 2002 NAS Report. New 
technologies, i.e., ones that were not assessed in the NAS report, have 
appeared in the market place or are expected to appear in the timeframe 
of the proposed rulemaking. Also, new studies have been conducted and 
reports issued by several other organizations providing new or 
different information regarding the fuel economy technologies that will 
be available and their costs and effectiveness values. To aid the 
agency in assessing these developments, NHTSA contracted with the NAS 
to update the fuel economy section, Chapter 3, of the 2002 NAS Report. 
However, as NHTSA explained, the NAS update was not available in time 
for this rulemaking.
    Accordingly, NHTSA worked with EPA staff to update the technology 
assumptions, and used the results as a basis for its NPRM. EPA staff 
published a related report and submitted it to the NAS committee.\110\
---------------------------------------------------------------------------

    \110\ EPA Staff Technical Report: Cost and Effectiveness 
Estimates of Technologies Used to Reduce Light-Duty Vehicle Carbon 
Dioxide Emissions, EPA 420-R-08-008, March 2008.
---------------------------------------------------------------------------

2. NHTSA's Contract with Ricardo for the Final Rule
    NHTSA specifically sought comment on the estimates, which it had 
developed jointly with EPA, of the availability, applicability, cost, 
and effectiveness of fuel-saving technologies, and the order in which 
the technologies were applied. See 73 FR 24352, 24367. To aid the 
agency in analyzing those comments and increasing the accuracy, clarity 
and transparency of its technology assumptions and methodologies 
employed in developing them, it hired an international consulting firm, 
Ricardo, which specializes in automotive engineering consulting. 
Ricardo, which describes itself as an eco-innovation technology 
company, is a leading independent provider of technology, product 
innovation, engineering solutions, software and strategic consulting. 
Its skill base includes the state-of-the-art in low emissions and fuel-
efficient powertrain and vehicle technology. Its customers include 
government agencies here and abroad and the world's automotive, 
transport and new-energy industries.\111\ For example, it has provided 
technical consulting on low CO2 strategies to the UK 
Department for Transport (DfT).\112\ Additionally, in December 2007, 
Ricardo completed an important study for EPA titled ``A Study of 
Potential Effectiveness of Carbon Dioxide Reducing Vehicle 
Technologies.'' \113\
---------------------------------------------------------------------------

    \111\ More information about Ricardo's work is available at 
their Web site, http://www.ricardo.com (last accessed September 20, 
2008). Its 2007 Annual Report provides a comprehensive view of some 
of its current work. See http://www.ricardo.com/investors/download/annualreport2007.pdf (last accessed September 22, 2008).
    \112\ Ricardo UK Ltd., ``Understanding manufacturers' responses 
to policy measures to incentivise fuel efficiency,'' Oct. 5, 2007. 
Available at http://www.dft.gov.uk/consultations/closed/co2emissions/ricardoreport.pdf (last accessed Oct. 4, 2008).
    \113\ A slightly updated (June 2008) version of Ricardo's study 
for EPA is available on EPA's Web site, at http://www.epa.gov/otaq/technology/420r08004a.pdf (last accessed September 20, 2008).
---------------------------------------------------------------------------

    Ricardo's role was as a technical advisor to NHTSA staff. In this 
capacity, Ricardo helped NHTSA undertake a comprehensive review of the 
NPRM technology assumptions and all comments received on those 
assumptions, based on both old and new public and confidential 
manufacturer information. NHTSA and Ricardo staff reviewed and compared 
comments on the availability and applicability of technologies, and the 
logical progression between them. NHTSA also reviewed and compared the 
methodologies used for determining

[[Page 14235]]

the costs and effectiveness of the technologies as well as the specific 
estimates provided. Relying on the technical expertise of Ricardo and 
taking into consideration all the information available, NHTSA revised 
its estimates of the availability and applicability of many 
technologies, and revised its estimate of the order in which the 
technologies were applied and how they are differentiated by vehicle 
class, as well as the costs and effectiveness estimates and used the 
revised numbers in analyzing alternative levels of stringency.
    While NHTSA sought Ricardo's expertise and relied significantly on 
their assistance as a neutral expert in developing its technical 
assumptions, it retained responsibility for the final estimates. The 
agency believes that the representation of technologies for MY 2011--
that is, estimates of the availability, applicability, cost, and 
effectiveness of fuel-saving technologies, and the order in which the 
technologies were applied--used in this rulemaking is more accurate 
than that used in the NPRM, and is the best available for purposes of 
this rulemaking.

C. What Technology Assumptions has NHTSA Used for the Final Rule?

1. How do NHTSA's technology assumptions in the final rule differ from 
those used in the NPRM?
    This final rule uses the same basic framework as the NPRM. However, 
NHTSA made several changes to its technology assumptions based on 
comments and information received during the rulemaking. As in the NPRM 
and the MY 2008-2011 light truck rule, the agency relied on the Volpe 
model CAFE Compliance and Effects Modeling System which was developed 
by the Department of Transportation's Volpe National Transportation 
Systems Center (Volpe Center) to apply technologies. The model, known 
as the Volpe model, is the primary tool the agency has used in 
conducting a ``compliance analysis'' of various CAFE stringencies. The 
Volpe model relied on the same types of technology related inputs as in 
previous rules, including market data files, technology cost and 
effectiveness estimates by vehicle classification, technology 
synergies, phase-in rates, learning curve adjustments, and technology 
decision trees.
    Regarding the decision trees, both the structure of the trees and 
ordering of the technologies were revised. The decision trees have been 
expanded so that NHTSA is better able to track the incremental and net/
cumulative cost and effectiveness of each technology, which 
substantially improves the ``accounting'' of costs and effectiveness 
for the final rule.\114\ The revised decision trees also have improved 
integration, accuracy, and technology representations.
---------------------------------------------------------------------------

    \114\ In addition to the (simplified) decision trees, as 
published in this document, NHTSA also utilized ``expanded'' 
decision trees in the final rule analysis. Expanded decision trees 
graphically represent each unique path, considering the branch 
points available to the Volpe model, which can be utilized for 
applying fuel saving technologies. For instance, the engine decision 
tree shown in this document has 20 boxes representing engine 
technologies, whereas the expanded engine decision tree requires a 
total of 45 boxes to accurately represent all available application 
variants. Expanded decision trees presented a significant 
improvement, compared to the NPRM analysis, in the overall 
assessment and tracking of applied technologies since they allowed 
NHTSA staff to accurately view and assess both the incremental and 
the accumulated, or net cost and effectiveness at any stage of 
technology application in a decision tree. Because of the large 
format of the expanded decision trees, they could not be included in 
the Federal Register, so NHTSA refers the reader to Docket No. 
NHTSA-2008-0177. Expanded decision trees for the engine, 
electrification/transmission/hybridization, and the vehicle 
technologies (three separate decision trees) were developed for each 
of the 12 vehicle technology application classes (the vehicle 
subclasses discussed in Section IV.D.4) and the three expanded 
decision trees for the Large Car subclass have been placed in the 
docket as an example for the reader's information.
---------------------------------------------------------------------------

    In revising the decision trees, NHTSA updated, combined, split and/
or renamed technologies. Several technologies were added, while others 
were deleted. The three technologies that were deleted because they do 
not appear in either public or confidential data and are primarily in 
the research phase of development are: Camless Valve Actuation, Lean-
Burn Gasoline Direct-Injection and Homogenous Charge Compression 
Ignition.\115\ NHTSA also added three advanced technologies based on 
confidential manufacturer submissions which showed these technologies 
as being emerging and currently under development. These technologies 
are: Combustion Restart, Exhaust Gas Recirculation Boost, and Plug-in 
Hybrids.
---------------------------------------------------------------------------

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

    The Volpe model was modified to allow a non-linear phase-in rate 
across the five model years, rather than a constant phase-in rate as 
was used in the NPRM and in previous rules. Most technology 
applications have tighter phase-in caps in the early years to provide 
for additional lead time.
    In the NPRM, NHTSA applied volume-based learning factors to 
technology costs for the first time. These learning factors were 
developed using the parameters of learning threshold, learning rate 
(decremented over two cycles), and the initial (unlearned) cost. In the 
NPRM, NHTSA applied a learning rate discount of 20 percent each time a 
technology was projected for use on 25,000 vehicles per manufacturer, 
which was the threshold volume for learning rate discounts. The 
discounts were only taken twice, at 25,000 and 50,000 vehicles. A 
technology was viewed as being fully learned out at 100,000 units.
    The agency also reconsidered volume-based learning factors and made 
significant revisions. First, the volume learning is now applied on an 
industry basis as opposed to a manufacturer basis. This takes into 
account the fact that the automobile industry shares best practices and 
that manufacturers learn from that sharing to produce their vehicles at 
lower costs. For the final rule, the revised learning threshold is set 
to 300,000 vehicles per year by the automobile industry. This number 
was developed based on comments indicating that many of the publicly 
available technology cost estimates are based on production quantities 
of 900,000 to 1.5 million vehicles by at least 3 manufacturers. The 
agency notes, however, that none of the technologies applied in MY 2011 
receive volume-based learning, due to the time frame applicable.
    For the technologies applied in the final rule, a time-based 
learning factor was used in response to public comments from Ford and 
others. This learning factor was not applied in the NPRM. Time-based 
learning is applied to widely available, high volume, stable and mature 
technologies typically purchased under negotiated multi-year 
contractual agreement with suppliers. This type of an agreement is 
typical of most supplier-provided fuel saving technologies. With time-
based learning, the initial cost of a technology is reduced by a fixed 
amount in its second and subsequent year of availability. A fixed rate 
3 percent year-over-year cost reduction is applied up to a maximum of 
12 percent cost reduction.
    In the NPRM NHTSA divided vehicles into ten subclasses based on 
technology applicability: four for cars and six for trucks. NHTSA 
assigned passenger cars into one of the following subclasses: 
Subcompact, Compact, Midsize, or Large Car. NHTSA assigned light trucks 
into one of the following subclasses: Minivan, Small SUV, Medium SUV, 
Large SUV, Small Pickup

[[Page 14236]]

Truck, or Large Pickup Truck. In its 2008 NPRM for MY 2011-2015, NHTSA 
included some differentiation in cost and effectiveness numbers between 
the various classes to account for differences in technology costs and 
effectiveness that are observed when technologies are applied on to 
different classes and subclasses of vehicles.
    For the final rule, NHTSA, working with Ricardo, increased the 
accuracy of its technology assumptions by reexamining the subclasses 
developed for the purpose of modeling technology application. For 
passenger cars, NHTSA divided vehicles into eight subclasses based on 
technology applicability by creating a performance class under each of 
the four subclasses. For trucks, NHTSA established four subclasses, 
including a minivan subclass, and small, midsize and large SUV/Pickup/
Van subclasses. NHTSA also provided more differentiation in the costs 
and effectiveness values by vehicle subclass. The agency found it 
important to make that differentiation because the agency estimated 
that some technologies would have different implications for large 
vehicles than for smaller vehicles.
    In summary, the revisions to NHTSA's methodology for technology 
application and cost and effectiveness estimates are designed to 
respond to comments, many of which focused on various inaccuracies and 
lack of clarity in the NPRM. NHTSA believes that the methodology for 
the final rule, as compared to the NPRM methodology, is much clearer, 
more accurate, and more representative of likely manufacturer behavior, 
although, of course, manufacturers are free to respond to the CAFE 
standards with whatever application of technology they choose. The 
revised technology related assumptions help substantially ensure the 
technological feasibility and economic practicability of the MY 2011 
CAFE standards promulgated in this final rule.
2. How are the technologies applied in the model?
    For the final rule, as in the NPRM, NHTSA made significant use of 
the CAFE Volpe model as discussed above. The NPRM contained a detailed 
discussion of the Volpe model and specifically stated its two primary 
objectives as (1) identifying technologies that manufacturers could 
apply in order to comply with a specified CAFE standard, and (2) 
calculating the cost and effects of manufacturers' technology 
applications. The NPRM also discussed other modeling systems and 
approaches that NHTSA considered to accomplish these same objectives, 
and also discusses why ultimately the agency chose to use the Volpe 
model (see 79 FR 24352, 24391). However, having done so for this final 
rule does not limit the agency's ability to use another approach for 
future CAFE rulemakings, and NHTSA will continue to consider other 
methods for estimating the costs and effects of adding technologies to 
manufacturers' future fleets.
    The Volpe model relies on several inputs and data files to conduct 
the compliance analysis, and each of these are discussed in detail in 
the NPRM. Many of these inputs contain economic and environmental data 
required for the full CAFE analysis. However, for the purposes of 
applying technologies, the subject of this section, the Volpe model 
primarily uses three data files, one that contains data on the vehicles 
being manufactured, one that identifies the appropriate stage within 
the vehicle's life-cycle for the technology to be applied, and one that 
contains data/parameters regarding the available technologies the model 
can apply. These inputs are discussed below.
    The Volpe model begins with an ``initial state'' of the domestic 
vehicle market, which in this case is the market for passenger cars and 
light trucks to be sold during the period covered by the final rule. 
The vehicle market is defined on a model, engine, and transmission 
basis, such that each defined vehicle model refers to a separately-
defined engine and a separately-defined transmission. For the final 
rule, this represented roughly 5,500 cars and trucks, 700 engines, and 
600 transmissions. The information, which is stored in a file called 
the ``vehicle market forecast,'' is informed significantly by product 
plans provided to NHTSA by vehicle manufacturers.\116\ However, the 
Volpe model does not require that the market forecast be based on 
confidential product plans, and the model is often tested using input 
files developed using only publicly- and commercially-available 
information. Also, as discussed in Section III above, EPCA does not 
require NHTSA to use manufacturers' confidential product plans as a 
basis for setting future CAFE standards, and the agency will continue 
to base its market forecasts on whatever it determines is the best 
available information, whether from public, commercially-available, or 
confidential sources.
---------------------------------------------------------------------------

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

    In addition to containing data about each vehicle, engine, and 
transmission, this file contains information for each technology under 
consideration as it pertains to the specific vehicle (whether the 
vehicle is equipped with it or not), the model year the vehicle is 
undergoing redesign, and information about the vehicle's subclass for 
purposes of technology application.
    The market forecast file provides NHTSA the ability to identify, on 
a technology by technology basis, which technologies may already be 
present (manufactured) on a particular vehicle, engine, or 
transmission, or which technologies are not applicable (due to 
technical considerations) to a particular vehicle, engine, or 
transmission. These identifications are made on a model-by-model, 
engine-by-engine, and transmission-by-transmission basis. For example, 
if Manufacturer X advises NHTSA that Vehicle Y will be manufactured 
with Technology Z, then for this vehicle Technology Z will be shown as 
used. Or alternatively, NHTSA might conclude based on its own 
assessment that for a given four cylinder engine, Manufacturer A cannot 
utilize a particular Technology C due to an engineering issue that 
prohibits it. In this case, NHTSA would, in the market forecast file, 
indicate that Technology C should not be applied to this particular 
engine (i.e., is unavailable). Since multiple vehicle models may be 
equipped with this engine, this may affect multiple models. In using 
this aspect of the market forecast file, NHTSA ensures the Volpe model 
only applies technologies in an appropriate manner, since before any 
application of a technology can occur, the model checks the market 
forecast to see if it is either already present or unavailable.
    Manufacturers typically plan vehicle changes to coincide with 
certain stages of a vehicle's life cycle that are appropriate for the 
change, or in this case the technology being applied. For instance, 
some technologies (e.g., those that require significant revision) are 
nearly always applied only when the vehicle is expected to be 
redesigned. Other technologies can be applied only when the vehicle is 
expected to be refreshed or redesigned and some others can be applied 
at any time, regardless of whether a refresh or redesign event is 
conducted. Accordingly, the model will only apply a technology at the 
particular point deemed suitable. These constraints are intended to 
produce results consistent with manufacturers' product planning 
practices. For each technology under consideration,

[[Page 14237]]

NHTSA stipulates whether it can be applied any time, at refresh/
redesign, or only at redesign. The data forms another input to the 
Volpe model, as discussed in detail below, called the Technology 
Refresh and Redesign Application table (Table IV-6). Each manufacturer 
identifies its planned redesign model year for each of its vehicles, 
and this data is also stored in the market forecast file. Vehicle 
redesign/refresh assumptions are discussed in Section IV.C.9 below.
    As discussed in Section IV.C.4 on vehicle subclasses below, NHTSA 
assigns one of 12 subclasses to each vehicle manufactured in the 
rulemaking period. The vehicle subclass data is used for the purposes 
of technology application. Each vehicle's class is stored in the market 
forecast file. When conducting a compliance analysis, if the Volpe 
model seeks to apply technology to a particular vehicle, it checks the 
market forecast to see if the technology is available and if the 
refresh/redesign criteria are met. If these conditions are satisfied, 
the model determines the vehicle's subclass, which it then uses to 
reference another input called the technology input file.
    In the technology input file, NHTSA has developed a separate set of 
technology data variables for each of the twelve vehicle subclasses. 
Each set of variables is referred to as an ``input sheet,'' so for 
example, the subcompact input sheet holds the technology data that is 
appropriate for the subcompact subclass. Each input sheet contains a 
list of technologies available for members of the particular vehicle 
subclass. The following items are provided for each technology: a brief 
description, its abbreviation, the decision tree with which it is 
associated, the (first) year in which it is available, the upper and 
lower cost and effectiveness (fuel consumption reduction) estimates, 
the learning type and rate, the cost basis, its applicability, and the 
phase-in values.
    The input sheets are another method NHTSA uses to determine how to 
properly apply, or in some cases constrain, a technology's application, 
as well as to establish the costs and fuel consumption changes that 
occur as it is applied. Examples of how technologies are applied (or 
constrained) include the ``Applicability'' variable: if it is set to 
``TRUE,'' then the technology can be applied to all members of the 
vehicle subclass (a value of ``FALSE'' would prevent the Volpe model 
from applying the technology to any member). Another example would be 
the ``Year Available'' variable, which if set to ``2012'' means the 
model can apply it to MY 2012 and later members, but cannot apply the 
technology to MY 2011 models. The ``Learning Type'' and ``Learning 
Rate'' define reductions in technology costs, if any are appropriate, 
that the Volpe model may apply under certain conditions, as discussed 
in the Learning Curve section below. ``Phase-in Values'' are intended 
to address the various constraints that limit a manufacturer's ability 
to apply technologies within a short period of time. For phase-ins, 
once the model applies a given technology to a percentage of a given 
manufacturers' fleet up to a specified phase-in cap, the model then 
ceases to apply it further instead applying other technologies. Phase-
in caps are also discussed below in Section IV.C.10.
    Perhaps the most important data contained in the input sheets are 
the cost and effectiveness information associated with each technology. 
One important concept to understand about the cost and effectiveness 
values is that they are ``incremental'' in nature, meaning that the 
estimates are ``referenced'' to some prior technology state in the 
decision tree in which the applied technology is represented, typically 
the preceding technology. Therefore, when considering values shown in 
the input sheet, the reader must understand that in all but a few cases 
they cannot fully deduce the accumulated or ``NET'' cost and 
effectiveness, referenced back to the base condition (i.e., start of 
the decision tree), without performing a more detailed analysis. The 
method for conducting this analysis, and a brief example of how it is 
done, is discussed in the Decision Tree section below. For the final 
rule, to help readers better understand Volpe model net or accumulated 
costs and fuel consumption reductions, NHTSA has published net values 
to key technology locations on the decision trees (e.g., to diesel 
engine conversion, or a strong hybrid). See the Tables showing 
Approximate Net Technology Costs and Approximate Net Technology 
Effectiveness, located in Section IV.E below. The tables have been 
produced for each of the four vehicle subclasses in the passenger car, 
performance passenger car, and light truck vehicle groups.
    The incremental costs of some technologies are dependent on certain 
factors specific to the vehicle to which they are applied. For 
instance, when the Material Substitution technology is applied, the 
cost of application is based on a cost per unit weight reduction, in 
dollars per pound, since the weight removed is a percentage of the curb 
weight of the vehicle (which differs from one vehicle to the next). 
Similarly, some engine technologies need to be calculated on a cost per 
cylinder basis, or a cost per configuration basis (i.e., a cost per 
bank basis, so that a V-configured engine would cost twice as much as 
an in-line, single bank engine). For each technology, the input sheet 
also contains a Cost Basis variable which indicates whether the costs 
need to be adjusted in this manner. This functionality, some of which 
is new for the final rule, allows NHTSA to estimate more accurately the 
costs of technology application, since in the NPRM the vehicles in a 
subclass were assumed to have common cylinder counts and configurations 
(thus the costs were underestimated for some vehicles and overestimated 
for others).
    Lastly for the technology input file, the term ``synergy'' as it 
applies to the Volpe modeling process refers to the condition that 
occurs when two or more technologies are applied to a vehicle and their 
effects interact with each other, resulting in a different net effect 
than the combination of the individual technologies. The term synergy 
usually connotes a positive interaction (e.g., 1 + 1 is more than 2), 
but as used here it also includes negative interactions (e.g., 1 + 1 is 
less than 2). Synergies are discussed in greater detail below in 
Section IV.C.7, and the values for the synergy factors NHTSA used in 
the final rule are stored in the technology input file.
    In some cases more than one decision tree path can lead to a 
subsequently applied technology. For example, the power split hybrid 
technology can be reached from one of two prior transmission 
technologies (CVT or DCTAM). Accordingly the incremental cost and 
effectiveness for applying the technology may vary depending on the 
path and the modifications made in the prior technology. To ensure 
accurate tracking of net costs and effectiveness, the Volpe model 
utilizes path correction factors, as discussed further in the decision 
tree discussion below. This functionality is an improvement to the 
final rule, and the specific factors used are stored in the technology 
input sheets. A copy of the final rule input sheets, titled ``2011-
2015--LV--CAFE--FinalRuleInputSheets20081019.pdf,'' can be obtained 
from the final rule docket.
    One additional concept to understand about how the Volpe model 
functions is called an ``engineering constraint,'' a programmatic 
method of controlling technology application that is independent of 
those discussed above. NHTSA has determined that some technologies are 
only suitable or

[[Page 14238]]

unsuitable when certain vehicle, engine, or transmission conditions 
exist. For example, secondary axle disconnect is only suitable for 4WD 
vehicles, and cylinder deactivation is unsuitable for any engine with 
fewer than 6 cylinders, while material substitution is only available 
for vehicles with curb weights greater than 5,000 pounds. Additionally, 
in response to comments received, an engineering constraint was added 
for purposes of the final rule to prevent the cylinder deactivation 
technology from being applied to vehicles equipped with manual 
transmissions, due primarily to driveability and NVH concerns 
documented by the commenter. Where appropriate and required, NHTSA has 
utilized engineering constraints to ensure accurate application of the 
fuel saving technologies.
3. Technology Application Decision Trees
    Several changes were made to the Volpe model between the analysis 
reported in the NPRM and the final rule. This section will discuss two 
of those changes: First, the updates to the set of technologies; and 
second, the updates to the logical sequence for progressing through 
these technologies, which NHTSA describes as ``decision trees.''
    As discussed above, the set of technologies considered by the 
agency has evolved since the NPRM. The set of technologies now included 
in the Volpe model is shown below in Table IV-1, with abbreviations 
used by the model to refer to each technology in the interest of 
brevity. Section IV.D below explains each technology in much greater 
detail, including definitions and cost and effectiveness values.

[[Page 14239]]

[GRAPHIC] [TIFF OMITTED] TR30MR09.015

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

[[Page 14240]]

incremental estimate takes into account its position in the decision 
tree path. If a technology is located further down the decision tree, 
the estimates for the costs and effectiveness values attributed to that 
technology are influenced by the incremental estimates of costs and 
effectiveness values for prior technology applications. In essence, 
this approach accounts for ``in-path'' effectiveness synergies and cost 
effects that occur between the technologies in the same path. When 
comparing cost and effectiveness estimates from various sources and 
those provided by commenters, it is vital that the estimates are 
evaluated in the proper context, especially as concerns their likely 
position in the decision trees and other technologies that may be 
present or missing. Not all estimates provided by commenters can be 
considered an ``apples-to-apples'' comparison with those used by the 
Volpe model, since in some cases the order of application, or included 
technology content, is inconsistent with that assumed in the decision 
tree.
    For the final rule, significant revisions have been made to the 
sequence of technology applications within the decision trees, and in 
some cases the paths themselves have been modified and additional paths 
have been added. The additional paths allow for a more accurate 
application of technology, insofar as the model now considers the 
existing configuration of the vehicle when applying technology. In this 
analysis, single overhead camshaft (SOHC), dual overhead camshaft 
(DOHC) and overhead valve (OHV) configured engines now have separate 
paths that allow for unique path-dependent versions of certain engine 
technologies. Thus, the cylinder deactivation technology (DEAC) now 
consists of three unique versions that depend on whether the engine 
being evaluated is an SOHC, DOHC or OHV design; these technologies are 
designated by the abbreviations DEACS, DEACD and DEACO, respectively, 
to designate which engine path they are located on. Similarly the last 
letter for the Coupled Cam Phasing (CCP) and Discrete Variable Valve 
Lift (DVVL) abbreviations are used to identify which path the 
technology is applicable to.
    Use of separate valvetrain paths and unique path-dependent 
technology variations also ensures that the incremental cost and 
effectiveness estimates properly account for technology effects so as 
not to ``double-count.'' For example, in the SOHC path, the incremental 
effectiveness estimate for DVVLS assumes that some pumping loss 
reductions have already been accomplished by the preceding technology, 
CCPS, which reduces or diminishes the effectiveness estimate for DVVLS 
because part of the efficiency gain associated with the reduction of 
the pumping loss mechanism has already occurred. Commenters pointed out 
several instances in the NPRM where double-counting appeared to have 
occurred, and the accounting approach used in the final rule resolves 
these concerns.
    In reviewing NPRM comments, NHTSA noted several questions regarding 
the retention of previously applied technologies when more advanced 
technologies (i.e., those further down the decision tree) were applied. 
In response, NHTSA has clarified the final rule discussions on this 
issue. In both the NPRM and final rule, as appropriate and feasible, 
previously-applied technologies are retained in combination with the 
new technology being applied, but this is not always the case. For 
instance, one exception to this would be the application of diesel 
technology, where the entire engine is assumed to be replaced, so 
gasoline engine technologies cannot carry over. This exception for 
diesels, along with a few other technologies, is documented below in 
the detailed discussion of changes to each decision tree and 
corresponding technologies.
    As the Volpe model steps through the decision trees and applies 
technologies, it accumulates total or ``NET'' cost and effectiveness 
values. Net costs are accumulated using an additive approach while net 
effectiveness estimates are accumulated multiplicatively. To help 
readers better understand the accumulation process, and in response to 
comments expressing confusion on this subject, the following examples 
demonstrate how the Volpe model calculates net values.
    Accumulation of net cost is explained first as this is the simpler 
process. This example uses the Electrification/Accessory decision tree 
sequentially applying the EPS, IACC, MHEV, HVIA and ISG technologies to 
a subcompact vehicle using the cost and effectiveness estimates from 
its input sheet. As seen in Table IV-2 below, the input sheet cost 
estimates have a lower and upper value which may be the same or a 
different value (i.e., a single value or a range) as shown in columns 
two and three. The Volpe model first averages the values (column 4), 
and then sums the average values to calculate the net cost of applying 
each technology (column 5). Accordingly, the net cost to apply the MHEV 
technology for example would be ($112.50 + $192.00 + $372.00 = 
$676.50). Net costs are calculated in a similar manner for all the 
decision trees.
[GRAPHIC] [TIFF OMITTED] TR30MR09.016


[[Page 14241]]


    The same decision tree, technologies, and vehicle are used for the 
example demonstrating the model's net effectiveness calculation. Table 
IV-3 below shows average incremental effectiveness estimates in column 
two; this value is calculated in the same manner as the cost estimates 
above (average of lower and upper value taken from the input sheet). To 
calculate the change in fuel consumption due to application of the EPS 
technology with incremental effectiveness of 1.5 percent (or 0.015 in 
decimal form, column 3), when applied multiplicatively, means that the 
vehicle's current fuel consumption `X' would be reduced by a factor of 
(1-0.015) = 0.985,\117\ or mathematically 0.985*X. To represent the 
changed fuel consumption in the normal fashion (as a percentage 
change), this value is subtracted from 1 (or 100%) to show the net 
effectiveness in column 5.
---------------------------------------------------------------------------

    \117\ A decrease in fuel consumption (FC) means the fuel economy 
(FE) will be increased since fuel consumption and economy are 
related by the equation FC = 1/FE.
---------------------------------------------------------------------------

    As the IACC technology is applied, the vehicle's fuel consumption 
is already reduced to 0.985 of its original value. Therefore the 
reduction for an additional incremental 1.5 percent results in a new 
fuel consumption value of 0.9702, or a net 2.98 percent effectiveness, 
as shown in the table. Net effectiveness is calculated in a similar 
manner for the all decision trees. It should be noted that all 
incremental effectiveness estimates were derived with this 
multiplicative approach in mind; calculating the net effectiveness 
using an additive approach will yield a different and incorrect net 
effectiveness.
[GRAPHIC] [TIFF OMITTED] TR30MR09.017

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

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

    The following paragraphs explain, in greater detail, the revisions 
to the decision trees and technologies from the NPRM to the final rule. 
Revisions were made in response to comments received and pursuant to 
NHTSA's analysis, and were made to improve the accuracy of the Volpe 
compliance analysis, or to correct other concerns from the NPRM 
analysis.
Engine Technology Decision Tree
    Figure IV-1 below shows the final rule decision tree for the engine 
technology category. For the final rule, NHTSA removed camless valve 
actuation (CVA), lean-burn GDI (LBDI), and homogenous charge 
compression ignition (HCCI) from the decision trees because these 
technologies were determined to be still in the research phase of 
development. NHTSA did not receive any new information or comments that 
suggested these technologies are under development, so NHTSA removed 
them from the decision trees. At the top of the engine decision tree 
Low Friction Lubricants (LUB) and Engine Friction Reduction (EFR) 
technologies are retained as utilized in the NPRM.
    As stated above, SOHC, DOHC and OHV engines have separate paths, 
whereas as the NPRM only made the distinction between OHC and OHV 
engines. The separation of SOHC and DOHC engines allowed the model to 
more accurately apply unique path-dependent valvetrain technologies 
including variations of Variable Valve Timing (VVT), Variable Valve 
Lift (VVL) and cylinder deactivation that are tailored to either SOHC 
or DOHC engines. This separation also allowed for a more accurate 
method of accounting for net cost and effectiveness

[[Page 14242]]

compared to the NPRM. For both the SOHC and DOHC paths, VVL 
technologies were moved upstream of cylinder deactivation in response 
to comments from the Alliance, additional confidential manufacturer 
comments and submitted product plan trends, and NHTSA's analysis. 
Confidential comments stated that applying cylinder deactivation to an 
OHC engine is more complex and expensive than applying it to an OHV 
engine. The Alliance additionally stated that cylinder deactivation is 
very application-dependent, and is more effective when applied to 
vehicles with high power-to-weight ratios. Taking in account the 
application-specific nature of cylinder deactivation and the fact the 
VVL technologies are more suitable to a broader range of applications, 
NHTSA moved VVL technologies ``upstream'' of cylinder deactivation on 
the SOHC and DOHC to more accurately represent how a manufacturer might 
apply these technologies.
BILLING CODE 4910-59-P

[[Page 14243]]

[GRAPHIC] [TIFF OMITTED] TR30MR09.018

BILLING CODE 4910-59-C
    On the OHV path, the ordering of cylinder deactivation (DEACO) then 
Coupled Cam Phasing (CCPO), which is opposite the order of the SOHC and 
DOHC paths, was retained as defined in the NPRM. This ordering depicts 
most accurately how manufacturers would actually implement these 
technologies and was reflected in the submitted product plans for OHV 
engines, which are largely used on trucks with high power-to-weight 
ratios. After the application of CCPO on the OHV decision tree, the 
model chooses between Discrete Variable Valve Lift (DVVLO) and the 
conversion to a dual overhead camshaft engine (CDOHC). This conversion 
now includes Dual Cam Phasing (DCP) instead of Continuously Variable 
Valve Lift (CVVL) because it is assumed that DCP, with its higher 
application rates, would more likely be

[[Page 14244]]

applied than CVVL, with its lower application rates.
    At this stage, and similar to the NPRM, the decision tree paths all 
converge into Stoichiometric Gasoline Direct Injection (SGDI). All 
previously applied technologies are retained with the assumption that 
SGDI is applied in addition to the pre-existing engine technologies. 
After SGDI, a newly defined technology, Combustion Restart (CBRST), has 
been added.
    The ``branch point'' after CBRST has been limited to two paths 
instead of the three paths in NPRM. This is due to the removal of HCCI 
from the final rule decision trees. The final rule engine decision tree 
allowed the model to apply either Turbocharging and Downsizing (TRBDS) 
or the conversion to diesel (DSLC). TRBDS is considered to be a 
completely new engine that has been converted to DOHC, if not already 
converted, with only LUB, EFR, DCP, SGDI and CBRST applied.
    The conversion to diesel is also considered to be a completely new 
engine that replaces the gasoline engine (although it carries over the 
LUB and EFR technologies). If the model chooses to follow the TRBDS 
path, the next technology that can be applied is another newly-added 
technology, EGR Boost (EGRB). After EGRB, the model is allowed to then 
convert the engine to diesel (DSLT). It should be noted that the path-
dependent variations of diesel, (DSLC) and (DSLT), result in the exact 
same technology. The net cost and effectiveness estimates are the same 
for both but DSLT's incremental cost and effectiveness estimates are 
slightly lower to account for the TRBDS and EGRB technologies that have 
already been applied.
Electrification/Accessory Technology Decision Tree
    This path, shown in Figure IV-2, was named simply ``Accessory 
Technology'' in the NPRM. Electric Power Steering (EPS) is now the 
first technology in this decision tree, since it is a primary enabler 
for both mild and strong hybrids. Improved Accessories (IACC) has been 
redefined to include only an intelligent cooling system and follows EPS 
(in the NPRM, IACC was the first technology in the tree). The 42-volt 
Electrical System (42V) technology has been removed because it is no 
longer viewed as the voltage of choice by manufactures and is being 
replaced by higher voltage systems. Micro-Hybrid (MHEV), which follows 
IACC, has been added as a 12-volt stop/start system to replace 
Integrated Starter/Generator with Idle-Off (ISGO), which was on the 
``Transmission/Hybrid Technology'' decision tree in the NPRM. Higher 
Voltage/Improved Alternator (HVIA), a higher efficiency alternator that 
can incorporate higher voltages (greater than 42V) follows MHEV. 
Integrated Starter Generator Hybrid (ISG) replaced IMA/ISAD/BSG Hybrid 
(which was also on the Transmission/Hybrid Technology decision tree in 
the NPRM) as a higher voltage hybrid system with limited regenerative 
capability. ISG takes into account all the previously applied 
Electrification/Accessory technologies and is the final step necessary 
in order to convert the vehicle to a (full) strong hybrid. All 
Electrification/Accessory technologies can be applied to both automatic 
and manual transmission vehicles.
Transmission Technology Decision Tree
    This decision tree, shown in Figure IV-2, contains two paths: one 
for automatic transmissions and one for manual transmissions. On the 
automatic path, the Aggressive Shift Logic (ASL) and Early Torque 
Converter Lockup (TORQ) technologies from the NPRM have been combined 
into an Improved Auto Trans Controls/Externals (IATC) technology, as 
both these technologies typically include only software or calibration-
related transmission modifications. This technology was moved to the 
top of the decision tree since it was deemed to be easier and less 
expensive to implement than a major redesign of the existing 
transmission. The 5-Speed Automatic Transmission (5SP) technology from 
the NPRM has been deleted due to several factors. First, the updated 
decision tree logic seeks to optimize the current hardware as an 
initial step, instead of applying an expensive redesign technology. 
Second, NHTSA determined an industry trend of 4-speed automatics going 
directly to 6-speed automatics, as reflected in the submitted product 
plans. And finally, confidential manufacturer comments indicated that 
in some cases 5-speed transmissions offered little or no fuel economy 
improvement over 4-speed transmissions (primarily due to higher 
internal mechanical and hydraulic losses, and increased rotating mass), 
making the technology less attractive from a cost and effectiveness 
perspective. In the final rule, both 4-speed and 5-speed automatic 
transmissions get the IATC technology applied first, before progressing 
through the rest of the transmission decision tree.
    After IATC the decision tree splits into a ``Unibody only'' and 
``Unibody or Ladder Frame'' paths, which is identical to the NRPM 
version of the decision tree. Both of these paths represent a 
conversion to new and fully optimized designs. The Unibody only path 
contains the Continuously Variable Transmission (CVT) technology, while 
the Unibody or Ladder Frame path has the 6-Speed Automatic Transmission 
(6SP) technology being replaced by 6/7/8-Speed Automatic Transmission 
with Improved Internals (NAUTO). The NAUTO technology represents a new 
generation of automatics with lower internal losses from gears and 
hydraulic systems.
    The NPRM technology ``Automated Manual Transmission (AMT)'' has 
been renamed Dual Clutch Transmission/Automated Manual Transmission 
(DCTAM) to more accurately reflect the true intent of this technology 
to be a Dual Clutch Transmission (DCT). The NPRM's use of the 
abbreviation ``AMT'' was confusing to many commenters, including the 
Alliance, BorgWarner, Chrysler, Ford and General Motors, and appeared 
to indicate that the NPRM analysis applied true automated manual 
transmissions, which exhibit a torque interrupt characteristic that 
many in the industry feel will not be customer acceptable. DCT does not 
have the torque interrupt concern. The technology DCTAM for the final 
rule assumes the use of a DCT type transmission only.
    The manual transmission path only has one technology application, 
like the NPRM. However, the technology being applied has been defined 
as conversion to a 6-Speed Manual with Improved Internals (6MAN) 
instead of a conversion to a 6/7/8-Speed Manual Transmission as defined 
in the NRPM. Extremely limited use of manual transmissions with more 
than 6 speeds is indicated in the updated product plans, so NHTSA 
believes this is a more accurate option for replacing a 4 or 5-speed 
manual transmission.
Hybrid Technology Decision Tree
    The strong hybrid options, 2-Mode (2MHEV) and Power Split (PSHEV), 
are no longer sequential as defined in the NPRM's Transmission/Hybrid 
decision tree. For the final rule, the model only applies strong hybrid 
technologies when both the Electrification/Accessory and Transmission 
(automatic transmissions only) technologies have been fully added to 
the vehicle, as seen in Figure IV-2. The final rule analysis and logic 
ensures that the model does not double-count the cost and effectiveness 
estimates for previously applied technologies that are included (e.g., 
EPS) or replaced (e.g., transmission) by strong hybrid systems, which 
is responsive to General Motors' comment

[[Page 14245]]

stating that the NPRM analysis had the potential to double-count 
effectiveness estimates when applying strong hybrids. For the final 
rule analysis, when the Volpe model applies strong hybrids it now takes 
into account that some of the fuel consumption reductions have already 
been accounted for when technologies like EPS or IACC have been 
previously applied. Once all the Electrification/Accessory and 
Transmission technologies have been applied, the model is allowed to 
choose between the application of 2MHEV, PSHEV and the newly added 
Plug-in Hybrid Vehicle (PHEV). The NPRM decision tree required the 
Volpe model to step through 2MHEV in order to apply PSHEV. This updated 
final rule decision tree is a more realistic representation of how 
manufacturers might apply strong hybrids, and allows the Volpe model to 
choose the strong hybrid that is most appropriate for each vehicle 
based on its vehicle subclass or the most cost-effective technology 
application. The PHEV technology was added to the decision tree in the 
final rule based upon information in the public domain and submitted 
product plans showing that limited quantities of these vehicles will be 
available from some manufacturers in this timeframe.
[GRAPHIC] [TIFF OMITTED] TR30MR09.019

Vehicle Technology Decision Tree
    Material Substitution (MS1), (MS2), and (MS5) are now located on 
dedicated material substitution path in the Vehicle Technology Decision 
Tree, shown in Figure IV-3. Low Rolling Resistance Tires (ROLL), Low 
Drag Brakes (LDB) and Secondary Axle Disconnect (SAX) now reside as a 
separate path, due to the relocation of material substitution 
technologies. Secondary Axle Disconnect has been redefined for the 
final rule to apply to 4WD vehicles only to more accurately reflect 
feasible applications of this technology. Aerodynamic Drag Reduction 
(AERO) remains a separate tree, and is now a 10 percent reduction for 
both car and truck classes (excluding performance cars, which are 
exempt).

[[Page 14246]]

[GRAPHIC] [TIFF OMITTED] TR30MR09.020

4. Division of Vehicles Into Subclasses Based on Technology 
Applicability, Cost and Effectiveness
    In assessing the feasibility of technologies under consideration, 
the agency evaluated whether each of these technologies could be 
implemented on all types and sizes of vehicles and whether some 
differentiation is necessary with respect to the potential to apply 
certain technologies to certain types and sizes of vehicles, and with 
respect to the cost incurred and fuel consumption achieved when doing 
so. The 2002 NAS Report differentiated technology application using ten 
vehicle classes (4 cars classes and 6 truck classes, including 
subcompact cars, compact cars, midsize cars, large cars, small SUVs, 
midsize SUVs, large SUVs, small pickups, large pickups, and minivans), 
but did not determine how cost and effectiveness values differ from 
``class'' to ``class.'' NAS's purpose in separating vehicles into these 
``classes'' was to create groups of ``like'' vehicles, i.e., vehicles 
similar in size, powertrain configuration, weight, and consumer use, 
and for which similar technologies are applicable. This vehicle 
differentiation is done solely for the purpose of applying technologies 
to vehicles and assessing their incremental costs and effectiveness, 
and should not be confused with, the regulatory classifications 
pursuant to 49 CFR part 523 discussed in Chapter XI.
    The Volpe model, which NHTSA has used to perform analysis 
supporting today's notice, divides the vehicle fleet into subclasses 
based on model inputs, and applies subclass-specific estimates, also 
from model inputs, of the applicability, cost, and effectiveness of 
each fuel-saving technology. Therefore, the model's estimates of the 
cost to improve the fuel economy of each vehicle model depend upon the 
subclass to which the vehicle model is assigned.
    In its MY 2005-2007 and MY 2008-2011 light truck CAFE standards as 
well as NPRM, NHTSA performed analysis using the same vehicle classes 
defined by NAS in its 2002 Report. In its 2008 NPRM for MY 2011-2015, 
NHTSA included some differentiation in cost and effectiveness numbers 
between the various classes to account for differences in technology 
costs and effectiveness that are observed when technologies are applied 
on to different classes and subclasses of vehicles. The agency found it 
important to make that differentiation because the agency estimated 
that, for example, engine turbocharging and downsizing would have 
different implications for large vehicles than for smaller vehicles. 
For the final rule, NHTSA, working with Ricardo, increased the accuracy 
of its technology assumptions by reexaming the subclasses developed for 
the purpose of modeling technology application and by providing more 
differentiation in the costs and effectiveness values by vehicle 
subclass.
    In the request for comments accompanying the NPRM, NHTSA asked 
manufacturers to identify the style of each vehicles model they submit 
in their product plans from eight possible groupings (convertible, 
coupe, hatchback, pickup, sedan, sport utility, van, or wagon) or 
sixteen possible market segments (cargo van, compact car, large car, 
large pickup, large station wagon, midsize car, midsize station wagon, 
mini-compact, minivan, passenger van, small pickup, small station 
wagon, special purpose, sport utility truck, subcompact car, and two-
seat car). NHTSA also requested that manufacturers identify many 
specific characteristics relevant to each vehicle model, such as the 
number of cylinders of the vehicle's engine and other engine, 
transmission and vehicle characteristics. This information was 
evaluated by NHTSA staff, entered in NHTSA's market data file, and used 
by NHTSA to assess how to divide the vehicles into subclasses for 
purposes of differentiating the applicability, effectiveness, and cost 
of available technologies.
    In response to the NPRM, the Alliance commented that NHTSA's 
classification approach is not robust enough. With regard to subclasses 
of cars, the Alliance stated that NHTSA did not distinguish high-
performance and sports cars which cannot accommodate certain 
technologies without changing the purpose and configuration of the 
vehicle. With regard to subclasses of trucks, the Alliance argued that 
SUVs were not adequately distinguished by size. The Alliance further 
stated the classification used by Sierra Research in

[[Page 14247]]

its report to distinguish groups of like vehicles for technology 
application purposes was more realistic and representative of 
differences in market segments than NHTSA's classification. The 
Alliance suggested that NHTSA consider the classes identified by Sierra 
Research in the final rule.
    NHTSA is not adopting Sierra's approach to classification for the 
following reasons. First, Sierra's classification scheme is too 
dependent on vehicle characteristics for which NHTSA often did not 
receive complete information from manufacturers. For example, although 
NHTSA requested that manufacturers provide estimates of the aerodynamic 
drag coefficient of each vehicle model planned for MY2011-2015, the 
agency received no estimates for many vehicles. NHTSA believes 
manufacturers are too far from production on many vehicles to 
confidently provide such estimates. Second, Sierra's classification 
scheme is, for NHTSA's purposes, excessively fine-grained. Sierra's 
analysis relied on 25 subclasses in total, 13 for cars and 12 for 
trucks. While their report provided tables comparing their classes to 
those of NHTSA's and cited product examples for each class, it did not 
provide a reason for why this detailed differentiation would 
significantly improve the outcome. NHTSA's review of the Sierra report 
did not reveal many differences in technology-application between these 
subclasses. In addition, the agency does not believe that the effort 
required by the agency to create a more detailed yet more complex 
modeling structure based on 25 subclasses would result in significant 
improvement in the accuracy of the results. Sierra may have found this 
additional differentiation important for the full vehicle simulation 
approach that the Alliance claimed should be used throughout NHTSA's 
analysis. However, as discussed below, NHTSA has concluded that this 
approach is neither necessary nor practical for CAFE analysis.
    The agency agrees with the Alliance, however, that some refinement 
in the classification approach used by NHTSA in the NPRM is merited in 
order to ensure the practicability of technologies being added. The 
agency also believes that the limited differentiation in costs and 
effectiveness values by vehicle class needs to be expanded in order to 
better account for fuel savings and costs.
    For the final rule, NHTSA first reexamined the Volpe model 
technology output files from the NPRM to identify where and why 
technologies may have been inappropriately applied by the model. Where 
this reexamination revealed logical errors, the Volpe model was revised 
accordingly. However, the review revealed that most of the observed 
inaccuracies resulted from the manner in which vehicles were assigned 
to subclasses for the purpose of technology applications. NHTSA also 
reviewed the confidential vehicle level information received from 
manufacturers, how manufacturers classified their vehicles by style or 
market segment groupings requested by NHTSA and the specific engine, 
transmission and other vehicle characteristics identified by the 
manufacturers for each vehicle model. This conclusion was among those 
that led NHTSA to assign more staff to perform quality control when 
reviewing and integrating manufacturers' product plans.
    In order to improve the accuracy of technology application 
modeling, NHTSA examined at the car and truck segments separately. 
First, for the car segment, NHTSA plotted the footprint distribution of 
vehicles in the product plans and divided that distribution into four 
equivalent footprint range segments. The footprint ranges were named 
Subcompact, Compact, Midsize, and Large classes in ascending order. 
Cars were then assigned to one of these classes based on their specific 
footprint size. Vehicles in each range were then manually reviewed by 
NHTSA staff to evaluate and confirm that they represented a fairly 
reasonable homogeneity of size, weight, powertrains, consumer use, etc. 
However, as the Alliance pointed out, some vehicles in each group were 
sports or high-performance models. Since different technologies and 
cost and effectiveness estimates are appropriate for these vehicles, 
NHTSA created a performance subclass within each car class to maximize 
the accuracy of technology application. To determine which cars would 
be assigned to the performance subclasses, NHTSA graphed (in ascending 
rank order) the power-to-weight ratio for each vehicle in a class. An 
example of the Compact subclass plot is shown below. The subpopulation 
was then manually reviewed by NHTSA staff to determine an appropriate 
transition point between ``performance'' and ``non-performance'' models 
within each class.
[GRAPHIC] [TIFF OMITTED] TR30MR09.021


[[Page 14248]]


    A total of eight classes (including performance subclasses) were 
identified for the car segment: Subcompact, Subcompact Performance, 
Compact, Compact Performance, Midsize, Midsize Performance, Large, 
Large Performance. In total, the number of cars that were ultimately 
assigned to a performance subclass was less than 10 percent. The table 
below shows the difference in the classification between the NPRM and 
Final Rule and provides examples of the types of vehicles assigned to 
each.
[GRAPHIC] [TIFF OMITTED] TR30MR09.074

[GRAPHIC] [TIFF OMITTED] TR30MR09.022

    For light trucks, in reviewing the updated manufacturer product 
plans and in reconsidering how to divide trucks into classes and 
subclasses based on technology applicability, NHTSA found less of a 
distinction between SUVs and pickup trucks than appeared to exist in 
earlier rulemakings. Manufacturers appear to be planning fewer ladder-
frame and more unibody pickups, and many pickups will share common 
powertrains with SUVs. Consequently, NHTSA condensed the classes 
available to trucks, such that SUVs and pickups are no longer divided. 
Recognizing structural differences between various types of ``Vans,'' 
NHTSA revisited how it assigned the different types of ``Vans.'' 
Instead of merging minivans, cargo vans, utility and multi-passenger 
type vans under the same class, as it did for the NPRM and in previous 
rules, NHTSA formed a separate minivan class, because minivans (e.g., 
the Honda Odyssey) are expected to remain closer in terms of structural 
and other engineering characteristics than vans (e.g., Ford's E-
Series--also known as Econoline--vans) intended for more passengers 
and/or heavier cargo.
    The remaining vehicles (other vans, pickups, and SUVs) were then 
segregated into three footprint ranges and assigned a class of Small 
Truck/SUV, Midsize Truck/SUV, and Large Truck/SUV based on their 
footprints. NHTSA staff then manually reviewed each population for 
inconsistent vehicles based on engine cylinder count, weight (curb and/
or gross), or intended usage, since these are important considerations 
for technology application, and reassigned vehicles to classes as 
appropriate. This system produced four truck segment classes--minivans 
and small, medium, and large SUVs/Pickups/Vans. The table below shows 
the difference in the classification between the NPRM and Final Rule.

[[Page 14249]]

[GRAPHIC] [TIFF OMITTED] TR30MR09.023

    Based on a close review of detailed output from the Volpe model, 
NHTSA has concluded that its revised classification for purposes of 
technology applicability substantially improves the overall accuracy of 
the results as compared to the system employed in the NPRM. The new 
method uses footprint as a first indicator for both the car and truck 
segments, and all are then manually reviewed for the types of 
technologies applicable to them and revised by NHTSA to ensure that 
they have been properly assigned. The addition of the performance 
subclasses in the car segment and the condensing of classes in the 
truck segment further refine the system. The new method increases the 
accuracy of technology application without overly complicating the 
Volpe modeling process, and the revisions address comments received in 
response to the NPRM.
5. How did NHTSA develop technology cost and effectiveness estimates 
for the final rule?
    In the NPRM, NHTSA employed technology cost and effectiveness 
estimates developed in consultation with EPA. They represented NHTSA 
and EPA staff's best assessment of the costs for each technology 
considered based on the available public and confidential information 
and data sources that the agencies had back in 2007 when the rulemaking 
was initiated. EPA also published a report and submitted it to the NRC 
committee on fuel economy of light-duty vehicles.\119\
---------------------------------------------------------------------------

    \119\ EPA Staff Technical Report: Cost and Effectiveness 
Estimates of Technologies Used to Reduce Light-Duty Vehicle Carbon 
Dioxide Emissions. EPA420-R-08-008, March 2008.
---------------------------------------------------------------------------

    Public comments on the NPRM's technology cost estimates generally 
fell into four categories: (1) That costs are underestimated because 
NHTSA did not account for all changes/costs required to apply a 
technology or because although NHTSA correctly identified all the 
changes required, it did not cost those changes appropriately; (2) that 
costs are underestimated because the Retail Price Equivalent (RPE) 
factors have been applied incorrectly to technologies; (3) that costs 
are either over- or underestimated because learning curves have been 
applied incorrectly to technologies; and (4) that cost assumptions are 
overly simplified as applied to the full range of fleet vehicles and do 
not properly account for the differences in cost impacts across vehicle 
and engine types (e.g., technologies applied to a sub-compact car will 
be unique to those same technologies applied to a large SUV). Many 
commenters also stated that they found it difficult to understand how 
NHTSA and EPA had derived the cost estimates. In addition to commenting 
on NHTSA's methodology, many commenters, particularly manufacturers, 
also submitted their own cost estimates for each technology and 
requested that NHTSA consider them for the final rule.
    As explained above, NHTSA contracted with Ricardo to aid the agency 
in analyzing the comments on the technology assumptions used in the 
NPRM, and relied considerably on Ricardo's expertise in developing the 
final technology cost and effectiveness estimates based on that 
analysis. For every technology included in NHTSA's analysis of 
technology costs and effectiveness, Ricardo and NHTSA engineers 
reviewed the comments thoroughly and exercised their expertise in 
assessing the merits of the comments, and in resolving the differences 
and determining which estimates should be used for the final rule.
    For each technology, NHTSA relied on Ricardo's experience with 
``bill of materials'' (BOM) costing. Some commenters criticized NHTSA 
for not using a BOM as the basis for its cost analysis. The 2008 Martec 
report,\120\ which updated the Martec report on which the 2004 NESCCAF 
study was based, was submitted by auto industry commenters to NHTSA's 
NPRM docket for the agency's consideration. This report provides cost 
estimates developed on a ``bill of materials'' basis and methodology. 
NHTSA, with Ricardo's assistance, reviewed the ``bill of materials'' 
methodology in the Martec report and found it to be, compared to the 
methodology used in the NPRM, a more defensible and transparent basis 
for evaluating the costs of applicable technologies.
---------------------------------------------------------------------------

    \120\ Martec, ``Variable Costs of Fuel Economy Technologies,'' 
June 1, 2008.
---------------------------------------------------------------------------

    A bill of materials in a general sense is a list of components that 
make up a system--in this case, an item of fuel economy-improving 
technology. In

[[Page 14250]]

order to determine what a system costs, one of the first steps is to 
determine its components and what they cost. In cases in which it was 
not practicable for the agency and Ricardo to estimate the cost of each 
component on a BOM basis because there was a shift to a more advanced 
technology and or because of difficulty in accounting for the sum of 
costs of all added components less the sum of costs of all deleted 
components (e.g., in the transition from a gas engine to a diesel 
engine), incremental costs were estimated to be those of the entire new 
technology platform (in this example, the diesel engine) less those of 
the entire old technology platform (in this example, the gas engine). 
This ``net difference'' process was only used where developing a 
ground-up description of all component changes necessitated by the 
incremental technology was deemed to be impracticable.
    With that framework in mind, Ricardo and NHTSA engineers proceeded 
with reviewing cost information for each major component of each 
technology. They compared the multiple sources available in the docket 
and assessed their validity. While NHTSA and Ricardo engineers relied 
considerably on the 2008 Martec Report for costing contents of some 
technologies, they did not do so for all. When relevant publicly 
available information and data sets, including the 2008 Martec report, 
were determined to be incomplete or non-existent, NHTSA looked to prior 
published data, including the NPRM, or to values provided to NHTSA by 
commenters familiar with the material costs of the described 
technologies.
    Generally, whenever cost information for a technology component 
existed in a non-confidential and publicly available report submitted 
to the NPRM docket and that information agreed with Ricardo's 
independent review of cost estimates based on Ricardo's historical 
institutional knowledge, Ricardo and NHTSA cited that information. 
Ricardo and NHTSA were able to take that approach frequently, as is 
evident in the explanation of the cost figures of each technology. When 
that approach was not possible, but there was confidential manufacturer 
data that had been submitted to NHTSA in response to the NPRM, and 
those costs were consistent with Ricardo's independently-reviewed cost 
estimates, NHTSA and Ricardo cited those data. When multiple 
confidential data sources differed greatly and conflicted with the 
Martec valuation or when the technical assumptions described by NHTSA 
for purposes of this rulemaking did not match exactly with the content 
costed by either Martec or other commenters, NHTSA and Ricardo 
engineers used component-level data to build up a partial cost, 
substituting Ricardo's institutional knowledge for the remaining gaps 
in component level data.
    Occasionally, NHTSA and Ricardo found that some cost information 
submitted by the public was either not very clearly described or 
revealed a lack of knowledge on the part of the commenter about NHTSA's 
methodology. In those cases, and in cases for which no cost data 
(either public or confidential) was available, NHTSA worked with 
Ricardo either to confirm the estimates it used in the NPRM, or to 
revise and update them.
    In several cases, values described in the NPRM were simply adjusted 
from 2006 dollars to 2007 dollars, using a ratio of GDP values for the 
associated calendar years.\121\ In many instances, an RPE factor of 1.5 
was determined to have been omitted from the cost estimates provided in 
the NPRM, so NHTSA applied the multiplier where necessary to calculate 
the price to the consumer.
---------------------------------------------------------------------------

    \121\ NHTSA examined the use of the CPI multiplier instead of 
GDP for adjusting these dollar values, but found the difference to 
be exceedingly small--only $0.14 over $100.
---------------------------------------------------------------------------

    Finally, in response to comments stating that cost estimates for 
individual technologies should be varied, based on the type and size of 
vehicle to which they are applied, NHTSA worked with Ricardo to account 
for that. Additionally, application of some technologies might be more 
or less expensive, depending on content (e.g., with or without a noise 
attenuation package), for particular vehicles. In these cases, NHTSA 
and Ricardo described a range of costs for this technology, and 
referred to sources that indicate the appropriate boundaries of that 
range.
    The agency notes that several technologies considered in the final 
rule have been updated with substantially different cost estimates 
relative to those costs described in the NPRM. For example, RPE 
estimates for turbocharging and downsizing (TRBDS), diesel technologies 
(DSLT) and hybrid technologies (like ISG) are much higher than the 
costs cited in the NPRM for those technologies. This is due in large 
part to the updated cost estimates of the 2008 Martec Report and 
others, referenced in the final rule, which reflect the dramatic rise 
of global costs for raw materials associated with the above 
technologies since the 2004 Martec report and other prior referenced 
cost estimates were conducted. The NPRM costs were not updated to 
reflect that rise in commodities prices. As described in the 2008 
Martec Report, advanced battery technologies with substantial copper, 
nickel or lithium content, and engine technologies employing high 
temperature steels or catalysts with considerable platinum group metals 
usage, have experienced tremendous inflation of raw material prices 
since the cost studies referenced in the NPRM were conducted. As of the 
time the sources were developed, prices of nickel, platinum, lithium, 
copper, dysprosium and rhodium had demonstrated cost inflation 
amounting to between 300 and 750 percent of global prices at the time 
of the original NESCCAF study \122\ and this is reflected in the higher 
costs described in the 2008 Martec report, and thus in the final rule. 
NHTSA is aware that commodity prices, like those for steel and platinum 
group metals described above, have dropped over the last several 
months. However, there is little information in the record to determine 
how prices of components used in MY 2011 could be impacted by the 
prices of metals and other commodities over the last few years. It is 
not clear whether the prices of components built and used in MY 2011 
are more likely to reflect the high price of commodities in the years 
prior to 2008, the current low prices of commodities, the prices of 
commodities closer to MY 2011, or some mixture of these. The agency 
notes, though, as mentioned above, that manufacturers' product plans 
were submitted along with manufacturers' indications that these plans 
were generally informed by expectations that relatively high commodity 
prices would prevail in the future. Therefore, in the expectation that 
economic conditions will improve by MY 2011, the agency relies on the 
commodity prices reflected in, for example, the 2008 Martec report. 
However, the agency further notes that these decisions are limited to 
the MY 2011 rulemaking. We intend to monitor commodity prices carefully 
and will adjust affected technology costs as appropriate in future 
rulemakings.
---------------------------------------------------------------------------

    \122\ 2008 Martec report, at 13-20.
---------------------------------------------------------------------------

    Some commenters referenced the price differential between vehicles 
with advanced technologies and more standard versions as evidence of 
those advanced technologies' costs, and argued that NHTSA should 
consider these price differentials in its cost estimation process. In 
response, NHTSA believes that the ``bottom-up, material cost based'' 
cost estimation methodology employed for the final rule is preferable 
to estimating costs based

[[Page 14251]]

on manufacturer price differentials between versions of vehicle models. 
Wherever possible, technologies were costed based on the estimation of 
variable material cost impacts to vehicle manufacturers at a fixed 
point in time (in 2007 dollar terms) for a prescribed set of component 
changes anticipated to be required in implementing the technology on a 
particular platform (e.g., wastegate turbo, increased high nickel 
alloyed exhaust manifolds, air charge cooler, etc. for TRBDS). The 
content assumptions are modified or scaled to account for differences 
across the range of vehicle sizes and functional requirements and 
associated material cost impacts are adjusted to account for the 
revised content. The material cost impacts to the vehicle manufacturers 
are then summed and converted to retail price equivalent impacts by 
multiplying by 1.5 to account for fixed costs and other overheads 
incurred in the implementation of new vehicle technologies but not 
contained in the variable material price impacts to the manufacturers.
    In employing this methodology, NHTSA relied on information provided 
to NHTSA by the suppliers and vehicle manufacturers themselves. Though 
this estimation process relies on often confidential data and employs a 
simplifying assumption in relating all variable material costs to 
retail impacts through the use of a consistent 1.5 RPE, the methodology 
is preferable to a ``top-down, retail price based'' methodology as 
might be used by comparing retail price differences of vehicles with 
different technologies. The ``bottom-up'' approach offers the benefits 
of providing a consistent and reasonable assessment of true, total 
costs for all technologies independent of geographic, or strategic 
pricing policies by vehicle manufacturers that could result in selling 
products at sub-standard or even negative margins. For many vehicle 
manufacturers, contribution to corporate profit varies dramatically 
across vehicle segment. Given that vehicle pricing is often decoupled 
from true costs and will vary with sales cycle, product maturity, 
geography, vehicle class, and marque, a ``top-down'' approach, while 
offering improved data transparency, is inherently limited in providing 
a consistent means of cost estimation. As such, NHTSA has adopted the 
described ``bottom-up'' cost estimation approach and has attempted to 
mitigate transparency issues with a reliance on Martec 2008 (where in 
agreement with other provided cost data), because it provides a 
detailed description of the costed content. Fundamentally, NHTSA 
believes that a ``bottom-up'' cost estimation methodology with a common 
RPE adjustment factor offers an intuitive, consistent process across 
all technologies, whether mature or otherwise, that avoids the pitfalls 
of reliance on significantly more variable and volatile pricing 
policies.
    Regarding estimates for technology effectiveness, NHTSA, working 
with Ricardo, also reexamined its NPRM estimates and those in the EPA 
Staff Technical Report,\123\ which largely mirrored NHTSA's NPRM 
estimates. We compared these estimates to estimates provided in 
comments, reports and confidential data received in response to our 
NPRM. Comments on the NPRM's effectiveness estimates generally fell 
into three categories: (1) That NHTSA did not account sufficiently for 
fuel economy or performance impacts because it used the Volpe model 
approach rather than full vehicle simulation; (2) that the synergy 
values used did not properly account for technology interactions; and 
(3) that NHTSA made errors when using estimates provided by 
manufacturers. In addition to commenting on NHTSA's methodology, many 
commenters, particularly manufacturers, also submitted their own fuel 
consumption reduction estimates for each technology and requested that 
NHTSA consider them for the final rule. NHTSA addresses comments 
relating to vehicle simulation in Section IV.C.8 and synergies in 
Section IV.C.7, but the section below describes NHTSA's process for 
developing effectiveness estimates for the final rule, which addresses 
the comments regarding NHTSA's use of estimates submitted by 
manufacturers.
---------------------------------------------------------------------------

    \123\ EPA Staff Technical Report: Cost and Effectiveness 
Estimates of Technologies Used to Reduce Light-Duty Vehicle Carbon 
Dioxide Emissions. EPA420-R-08-008, March 2008.
---------------------------------------------------------------------------

    For each technology, NHTSA also relied on Ricardo's experience with 
``bill of materials'' (BOM) technology descriptions. Some commenters 
argued that the same BOM used as the basis for the cost analysis could 
and should be used to define the technologies being studied for 
effectiveness. In fact, Ricardo's methodology for cost and 
effectiveness estimates for this rule was to define a vehicle class-
specific BOM or BOMs, depending upon the number of variants possible 
within a class and within a decision tree. These BOMs were defined for 
the baseline configuration for each class and then for each incremental 
step in the decision tree. Use of a consistently-defined BOM is very 
important to estimating the impacts of technologies accurately, as it 
helps to ensure that technologies are not applied to baseline vehicles 
that already contain the technology (with the exception of items that 
are not well-defined such as aerodynamic drag reduction, reduced 
rolling resistance tires, weight reduction, and engine friction 
reduction.)
    In defining these BOMs, Ricardo relied on its experience working 
with industry over many years and its recent experience preparing the 
December 2007 study for EPA. Ricardo built on its vehicle simulation 
work for EPA to help NHTSA evaluate appropriate effectiveness values 
for individual fuel-saving technologies. In considering the comments, 
NHTSA and Ricardo evaluated the 10 ``vehicle subclasses'' used in the 
NPRM for applicability of technologies and determined that the cost and 
effectiveness estimates could be more accurate by revising the 
``vehicle subclasses'' as described above so that they better 
represented the parameters of the vehicles they included. This, in 
turn, enabled NHTSA and Ricardo to distinguish more clearly the 
differences in fuel consumption reduction occurring when a technology 
is added to different vehicles.
    Then, with the BOM framework applied to more precisely-defined 
vehicle subclasses, NHTSA and Ricardo engineers reviewed effectiveness 
information from multiple sources for each technology. Together, they 
compared the multiple sources available in the docket and assessed 
their validity, taking care to ensure that common BOM definitions and 
other vehicle attributes such as performance, refinement, and 
drivability were not compromised.
    Generally, whenever relevant effectiveness information for a 
technology component existed in a non-confidential and publicly-
available report submitted to the NPRM docket, and that information 
agreed with Ricardo's independent review of estimates based on 
Ricardo's historical institutional knowledge, NHTSA and Ricardo cited 
that information. NHTSA and Ricardo were able to take that approach 
frequently, as is evident in the explanation of the effectiveness for 
each technology. When that approach was not possible, but there was 
confidential manufacturer data that had been submitted to NHTSA in 
response to the NPRM, and those values were consistent with Ricardo's 
independently-reviewed estimates, NHTSA and Ricardo cited those data. 
When multiple confidential data sources differed greatly or when the 
technical assumptions described by NHTSA for purposes of this 
rulemaking

[[Page 14252]]

did not match the content included in Ricardo's study for EPA or in 
other comments, NHTSA and Ricardo engineers relied on Ricardo's 
experience and an understanding of the maximum theoretical losses that 
could be eliminated by particular technologies to build up an 
effectiveness estimate, substituting Ricardo's institutional knowledge 
for the remaining gaps in data.
    Occasionally, NHTSA and Ricardo found that some fuel consumption 
reduction information submitted by the public was either not very 
clearly described or revealed a lack of knowledge on the part of the 
commenter about NHTSA's methodology. In those cases, and in cases for 
which no effectiveness data (either public or confidential) was 
available, NHTSA worked with Ricardo either to confirm the estimates it 
used in the NPRM, or to revise and enhance them. In other cases, the 
commenters appeared unsure how to evaluate the data from the NPRM, and 
so NHTSA and Ricardo provided more detailed explanations on the process 
used or the components involved.
    In response to comments stating that estimates for individual 
technologies should be varied based on the type and size of vehicle to 
which they are applied, NHTSA worked with Ricardo to account for those 
differences mostly through the refined vehicle subclass definitions. 
However, even after making these adjustments, there are still some 
classes that require spanning different engine architectures and 
performance thresholds. Just as the application of some technologies 
might be more or less expensive, depending on content (e.g., with or 
without a noise attenuation package), particular vehicle technologies 
may have more or less impact between classes where maintaining 
equivalent performance led to a reduced effectiveness. In these cases, 
NHTSA and Ricardo described a range of effectiveness values for this 
technology, and referred to sources that indicate the appropriate 
boundaries of that range.
    With Ricardo's assistance, the technology cost and effectiveness 
estimates for the final rule were developed consistently, using this 
systematic approach. While NHTSA still believes that the ideal 
estimates for the final rule would be those that have been through a 
peer-reviewed process such as that used for the 2002 NAS Report, and 
will continue to work with NAS, as required by EISA, to update the 
technology cost and effectiveness estimates for subsequent CAFE 
rulemakings, this approach, combined with the BOM methodology for cost 
and effectiveness, expanded number and types of vehicle subclasses and 
the changes to the synergistic effects described below, not only help 
to address the concerns raised by commenters, but also represent a 
considerable improvement in terms of accuracy and transparency over the 
approach used to develop the cost and effectiveness estimates in the 
NPRM.
6. Learning Curves
    As explained in the NPRM, historically NHTSA did not explicitly 
account for the cost reductions a manufacturer might realize through 
learning achieved from experience in actually applying a technology. 
However, based on its work with EPA, in the NPRM NHTSA employed a 
learning factor for certain newer, emerging technologies. The 
``learning curve'' describes the reduction in unit incremental 
production costs as a function of accumulated production volume and 
small redesigns that reduce costs. The NPRM implemented technology 
learning curves by using three parameters: (1) The initial production 
volume that must be reached before cost reductions begin to be realized 
(referred to as ``threshold volume''); (2) the percent reduction in 
average unit cost that results from each successive doubling of 
cumulative production volume (usually referred to as the ``learning 
rate''); and (3) the initial cost of the technology. The majority of 
technologies considered in the NPRM did not have learning cost 
reductions applied to them.
    NHTSA assumed that learning-based reductions in technology costs 
occur at the point that a manufacturer applies the given technology to 
the first 25,000 cars or trucks, and are repeated a second time as it 
produces another 25,000 cars or trucks for the second learning 
step.\124\ NHTSA explained that the volumes chosen represented the 
agency's best estimate for where learning would occur, and that they 
were better suited to NHTSA's analysis than using a single number for 
the learning curve factor, because each manufacturer would implement 
technologies at its own pace in the rule, rather than assuming that all 
manufacturers implement identical technology at the same time.
---------------------------------------------------------------------------

    \124\ NHTSA treated car and truck volumes separately for 
determining those sales volumes.
---------------------------------------------------------------------------

    NHTSA further assumed that after having produced 25,000 cars or 
trucks with a specific part or system, sufficient learning will have 
taken place such that costs will be lower by 20 percent for some 
technologies and 10 percent for others. For those technologies, NHTSA 
additionally assumed that another cost reduction would be realized 
after another 25,000 units. If a technology was already in widespread 
use (e.g., on the order of several million units per year) or expected 
to be so by the MY 2011-2012 time frame, NHTSA assumed that the 
technology was ``learned out,'' and that no more cost reductions were 
available for additional volume increases. If a technology was not 
estimated to be available until later in the rulemaking period at that 
time, like MY 2014-2015, NHTSA did not apply learning for those 
technologies until those model years. Most of the technologies for 
which learning was applied after MY 2014 were adopted from the 2004 
NESCCAF study, which was completed by Martec. Whenever source data, 
like the 2004 NESCCAF study, indicated that manufacturer cost reduction 
from future learning would occur, NHTSA took that information into 
account.
    Comments received regarding NHTSA's approach to technology cost 
reductions due to manufacturer learning generally disagreed with the 
agency's method. The Alliance, AIAM, Honda, GM, and Chrysler all 
commented that NHTSA had substantially overestimated, and essentially 
``double-counted,'' learning effects by applying learning reductions to 
component costs, specifically Martec estimates, which were already at 
high volume. The Alliance submitted the 2008 Martec Report, which 
stated that NHTSA had ``misstated'' Martec's approach to cost 
reductions due to learning in the NPRM. As Martec explained,

    Martec did not ask suppliers to quote prices that would be valid 
for three years, and Martec did not receive cost reductions from 
suppliers for some components in years two and three. Rather, 
industry respondents were asked to establish mature component 
pricing on a forward basis given the following conditions: At least 
three (3) manufacturers demanding 500,000 units per year and at 
least three (3) globally-capable suppliers available to supply the 
needs of each manufacturer.
    In no case did Martec ask industry respondents to provide low 
volume, launch or transition costs for fuel consumption/
CO2 reducing technologies. Martec specifically designed 
the economic parameters in order to capture the effects of learning 
which is a reality in the low margin, high capital cost, high 
volume, highly competitive global automotive industry. Applying 
additional reductions attributable to ``learning'' based on 25,000 
unit improvements in cumulative volume after production launch (as 
described on pages 118-125 of the NHTSA NPRM) on top of Martec's 
mature costs is an error. Martec's costs are based on 1.5-2.0 
equivalent modules of powertrain capacity (500,000 units/year) so 
25,000 unit

[[Page 14253]]

incremental changes in cumulative production, as defined by NHTSA, 
will have no effect on costs.


    The 2008 Martec Report also stated that current industry practice 
consists of using competitive bidding based on long-term, high-volume 
contracts that are negotiated before technology implementation 
decisions are made. Martec stated that this practice considers the 
effects of volume, learning, and capital depreciation. Martec also 
indicated that most of the technologies evaluated in the study are in 
high volume production in the global automotive industry today, and 
thus this forms a solid basis from which to estimate future costs.
    Honda also commented on NHTSA's 25,000 unit (per manufacturer per 
year) volume threshold stating that, in their experience, costs were 
only likely to decrease due to learning at volumes exceeding about 
300,000 units per year per manufacturer. GM agreed, stating that 
suppliers do not respond to, change processes, or change contract terms 
for relatively small volume changes like NHTSA's 25,000 unit increment, 
thus volume changes of this magnitude have no effect on component 
pricing. GM also commented that its learning cycles are based on time, 
not volume, and agreed with Martec's assessment that contracts with 
suppliers typically specify volumes and costs over a period, which are 
usually equal to a product life cycle, a 4- to 5-year period.
    Ford commented that base costs in the automotive industry are 
determined by a target setting process, where manufacturers develop 
pricing with suppliers for a set period, and manufacturers receive cost 
reductions from the suppliers due to learning as time passes, 
apparently at a set amount year over year for several years. Ford also 
commented that NHTSA's approach to learning curves had not accounted 
for current economic factors, like increases in commodity and energy 
prices, and cited the example of costs of batteries for hybrids and 
PHEVs which Ford stated ``are not likely to depend solely on experience 
learned, but, to a large extent, on the additional energy and material 
costs they incur relative to the vehicles without the new technology.'' 
Ford commented that NHTSA should account for these costs, and the 
factor of declining vehicle sales, in its learning curve approach.
    BorgWarner, a components supplier, commented that learning-related 
costs savings are valid for technologies that ``start at low volume'' 
(commenter's emphasis). BorgWarner argued, however, that NHTSA's 
assumed learning curve would not apply to the technologies it supplies 
to manufacturers,\125\ since these components are well-developed and in 
high volume use already, and are thus already ``learned out.'' 
BorgWarner further commented that an increase in demand could in fact 
lead to higher prices if demand for raw materials exceeded supply.
---------------------------------------------------------------------------

    \125\ BorgWarner manufacturers and supplies turbochargers, dual 
clutch transmissions, variable valve timing systems, diesel engine 
components (EGR and starting), aggressive shift logic and early 
torque convertor lockup systems.
---------------------------------------------------------------------------

    UCS, in contrast, commented that NHTSA had not accounted for enough 
cost reductions due to learning. UCS stated that NHTSA should have 
provided ``source data'' for manufacturer-specific learning curves, and 
argued that NHTSA's approach was ``fundamentally flawed'' for two 
primary reasons: First, because NHTSA had not considered the fact that 
manufacturers engage in joint ventures to develop new technologies, and 
second, because manufacturers may also learn from one another ``through 
the standard practice of tearing down competitors' products.'' UCS 
argued that NHTSA's learning-based cost reductions should account for 
these methods of learning. UCS further stated that NHTSA should not 
``treat[] car and truck sales volumes separately when estimating 
learning curves'' because there may be much overlap in terms of 
technology application, especially for vehicles like crossovers which 
may be either cars or trucks. UCS concluded that NHTSA should use EPA's 
suggested learning factor of 20 percent, citing EPA's Staff Technical 
Report.
    Public Citizen agreed that NHTSA should account for economies of 
scale, but argued that NHTSA should not have relied on initial cost 
estimates from industry, which the commenter stated were ``often 
overestimated.'' Public Citizen cited a 1997 briefing paper by the 
Economic Policy Institute in support of this point, and argued that 
compliance cost estimates were often much lower than actual costs. 
Public Citizen concluded that NHTSA's use of learning curve factors 
``impedes transparency'' in NHTSA's analysis.
    Agency response: Based on the comments received and on its work 
with Ricardo, NHTSA has revised its approach to accounting for 
technology cost reductions due to manufacturer learning. The method of 
learning used in the NPRM has been retained, but the threshold volume 
has been revised and is now calculated on an industry-wide production 
basis. However, learning of this type, which NHTSA now refers to as 
``volume-based'' learning, is not applicable to any technologies for MY 
2011. Additionally, NHTSA has adopted a fixed rate, year-over-year 
(YOY) cost reduction for widely-available, high-volume, mature 
technologies, in response to comments from Ford and others. NHTSA 
refers to this type cost reduction as ``time-based'' learning. For each 
technology, if learning is applicable, only one type of learning would 
be applied, either volume-based or time-based (i.e., the types are 
independent of each other). These revisions are discussed below.
    For volume-based learning, NHTSA considered comments from UCS and 
decided to revise the method used to calculate the threshold volume 
from a per-manufacturer to an industry-wide production volume basis. 
NHTSA agreed with UCS' comment that cars and trucks may share common 
components--this is true across many makes and models which share 
common engines, transmissions, accessory systems, and mild or strong 
hybrid systems, all of which can potentially utilize the technologies 
under consideration. These systems are often manufactured by suppliers 
who contract with multiple OEMs, all of whom benefit (in the form of 
cost reductions for the technology) from the supplier's learning. The 
2008 Martec Report and the BorgWarner comments additionally both 
indicated that when manufacturers demand components in high volumes, 
suppliers are able to pass on learning-based savings to all 
manufacturers with whom they contract. Thus, it made sense to NHTSA to 
revise its method of determining whether the threshold volume has been 
achieved from an annual per-manufacturer to an annual industry-wide 
production volume basis.
    NHTSA also changed the threshold volume for volume-based learning 
from 25,000 to 300,000 units. The 2008 Martec Report and comments from 
multiple manufacturers indicated that 25,000 units was far too small a 
production volume to affect component costs. In response, NHTSA began 
with the Martec estimate that technologies were fully learned-out at 
1.5 million units of production (which met the production needs of 
three manufacturers, according to that report). NHTSA then applied two 
cycles of learning in a reverse direction to determine what the proper 
threshold volume would be for these conditions. One cycle would be 
applied at 750,000 units (1.5 million divided by 2, which would 
represent the second volume doubling) and one at 375,000 units (750,000 
divided by 2, which would represent the first volume doubling).

[[Page 14254]]

NHTSA thus estimated that the Martec analysis would suggest a threshold 
volume of 375,000 units. However, the agency notes that Martec stated 
that it chose the 1.5 million units number specifically because Martec 
knew it was well beyond the point where learning is a factor, which 
means that 1.5 million was beyond the cusp of the learning threshold. 
NHTSA therefore concluded that 375,000 units should represent the upper 
bound for the threshold volume for Martec's analysis.
    Having determined this, NHTSA sought to establish a lower bound for 
the threshold volume. The 2008 Martec report indicated that production 
efficiencies are maximized at 250,000-350,000 units (which averages to 
300,000 units), and that manufacturers consequently target this range 
when planning and developing manufacturing operations. Honda also cited 
this production volume. Thus, for three manufacturers, the annual 
volume requirement would be 900,000 units.\126\ NHTSA concluded this 
could also represent high volume where learned costs could be 
available, and considered it as a lower bound estimate. With the upper 
and lower values established, and given that Martec specifically 
indicated that 1.5 million did not represent the cusp of the learning 
threshold, NHTSA chose the mid-point of 1.2 million units as the best 
estimate of annual industry volumes where learned costs would be 
experienced. For proper forward learning, this would mean the first 
learning cycle would occur at 300,000 and the second at 600,000. 
Accordingly NHTSA has established the threshold volume for the final 
rule at 300,000 industry units per year.
---------------------------------------------------------------------------

    \126\ An industry volume of 900,000 would imply a threshold 
volume of 225,000 units according to NHTSA's analysis. This is still 
nine times the value used at the NPRM.
---------------------------------------------------------------------------

    Having established the threshold volume, NHTSA next considered 
which technologies to apply volume learning to. Comments confirmed that 
NHTSA had been correct in the NPRM to assume that learning would be 
applicable to low-volume, emerging technologies that could benefit from 
economies of scale, so NHTSA consulted confidential product plans to 
determine the volumes of technologies to be applied by manufacturers 
during the rulemaking period. If the product plans indicated that the 
technologies would be in high-volume use (i.e., above 600,000 units 
produced annually for cars and trucks by all manufacturers) at the 
beginning of its first year of availability, then volume-based learning 
was not considered applicable, since at this volume the technology 
would be available at learned cost. If the volume was below 600,000 
units annually, then NHTSA also looked at the Volpe model's application 
of the technology. If the model applied more than 600,000 units within 
the first year of availability, NHTSA did not apply volume-based 
learning. If neither manufacturers nor the model applied more than 
600,000 units within the first year, then volume learning was applied 
to the technology.
    Based on this analysis, NHTSA determined that volume-based learning 
would be applicable to three technologies for purposes of the final 
rule: integrated starter generator, 2-mode hybrid, and plug-in hybrid. 
For these three technologies, and where the agency's initial cost 
estimates reflected full learning, NHTSA reverse-learned the cost by 
dividing the estimate by the learning rate twice to properly offset the 
learned cost estimate. NHTSA used a 20 percent learning rate in the 
NPRM for these technologies, and concluded that that rate was still 
applicable for the final rule. This learning rate was validated using 
manufacturer-submitted current and forecast cost data for advanced-
battery hybrid vehicle technology, and accepted industry forecasts for 
U.S. sales volumes of these same vehicles. This limited study indicated 
that cost efficiencies were approximately 20 percent for a doubling of 
U.S. market annual sales of a particular advanced battery technology, 
and the learning rate was thus used as a proxy for other advanced 
vehicle technologies.
    Commenters also indicated that learning-related cost reductions 
could occur not only as a result of production volume changes, but also 
as a function of time. For example, Ford stated that technology cost 
reductions were negotiated as part of the contractual agreement to 
purchase components from suppliers, a target-setting process which Ford 
described as common in the automotive industry. In this arrangement 
suppliers agree to reduce costs on a fixed percentage year over year 
according to negotiated terms. GM described a cost reduction process 
that occurs over the course of a product life cycle, typically no less 
than 4-5 years, where costs are reduced as production experience 
increases. GM stated that its cost reductions included engineering, 
manufacturing, investment, and material costs, and were also defined 
through supplier contracts that anticipate volume and costs over the 
whole period. The components involved are assumed to be high volume, 
mature technologies being used in current vehicle production. These are 
the types of components that would typically be subject to ``cost-
down'' \127\ efforts that target savings through small, incremental 
design, manufacturing, assembly, and material changes on a recurring or 
periodic basis.
---------------------------------------------------------------------------

    \127\ Cost-down efforts are a common practice in competitive 
manufacturing environments like the automotive industry.
---------------------------------------------------------------------------

    In response to these comments, NHTSA has adopted this approach as 
an additional type of learning related cost reduction, referring to it 
as ``time-based'' learning. For purposes of the final rule, time-based 
learning is applied to high-volume, mature technologies likely to be 
purchased by OEMs on a long-term contractual basis. This would include 
most of the fuel-saving technologies under consideration, except those 
where volume-based learning is applied, or those where components might 
consist of commodity materials, such as oil or rubber, where pricing 
fluctuations prevent long-term or fixed value contracts. NHTSA has used 
a 3 percent reduction rate for time-based learning, based on 
confidential manufacturer information and NHTSA's understanding of 
current industry practice. Thus, if time-based learning is deemed 
applicable, then in year two of a technology's application, and in each 
subsequent year (if any), the initial cost is reduced by 3 percent. 
This approach is responsive to comments about compliance costs 
estimation, and improves the accuracy of projecting future costs 
compared to the NPRM.
    With regard to the comments from UCS, NHTSA recognizes that joint-
venture collaboration and competitor tear-downs are methods used by 
manufacturers for designing and developing new products and components, 
but notes that these methods are used prior to the manufacturing stage, 
and thus are not considered manufacturing costs. NHTSA has received no 
specific manufacturer learning curve-related data, and thus has no 
``source data'' to disclose. NHTSA continues to use a 20 percent 
learning factor for volume-based learning, which is consistent with 
EPA's learning factor recommended by UCS for NHTSA's use.
    With regard to the comments from Public Citizen, although NHTSA 
reviewed the paper cited by the commenter, the agency found its 
analysis largely irrelevant to NHTSA's estimation of cost reduction 
factors due to automobile manufacturer learning, and thus declines to 
adopt its findings.
    Table IV-4 below shows the applicability and type of learning 
applied in the final rule.
BILLING CODE 4910-59-P

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BILLING CODE 4910-59-C
7. Technology Synergies
    When two or more technologies are added to a particular vehicle 
model to improve its fuel efficiency, the resultant fuel consumption 
reduction may sometimes be higher or lower than the product of the 
individual effectiveness values for those items.\128\ This may

[[Page 14256]]

occur because one or more technologies applied to the same vehicle 
partially address the same source or sources of engine, drivetrain or 
vehicle losses. Alternately, this effect may be seen when one 
technology shifts the engine operating points, and therefore increases 
or reduces the fuel consumption reduction achieved by another 
technology or set of technologies. The difference between the observed 
fuel consumption reduction associated with a set of technologies and 
the product of the individual effectiveness values in that set is 
referred to for purposes of this rulemaking as a ``synergy.'' Synergies 
may be positive (increased fuel consumption reduction compared to the 
product of the individual effects) or negative (decreased fuel 
consumption reduction).
---------------------------------------------------------------------------

    \128\ More specifically, the products of the differences between 
one and the technology-specific levels of effectiveness in reducing 
fuel consumption. For example, not accounting for interactions, if 
technologies A and B are estimated to reduce fuel consumption by 10% 
(i.e., 0.1) and 20% (i.e., 0.2) respectively, the ``product of the 
individual effectiveness values'' would be 1-0.1 times 1-0.2, or 0.9 
times 0.8, which equals 0.72, corresponding to a combined 
effectiveness of 28% rather than the 30% obtained by adding 10% to 
20%. The ``synergy factors'' discussed in this section further 
adjust these multiplicatively combined effectiveness values.
---------------------------------------------------------------------------

    For the NPRM, the Volpe model was modified to estimate the 
interactions of technologies using estimates of incremental synergies 
associated with a number of technology pairs identified by NHTSA. The 
use of discrete technology pair incremental synergies is similar to 
that in DOE's National Energy Modeling System (NEMS).\129\ Inputs to 
the Volpe model incorporate NEMS-identified pairs, as well as 
additional pairs for the final rule from the set of technologies 
considered in the Volpe model. However, to maintain an approach that 
was consistent with the technology sequencing developed by NHTSA, new 
incremental synergy estimates for all pairs were obtained from a first-
order ``lumped parameter'' analysis tool created by EPA.\130\
---------------------------------------------------------------------------

    \129\ U.S. Department of Energy, Energy Information 
Administration, Transportation Sector Module of the National Energy 
Modeling System: Model Documentation 2007, May 2007, Washington, DC, 
DOE/EIAM070(2007), at 29-30. Available at http://tonto.eia.doe.gov/ftproot/modeldoc/m070(2007).pdf (last accessed Oct. 24, 2008).
    \130\ EPA Staff Technical Report: Cost and Effectiveness 
Estimates of Technologies Used to Reduce Light-duty Vehicle Carbon 
Dioxide Emissions; EPA420-R-08-008, March 2008.
---------------------------------------------------------------------------

    The lumped parameter tool is a spreadsheet model that represents 
energy consumption in terms of average performance over the fuel 
economy test procedure, rather than explicitly analyzing specific drive 
cycles. The tool begins with an apportionment of fuel consumption 
across several loss mechanisms and accounts for the average extent to 
which different technologies affect these loss mechanisms using 
estimates of engine, drivetrain and vehicle characteristics that are 
averaged over the EPA fuel economy drive cycle. Results of this 
analysis were generally consistent with those of full-scale vehicle 
simulation modeling performed by Ricardo, Inc. However, regardless of a 
generally consistent set of results for the vehicle class and set of 
technologies studied, the lumped parameter tool is not a full vehicle 
simulation and cannot replicate the physics of such a simulation.
    Many comments were received that stated this and pointed to errors 
in the synergies listed in the NPRM being in some cases inaccurate or 
even directionally incorrect. NHTSA recognizes that the estimated 
synergies applied for the NPRM were not all correct, and has 
reevaluated all estimated synergies applied in the analysis supporting 
today's final rule. In response to commenters calling for NHTSA to use 
full vehicle simulation, either in the first instance or as a check on 
the synergy factors that NHTSA developed, the agency has concluded that 
the vehicle simulation analyses conducted previously by Ricardo provide 
a sufficient point of reference, especially considering the time 
constraints for establishing the final rule. NHTSA did, however, 
improve the predictive capability of the lumped parameter tool.
    The lumped parameter tool was first updated with the new list of 
technologies and their associated effectiveness values. Second, NHTSA 
conducted a more rigorous qualitative analysis of the technologies for 
which a competition for losses would be expected, which led to a much 
larger list of synergy pairings than was present in the NRPM. The types 
of losses that were analyzed were tractive effort, transmission/
drivetrain, engine mechanical friction, engine pumping, engine 
indicated (combustion) efficiency and accessory (see Table IV-5). As 
can be seen from Table IV-5, engine mechanical friction, pumping and 
accessory losses are improved by various technologies from engine, 
transmission, electrification and hybrid decision trees and must be 
accounted for within the model with a synergy value. The updated lumped 
parameter model was then re-run to develop new synergy estimates for 
the expanded list of pairings. That list is shown in Tables IV-6a-d. 
The agency notes that synergies that occur within a decision tree are 
already addressed within the incremental values assigned and therefore 
do not require a synergy pair to address. For example, all engine 
technologies take into account incremental synergy factors of preceding 
engine technologies, and all transmission technologies take into 
account incremental synergy factors of preceding transmission 
technologies. These factors are expressed in the fuel consumption 
improvement factors in the input files used by the Volpe model.
    For applying incremental synergy factors in separate path 
technologies, the Volpe model uses an input table (see Tables IV-6a-d) 
which lists technology pairings and incremental synergy factors 
associated with those pairings, most of which are between engine 
technologies and transmission/electrification/hybrid technologies. When 
a technology is applied to a vehicle by the Volpe model, all instances 
of that technology in the incremental synergy table which match 
technologies already applied to the vehicle (either pre-existing or 
previously applied by the Volpe model) are summed and applied to the 
fuel consumption improvement factor of the technology being applied. 
Synergies for the strong hybrid technology fuel consumption reductions 
are included in the incremental value for the specific hybrid 
technology block since the model applies technologies in the order of 
the most effectiveness for least cost and also applies all available 
electrification and transmission technologies before applying strong 
hybrid technologies.
    As another possible alternative to using synergy factors, NHTSA has 
also considered modifying the Volpe model to apply inputs--for each 
vehicle model--specifying the share of total fuel consumption 
attributable to each of several energy loss mechanisms. The agency has 
determined that this approach, discussed in greater detail below, 
cannot be implemented at this time because the requisite information is 
not available.

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[[Page 14261]]


[GRAPHIC] [TIFF OMITTED] TR30MR09.029

BILLING CODE 4910-59-C
8. How does NHTSA use full vehicle simulation?
    For regulatory purposes, the fuel economy of any given vehicle is 
determined by placing the vehicle on a chassis dynamometer (akin to a 
large treadmill that puts the vehicle's wheels in contact with one or 
more rollers, rather than with a belt stretched between rollers) in a 
controlled

[[Page 14262]]

environment, driving the vehicle over a specific driving cycle (in 
which driving speed is specified for each second of operation), 
measuring the amount of carbon dioxide emitted from the vehicle's 
tailpipe, and calculating fuel consumption based on the density and 
carbon content of the fuel.
    One means of determining the effectiveness of a given technology as 
applied to a given vehicle model would be to measure the vehicle's fuel 
economy on a chassis dynamometer, install the new technology, and then 
re-measure the vehicle's fuel economy. However, most technologies 
cannot simply be ``swapped out,'' and even for those that can, simply 
doing so without additional engineering work may change other vehicle 
characteristics (e.g., ride, handling, performance, etc.), producing an 
``apples to oranges'' comparison.
    Some technologies can also be more narrowly characterized through 
bench or engine dynamometer (i.e., in which the engine drives a 
generator that is, in turn, used to apply a controlled load to the 
engine) testing. For example, engine dynamometer testing could be used 
to evaluate the brake-specific fuel consumption (e.g., grams per 
kilowatt-hour) of a given engine before and after replacing the engine 
oil with a less viscous oil. However, such testing does not provide a 
direct measure of overall vehicle fuel economy or changes in overall 
vehicle fuel economy.
    For a vehicle that does not yet exist, as in NHTSA's analysis of 
CAFE standards applicable to future model years, even physical testing 
can provide only an estimate of the vehicle's eventual fuel economy. 
Among the alternatives to physical testing, automotive engineers 
involved in vehicle design make use of computer-based analysis tools, 
including a powerful class of tools commonly referred to as ``full 
vehicle simulation.'' Given highly detailed inputs regarding vehicle 
engineering characteristics, full vehicle simulation provides a means 
of estimating vehicle fuel consumption over a given drive cycle, based 
on the explicit representation of the physical laws governing vehicle 
propulsion and dynamics. Some vehicle simulation tools also incorporate 
combustion simulation tools that represent the combustion cycle in 
terms of governing physical and chemical processes. Although these 
tools are computationally intensive and required a great deal of input 
data, they provide engineers involved in vehicle development and design 
with an alternative that can be considerably faster and less expensive 
than physical experimentation and testing.
    Properly executed, methods such as physical testing and full 
vehicle simulation can provide reasonably (though not absolutely) 
certain estimates of the vehicle fuel economy of specific vehicles to 
be produced in the future. However, when analyzing potential CAFE 
standards, NHTSA is not actually designing specific vehicles. The 
agency is considering implications of new standards that will apply to 
the average performance of manufacturers' entire production lines. For 
this type of analysis, precision in the estimation of the fuel economy 
of individual vehicle models is not essential; although it is important 
that the agency avoid systematic upward or downward bias, uncertainty 
at the level of individual models is mitigated by the fact that 
compliance with CAFE standards is based on average fleet performance.
    As discussed above, the Volpe Model, which the agency has used to 
perform the analysis supporting today's final rule, applies an 
incrementally multiplicative approach to estimating the fuel savings 
achieved through the progressive addition of fuel-saving technologies. 
NAS' use of the same approach in its 2002 report was, at the time and 
henceforth, criticized by a small number of observers as being prone to 
systematic overestimation of available fuel savings. This assertion was 
based on the fact that, among the technologies present on any given 
vehicle, more than one may address the same energy loss mechanism 
(notably, pumping losses on throttled engines). Once all energy losses 
of a given type are eliminated, even theoretical improvements 
attributable to that loss mechanism are no longer available.
    The most direct critique of NAS' methods appeared in a 2002 SAE 
paper by four General Motors researchers (Patton, et al.), who compared 
some of NAS' calculations to fuel consumption estimates obtained 
through vehicle testing and simulation, and concluded that, as 
increasing numbers of technologies were applied, NAS' estimates became 
increasingly subject to overestimation of available fuel consumption 
reductions.\131\
---------------------------------------------------------------------------

    \131\ Patton, K.J., et al., General Motors Corporation, 
``Aggregating Technologies for Reduced Fuel Consumption: A Review of 
the Technical Content in the 2002 National Research Council Report 
on CAFE'', 2002-01-0628, Society of Automotive Engineers, Inc., 
2002.
---------------------------------------------------------------------------

    In response to such concerns, which had also been raised as the NAS 
committee performed its analysis, the NAS report concluded that vehicle 
simulation performed for the committee indicated that the report's 
incremental fuel savings estimates were ``quite reasonable'' for the 
less aggressive two of the three product development paths it 
evaluated. The report did, however, conclude that uncertainty increased 
with consideration of more technologies, especially under the more 
aggressive ``path 3'' evaluated by the committee. The report did not, 
however, mention any directional bias to this uncertainty.\132\
---------------------------------------------------------------------------

    \132\ NRC (2002), op. cit., p. 151.
---------------------------------------------------------------------------

    Notwithstanding this prior response to concerns about the possible 
overestimation of available fuel savings, and considering that analyses 
supporting the development of the NPRM, the Volpe model applies 
``synergy factors'' that adjust fuel savings calculations when some 
pairs of technologies are applied to the same vehicle, as discussed 
above in Section IV.C.7. These factors reduce uncertainty and the 
potential for positive or negative biases in the Volpe model's 
estimates of the effects of technologies.
    As an alternative to estimating fuel consumption through 
incremental multiplication and the application of ``synergy'' factors 
to address technology interactions, NHTSA considered basing its 
analysis of fuel economy standards on full vehicle simulation at every 
step. However, considering the nature of CAFE analysis (in particular, 
the analysis of fleets projected to be sold in the future by each 
manufacturer), as well as the quantity and availability of information 
required to perform vehicle simulation, the agency explained that it 
believed detailed simulation when analyzing the entire fleet of future 
vehicles is neither necessary nor feasible. Still, when estimating 
synergies between technologies, the agency did make use of vehicle 
simulation studies, as discussed above. The agency has also done so 
when re-estimating synergies before performing the analysis supporting 
today's final rule.
    NHTSA also considered estimating changes in fuel consumption by 
explicitly accounting for each of several energy loss mechanisms--that 
is, physical mechanisms to which the consumption of (chemical) energy 
in fuel may be attributed. This approach would be similar to that 
proposed in 2002 by Patton et al. The agency invited comment on this 
approach, requested that manufacturers submit product plans 
disaggregating fuel consumption into each of nine loss mechanisms, and 
sought estimates of the extent to which fuel-saving technologies affect 
each of these loss mechanisms.

[[Page 14263]]

    In response to the NPRM, the Alliance presented a detailed analysis 
by Sierra Research, which used a modified version of VEHSIM (a vehicle 
simulation tool) to estimate the fuel consumption resulting from the 
application of various vehicle technologies to 25 vehicle categories 
intended to represent the fleet. The Alliance commented that this 
simulation-based approach is more accurate than that applied by NHTSA, 
and indicated that Sierra's ability to perform this analysis 
demonstrates that NHTSA should be able to do the same.
    General Motors also raised questions regarding the multiplicative 
approach to fuel consumption estimation NHTSA has implemented using the 
Volpe model. GM indicated that the Volpe model should be enhanced with 
modifications to ``take into account the basic physics of vehicles.'' 
\133\ Although GM's comments did not explicitly mention vehicle 
simulation, GM did express full support for the Alliance's comments.
---------------------------------------------------------------------------

    \133\ GM comments at 2, Docket No. NHTSA-2008-0089-0162.
---------------------------------------------------------------------------

    The California Air Resources Board (CARB) presented comparisons of 
different simulation studies, commenting that these demonstrate that 
the VEHSIM model used by Sierra Research ``cannot accurately simulate 
vehicles that use advanced technologies such as variable valve timing 
and lift and advanced transmissions.'' \134\ CARB also questioned 
Sierra Research's simulation capabilities and suggested that, in 
support of actual product development, manufacturers neither contract 
with Sierra Research for such services nor make use of VEHSIM. CARB 
further commented that both AVL (which performed simulation studies for 
CARB's evaluation of potential greenhouse gas standards) and Ricardo 
(which has recently performed simulation studies and related analysis 
for both EPA and NHTSA) provide such services to manufacturers.\135\
---------------------------------------------------------------------------

    \134\ CARB comments at 5, Docket No. NHTSA-2008-0089-0173. In 
developing potential greenhouse gas (GHG) emissions standards for 
light vehicles, CARB made significant use of vehicle simulation 
results presented in ``Reducing Greenhouse Gas Emissions from Light-
Duty Motor Vehicles'', which was published in 2004 by the Northeast 
States Center for a Clean Air Future (NESCCAF). As NHTSA discussed 
in the NPRM, CARB's and NESCCAF's approach, which effectively 
reduces each manufacturer's fleet to five ``representative'' 
vehicles and two average vehicle weights, is too limited for 
purposes of CAFE analysis.
    \135\ California Air Resources Board, ``Air Resources Board 
Staff Comments on Sierra and Martec NRC Presentations'', p. 2.
---------------------------------------------------------------------------

    However, the Alliance and GM have criticized technical aspects of 
the AVL and Ricardo vehicle simulation studies mentioned by CARB. 
Regarding the AVL vehicle simulations CARB utilized, GM raised concerns 
that, among other things, some of AVL's simulations assumed the use of 
premium-grade gasoline, and some effectively assume vehicle performance 
and utility would be compromised.\136\ Similarly, the Alliance raised 
concerns that some of the simulations performed by Ricardo for EPA 
assumed the use of premium fuel, and that many of the simulations 
assumed vehicle performance would be reduced.\137\ The Alliance also 
indicated that the five vehicles analyzed by Ricardo for EPA were not 
representative of all vehicles in the fleet, leading to overstatement 
of the degree of improvement potentially available to vehicles that 
already use technologies not present in the vehicles examined by EPA. 
The Alliance further argued that the report did not reveal sufficient 
detail regarding important simulation details (related, e.g., to 
cylinder deactivation), that it failed to account for some parasitic 
and accessory loads, and that EPA directed Ricardo to unrealistically 
assume universal improvements in aerodynamics, tire efficiency, and 
powertrain friction.\138\
---------------------------------------------------------------------------

    \136\ Testimony of Kenneth Patton (GM); Testimony of Kevin 
McMahon (Martec); Plaintiffs' Proposed Findings of Fact, June 15, 
2007, pp. 103 -113.
    \137\ Alliance of Automobile Manufacturers, ``Detailed Technical 
Comments on Ricardo `Study of Potential Effectiveness of Carbon 
Dioxide Reducing Vehicle Technologies' Report'', March 6, 2008.
    \138\ For the reader's reference, Ricardo's study for EPA was 
based on specific EPA-defined requirements, such as performing full 
vehicle simulations of 26 different technology packages on the EPA-
specified 5 baseline vehicles. Thus, to the extent that Ricardo's 
numbers do not reflect specific differences in technology 
effectiveness by vehicle model, in conducting the analysis for 
NHTSA's final rule, NHTSA and Ricardo drew on Ricardo's knowledge to 
develop incremental benefits based in part on Ricardo's simulation 
work. Ricardo also noted differences between its report for EPA and 
the EPA Staff Technical Report in terms of the incremental benefits 
for individual technologies developed by EPA based on Ricardo's 
simulation.
---------------------------------------------------------------------------

    Although submitted after the close of the comment period specified 
in the NPRM, comments by several state Attorneys General and other 
state and local official questioned the need and merits of full vehicle 
simulation within the context of CAFE analysis, stating that

    Computer simulation models such as VEHSIM are not practical 
except perhaps during vehicle development to determine the 
performance of specific vehicle models where all vehicle engineering 
parameters are known and can be accounted for in the inputs to the 
model. Such an exercise is extremely data intensive, and extending 
it to the entire fleet makes it subject to multiple errors unless 
the specific parameters for each vehicle model are known and 
accounted for in the model inputs.\139\
---------------------------------------------------------------------------

    \139\ Attorneys General of the States of California, Arizona, 
Connecticut, Illinois, Maryland, Massachusetts, New Jersey, New 
Mexico, Oregon, and Vermont, the Executive Officer of the California 
Air Resources Board, the Commissioner of the New Jersey Department 
of Environmental Protection, the Secretary of the New Mexico 
Environment Department, the Secretary of the Commonwealth of 
Pennsylvania Department of Environmental Protection, and the 
Corporation Counsel of the City of New York, Supplemental Comments 
Regarding Alliance of Automobile Manufacturers Comments, Docket No. 
NHTSA-2008-0089-0495, October 8, 2008, p. 3.

    Considering the comments summarized above, the analyses to which 
they refer, and the nature of the analysis the agency performs when 
evaluating potential CAFE standards, NHTSA has concluded that full 
vehicle simulation, though useful to manufacturers' own product 
development efforts, remains neither necessary nor feasible for the MY 
2011 CAFE analysis. NHTSA's basis for this conclusion is as follows:
    Full vehicle simulation involves estimating the fuel consumption 
(and, typically, emissions) of a specific vehicle over a specific 
driving cycle. Many engineering characteristics of the vehicle must be 
specified, including, but not limited to weight, rolling resistance, 
tire radius, aerodynamic drag coefficient, frontal area, engine 
maps\140\ and detailed transmission characteristics (gear ratios, shift 
logic, etc.), other drivetrain characteristics, and accessory loads. 
Additional engine test data would also be required in order to update 
engine maps when evaluating the application of advanced engine 
technologies. Driving cycles--vehicle speeds over time--are specified 
on a second-by-second (or more finely-grained) basis. Using full 
vehicle simulation to estimate average fuel consumption under the test 
procedures relevant to CAFE involves many simulations to capture all 
the potential combinations of technologies that could be used.
---------------------------------------------------------------------------

    \140\ An engine map specifies the engine's efficiency under many 
different operating conditions, each of which is defined in terms of 
rotational speed (i.e., revolutions per minute, or RPM) and load 
(i.e., torque).
---------------------------------------------------------------------------

    Given all of the requisite data representing a specific vehicle, 
full vehicle simulation can provide a powerful means of estimating 
vehicle performance while accounting for interactions between various 
vehicle components and systems. Full simulation can also provide a 
means of estimating vehicle performance under driving conditions not 
represented by the fuel economy test procedures. For

[[Page 14264]]

an engineer involved in the design of a specific vehicle or vehicle 
component or system, or a manufacturer making specific decisions 
regarding the fleet of vehicles it will produce, vehicle simulation can 
be a powerful tool. However, even the most detailed simulation 
involving full combustion cycle simulation is not the ``gold standard'' 
for product design. Chrysler, for example, has portrayed simulation as 
one of several tools in its CAFE planning process, which also involves 
physical testing (i.e., bench testing, chassis dynamometer testing) of 
actual components and assembled vehicles.\141\
---------------------------------------------------------------------------

    \141\ Fodale, F., Chrysler LLC, ``Fuel Economy/Fuels--Presented 
to NRC Committee on Fuel Economy of Light-Duty Vehicles'', November 
27, 2007.
---------------------------------------------------------------------------

    In purpose and corresponding requirements, NHTSA's evaluation of 
regulatory options is fundamentally different from the type of product 
planning and development that a manufacturer conducts. A manufacturer 
must make specific decisions regarding every component that will be 
installed in every vehicle it plans to produce, and it must ultimately 
decide how many of each vehicle it will produce. Although manufacturers 
have some ability to make ``mid-course adjustments,'' that ability is 
limited by a range of factors, such as contracts and tooling 
investments. By comparison, NHTSA attempts only to estimate how a given 
manufacturer might attempt to comply with a potential CAFE standard; 
given the range of options available to each manufacturer, NHTSA has 
little hope of predicting specifically what a given manufacturer will 
do. CAFE standards require average levels of performance, not specific 
technology outcomes. Therefore, while it is important that NHTSA avoid 
systematic bias when estimating the potential to increase the fuel 
economy of specific vehicle models, it is not important that the 
agency's estimates precisely forecast results for every future vehicle.
    Furthermore, NHTSA evaluates the impact of CAFE standards on all 
manufacturers, based on a forecast of specific vehicle models each 
manufacturer will produce for sale in the U.S. in the future. An 
analysis for MY 2011 can involve thousands of unique vehicle models, 
hundreds of unique engines, and hundreds of unique transmissions. 
Model-by-model representation, as used in the analysis for this final 
rule, allows the agency to, among other things, account for 
technologies expected to be present on each vehicle under ``business as 
usual'' conditions, thereby avoiding errors regarding the potential to 
add further technologies.
    Because of the intense informational and computational 
requirements, industry-wide studies that rely on vehicle simulation 
reduce the fleet to a limited number of ``representative'' vehicles. 
This reduction limits the ability to account for technological and 
other heterogeneity of the fleet, virtually ensuring the overestimation 
of improvements available to some vehicles (e.g., vehicles that begin 
with a great deal of technology) and some manufacturers (e.g., 
manufacturers that sell many high-technology vehicles). AVL's analysis 
for NESCCAF and Ricardo's analysis for EPA, each of which considered 
only five vehicle models, are both, therefore, of severely limited use 
for the kind of fleetwide analysis used in this final rule, although 
both provide useful information regarding the range of fuel savings 
achieved by specific technologies and ``packages'' of technologies.
    The analysis conducted by Sierra Research for the Alliance 
considers a significantly greater number (25) of ``representative'' 
vehicles, drawing important distinctions between similarly-sized cars 
based on performance. Sierra was able to do so in part because it 
analyzed historical vehicles. For example, Sierra indicates that model 
year 1998 engines were used to supply VEHSIM with baseline, ``blended'' 
engine maps applied universally (rather than specific maps for each 
manufacturer and vehicle model) for vehicle model years out to 2020. 
Considering that, even without increases in CAFE standards, many 
vehicles produced for sale in the U.S. during the time period 
considered in a CAFE rulemaking are likely to have technologies such as 
VVLT and cylinder deactivation, NHTSA doubts ``blended'' 1998 engines 
are as representative as implied by Sierra's analysis.
    Although NHTSA could, in principle, integrate full vehicle 
simulation of every vehicle model into its analysis of the future 
fleet, the agency expects that manufacturers would be unable to provide 
much of the required information for future vehicles. Even if 
manufacturers were to provide such information, using full vehicle 
simulation to estimate the effect of further technological improvements 
to future vehicles would involve uncertain detailed estimates, such as 
valve timing, cylinder deactivation operating conditions, transmission 
shift points, and hybrid vehicle energy management strategies for each 
specific vehicle, engine, and transmission combination. Even setting 
aside the vast increases in computational demands that would accompany 
the use of full vehicle simulation in model-by-model analysis of the 
entire fleet, the agency remains convinced that the availability of 
underlying information and data would be too limited for this approach 
to be practical.
    As a third alternative, one that might be more explicitly 
``physics-based'' than the use of synergy factors and vastly more 
practical than full vehicle simulation, NHTSA requested comment on the 
use of partitioned fuel consumption accounting. Aside from GM's 
nonspecific recommendation that the Volpe model be modified to account 
for the ``basic physics of vehicles,'' NHTSA did not receive comments 
regarding the relative merits of partitioning fuel consumption into 
several energy loss mechanisms for purposes of estimating the effects 
of fuel-saving technologies, even though the concept is similar to that 
proposed by Patton, et al. in 2002.\142\ Some manufacturers provided 
some of the information that would have been necessary for the 
implementation of this approach. However, as a group, manufacturers 
that submitted product plan information to the agency provided far too 
little disaggregated fuel consumption information to support the 
development of this approach. Although NHTSA continues to believe that 
partitioning fuel consumption into various loss mechanisms could 
provide a practical and sound basis for future analysis, the 
information required to support this approach is not available at this 
time.
---------------------------------------------------------------------------

    \142\ Patton, et al., present an energy balance calculation that 
disaggregates fuel consumption into six energy loss categories, 
indicating that ``an accounting of the effects of individual 
technologies on energy losses within these categories provides a 
practical, physically-based means to evaluate and compare the fuel 
consumption effects of the various technologies.'' (Patton, et al., 
(2002), op. cit., p. 11.)
---------------------------------------------------------------------------

    In conclusion, NHTSA observes that with respect to the CAFE 
analysis prepared for this final rule, full vehicle simulation could 
theoretically be used at three different levels. First, full vehicle 
simulation could be used only to provide specific estimates, that, 
combined with other data (e.g., from bench testing) would provide a 
basis for estimates of the effectiveness of specific individual 
technologies. While NHTSA will continue considering this type of 
analysis, the agency anticipates that it will continue to be feasible 
and informative to make somewhat greater use of full vehicle 
simulation. Second, full vehicle simulation could be fully integrated 
into NHTSA's model-by-model analysis of the entire fleet to be

[[Page 14265]]

projected to be produced in future model years. NHTSA expects, however, 
that this level of integration will remain infeasible considering the 
size and complexity of the fleet. Also, considering the forward-looking 
nature of NHTSA's analysis, and the amount of information required to 
perform full vehicle simulation, NHTSA anticipates that this level of 
integration would involve misleadingly precise estimates of fuel 
consumption, even for MY 2011. Finally, full vehicle simulation can be 
used to develop less complex representations of interactions between 
technologies (such as was done using the lumped parameter model to 
develop the synergies for the final rule), and to perform reference 
points to which vehicle-specific estimates may be compared. NHTSA views 
this as a practical and productive potential use of full vehicle 
simulation, and will consider following this approach in the future. 
NHTSA has contracted with NAS to, among other things, evaluate the 
potential use of full vehicle simulation and other fuel consumption 
estimation methodologies. Nevertheless, in addition to considering 
further modifications to the Volpe model, NHTSA will continue to 
consider other methods for evaluating the cost and effect of adding 
technology to manufacturers' fleets.
9. Refresh and Redesign Schedule
    In addition to, and as discussed below, developing analytical 
methods that address limitations on overall rates at which new 
technologies can be expected to feasibly penetrate manufacturers' 
fleets, the agency has also developed methods to address the feasible 
scheduling of changes to specific vehicle models. In the Volpe model, 
which the agency has used to support the current rulemaking, these 
scheduling-related methods were first applied in 2003, in response to 
concerns that an early version of the model would sometimes add and 
then subsequently remove some technologies.\143\ By 2006, these methods 
were integrated into a new version of the model, one which explicitly 
``carried forward'' technologies added to one vehicle model to 
succeeding vehicle models in the next model year, and which timed the 
application of many technologies to coincide with the redesign or 
freshening of any given vehicle model.\144\
---------------------------------------------------------------------------

    \143\ 68 FR 16874 (Apr. 7, 2003).
    \144\ 71 FR 17582 (Apr. 6, 2006).
---------------------------------------------------------------------------

    Even within the context of the phase-in caps discussed below, NHTSA 
considers these model-by-model scheduling constraints necessary in 
order to produce an analysis that reasonably accounts for the need for 
a period of stability following the redesign of any given vehicle 
model. If engineering, tooling, testing, and other redesign-related 
resources were free, every vehicle model could be redesigned every 
year. In reality, however, every vehicle redesign consumes resources 
simply to address the redesign. Phase-in caps, which are applied at the 
level of manufacturer's entire fleet, do not constrain the scheduling 
of changes to any particular vehicle model. Conversely, scheduling 
constraints to address vehicle freshening and redesign do not 
necessarily yield realistic overall penetration rates (e.g., for strong 
hybrids).
    In the automobile industry there are two terms that describe when 
changes to vehicles occur: redesign and refresh (i.e., freshening). 
Vehicle redesign usually encompasses changes to a vehicle's appearance, 
shape, dimensions, and powertrain, and is traditionally associated with 
the introduction of ``new'' vehicles into the market, which is often 
characterized as the next generation of a vehicle. In contrast, vehicle 
refresh usually encompasses only changes to a vehicle's appearance, and 
may include an upgraded powertrain. Refresh is traditionally associated 
with mid-cycle cosmetic changes to a vehicle, within its current 
generation, to make it appear ``fresh.'' Vehicle refresh traditionally 
occurs no earlier than two years after a vehicle redesign or at least 
two years before a scheduled redesign. In the NPRM, NHTSA tied the 
application of the majority of the technologies to a vehicle's refresh/
redesign cycle, because their application was significant enough that 
it could involve substantial engineering, testing, and calibration 
work.
    NHTSA based the redesign and refresh schedules used in the NPRM as 
inputs to the Volpe model on a combination of manufacturers' 
confidential product plans and NHTSA's engineering judgment. In most 
instances, NHTSA reviewed manufacturers' planned redesign and refresh 
schedules and used them in the same manner it did in past rulemakings. 
However, in NHTSA's judgment, manufacturers' planned redesign and 
refresh schedules for some vehicle models were unrealistically slow 
considering overall market trends. In these cases, the agency re-
estimated redesign and refresh schedules more consistent with the 
agency's expectations, as discussed below. Also, if companies did not 
provide product plan data, NHTSA used publicly available data about 
vehicle redesigns to project the redesign and refresh schedules for the 
vehicles produced by these companies.\145\
---------------------------------------------------------------------------

    \145\ Sources included, but were not limited to manufacturers' 
web sites, industry trade publications (e.g., Automotive News), and 
commercial data sources (e.g., Wards Automotive, etc.).
---------------------------------------------------------------------------

    Unless a manufacturer submitted plans for a more rapid redesign and 
refresh schedule, NHTSA assumed that passenger cars would normally be 
redesigned every 5 years, based on the trend over the last 10-15 years 
showing that passenger cars are typically redesigned every 5 years. 
These trends were reflected in the manufacturer product plans that 
NHTSA used in the NPRM analysis, and were also confirmed by many 
automakers in meetings held with NHTSA to discuss various general 
issues regarding the rulemaking.
    NHTSA explained that it believes that the vehicle design process 
has progressed and improved rapidly over the last decade and that these 
improvements have made it possible for some manufacturers to shorten 
the design process for some vehicles in order to introduce vehicles 
more frequently in response to competitive market forces. Although 
manufacturers have likely already taken advantage of most available 
improvements, according to public and confidential data available to 
NHTSA, almost all passenger cars will be on a 5-year redesign cycle by 
the end of the decade, with the exception being some high performance 
vehicles and vehicles with specific market niches.
    NHTSA also stated in the NPRM that light trucks are currently 
redesigned every 5 to 7 years, with some vehicles (like full-size vans) 
having longer redesign periods. In the most competitive SUV and 
crossover vehicle segments, the redesign cycle currently averages 
slightly above 5 years. NHTSA explained that it is expected that the 
light truck redesign schedule will be shortened in the future due to 
competitive market forces Thus, for almost all light trucks scheduled 
for a redesign in model year 2014 and later, NHTSA projected a 5-year 
redesign cycle. Exceptions were made for high performance vehicles and 
other vehicles that traditionally had longer than average design 
cycles. For those vehicles, NHTSA attempted to preserve their 
historical redesign cycle rates.
    NHTSA discussed these assumptions with several manufacturers at the 
NPRM stage, before the current economic crisis. Two manufacturers 
indicated at

[[Page 14266]]

that time that their vehicle redesign cycles take at least five years 
for cars and 6 years and longer for trucks because they rely on those 
later years to earn a profit on the vehicles. They argued that they 
would not be able to sustain their business if forced by CAFE standards 
to a shorter redesign cycle. The agency recognizes that some 
manufacturers are severely stressed in the current economic 
environment, and that some manufacturers may be hoping to delay planned 
vehicle redesigns in order to conserve financial resources. However, 
consistent with its forecast of the overall size of the light vehicle 
market from MY 2011 on, the agency currently expects that the 
industry's status will improve, and that manufacturers will typically 
redesign both car and truck models every 5 years in order to compete in 
that market.
    NHTSA received relatively few comments regarding its refresh/
redesign schedule assumptions. UCS commented that redesign schedules 
should be shortened to 3 years, based on recent public statements by 
Ford that they intended to move to that cycle, and based on other 
recent manufacturer behavior.
    Although NHTSA agrees with UCS that remarks by one Ford official at 
a January 2008 conference suggest that that company was then hoping to 
accelerate its vehicle ``cycle time'' to 3 years, the agency questions 
the context, intended meaning and scope, and representation of those 
remarks.\146\ Further, the agency notes that the article referenced by 
UCS also indicates that ``most manufacturers make changes to their 
vehicle lines every four years or more, depending on the segment of the 
market, with mid-cycle freshenings every two years or so.'' \147\ 
Although some manufacturers have, in their product plans, indicated 
that they plan to redesign some vehicle models more frequently than has 
been the industry norm, all manufacturers have also indicated that they 
expect to redesign some other vehicle models considerably less 
frequently. The CAR report submitted by the Alliance, prepared by the 
Center for Automotive Research and EDF, states that ``For a given 
vehicle line, the time from conception to first production may span two 
and one-half to five years,'' but that ``The time from first production 
(``Job 1'') to the last vehicle off the line (``Balance Out'') 
may span from four to five years to eight to ten years or more, 
depending on the dynamics of the market segment.'' The CAR report then 
states that ``At the point of final production of the current vehicle 
line, a new model with the same badge and similar characteristics may 
be ready to take its place, continuing the cycle, or the old model may 
be dropped in favor of a different product.'' \148\
---------------------------------------------------------------------------

    \146\ Zoia, D.E. 2008. Ford to cut cycle times to three years. 
Online at http://www.wardsauto.com. January 24.
    \147\ Id.
    \148\ See NHTSA-2008-0089-0170.1, Attachment 16, at 8 (393 of 
pdf).
---------------------------------------------------------------------------

    NHTSA believes that this description, which states that a vehicle 
model will be redesigned or dropped after 4-10 years, is consistent 
with other characterizations of the redesign and freshening process, 
and supports its 5-year redesign assumption and its 2-3 year refresh 
cycle assumptions.\149\ Thus, for purposes of the final rule, NHTSA is 
retaining the 5-year redesign/2-3 year refresh assumptions employed in 
the NPRM. However, NHTSA will continue to monitor manufacturing trends 
and will reconsider these assumptions in subsequent rulemakings if 
warranted.
---------------------------------------------------------------------------

    \149\ See id., at 9 (394 of pdf).
---------------------------------------------------------------------------

    For purposes of the final rule, NHTSA has also considered 
confidential product plans where applicable and industry trends on 
refresh and redesign timing as discussed above, to apply specific 
technologies at redesign, refresh, or any model years as shown in Table 
IV-7 below.
BILLING CODE 4910-59-P

[[Page 14267]]

[GRAPHIC] [TIFF OMITTED] TR30MR09.030

BILLING CODE 4910-59-C
    As the table shows, most technologies are applied by the Volpe 
model when a specific vehicle is due for a redesign or refresh. 
However, for low friction lubricants, the model is not restricted to 
applying it during a refresh/redesign year and thus it was made 
available for application at any time. Low friction lubricants are very 
cost-effective, can apply to multiple vehicle models/platforms and can 
be applied across multiple vehicle models/platforms in one year. 
Although they can also be applied during a refresh/redesign year, they 
are not restricted to that timeframe because their application is not 
viewed as necessitating a major engineering redesign and associated 
testing/calibration.
    For several technologies estimated in the NPRM to be available for 
application during any model year, NHTSA now estimates that these 
technologies will be available only at refresh or redesign. Those 
technologies include aggressive shift logic, improved accessories, low 
rolling resistance tires and low drag

[[Page 14268]]

brakes. Aggressive shift logic is now one of the technologies included 
under improved automatic transmission controls. This technology 
requires a recalibration specific to each vehicle, such that it can 
therefore be applied only at refresh or redesign model years. The 
``improved accessories'' technology has been redefined to include 
intelligent engine cooling systems, which require a considerable change 
to the vehicle and engine cooling system; therefore, improved 
accessories also can be applied only at refresh or redesign model 
years. Also, NHTSA concurs with manufacturers' confidential statements 
that indicating that low drag brakes and low rolling resistance tires 
can be applied only at refresh or redesign model years due to the need 
for vehicle testing and calibration (e.g., to ensure safe handling and 
braking) when these technologies are applied.
10. Phase-In Caps
    In 2002, NHTSA proposed the first increases in CAFE standards in 
six years due to a previous statutorily-imposed prohibition on setting 
new standards. That proposal, for MY 2005-2007 light truck standards, 
relied, in part, on a precursor to the current Volpe model. This 
earlier model used a ``technology application algorithm'' to estimate 
the technologies that manufacturers could apply in order to comply with 
new CAFE standards.
    NHTSA received more than 65,000 comments on that proposal. Among 
those were many manufacturer comments concerning lead time and the 
potential for rapid widespread use of new technologies. The agency 
noted that DaimlerChrysler and Ford ``argued that the agency had 
underestimated the lead time necessary to incorporate fuel economy 
improvements in vehicles, as well as the difficulties of introducing 
new technologies across a high volume fleet.'' Specific to Volpe's 
technology application algorithm, the agency noted that General Motors 
took issue with the algorithm's ``application of technologies to all 
truck lines in a single model year.'' \150\
---------------------------------------------------------------------------

    \150\ 68 FR 16874 (Apr. 7, 2003).
---------------------------------------------------------------------------

    In response to those concerns, Volpe's algorithm was modified ``to 
recognize that capital costs require employment of technologies for 
several years, rather than in a single year.'' \151\ Those changes 
moderated the rates at which technologies were estimated to penetrate 
manufacturers' fleets in response to the new (MY 2005-MY 2007) CAFE 
standards. These changes produced more realistic estimates of the 
technologies manufacturers could apply in response to the new 
standards, and thereby produced more realistic estimates of the costs 
of those standards.
---------------------------------------------------------------------------

    \151\ Id., at 16885.
---------------------------------------------------------------------------

    Prior to the next rulemaking, the Volpe model underwent significant 
integration and improvement, including the accommodation of explicit 
``phase-in caps'' to constrain the rates at which each technology would 
be estimated to penetrate each manufacturer's fleet in response to new 
CAFE standards.\152\ As documented in 2006, the agency's final 
standards for light trucks sold in MY 2008-MY 2011 were based on phase-
in caps ranging from 17 percent to 25 percent (corresponding to full 
penetration of the fleet within 4 to 6 years) for most technologies, 
and from 3 percent to 10 percent (full penetration within 10 to 33 
years) for more advanced technologies such as hybrid electric 
vehicles.\153\ The agency based these rates on consideration of 
comments and on the 2002 NAS Committee's findings that ``widespread 
penetration of even existing technologies will probably require 4 to 8 
years'' and that for emerging technologies ``that require additional 
research and development, this time lag can be considerably 
longer''.\154\
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    \152\ These caps constrain the extent to which additional 
technology is applied by the model, beyond the levels projected in 
each manufacturer's baseline fleet. Also, because manufacturers' 
fleets are comprised of vehicles, engines, and transmissions sold in 
discrete volumes, phase-in caps cannot be applied as precise limits. 
In some cases (when a phase-in cap is small or a manufacturer has a 
limited product line), doing so would prevent the technology from 
being applied at all. Therefore, the Volpe model enforces each 
phase-in cap constraint as soon as it has been exceeded by 
application of technologies to manufacturers.
    \153\ 71 FR 17572, 17679 (Apr. 6, 2006).
    \154\ Id. at 17572. See also 2002 NAS Report, at 5.
---------------------------------------------------------------------------

    In its 2008 NPRM proposing new CAFE standards for passenger cars 
and light trucks sold during MY 2011-MY 2015, NHTSA considered 
manufacturers' planned product offerings and estimates of technology 
availability, cost, and effectiveness, as well as broader market 
conditions and technology developments. The agency concluded that many 
technologies could be deployed more rapidly than it had estimated 
during the prior rulemaking.\155\ For most engine technologies, the 
agency increased these caps from 17 percent to 20 percent, equivalent 
to reducing the estimated time for potential fleet penetration from 6 
years to 5 years. For stoichiometric gasoline direct injection (GDI) 
engines, the agency increased the phase-in cap from 3 percent to 20 
percent, equivalent to estimating that such engines could potentially 
penetrate a given manufacturer's fleet in 5 years rather than the 
previously-estimated 33 years. However, as in its earlier CAFE 
rulemakings, the agency continued to recognize that myriad constraints 
prohibit most technologies from being applied across an entire fleet of 
vehicles within a year, even if those technologies are available in the 
market.
---------------------------------------------------------------------------

    \155\ 73 FR 24387-88 (May 2, 2008).
---------------------------------------------------------------------------

    In addition to requesting further explanation of NHTSA's use of 
phase-in caps, commenters addressing phase-in caps generally asserted 
one of three themes: (1) That hybrid phase-in caps were much lower than 
market trends or manufacturer announcements would otherwise suggest; 
(2) that the phase-in caps proposed in the NPRM were too high in the 
early years of the rulemaking and did not reflect the very small (from 
a manufacturing perspective) amount of lead-time between the final rule 
and the MY 2011 standards, and/or were too low in the later years of 
the rulemaking given the relatively-increased amount of lead-time for 
those model years; (3) that there are insufficient resources (either in 
terms of capital or engineering) to implement the number of 
technologies implied by the phase-in caps simultaneously.
    Agency response: NHTSA continues to recognize that many factors 
constrain the rates at which manufacturers will be able to feasibly add 
fuel-saving technologies to the fleets they will sell in the United 
States. For a given technology, examples of these factors may include, 
but would not be limited to the following:
     Is the technology ready for commercial use? For example, 
can it operate safely and reliably under real-world driving conditions 
for several years and many miles?
     If the technology requires special infrastructure (e.g., 
new electrical generation and charging facilities), how quickly will 
that be put in place?
     How quickly can suppliers ramp up to produce the 
technology in mass quantities? For example, how quickly can they obtain 
the materials, tooling, and engineering resources they will need?
     Are original equipment manufacturers (OEMs) ready to 
integrate the technology into vehicles? For example, how quickly can 
they obtain the necessary tooling (e.g., retool factories), 
engineering, and financial resources?
     How long will it take to establish failure and warranty 
data, and to make sure dealers and maintenance and repair businesses 
have any new training and tooling required in order to work with the 
new technology?

[[Page 14269]]

     Will OEMs be able to reasonably recoup prior investments 
for tooling and other capital?
     To what extent are suppliers and OEMs constrained by 
preexisting contracts?
    NHTSA cannot explicitly and quantitatively evaluate every one of 
these and other factors with respect to each manufacturer's potential 
deployment of each technology available during the production intent or 
emerging technology framework. Attempting to do so would require an 
extraordinary effort by the agency, and would likely be subject to 
tremendous uncertainties. For example, in the current economic and 
market environment, the agency expects that it would be impossible to 
reliably predict specific characteristics of future supply chains. 
Therefore, the agency has concluded that it is appropriate to continue 
using phase-in caps to apply the agency's best judgment of the extent 
to which such factors combine to constrain the rates at which 
technologies may feasibly be deployed. We note, however, that many of 
the assumptions about phase-in caps made in this final rule apply to 
years beyond MY 2011, because as the NAS Committee and commenters 
indicated, technologies are phased in over several years, so the agency 
evaluated the phasing-in of technologies over the five-year period 
proposed in the NPRM. NHTSA provides these assumptions both in response 
to comments and to provide context for the agency's decisions regarding 
MY 2011 phase-in caps. We emphasize that all assumptions for years 
other than MY 2011 will be reconsidered for future rulemakings and may 
be subject to change at that time.
    Considering the above-mentioned comments, NHTSA has concluded that 
the phase-in caps it applied during its analysis documented in the 2008 
NPRM resulted in technology penetration rates that were unrealistically 
high in the earlier model years covered by its proposal, particularly 
for MY 2011. This was a significant basis for the proposed standards' 
``front loading'' about which manufacturers expressed serious concerns. 
In response, and based on this conclusion, the Volpe model was modified 
for purposes of the final rule analysis to use phase-in caps for each 
technology that vary from one year to the next, and that in many cases 
would have increased more rapidly in the later years of the agency's 
analysis than in earlier years. In making these changes, particularly 
to the MY 2011 phase-in caps, the agency has been mindful of the need 
to provide manufacturers sufficient lead time to add technologies to 
their fleets. In the agency's judgment, its revised approach more 
realistically represents manufacturers' capabilities and therefore 
produces more realistic estimates of the costs of new CAFE standards.
    For some technologies, NHTSA also concluded that slower overall 
rates of fleet penetration are more likely than the rates shown in the 
NPRM. The agency estimates that cylinder deactivation, stoichiometric 
GDI, and turbocharging with downsizing would be able to potentially be 
added to 12-14 percent of the fleet per year on average, rather than 
the 20 percent phase-in caps used in the NPRM for these technologies. 
Considering manufacturers' comments and some aspects of its 
reevaluation of the incremental benefits of available engine 
technologies, the agency has concluded that these technologies will, 
for some engines, require more significant hardware changes and 
certification burden than previously recognized, such that feasible 
deployment is likely to be somewhat slower than estimated in the NPRM.
    NHTSA has also concluded, considering the complexities involved in 
deploying strongly hybridized vehicles (i.e., power split, two mode, 
and plug-in hybrids), it is unrealistic to expect that, in response to 
new CAFE standards, manufacturers can produce more of such vehicles in 
MY 2011 than they are already planning. Therefore, NHTSA has set the MY 
2011 phase-in cap for strong hybrids to zero in that model year. Based 
on new information regarding engineering resources entailed in 
developing new power split and two-mode hybrid vehicles, the agency 
estimated in its analysis that these technologies could be added to up 
to 11 percent and 8 percent, respectively, of a given manufacturer's 
long run fleet, rather than the 15 percent the agency estimated for the 
NPRM. The agency also considered a less aggressive 1 percent longer run 
phase-in cap for plug-in hybrids, in part because although the agency 
expects that plug-in hybrids will rely on lithium-ion batteries, it is 
not clear whether and, if so, how the supply chain for large and robust 
lithium-ion batteries will develop.
    On the other hand, NHTSA has also concluded that some technologies 
can potentially be deployed more widely than estimated in the NPRM. For 
example, the agency estimates that 6/7/8-speed transmissions, dual 
clutch or automated manual transmissions, secondary axle disconnect, 
and aerodynamic improvements can potentially (notwithstanding 
engineering constraints that, for example, preclude the application of 
aerodynamic improvements to some performance vehicles) be added at an 
average rate of 20 percent per year of a given manufacturer's fleet 
rather than the 14-17 percent average annual phase-in caps used in the 
NPRM for these technologies. In the agency's judgment, increased phase-
in caps are appropriate for these transmission technologies, in part 
because the agency's review of confidential product plans which 
indicated a higher than anticipated application rate of these 
technologies than existed at the time of the NPRM. Additionally, 
several manufacturers indicated a high likelihood of significant usage 
of dual clutch transmissions across their fleet of vehicles. The 
secondary axle disconnect technology was redefined for the final rule 
to consist of a somewhat basic, existing technology applicable only to 
4 wheel-drive vehicles (a smaller population) rather than the NPRM-
defined technology (which was applicable to both 4 and all wheel drive 
vehicles). The agency has also concluded that, because it has 
identified performance vehicles as such, and has estimated that 
aerodynamic improvements are not applicable to these vehicles, 
aerodynamic dynamic improvements can be applied more widely as long as 
they are applied consistent with vehicle redesign schedules. 
Furthermore, considering changes in manufacturers' stated expectations 
regarding prospects for diesel engines, the agency estimates that 
diesel engines could be added to as much as 4 percent of a 
manufacturer's light truck fleet each year on average, rather than the 
3 percent estimated in the NPRM. These changes in NHTSA's estimates 
stem from the agency's reevaluation of the status of these 
technologies, as revealed by manufacturers' plans and confidential 
statements, as well as other related comments submitted in response to 
the NPRM.
    Regarding comments that manufacturers' public statements reflect 
the ability to deploy technology more rapidly than reflected in the 
phase-in caps NHTSA applied in the NPRM, NHTSA notes that it did 
consider such statements. Combined with other information, these led 
the agency to conclude that, as mentioned above, some technologies 
could, particularly in later years, be applied more widely than the 
agency had previously estimated. However, in their confidential 
statements to NHTSA, manufacturers

[[Page 14270]]

are typically more candid about factors--both positive and negative--
that affects their ability to deploy new technologies than they are in 
public statements available to their competitors. Therefore, NHTSA 
places greater weight on manufacturers' confidential statements, 
especially when they are consistent with statements made by other 
manufacturers and/or suppliers. NHTSA also observes that some 
organizations have exhibited a tendency to take manufacturers' 
statements out of context, or overlook important caveats included in 
such statements, which are largely used for marketing purposes.
    Table IV-8 below outlines the phase-in caps for each discrete 
technology for MY 2011. These phase-in caps, along with the expanded 
number and types of vehicle subclasses, address the concerns raised by 
commenters and represent a substantial improvement in terms of 
consideration of the factors affecting technology penetration rates 
over those used in the NPRM. Additional considerations regarding 
specific phase-in caps, including nonlinear increases in these caps, 
are presented in the more detailed technology-by-technology analysis 
summarized below.
    For some of the technologies applied in the final rule, primarily 
the valvetrain and diesel engine technologies, NHTSA has utilized 
combined phase-ins caps since the technologies are effectively the same 
from the standpoints of engineering and implementation. The final rule 
represented diesel engines as two technologies that both result in the 
conversion of gasoline engine vehicles. The annual phase-in caps for 
these two technologies, which are both set to a maximum of 3 percent 
for passenger cars (4 percent for light trucks) have been combined so 
that the maximum total application of either or both technologies to 
any manufacturers' passenger car fleet is limited to 3 percent (not 6 
percent). For example, if 3 percent of a manufacturers' passenger car 
fleet has received diesel following combustion restart in a given year, 
diesel following turbocharging and downsizing will not be applied 
because the phase-in cap for diesels would have been reached. These 
combined phase-in caps are discussed below where applicable to each 
technology.
BILLING CODE 4910-59-P
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[[Page 14271]]


[GRAPHIC] [TIFF OMITTED] TR30MR09.032

BILLING CODE 4910-59-C

D. Specific Technologies Considered for Application and NHTSA's 
Estimates of Their Incremental Costs and Effectiveness

1. What data sources did NHTSA evaluate?
    In developing the technology assumptions in the final rule, NHTSA, 
working with Ricardo, examined a wide range of data sources and 
comments. We reexamined the sources we relied on for the NPRM such as 
the 2002 NAS Report, the 2004 NESCCAF report developed for CARB by AVL 
and Martec, the 2006 EEA report and the EPA certification data. We also 
considered more recent and updated sources of information and reports 
submitted to the NPRM docket, including the (1) Sierra Research report 
submitted by the Alliance as an attachment to its comments as another 
set of estimates for fuel economy cost and effectiveness,\156\ (2) 
CARB's response to aspects of that report, which was filed as 
supplemental comment on October 14, 2008, (3) the 2008 Martec 
Report,\157\ which updated the Martec report on which the 2004 NESCCAF 
study was based, and the EPA Staff Technical Report,\158\ which largely 
mirrored NHTSA's NPRM estimates.
---------------------------------------------------------------------------

    \156\ Sierra Research, ``Attachment to Comment Regarding the 
NHTSA Proposal for Average Fuel Economy Standards Passenger Cars and 
light Trucks Model Years 2011-2015,'' June 27, 2008. Available at 
Docket No. NHTSA-2008-0089-0179.1.
    \157\ Martec, ``Variable Costs of Fuel Economy Technologies,'' 
June 1, 2008. Available at Docket No. NHTSA-2008-0089-0169.1.
    \158\ EPA Staff Technical Report: Cost and Effectiveness 
Estimates of Technologies Used to Reduce Light-Duty Vehicle Carbon 
Dioxide Emissions. EPA420-R-08-008, March 2008.
---------------------------------------------------------------------------

    The agency also evaluated confidential data from a number of 
vehicle manufacturers and technology component suppliers.\159\ We note 
that vehicle manufacturers updated their product plans in response to 
NHTSA's May 2008 Request for Comment.\160\
---------------------------------------------------------------------------

    \159\ The major suppliers that provided NHTSA with fuel economy 
cost and effectiveness estimates in response to our request for 
comments included Borg-Warner, Cummins, and Delphi, while Borg-
Warner, Bosch, Coring, Cummins, Delphi, and Siemens also provided 
NHTSA with fuel economy cost and effectiveness estimates during 
confidential meetings.
    \160\ Manufacturers that provided NHTSA with fuel economy cost 
and effectiveness estimates in response to our request for comments 
include BMW, Chrysler, Daimler, Ford, GM, Honda, Nissan, and Toyota.
---------------------------------------------------------------------------

2. Individual technology descriptions and cost/effectiveness estimates
(a) Gasoline Engine Technologies
(i) Overview
    Most passenger cars and light trucks in the U.S. have gasoline-
fueled spark ignition internal combustion engines. These engines move 
the vehicle by converting the chemical energy in gasoline fuel to 
useful mechanical work output as shaft torque and power delivered to 
the transmission and to the vehicle's driving wheels. Vehicle fuel 
economy is directly proportional to the efficiency of the engine. Two 
common terms are used to define the efficiency of an engine are (1) 
Brake Specific Fuel Consumption (BSFC), which is the ratio of the mass 
of fuel used to the output mechanical energy; and (2) Brake Thermal 
Efficiency (BTE), which is the ratio of the fuel chemical energy, known

[[Page 14272]]

as calorific value, to the output mechanical energy.
    The efficiency of an automotive spark ignition engine varies 
considerably with the rotational speed and torque output demanded from 
the engine. The most efficient operating condition for most current 
engine designs occurs around medium speed (30-50 percent of the maximum 
allowable engine rpm) and typically between 70-85 percent of maximum 
torque output at that speed. At this operating condition, BTE is 
typically 33-36 percent. However, at lower engine speeds and torque 
outputs, at which the engine operates in most consumer vehicle use and 
on standardized drive cycles, BTE typically drops to 20-25 percent.
    Spark ignition engine efficiency can be improved by reducing the 
energy losses that occur between the point of combustion of the fuel in 
the cylinders to the point where that energy reaches the output 
crankshaft. Reduction in this energy loss results in a greater 
proportion of the chemical energy of the fuel being converted into 
useful work. For improving engine efficiency at lighter engine load 
demand points, which are most relevant for CAFE fuel economy, the 
technologies that can be added to a given engine may be characterized 
by which type of energy loss is reduced, as shown in Table IV-9 below.
[GRAPHIC] [TIFF OMITTED] TR30MR09.033

    As Table IV-9 shows, the main types of energy losses that can be 
reduced in gasoline engines to improve fuel economy are exhaust energy 
losses, engine friction losses, and gas exchange losses. Converting the 
gasoline engine to a diesel engine can also reduce heat losses.
Exhaust Energy Loss Reduction
    Exhaust energy includes the kinematic and thermal energy of the 
exhaust gases, as well as the wasted chemical energy of unburned fuel. 
These losses represent approximately 32 percent of the initial fuel 
chemical energy and can be reduced in three ways: first, by recovering 
mechanical or electrical energy from the exhaust gases; second, by 
improving the hydrocarbon fuel conversion; and third, by improving the 
cycle thermodynamic efficiency. The thermodynamic efficiency can be 
improved by either increasing the engine's compression ratio or by 
operating with a lean air/fuel ratio. The latter is not considered to 
be at the emerging technology point yet due to the non-availability of 
lean NOX aftertreatment, as discussed below. However, the 
compression ratio may potentially be raised by 1 to 1.5 ratios using 
stoichiometric direct fuel injection.
Engine Friction Loss Reduction
    Friction losses can represent a significant proportion of the 
global losses at low load. These losses are dissipated through the 
cooling system in the form of heat. Besides via direct reduction 
measures, friction can also be reduced through downsizing the engine by 
means of increasing the engine-specific power output.
Gas Exchange Loss Reduction
    The energy expended while delivering the combustion air to the 
cylinders and expelling the combustion products is known as gas 
exchange loss, commonly referred to as pumping loss. The main source of 
pumping loss in a gasoline engine is the use of an inlet air throttle, 
which regulates engine output by controlling the pre-combustion 
cylinder air pressure, but is an inefficient way to achieve this 
pressure control. A more efficient way of controlling the cylinder air 
pressure is to modify the valve timing or lift. Another way to reduce 
the average pumping losses is to ``downsize'' the

[[Page 14273]]

engine, making it run at higher loads or higher pressures.
    As illustrated in Table IV-9, several different technologies target 
pumping loss reduction, but it is important to note that the fuel 
consumption reduction from these technologies is not necessarily 
cumulative. Once most of the pumping work has been eliminated, adding 
further technologies that also target reduced pumping loss will have 
little additional effectiveness. Thus, in the revised decision trees, 
the effectiveness value shown for additional technologies targeting 
pumping loss depends on the existing technology combination already 
present on the engine.
(ii) Low Friction Lubricants (LUB)
    One of the most basic methods of reducing fuel consumption in 
gasoline engines is the use of lower viscosity engine lubricants. More 
advanced multi-viscosity engine oils are available today with improved 
performance in a wider temperature band and with better lubricating 
properties. CAFE standards notwithstanding, the trend towards lower 
friction lubricants is widespread. Within the next several year, most 
vehicles are likely to use 5W-30 motor oil, and some will use even less 
viscous oils, such as 5W-20 or possibly even 0W-20, to reduce cold 
start friction.
    The NPRM reflected NHTSA's belief that manufacturer estimates are 
the most accurate, and it estimated that low friction lubricants could 
reduce fuel consumption by 0.5 percent for all vehicle types at an 
incremental cost of $3, which represented the mid-point of manufacturer 
estimates range, rounded up to the next dollar. For the final rule 
NHTSA used the $3 cost from the NPRM, updated it to 2007 dollars, and 
marked it up to a retail price equivalent (RPE) of $5. Several 
manufacturers commented confidentially that low friction lubricants 
could reduce fuel consumption by 0 to 1 percent, and the Alliance 
suggested 0.5 percent relative to the baseline fleet. These comments 
confirm NHTSA's NPRM effectiveness estimate, so NHTSA has retained it 
for the final rule.
    Low friction lubricants may be applied to any class of vehicles. 
The phase-in for low friction lubricants is capped at 50 percent for MY 
2011. Honda commented that low friction lubricants cannot be applied to 
engines that have not been developed specifically for them.\161\ NHTSA 
understands that in some cases there could be a need for design changes 
and durability verification to implement low friction lubricants in 
existing engines. However, aftermarket low friction lubricant products 
already exist, and have been approved for use in existing engines.
---------------------------------------------------------------------------

    \161\ Docket NHTSA-2008-0089-0191.1.
---------------------------------------------------------------------------

(iii) Engine Friction Reduction (EFR)
    Besides low friction lubricants, manufacturers can also reduce 
friction and improve fuel economy by improving the design of engine 
components and subsystems. Examples include improvements in low-tension 
piston rings, roller cam followers, improved crankshaft design and 
bearings, material coatings, material substitution, more optimal 
thermal management, and piston and cylinder surface treatments.
    In the NPRM, based on confidential manufacturer data and the NAS, 
NESCCAF, and EEA reports, NHTSA estimated that friction reduction could 
incrementally reduce fuel consumption for all vehicles by 1 to 3 
percent at a cost of $0 to $21 per cylinder resulting in cost estimates 
of $0-$84 for a 4-cylinder, $0-$126 for a V-6, and $0-$168 for a V-8. 
For the final rule, NHTSA assumed there would be some cost associated 
with reducing engine friction, since at a minimum engineering and 
validation testing is required, in addition to any new components 
required such as roller followers or improved bearings. Additionally 
some revised components, such as improved surface materials/treatments, 
piston rings, etc., have costs that vary by component size which need 
to account for the full range of engines under consideration in the 
rulemaking, from small displacement gasoline to large displacement 
diesel engines.
    Considering the above, NHTSA relied on confidential manufacturer 
comments in response to the NPRM to determine a lower technology cost 
bound of $35 for a 4-cylinder engine and an upper cost of $195 for a 6 
cylinder engine. These costs were marked up by a 1.5 RPE factor to 
arrive at per-cylinder costs of $13 to $49 which were used to establish 
costs based on cylinder count. Costs of $52 to $196 for a 4-cylinder 
engine, $78 to $294 for a 6-cylinder engine, and $104 to $392 for an 8-
cylinder engine were used in the final rule.
    Confidential manufacturer comments submitted in response to the 
NPRM showed an effectiveness range of 0.3 to 2 percent for engine 
friction reduction. Besides the comments received another effectiveness 
estimate, a November 2007 press release from Renault, claimed a gain of 
2 percent over the NEDC cycle \162\ from engine friction 
reduction.\163\ Based on the available sources, NHTSA established the 
fuel consumption effectiveness estimate for the final rule as 1 to 2 
percent.
---------------------------------------------------------------------------

    \162\ Due to the advanced nature of many of the technologies 
discussed in the NPRM, and in an effort to find broad based 
rationale for the specific benefits of each technology type, 
reference data has been gathered that specifies fuel consumption 
benefits as measured on the NEDC test cycle. To make this 
conversion, data from the International Council on Clean 
Transportation (ICCT) showed excellent correlation between CAFE test 
cycle results and NEDC test cycle results. While there was an offset 
in the linear best fit, the slope was nearly equal to 1; therefore, 
for this report, any percentage improvement found on the NEDC cycle 
will be assumed to be equivalent to gains found on the CAFE test 
cycle.
    \163\ Renault press release, ``Renault Introduces The 
Ecological, Economical Logan `Renault Eco[sup2]' Concept At The 
Michelin Organized Challenge Bibendum, November 14, 2007. Available 
at http://www. renault.com/renault_ com/en/images/15181%2015181_
DP_logan_eco2_Shanghai_14_nov_DEF_DB_2_tcm1120-686305.pdf 
(last accessed October 27, 2008).
---------------------------------------------------------------------------

    Engine friction-reducing technologies are available from model year 
2011 and may be applied to all vehicle subclasses. No learning factors 
were applied to costs as the technology has a loosely defined BOM which 
may in part consist of materials (surface treatments, raw materials) 
that are commodity based. As was the case in the NPRM, an average of 20 
percent year-over-year phase-in rate starting in 2011 was adopted. As 
confirmed by manufacturers' comments, NHTSA has maintained the NPRM 
position that engine friction reduction may only be applied in 
conjunction with a refresh cycle.
(iv) Variable Valve Timing (VVT)
    Variable valve timing (VVT) is a classification of valve-train 
designs that alter the timing of the intake valve, exhaust valve, or 
both, primarily to reduce pumping losses, increase specific power, and 
control the level of residual gases in the cylinder. VVT reduces 
pumping losses when the engine is lightly loaded by positioning the 
valve at the optimum position needed to sustain horsepower and torque. 
VVT can also improve thermal efficiency at higher engine speeds and 
loads. Additionally, VVT can be used to alter (and optimize) the 
effective compression ratio where it is advantageous for certain engine 
operating modes.
    VVT has now become a widely adopted technology: For the 2007 model 
year, over half of all new cars and light trucks have engines with some 
method of variable valve timing. Therefore, the degree of further 
improvement across the fleet is limited by the level of valvetrain 
technology already

[[Page 14274]]

implemented on the vehicles. Comments from Ford received in response to 
the NPRM indicate that many of its new and upgraded engines during the 
specified time period will launch with or upgrade to advanced forms of 
VVT, which are discussed below.\164\ Information found in the submitted 
product plans is used to determine the degree to which VVT technologies 
have already been applied to particular vehicles to ensure the proper 
level of VVT technology, if any, is applied. There are three different 
implementation classifications of variable valve timing: ICP (Intake 
Cam Phasing), where a cam phaser is used to adjust the timing of the 
inlet valves only; CCP (Coupled Cam Phasing), where a cam phaser is 
used to adjust the timing of both the inlet and exhaust valves equally; 
and DCP (Dual Cam Phasing), where two cam phasers are used to control 
the inlet and exhaust valve timing independently. Each of these three 
implementations of VVT uses a cam phaser to adjust the camshaft angular 
position relative to the crankshaft position, referred to as ``camshaft 
phasing.'' This phase adjustment results in changes to the pumping work 
required by the engine to accomplish the gas exchange process. The 
majority of current cam phaser applications use hydraulically actuated 
units, powered by engine oil pressure and managed by a solenoid that 
controls the oil pressure supplied to the phaser. Electrically actuated 
cam phasers are relatively new, but are now in volume production with 
Toyota, which suggests that technical issues have been resolved.
---------------------------------------------------------------------------

    \164\ Docket No. NHTSA-2008-0089-0202.1, at 4.
---------------------------------------------------------------------------

    Honda commented that VVT is not applicable on existing engine 
designs that do not already contain these technologies due to 
durability, noise-vibration-harshness (NVH), thermal, packaging, and 
other constraints that require engine redesign.
1. Intake Cam Phasing (ICP)
    Valvetrains with ICP can modify the timing of the inlet valves by 
phasing the intake camshaft while the exhaust valve timing remains 
fixed. This requires the addition of a cam phaser on each bank of 
intake valves on the engine. An in-line 4-cylinder engine has one bank 
of intake valves, while V-configured engines have two banks of intake 
valves.
    In the NPRM, NHTSA and EPA estimated that ICP would cost $59 per 
cam phaser or $59 for an in-line 4 cylinder engine and $119 for a V-
type, for an overall cost estimate of $59 to $119, based on the NAS, 
NESCCAF, and EEA reports and confidential manufacturer data. NHTSA 
received several updated cost estimates confidentially from 
manufacturers for ICP costs in response to the NPRM that varied over a 
wide range from $35 to $300, and additionally looked to the 2008 Martec 
report for costing guidance. According to the 2008 Martec report, 
content assumptions for ICP costing include the addition of a cam 
phaser and oil control valves at $25 and $10 respectively, per bank, 
which agreed with confidential manufacturer data received in response 
to the NPRM. These figures were then adjusted to include an incremental 
camshaft sensor per bank at $4, and an additional $2 increase to 
account for an ECU upgrade as shown by confidential data. Using a 
markup of 1.5 to yield a RPE value, the incremental cost for ICP in the 
final rule is estimated to be $61 per bank, resulting in a $61 charge 
for in-line engine configurations and $122 for V-engine configurations.
    For fuel economy effectiveness values, NHTSA tentatively concluded 
in the NPRM that the incremental gain in fuel consumption for ICP would 
be 1 to 2 percent depending on engine configuration, in agreement with 
the NESCCAF study. Confidential manufacturer data submitted in response 
to the NPRM showed a larger effectiveness range of 1.0 to 3.4 percent, 
although the majority of those estimates fell at the lower end of that 
range. Based on the comments received, NHTSA retained the NPRM 
estimates of 1 to 2 percent incremental improvement in fuel consumption 
due to ICP.
    ICP is applicable to all vehicle classes and can be applied at the 
refresh cycle. For the final rule, NHTSA has combined the phase-in caps 
for ICP, CCPS, CCPO and DCP and capped the joint penetration allowed at 
15 percent in MY 2011 with time-based learning applied.
2. Coupled Cam Phasing (CCPS and CCPO)
    Valvetrains with coupled (or coordinated) cam phasing can modify 
the timing of both the inlet valves and the exhaust valves an equal 
amount by phasing the camshaft of a single overhead cam (SOHC) engine 
or an overhead valve (OHV) engine.\165\ For overhead cam engines, this 
requires the addition of a cam phaser on each bank of the engine. Thus, 
an in-line 4-cylinder engine has one cam phaser, while V-engines have 
two cam phasers. For overhead valve (OHV) engines, which have only one 
camshaft to actuate both inlet and exhaust valves, CCP is the only VVT 
implementation option available.\166\
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    \165\ Although CCP appears only in the SOHC and OHV branches of 
the decision tree, it is noted that a single phaser with a secondary 
chain drive would allow CCP to be applied to DOHC engines. Since 
this would potentially be adopted on a limited number of DOHC 
engines NHTSA did not include it in that branch of the decision 
tree.
    \166\ It is also noted that coaxial camshaft developments would 
allow other VVT options to be applied to OHV engines. However, since 
they would potentially be adopted on a limited number of OHV engines 
NHTSA did not include them in the decision tree.
---------------------------------------------------------------------------

    In the NPRM, NHTSA explained that for an OHV engine, the same 
phaser added for ICP would be used for CCP control, so the cost for CCP 
should be identical to that for ICP. For an OHV, since only one phaser 
would be required since only camshaft exists, NHTSA estimated the cost 
for CCP at $59 regardless of engine configuration, using the logic 
provided for ICP. For purposes of the final rule, the logic for ICP 
also carries over to the cost estimates for CCP. Cost assumptions for 
CCP are the same as ICP resulting in RPE-adjusted costs of $61 for in-
line SOHC or OHV engines and $122 for SOHC V-engine configurations, 
incremental to an engine without VVT.
    For fuel economy effectiveness, NHTSA estimated in the NPRM that 
the incremental gain in fuel consumption for CCP is 1 to 3 percent 
above that obtained by ICP, in agreement with the NESCCAF report and 
confidential manufacturer data. Confidential manufacturer data 
submitted in response to the NPRM also showed an effectiveness range of 
1 to 3 percent for CCP, although Ford has publicly reported a 3.3 
percent improvement for CCP when applied to its 5.4 liter 3-valve V8 
engine (which has high EGR tolerance due to the valve-masking effect 
with the 3-valve design).\167\ Most engines are not as EGR-tolerant and 
so will not achieve as much effectiveness from CCP as the Ford engine. 
For purposes of the final rule, NHTSA essentially carried over the NPRM 
incremental effectiveness of applying the CCP technologies to be 1 to 3 
percent. CCP can be applied to any class of vehicles at refresh. For 
the final rule, NHTSA has combined the phase-in caps for ICP, CCPS, 
CCPO and DCP and capped the joint penetration at 15 percent in MY 2011. 
Since these technologies are mature and in high volume, time-based 
learning factors are

[[Page 14275]]

applied. CCP can be applied to any class of vehicles.
---------------------------------------------------------------------------

    \167\ Robert Stein, Tachih Chou, and Jeffrey Lyjak, ``The 
Combustion System Of The Ford 5.4 L 3 Valve Engine,'' Global 
Powertrain Congress 2003--Advanced Engine Design & Performance, Sep 
2003, Volume 24. Available at http://www.gpc-icpem.org/pages/publications.html (last accessed Nov. 8, 2008).
---------------------------------------------------------------------------

3. Dual Cam Phasing (DCP)
    The most flexible VVT design is dual (independent) cam phasing, 
where the intake and exhaust valve opening and closing events are 
controlled independently. This option allows the option of controlling 
valve overlap, which can be used as an internal EGR strategy. At low 
engine loads, DCP creates a reduction in pumping losses, resulting in 
improved fuel consumption. Additionally, increased internal EGR results 
in lower engine-out NOX emissions and improved fuel 
consumption. This fuel economy improvement depends on the residual 
tolerance of the combustion system, as noted in the CCP section above. 
Additional improvements are observed at idle, where low valve overlap 
can result in improved combustion stability, potentially reducing idle 
fuel consumption.
    In the NPRM, NHTSA estimated costs for DCP by building upon the 
cost estimates for ICP, where an additional cam phaser is added to 
control each bank of exhaust valves less the cost of the EGR valve 
which can be deleted. This resulted in an NPRM cost range of $89 to 
$209. For purposes of the final rule, cost assumptions for DCP, which 
included inflation, were determined by essentially doubling the ICP 
hardware, yielding an incremental cost of $61 per engine cylinder bank, 
over ICP. This translates to a cost of $61 for in-line engines and $122 
for V-engine configurations, incremental to ICP technology.
    For fuel economy effectiveness, NHTSA estimated in the NPRM that 
the incremental gain in fuel consumption for DCP is 1 to 3 percent, in 
agreement with the NESCCAF report and confidential manufacturer data. 
Confidential manufacturer data received in response to the NPRM showed 
an effectiveness range of 0.5 to 3.4 percent for DCP. Publicly 
available data from BMW \168\ and Ford \169\ show an effectiveness of 5 
percent for DCP over engines without VVT, agreeing with the upper 
bounds for ICP and DCP combined. For purposes of the final rule, NHTSA 
concluded that the effectiveness for DCP should be at the upper end of 
the CCP range due to the additional flexibility gained through 
independent control of intake and exhaust valve timing, and therefore 
estimated an incremental fuel consumption reduction of 2 to 3 percent 
for DCP incremental to the 1 to 2 percent for ICP.
---------------------------------------------------------------------------

    \168\ Meyer, BMW, ``Turbo-Charging BMW's Spray-Guided DI 
Combustion System--Benefits and Challenges,'' Global Powertrain 
Congress, September, 2005, vol. 33. Available at http://www.gpc-icpem.org/pages/publications.html (last accessed Nov. 8, 2008).
    \169\ Ulrich Kramer and Patrick Phlips, ``Phasing Strategy For 
An Engine With Twin Variable Cam Timing,'' SAE Technical Paper 2002-
01-1101, 2002. Available at http://www.sae.org/technical/papers/2002-01-1101. (last accessed Nov. 9, 2008),
---------------------------------------------------------------------------

    There are no class-specific applications of this technology and DCP 
can be applied at the refresh cycle. For the final rule, NHTSA has 
combined the annual average phase-in caps for ICP, CCPS, CCPO and DCP 
and capped the joint penetration at 15 percent in MY 2011. The DCP 
technology is assumed to be produced at high volume, thus time-based 
learning is applied.
(v) Discrete Variable Valve Lift (DVVLS, DVVLD, DVVLO)
    DVVL systems allow the selection between two or three separate cam 
profiles by means of a hydraulically actuated mechanical system. By 
optimizing the cam profile for specific engine operating regions, the 
pumping losses can be reduced by reducing the amount of throttling 
required to produce the desired engine power output. This increases the 
efficiency of the engine. DVVL is normally applied together with VVT 
control. DVVL is also known as Cam Profile Switching (CPS). DVVL is a 
mature technology with low technical risk.
    In the NPRM, based on the NESCCAF report and confidential 
manufacturer data, NHTSA estimated the incremental cost for DVVL at 
$169 to $322 compared to VVT depending on engine size, which included 
$25 for controls and associated oil supply needs. In response to the 
NPRM, confidential manufacturer comments noted a cost range of $150 to 
$600 for DVVL on OHC engines. Sierra Research has noted costs ranging 
from $518 to $656 for DVVL including dual cam phasers on a mid-size car 
and $634 to $802 on trucks.\170\ For purposes of the final rule, NHTSA 
has changed the order of the technologies in the decision trees which 
has changed how the DVVL costs are handled.
---------------------------------------------------------------------------

    \170\ Docket No. NHTSA-2008-0089-0179.1, p 59 and Docket No. 
NHTSA-2008-0089-0046, p. 52.
---------------------------------------------------------------------------

    For the overhead cam engines, SOHC and DOHC, the costs were derived 
by taking $30 per cylinder for lost motion devices, adding a $4 
incremental cost for a camshaft position sensor upgrade and $10 for an 
oil control valve on each engine cylinder bank, as indicated by the 
2008 Martec report. This assumes that one lost motion device is used to 
control either a single intake valve on an SOHC engine or a pair of 
intake valves on a DOHC engine, as was done in the NPRM. NHTSA's 
independent review concurred with data in the 2008 Martec report 
because it contained the most complete published description of DVVL 
costs and it agreed with confidential manufacturer data received in 
response to the NPRM NHTSA adopted these cost estimates for the final 
rule, such that incremental costs for DVVLS and DVVLD, including a 1.5 
RPE markup, are $201 for an in-line 4-cylinder engine, $306 for V-6 
engines, and $396 for V-8 engines. For overhead valve engines, OHV, the 
costs for V6 and V8 engines do not include the lost motion devices and 
control hardware since DVVLO follows cylinder deactivation on the OHV 
decision tree path and employs similar lost motion devices. Rather, the 
DVVLO cost is for active engine mounts on V6 and V8 OHV engines which 
was based on $50 variable cost from Martec, adjusted to 2007 dollars 
and marked up with a 1.5 RPE factor to $76. For in-line 4-cylinder 
engines cylinder deactivation is not allowed so the cost for DVVLO is 
the same as for DVVLS and DVVLD at $201.
    For fuel economy effectiveness, in the NPRM NHTSA estimated that 
DVVL could incrementally reduce fuel consumption by 0.5 to 3 percent 
compared to VVT. Confidential manufacturer comments received in 
response to the NPRM indicated a 2 percent effectiveness for DVVL, 
while the Alliance commented that a two-step system with dual cam 
phasing could reduce fuel consumption by 6.3 percent, with 1.3 percent 
attributable to DVVL. Publicly-available estimates suggest an 
improvement over the NEDC test cycle of 8 percent for DCP with 2 stage 
inlet DVVL applied to a 1.6 liter DOHC 4 cylinder engine in a 1500 kg 
vehicle.\171\ With the DCP system expected to deliver 5 percent 
effectiveness, this suggests the DVVL system is giving approximately 3 
percent. The comments received from manufacturers and publicly 
available data are in alignment with independent review suggesting a 
range of 1 to 3 percent for overhead cam engines with VVT. NHTSA has 
therefore estimated an incremental reduction in fuel consumption for 
DVVLS and DVVLD of 1 to 3 percent for purposes of the final rule. On 
OHV engines, DVVLO is applied following both VVT and cylinder 
deactivation, therefore the fuel consumption effectiveness has been

[[Page 14276]]

reduced from 1 to 3 percent for OHC engines to 0.5 to 2.6 percent.
---------------------------------------------------------------------------

    \171\ Mark Sellnau and Eric Rask, ``Two-Step Variable Valve 
Actuation For Fuel Economy, Emissions, and Performance, Delphi 
Research Labs, SAE 2003-01-0029. Available at http://www.sae.org/technical/papers/2003-01-0029. (last accessed Nov. 9, 2008).
---------------------------------------------------------------------------

    This technology may be applied to any class of vehicles with any 
kind of engine at the redesign cycle. For the final rule, NHTSA has 
combined the phase-in caps for DVVLS, DVVLD, DVVLO and CVVL and capped 
the joint penetration allowed at 15 percent in MY 2011 with time-based 
learning applied. Other technologies, such as continuously variable 
valve lift (CVVL), described below, will be implemented in place of 
DVVL in some applications where the fuel economy requirements dictate 
further optimization of the engine's breathing characteristics to 
improve efficiency.
(vi) Continuously Variable Valve Lift (CVVL)
    In CVVL systems, maximum valve lift is varied by means of a 
mechanical linkage, driven by an actuator controlled by the engine 
control unit. The valve opening and phasing vary as the maximum lift is 
changed; the relation depends on the geometry of the mechanical system. 
BMW has the most production experience with CVVL systems and has sold 
port-injected ``Valvetronic'' engines since 2001. CVVL allows the 
airflow into the engine to be regulated by means of inlet valve opening 
reduction, which improves engine efficiency by reducing pumping losses 
from throttling the intake system further upstream as with a normally 
throttled engine.
    Variable valve lift gives a further reduction in pumping losses 
compared to that which can be obtained with cam phase control only, 
with CVVL providing greater effectiveness than DVVL, since it can be 
fully optimized for all engine speeds and loads, and is not limited to 
a two or three step compromise. There may also be a small reduction in 
valvetrain friction when operating at low valve lift. This results in 
improved low load fuel consumption for cam phase control with variable 
valve lift as compared to cam phase control only. Most of the fuel 
economy effectiveness is achieved with variable valve lift on the inlet 
valves only.
    It is generally more difficult to achieve good cylinder-to-cylinder 
airflow balance at low load with a CVVL valve-throttled engine due to 
the sensitivity of airflow to small differences in lift caused by 
manufacturing tolerances. BMW has reported mixture quality issues with 
CVVL and port fuel injection, requiring a compromise on pumping work 
reduction to ensure good mixture quality. In addition, a small amount 
of throttling is necessary with CVVL to maintain the vacuum required 
for power brake assist, unless a separate vacuum pump is used. BMW 
calibrations maintain a small amount of inlet manifold depression on 
their ``Valvetronic'' engines to allow the brake servo to function, 
which reduces the efficiency gain from the system somewhat. Tumble air 
motion generated by the inlet port is not available in the cylinder at 
low valve lift, which has an effect on combustion characteristics. The 
high gas velocities at the valve seat generate high turbulence levels, 
but most of this has decayed by the time of ignition. This phenomenon 
could potentially lead to sub-optimal combustion characteristics, which 
would reduce the fuel consumption effectiveness of the technology.
    In the NPRM, NHTSA estimated the cost for CVVL of $254 to $508 
compared to VVT, with cost estimates varying from $254 for a 4-cylinder 
engine, $466 for a 6-cylinder engine, and $508 for an 8-cylinder 
engine, based on confidential manufacturer data and the NESCCAF report, 
with more weight given to the manufacturer data. As for DVVL, for 
purposes of the final rule, NHTSA relied primarily on the 2008 Martec 
report, because it contained the most complete published description of 
CVVL costs and agreed with confidential manufacturer data received in 
response to the NPRM. The system consists of 1 stepper motor per bank 
to control an eccentric shaft and the costs as described by Martec 
include dual cam phasing are $285 for an in-line 4-cylinder engine, 
$450 for a V-6 engine, and $550 for a V-8 engine. Applying a 1.5 RPE 
markup factor to these variable costs, and then deducting $122 for the 
incremental cost of both ICP and DCP per bank, the incremental RPE cost 
is $306 for a 4-cylinder engine, $432 for a 6-cylinder engine and $582 
for an 8-cylinder engine.
    For fuel economy effectiveness, in the NPRM NHTSA estimated that 
CVVL could incrementally reduce fuel consumption by 1.5 to 4 percent 
compared to VVT, based on confidential manufacturer data and the 
NESCCAF report. Confidential manufacturer comments received in response 
to the NPRM suggested a range of 3 to 7.4 percent incremental fuel 
consumption savings. NHTSA also found several sources reporting a 5 
percent additional fuel consumption effectiveness over the NEDC cycle 
when applying CVVL to an engine with dual cam phasers.\172\ For 
purposes of the final rule, NHTSA has estimated the reduction in fuel 
consumption for CVVL at 1.5 to 3.5 percent over an engine with DCP. 
This estimate is lower than the effectiveness reported by BMW and 
allows the application of CVVL without the need for the high level of 
manufacturing complexity inherent in BMW's ``Valvetronic'' engines.
---------------------------------------------------------------------------

    \172\ See Johannes Liebl, Manfred Kluting, Jurgen Poggel, and 
Stephen Missy, BMW, ``The New BMW 4-Cylinder Engine with Valvetronic 
Part 2: Thermodynamics and Functional Features,'' MTZ Worldwide, 
July/Aug. 2001, pp 26-29. See also Meyer, BMW, ``Turbo-Charging 
BMW's Spray-Guided DI Combustion System--Benefits and Challenges,'' 
Global Powertrain Congress, Sept. 2005, vol. 33. Available at http://www.gpc-icpem.org/pages/publications.html (last accessed Nov. 8, 
2008). See also Rainer Wurms, Philipp Lobbert, Stefan Dengler, Ralf 
Budack, and Axel Eiser, Audi, ``How Much VVT Makes Sense?'' Haus der 
Technik Conference on Variable Valve Control, Essen, Feb. 2007.
---------------------------------------------------------------------------

    There are no class specific applications of this technology, 
although it appears in only the DOHC portion of the decision tree. Due 
to the changes required to implement DVVL on an engine the Volpe model 
allows it to be applied at redesign model years only with time-based 
learning applied. For the final rule, NHTSA has combined the phase-in 
caps for DVVLS, DVVLD, DVVLO and CVVL and capped the joint penetration 
allowed at 20 percent per year on average (15 percent in year one). 
There is no technical reason this technology could not be applied to 
all DOHC engines, but due to engineering resource limitations it is 
unlikely that CVVL will be applied to all engines, and that other 
technologies such as DVVL will be used in some instances.
(vii) Cylinder Deactivation (DEACS, DEACD, DEACO)
    In conventional spark-ignited engines, combustion occurs in all 
cylinders of the engine (i.e., the engine is ``firing on all 
cylinders''), and throttling the airflow controls the engine output, or 
load. This is an inefficient method of operating the engine at low 
loads as pumping losses result from throttling. Cylinder deactivation 
(DEAC) can improve engine efficiency by disabling or deactivating half 
of the cylinders when the load is less than half of the engine's total 
torque capability, allowing the active cylinders to operate at roughly 
twice the load level, and thereby incur roughly half the pumping 
losses.
    Simplistically, cylinder deactivation control strategy relies on 
setting maximum and minimum manifold absolute pressures (which are 
directly proportional to load) within which it can deactivate the 
cylinders. The engine operating range over which cylinder deactivation 
may be enabled is restricted by other factors as well, with

[[Page 14277]]

noise, vibration, and harshness (NVH) being the primary concern; these 
restrictions all reduce the fuel economy effectiveness achievable with 
cylinder deactivation. In general, DEAC has very high sensitivity of 
efficiency gain relative to vehicle application, according to comments 
from Ford, Chrysler, the Alliance, and in confidential comments 
submitted in response to the NPRM.
    Manufacturers have stated that use of DEAC on 4-cylinder engines 
would cause unacceptable NVH; therefore NHTSA has not applied cylinder 
deactivation to 4-cylinder engines. In addition, to address NVH issues 
for V6 and V8 engines, active engine mounts are included in the content 
list. Noise quality from both intake and exhaust systems has been 
problematic on some vehicle applications, and in some cases, has 
resulted in active exhaust systems solutions with an ECU-controlled 
valve.
    The NPRM reported an incremental cost range for DEAC at $203 to 
$229, citing manufacturer data as the most credible, with the bill of 
materials including lost motion devices for each cylinder. The 2008 
Martec report estimated the additional hardware necessary for cylinder 
deactivation ranging between $50 for the addition of two active engine 
mounts ($75 RPE using 1.5 RPE factor) where DVVL already exists. This 
value has been adopted by NHTSA in the final rule so DEACS and DEACD 
costs are $75. For OHV engines NHTSA estimates the costs for DEACO as 
being $306 for V6 engines and $400 for V8 engines that are not already 
equipped with DVVL using assumptions for lost motion devices plus 
incremental costs for oil control valves and camshaft position sensors 
as noted in the DVVL section.
    For fuel economy effectiveness, in the NPRM NHTSA estimated that 
cylinder deactivation could reduce fuel consumption by 4.5 to 6 
percent. As noted, DEAC has very high sensitivity of efficiency gain 
relative to vehicle application. Chrysler, for example, stated that the 
effectiveness could range from 3 to 10 percent on the same engine 
depending on the specific vehicle application.\173\ Confidential 
manufacturer comments received in response to the NPRM reported a range 
of 3 to 7.5 percent. For the final rule, the incremental fuel 
consumption effectiveness varies depending on which branch of the 
decision tree it is on: For DOHC engines which are already equipped 
with DCP and DVVLD there is little benefit that can be achieved since 
the pumping work has already been minimized and internal EGR rates are 
maximized, so the effectiveness ranges from 0 to 0.5 percent for DEACD; 
for SOHC engines which have CCP and DVVLS applied, NHTSA estimates a 
2.5 to 3 percent effectiveness for DEACS; and for OHV engines, which do 
not have VVT or VVL technologies, the effectiveness for DEACO ranges 
from 3.9 to 5.5 percent.
---------------------------------------------------------------------------

    \173\ Docket No. NHTSA-2008-0089-0215.1.
---------------------------------------------------------------------------

    This technology may be applied only to V-6 and V-8 engines, as 
discussed above, and so does not apply to vehicle classes with I-4 
engines. DEAC can be applied during a redesign or refresh model year 
with time-based learning. NHTSA proposed to raise the phase-in cap for 
this technology to 20 percent per year in the NPRM. For the final rule, 
NHTSA has combined the phase-in caps for DEACS, DEACD and DEACO and 
capped the joint penetration allowed at 9 percent in MY 2011.
(viii) Conversion to Double Overhead Camshaft Engine With Dual Cam 
Phasing (CDOHC)
    This technology was named ``Multi-valve Overhead Camshaft Engine'' 
in the NPRM. Engines with overhead cams (OHC) and more than two valves 
per cylinder achieve increased airflow at high engine speeds and 
reductions of the valvetrain's moving mass and enable central 
positioning of the spark plug. Such engines typically develop higher 
power at high engine speeds. In the NPRM, the model was generally not 
allowed to apply multivalve OHC technology to OHV engine, except where 
continuous variable valve timing and lift (CVVL) is applied to OHV 
engine. In that case, the model assumed conversion to a DOHC 
valvetrain, because a DOHC valvetrain is a prerequisite for the 
application of any advanced engine technology over and above CVVL. 
Since applying CVVL to an OHV engine is the last improvement that could 
be made, it was assumed that manufacturers would redesign that engine 
as a DOHC and include CVVL as part of that redesign.
    However, it appears likely that vehicles will still use overhead 
valve (OHV) engine with pushrods and one intake and one exhaust valve 
per cylinder into the next decade. For the final rule, NHTSA assumed 
that conversion of an OHV engine to a DOHC engine would more likely be 
accompanied by dual cam phasing (DCP) than by CVVL, since DCP 
application rates are higher than CVVL rates.
    For V8 engines, the incremental cost to redesign an OHV engine as a 
DOHC with DCP was estimated as $746 which includes $415 for the engine 
conversion to DOHC per the 2008 Martec report and a 1.5 RPE factor, 
plus $122 for an incremental cam phasing system (reflecting the 
doubling of cam shafts). For a V6 engine we estimated 75 percent of the 
V8 engine cost to convert to DOHC plus the same incremental coupled cam 
phasing cost to arrive at $590. For inline 4-cylinder engines, 50 
percent of the V8 engine conversion costs were assumed and one 
additional cam phasing system yielding an incremental cost including a 
1.5 RPE factor of $373.
    For fuel economy effectiveness, NHTSA estimated in the NPRM that 
the incremental gain in fuel consumption for conversion of an OHV 
engine with cylinder deactivation and CCP to a DOHC engine with CVVL at 
1 to 4 percent, in agreement with the NESCCAF report and confidential 
manufacturer data. The fuel consumption benefit for converting an OHV 
engine to a DOHC engine with DCP is due largely to friction reduction 
according to a confidential manufacturer comment. For the final rule 
the upper bound stated in the NPRM was reduced because DCP will give 
less improvement than CVVL compared to an engine that already has 
cylinder deactivation and CCP applied. NHTSA estimates the incremental 
fuel consumption effectiveness at 1 to 2.6 percent independent of the 
number of engine cylinders.
    There are no class-specific applications of this technology. In the 
NPRM, NHTSA proposed raising the phase-in cap to 20 percent per year, 
but has concluded for the final rule that a 9 percent phase-in cap for 
MY 2011 is more consistent with manufacturers' comments. No comments 
were received regarding phase-in rates of converting OHV engines to 
DOHC. The conversion from OHV to DOHC engine architecture with DCP is a 
major engine redesign that can be applied at redesign model years only 
with time-based learning applied.
(ix) Stoichiometric Gasoline Direct Injection (SGDI)
    In gasoline direct injection (GDI) engines, fuel is injected into 
the cylinder rather than into the inlet manifold or inlet port. GDI 
allows for the compression ratio of the engine to be increased by up to 
1.5 units higher than a port-injected engine at the same fuel octane 
level. As a result of the higher compression ratio, the thermodynamic 
efficiency is improved, which is the primary reason for the fuel 
economy effectiveness with stoichiometric DI systems. The compression 
ratio increase comes about as a result of the in-cylinder air charge 
cooling that occurs

[[Page 14278]]

as the fuel, which is sprayed directly into the combustion chamber, 
evaporates.
    Volumetric efficiency in naturally-aspirated GDI engines can also 
be improved by up to 2 percent, due to charge cooling, which improves 
the full load torque. The improved full load torque capability of GDI 
engines can have a secondary effect on fuel economy by enabling engine 
downsizing, thereby reducing fuel consumption.
    Two operating strategies can be used in gasoline DI engines, 
characterized by the mixture preparation strategy. One strategy is to 
use homogenous charge where fuel is injected during the intake stroke 
with a single injection. The aim is to produce a homogeneous air-fuel-
residual mixture by the time of ignition. In this mode, a 
stoichiometric air/fuel ratio can be used and the exhaust 
aftertreatment system can be a relatively low cost, conventional three-
way catalyst. Another strategy is to use stratified charge where fuel 
is injected late in the compression stroke with single or multiple 
injections. The aim here is to produce an overall lean, stratified 
mixture, with a rich area in the region of the spark plug to enable 
stable ignition. Multiple injections can be used per cycle to control 
the degree of stratification. Use of lean mixtures significantly 
improves efficiency by reducing pumping work, but requires a relatively 
high cost lean NOX trap in the exhaust aftertreatment 
system.
    For purposes of this rulemaking, only homogeneous charge 
stoichiometric DI systems were considered, due to the anticipated 
unavailability of low sulfur gasoline during the time period 
considered. This decision was supported by comments from Mercedes, 
which sells lean burn DI engines in other world markets, stating that 
lean burn DI engines cannot function in the absence of ultra-low sulfur 
gasoline. Lean NOX trap technologies require ultra-low 
sulfur gasoline to function at high conversion efficiency over the 
entire life cycle of a vehicle.
    Gasoline DI systems effectiveness from the increased efficiency of 
the thermodynamic cycle. The fuel consumption effectiveness from DI 
technology is therefore cumulative to technologies that target pumping 
losses, such as the VVT and VVLT technologies. The Sierra Research 
report stated that Sierra Research could not determine from the NPRM 
decision trees if VVLT technologies were retained when SGDI was 
applied. To clarify, as the model progresses through the decision 
trees, technologies preceding SGDI are retained in the cumulative 
effectiveness and cost.
    In the NPRM, NHTSA estimated the incremental fuel consumption 
effectiveness for naturally aspirated SGDI \174\ to be 1 to 2 percent. 
The Alliance commented that it estimated 3 percent gains in fuel 
efficiency, as well as a 7 percent improvement in torque, which can be 
used to mildly downsize the engine and give up to a 5.8 percent 
increase in efficiency. Other published literature reports a 3 percent 
effectiveness for SGDI,\175\ and another source reports a 5 percent 
improvement on the NEDC drive cycle.\176\ Confidential manufacturer 
data submitted in response to the NPRM reported an efficiency 
effectiveness range of 1 to 2 percent. For the final rule NHTSA has 
estimated, following independent review of all the sources referenced 
above, the incremental gain in fuel consumption for SGDI to be 
approximately 2 to 3 percent.
---------------------------------------------------------------------------

    \174\ SGDI was referred to as GDI or SIDI in the NPRM.
    \175\ Paul Whitaker, Ricardo, Inc., ``Gasoline Engine 
Performance and Emissions--Future Technologies and Optimization,'' 
ERC Symposium, Low Emission Combustion Technologies for Future IC 
Engines, Madison, WI, June 8-9, 2005. Available at http://www.erc.wisc.edu/symposiums/2005_Symposium/June%208%20PM/Whitaker_Ricardo.pdf (last accessed Nov. 9, 2008).
    \176\ Stefan Trampert, FEV Motorentechnik GmbH, ``Engine and 
Transmission Development Trends--Rising Fuel Cost Pushes 
Technology,'' Symposium on International Automotive Technology, 
Pune, India, January 2007.
---------------------------------------------------------------------------

    Content assumptions for cost estimating of SGDI include no major 
changes to engine architecture compared to a port fuel injection 
engine, although cylinder head casting changes are required to 
incorporate the fuel injection system and the piston must change as 
well to suit the revised combustion chamber geometry. The fuel 
injection system utilizes an electrically-driven low pressure fuel pump 
to feed a high pressure mechanical pump, supplying fuel at pressures up 
to 200 Bar. A common fuel rail supplies the injectors, which produce a 
highly atomized spray with a Sauter Mean Diameter (SMD) of 15-20 
microns, which compares to approximately 50 microns for a port 
injector.
    In the NPRM, NHTSA estimated the following incremental cost ranges 
for applying SGDI: $122 to $420 for an inline 4-cylinder engine, $204 
to $525 for a V6 engine, and $228 to $525 for a V8 engine. The Alliance 
commented that NHTSA had not accounted for the costs required to 
address NVH concerns associated with the implementation of SGDI. For 
purposes of the final rule, all costs have been based upon side mount 
DI technology as these costs were determined in the 2008 Martec Report 
to be lower than center mount DI systems. An applied RPE factor of 1.5 
was used in all cases, and a NVH package was added to all engines in 
response to Alliance comments, providing incremental costs that ranged 
from $293 to $440 for an I4 engine, to $384 to $558 for a V6 engine and 
$512 to $744 for a V8 engine.
    Homogeneous, stoichiometric DI systems are regarded as mature 
technology with minimal technical risk and are expected to be 
increasingly incorporated into manufacturers' product lineups. Time-
based learning has been applied to this technology due to the fact that 
over 1.5 million vehicles containing this technology are now produced 
annually. Due to the changes to the cylinder head and combustion system 
and the control system development required to adopt SGDI technology, 
which are fairly extensive, SGDI can be applied only at redesign model 
years. There are no limitations on applying SGDI to any vehicle class. 
The phase-in cap for SGDI is applied at a 3 percent rate for MY 2011 in 
order to account for the lead time required to incorporate SGDI 
engines.
(x) Combustion Restart (CBRST)
    Combustion restart allows ``start-stop'' functionality of DI 
engines through the implementation of an upgraded starter with bi-
directional rotation to allow precise crankshaft positioning prior to 
subsequent fuel injection and spark ignition, allowing engine restart. 
This method of implementing engine stop/start functionality allows not 
only the fuel savings from not idling the engine, but also reduces fuel 
consumption as the engine speeds up to its operational speed. A Direct 
Injection (DI) fuel system is required for implementation of this 
technology.
    NHTSA has determined, upon independent review, combustion restart 
to be a high technical risk due to the following unresolved issues. 
First, very high or very low ambient air temperatures may limit the 
ability to start the engine in the described manner. Although the 
starter motor can provide fail-safe starting capability in these 
temperature limited areas, strategies must be developed to manage the 
transitions. Additionally, a fail-safe start strategy that recognizes 
failed attempts and responds quickly enough has yet to be demonstrated. 
The risk of missed start events is currently relatively high, which is 
unacceptable from a production implementation perspective. As a result, 
availability of this technology was assessed as beyond the emerging 
technology time frame for purposes of this MY 2011 rulemaking.

[[Page 14279]]

(xi) Turbocharging and Downsizing (TRBDS)
    Forced induction in the form of turbocharging and supercharging has 
been used on internal combustion engines for many years. Their 
traditional role has been to provide enhanced performance for high-end 
or sports car applications. However, turbocharging and downsizing can 
also be used to improve fuel economy. There is a natural friction 
reduction with a boosted downsized engine, because engine friction 
torque is primarily a function of engine displacement. When comparing 
FMEP (Friction Mean Effective Pressure--friction torque normalized by 
displacement) there is very little difference between the full size 
naturally-aspirated engine and the boosted downsized engine despite the 
higher cylinder pressure associated with higher BMEP. Turbocharging and 
downsizing can also reduce pumping losses (PMEP), because a 
turbocharged downsized engine runs at higher BMEP (Brake Mean Effective 
Pressure) levels, and therefore higher manifold pressures, than a 
naturally aspirated engine. The upper limit of BMEP level that can be 
expected from a naturally aspirated engine is approximately 13.5 Bar, 
whereas a turbocharged engine can produce BMEP levels in excess of 20 
Bar. Engines that are not downsized and boosted use a throttle to 
regulate load, but this causes pumping losses as discussed previously. 
Thus, by using a small displacement engine with a turbocharger, the 
smaller engine works harder (higher cylinder load), which results in 
lower pumping loss since the throttle must be further open to produce 
the same road power output.
    Due to the incremental nature of the decision tree, engines having 
turbocharging and downsizing applied are assumed to have SGDI already 
applied. In boosted engines, SGDI allows improved scavenging of the 
cylinder, which reduces the internal exhaust gas residual level and the 
charge temperature. This in turn allows a higher compression ratio to 
be used for a given fuel octane rating and can therefore improve the 
fuel consumption of boosted SGDI engines.
    In most cases, a boosted downsized engine can replace a 
conventional naturally aspirated engine and achieve equivalent or 
greater (albeit at the expense of fuel economy) power and torque. 
However, there are some challenges associated with acceptance of a down 
sized boosted engine, including:
     Achievement of ``seamless'' power delivery compared to the 
naturally aspirated engine (no perceptible turbo lag);
     A complication in emissions regulatory compliance, because 
the addition of a turbocharger causes additional difficulty with 
catalyst light off due to the thermal inertia of the turbo itself;
     Potential issue with customer acceptance of smaller-
displacement engines, given a common perception that only larger-
displacement engines can be high-powered; and
     Additional base engine cost and vehicle integration costs.
    Manufacturers' structural changes to the base engine are generally 
focused on increasing the structure's capacity to tolerate higher 
cylinder pressures. NHTSA believes that it is reasonable to expect that 
the maximum cylinder pressure would increase by 25 to 30 percent over 
those typical of a naturally aspirated engine. Another consideration is 
that higher pressures lead to higher thermal loads.
    One potential disadvantage of downsized and boosted engines is 
cost. Turbocharging systems can be expensive and are best combined with 
direct injection and other engine technologies. The Alliance expressed 
a related concern that the fuel economy effectiveness was based on the 
use of premium grade fuel in direct injection turbocharged engines, and 
argued that as the baseline vehicles were not fueled with premium 
gasoline, this gave the direct injection turbocharged engines an 
unrealistic advantage.\177\ However, CARB stated in its comments that 
premium fuel is not necessary for use with turbocharged downsized 
engines and that substantial effectiveness are still available with 
regular fuel.\178\ In fact, most turbocharged direct injection engines 
will have a compression ratio and calibration designed to give best 
performance on premium fuel, although they are safe to operate on 
regular fuel. On regular fuel, the knock sensor output is used to allow 
the ECU to keep the engine safe by controlling boost and ignition 
timing. Maximum torque is reduced on the lower octane fuel due to the 
ECU intervention strategy, but at part load, where knock is not an 
issue, the fuel economy will not be affected adversely relative to the 
estimated effectiveness. Additionally, the driver retains the choice of 
obtaining more performance by paying more for premium fuel and will 
still obtain stated fuel consumption effectiveness.
---------------------------------------------------------------------------

    \177\ Docket No. NHTSA-2008-0089-0179.1.
    \178\ Docket No. NHTSA-2008-0089-0173.
---------------------------------------------------------------------------

    Nevertheless, the case for using downsized boosted engines has 
strengthened with the wider introduction of direct injection gasoline 
engines. Downsized boosted engines with stoichiometric direct injection 
present minimal technical risk, although there have been only limited 
demonstrations of this technology achieving SULEV emission levels.
    In the NPRM, NHTSA estimated that downsized and turbocharged 
engines could incrementally reduce fuel consumption from 5 to 7.5 
percent. CARB commented that Sierra Research in its presentation to the 
NAS committee on January 24, 2008, suggested there is no carbon dioxide 
reduction potential for turbocharging and downsizing, but argued that 
this is not supported by other vehicle simulation efforts nor by 
manufacturer plans to release systems such as the Ford EcoBoost.\179\ 
The Alliance and Sierra Research, in contrast, commented that 
turbocharged and downsized engines do not improve fuel economy unless 
they are also equipped with DI fuel systems and using premium 
fuel.\180\ NHTSA believes that turbocharging and downsizing, when 
combined with SGDI, offers benefits without the use of premium fuel as 
noted above. Confidential manufacturer data suggests an incremental 
range of fuel consumption reduction of 4.8 to 7.5 percent for 
turbocharging and downsizing. Other publicly-available sources suggest 
a fuel consumption benefit of 8 to 13 percent compared to current-
production naturally-aspirated engines without friction reduction or 
other fuel economy technologies: A joint technical paper by Bosch and 
Ricardo suggesting an EPA fuel economy gain of 8 to 10 percent for 
downsizing from a 5.7 liter port injection V8 to a 3.6 liter V6 with 
direct injection; \181\ a Renault report suggesting a 11.9 percent NEDC 
fuel consumption gain for downsizing from a 1.4 liter port injection 
in-line 4-cylinder engine to a 1.0 liter in-line 4-cylinder engine with 
direct injection; \182\ and a Robert Bosch paper suggesting a 13 
percent NEDC gain for downsizing to a turbocharged DI engine.\183\ 
These

[[Page 14280]]

reported fuel economy benefits show a wide range in large part due to 
the degree of vehicle attribute matching (such as acceleration 
performance) that was achieved.
---------------------------------------------------------------------------

    \179\ Docket No. NHTSA-2008-0089-0173.4.
    \180\ Docket No. NHTSA-2008-0089-0046, Docket No. NHTSA-2008-
0089-0179.1.
    \181\ David Woldring and Tilo Landenfeld of Bosch, and Mark J. 
Christie of Ricardo, ``DI Boost: Application of a High Performance 
Gasoline Direct Injection Concept,'' SAE 2007-01-1410. Available at 
http://www.sae.org/technical/papers/2007-01-1410 (last accessed Nov. 
9, 2008).
    \182\ Yves Boccadoro, Lo[iuml]c Kermanac'h, Laurent Siauve, and 
Jean-Michel Vincent, Renault Powertrain Division, ``The New Renault 
TCE 1.2L Turbocharged Gasoline Engine,'' 28th Vienna Motor 
Symposium, April 2007.
    \183\ Tobias Heiter, Matthias Philipp, Robert Bosch, ``Gasoline 
Direct Injection: Is There a Simplified, Cost-Optimal System 
Approach for an Attractive Future of Gasoline Engines?'' AVL Engine 
& Environment Conference, September 2005.
---------------------------------------------------------------------------

    For purposes of the final rule, NHTSA estimated a net fuel 
consumption reduction of approximately 14 percent for a turbocharged 
downsized DOHC engine with direct injection and DCP over a baseline 
fixed-valve engine that does not incorporate friction reducing 
technologies. This equates to an incremental fuel consumption reduction 
of 2.1 to 5.2 percent for TRBDS, which is incremental to an engine with 
SGDI and previously applied technologies (e.g., VVT and VVL) as defined 
by the decision tree. This wide range is dependent upon the decision 
tree path that is followed or the configuration of the engine prior to 
conversion to TRBDS. The incremental fuel consumption benefit for TRBDS 
is estimated to range from 2.1 to 2.2 percent for V6 and V8 engines and 
from 4.5 to 5.2 percent for inline 4-cylinder engines. As explained, 
the incremental improvement from TRBDS must be added to the previous 
technology point on the decision tree. In the case of SOHC and OHV 
engines, for example, moving to the TRBDS technology also assumes 
implementation of DOHC engine architecture in addition to DCP and SGDI.
    In the NPRM, NHTSA estimated that the cost for a boosted/downsized 
engine system would be $690 for small cars, $810 for large trucks, and 
$120 for all other vehicle classes, based on the NAS report, the EEA 
report, and confidential manufacturer data, which assumed downsizing 
allowed the removal to two cylinders in most cases, except for small 
cars and large trucks. CARB questioned Martec's cost estimates for 
turbocharging and downsizing, specifically the credit for downsizing a 
V6 engine to an in-line 4 cylinder dropped from their estimate used in 
the NESCCAF report of $700 to $310 and the use of more expensive 
hardware than some manufacturers use. In response, NHTSA's independent 
review of the cost to downsize a V6 DOHC engine to a I4 DOHC engine 
closely aligned with the 2008 Martec credit of $310, while the report 
for NESCCAF was not specific with regard to the assumptions used to 
construct that estimate. Additionally, confidential manufacturer data 
submitted in response to the NPRM provided a range for TRBDS with SGDI 
of $600 to $1,400 variable cost or $900 to $2,100 RPE assuming a 1.5 
markup factor. When comparing the confidential manufacturer cost range 
and the incremental RPE cost estimates for the final rule, it is 
important to realize the incremental cost for TRBDS does not include 
SGDI since it is considered a separate technology.\184\
---------------------------------------------------------------------------

    \184\ NHTSA also examined the Jetta TDI as an example of a 
current vehicle model that comes in both diesel and gasoline-engine 
form, but in attempting to do an apples-to-apples comparison with 
the non-turbocharged/downsized version, the SE, found indications 
that VW appears to be keeping the cost of the TDI down by removing 
other content (e.g., the SE has a sunroof, which normally costs 
around $1,000, while the TDI does not). Thus, NHTSA did not find 
VW's price differential for the two versions of the Jetta to be 
convincing evidence of the actual cost of turbocharging and 
downsizing an engine.
---------------------------------------------------------------------------

    Some of the costs included in turbocharging and downsizing come 
from structural changes due to the higher cylinder pressures and 
increased cylinder temperatures, which also drive additional cooling 
requirements (e.g. water-cooled charge air cooler, circulation pump, 
and thermostats) and require improved exhaust valve materials. High 
austenitic stainless steel exhaust manifolds and upgraded main bearings 
are some of the other hardware upgrades required. For purposes of the 
final rule, NHTSA used cost data from the 2008 Martec report, but 
constructed a bill of materials consistent with the incremental TRBDS 
technology as shown in the decision trees and based on confidential 
manufacturer data. For the vehicle subclasses which have a baseline 
gasoline V8 engine, two turbochargers rated for 1050 [deg]C at $250 
each were added, $270 was deducted for downsizing to a V6 from a V8 
engine, $217 was added for engine upgrades to handle higher operating 
pressures and temperatures at, and a water-cooled charge air cooler was 
added at $280. The baseline SOHC engine was converted to a DOHC engine 
with 4 valves per cylinder at a variable incremental cost of $92. The 
total variable costs summed to $819 and a 1.5 RPE factor was applied to 
arrive at $1,229 incremental cost to turbocharging and downsizing.
    For the vehicle subclasses which have a baseline gasoline V6 
engine, a twin-scroll turbocharger rated for 1050 [deg]C was added at a 
cost of $350, $310 was deducted for downsizing to an I4 from a V6 
engine, $160 was added for engine upgrades to handle higher operating 
pressures and temperatures, and a water-cooled charge air cooler was 
added at $259. The baseline SOHC engine was converted to a DOHC engine 
with 4 valves per cylinder at a variable incremental cost of $87. The 
total variable costs summed to $548 and a 1.5 RPE factor was applied to 
arrive at $822 incremental cost to turbocharging and downsizing.
    For the vehicle subclasses which have a baseline gasoline I4 
engine, a twin-scroll turbocharger rated for 1050 [deg]C was added at a 
cost of $350, $160 was added for engine upgrades to handle higher 
operating pressures and temperatures, and a water-cooled charge air 
cooler was added at $259. The baseline SOHC engine was converted to a 
DOHC engine with 4 valves per cylinder at a variable incremental cost 
of $46. The total variable costs summed to $815 and a 1.5 RPE factor 
was applied to arrive at $1,223 incremental cost for turbocharging and 
downsizing.
    In summary, for the final rule NHTSA estimated TRBDS to have an 
incremental RPE cost of $1,223 for vehicle classes with a baseline in-
line 4-cylinder engine downsized to a smaller I-4 engine which are: 
Subcompact, Performance Subcompact, Compact and Midsize Car, and Small 
Truck. For vehicle classes with a baseline V6 engine that was downsized 
to an I4 engine the RPE cost is estimated at $822; these classes are 
the Performance Compact, Performance Midsize and Large Car, Minivan and 
Midsize Truck. The two vehicle classes with baseline V8 engines, 
Performance Large Car and Large Truck, were downsized to V6 
turbocharged engines at an incremental RPE cost of $1,229.
    Time-based learning has been applied to TRBDS because submitted 
product plan data indicated turbocharging and downsizing would already 
be at high volume in 2011. Due to the fact that a turbocharged and 
downsized engine is entirely different than the baseline engine it can 
be applied only at redesign model years. The phase-in cap for TRBDS is 
applied at a 9 percent rate for MY 2011 in order to account for the 
lead time required to incorporate TRBDS engines.
(xii) Cooled Exhaust Gas Recirculation Boost (EGRB)
    EGR Boost is a combustion concept that involves utilizing EGR as a 
charge dilutant for controlling combustion temperatures. Fuel economy 
is therefore increased by operating the engine at or near the 
stoichiometric air/fuel ratio over the entire speed and load range and 
using higher exhaust gas residual levels at part load conditions. 
Further fuel economy increases can be achieved by increased compression 
ratio enabled by reduced knock sensitivity, which enables higher 
thermal efficiency from more advanced spark timing. Currently

[[Page 14281]]

available turbo, charge air cooler, and EGR cooler technologies are 
sufficient to demonstrate the feasibility of this concept.
    However, this remains a technology with a number of issues that 
still need to be addressed and for which there is no production 
experience. EGR system fouling characteristics could be potentially 
worse than diesel EGR system fouling, due to the higher HC levels found 
in gasoline exhaust. Turbocharger compressor contamination may also be 
an issue for low pressure EGR systems. Additionally, transient controls 
of boost pressure, EGR rate, cam phasers and intake charge temperature 
to exploit the cooled EGR combustion concept fully will require 
development beyond what has already been accomplished by the automotive 
industry. These are all ``implementation readiness'' issues that must 
be resolved prior to putting EGR Boost into volume production.
    Because of these issues NHTSA did not consider EGR Boost in the 
NPRM, and consequently had no tentative conclusions with regard to its 
cost or fuel economy effectiveness. For purposes of the final rule, 
NHTSA found no evidence from commenters or elsewhere that these 
implementation readiness issues could be resolved prior to MY 2011. 
Therefore, in the final rule, the phase-in cap for MY 2011 is zero.
(b) Diesel Engine Technologies
    Diesel engines, which currently make up about 0.27 percent of 
engines in the MY 2008 U.S. fleet, have several characteristics that 
give them superior fuel efficiency compared to conventional gasoline, 
spark-ignited engines. Pumping losses are much lower due to lack of (or 
greatly reduced) throttling. The diesel combustion cycle operates at a 
higher compression ratio, with a very lean air/fuel mixture, and 
turbocharged light-duty diesels typically achieve much higher torque 
levels at lower engine speeds than equivalent-displacement naturally-
aspirated gasoline engines. Additionally, diesel fuel has higher energy 
content per gallon.\185\
---------------------------------------------------------------------------

    \185\ Burning one gallon of diesel fuel produces about 11 
percent more carbon dioxide than gasoline due to the higher density 
and carbon to hydrogen ratio.
---------------------------------------------------------------------------

    However, diesel engines, including those on the many diesel 
vehicles sold in Europe, have emissions characteristics that present 
challenges to meeting federal Tier 2 emissions standards. It is a 
significant systems-engineering challenge to maintain the fuel 
consumption advantage of the diesel engine while meeting U.S. emissions 
regulations, since fuel consumption is negatively impacted by emissions 
reduction strategies. Emission compliance strategies for diesel 
vehicles sold in the U.S. are expected to include a combination of 
combustion improvements and aftertreatment. These emission control 
strategies are currently widely used in Europe, but will have to be 
modified due to the fact that U.S. emission standards, especially for 
NOX, are much tighter than corresponding European standards. 
To achieve U.S. Tier 2 emissions limits, roughly 45 to 65 percent more 
NOX reduction is required compared to the Euro VI standards. 
Additionally, as discussed below, there may be a fuel consumption 
penalty associated with diesel aftertreatment since extra fuel is 
needed for the aftertreatment, subsequently this extra fuel is not used 
in the combustion process of the engine that provides torque to propel 
the vehicle.
    Nevertheless, emissions control technologies do exist, and will 
enable diesel engines to make considerable headway in the U.S. fleet in 
coming years. Several key advances in diesel technology have made it 
possible to reduce emissions coming from the engine prior to 
aftertreatment. These technologies include improved fuel systems 
(higher pressures and more responsive injectors), advanced controls and 
sensors to optimize combustion and emissions performance, higher EGR 
levels and EGR cooling to reduce NOX, lower compression 
ratios, and advanced turbocharging systems.
    The fuel systems on advanced diesel engines are anticipated to be 
of a High-Pressure Common Rail (HPCR) type with piezoelectric injectors 
that operate at pressures up to 1800 Bar or greater and provide fast 
response to allow multiple injections per cycle. The air systems will 
include a variable geometry turbocharger for 4-cylinder inline engines 
with charge-air cooling and high-pressure and low-pressure EGR loops 
with EGR coolers. For V-6 or V-8 engines the air systems will employ 
series sequential turbo-charging with one variable geometry 
turbocharger and one fixed geometry turbocharger.
    As suggested above, the traditional 3-way catalyst aftertreatment 
found on gasoline-powered vehicles is ineffective due to the lean-burn 
combustion of a diesel. All diesels will require a diesel particulate 
filter (DPF), a diesel oxidation catalyst (DOC), and a NOX 
reduction strategy to comply with Tier 2 emissions standards. The most 
common NOX reduction strategies include the use of lean 
NOX traps (LNT) or selective catalytic reduction (SCR), 
which are outlined below.
(i) Diesel Engine With Lean NOX Trap (LNT) Catalyst After-
Treatment
    A lean NOX trap operates, in principle, by storing 
NOX (NO and NO2) when the engine is running in 
its normal (lean) state. When the control system determines (via 
mathematical model or a NOX sensor) that the trap is 
saturated with NOX, it switches the engine into a rich 
operating mode or may in some cases inject fuel directly into the 
exhaust stream to produce excess hydrocarbons that act as a reducing 
agent to convert the stored NOX to N2 and water, 
thereby ``regenerating'' the LNT and opening up more locations for 
NOX to be stored. LNTs are sensitive to sulfur deposits that 
can reduce catalytic performance, but periodically undergo a 
desulfurization engine-operating mode to clean it of sulfur buildup.
    The fuel consumption penalty associated with aftertreatment 
systems, including both DPF and LNT, is taken into account in the 
reported values. In the case of the DPF, extra fuel is needed to raise 
the temperature of the DPF above approximately 550[deg]C to enable 
active regeneration. A similar process is needed to regenerate the LNT, 
but instead of being used to remove particulates and raise the 
temperature, the excess fuel is used to provide a fuel-rich condition 
at the LNT to convert the trapped NOX on the LNT to nitrogen 
gas. The estimated fuel consumption penalty on the CAFE test cycle 
associated with the LNT aftertreatment system is 5 percent on the EPA 
city cycle and 3 percent on the highway cycle, as described in the 
report to the EPA.\186\
---------------------------------------------------------------------------

    \186\ Ricardo, ``A Study of Potential Effectiveness of Carbon 
Dioxide Reducing Vehicle Technologies, Revised Final Report,'' at 
62. Available at http://www.epa.gov/otaq/technology/420r08004a.pdf 
(last accessed Oct. 4, 2008).
---------------------------------------------------------------------------

    In order to maintain equivalent performance to comparable gasoline-
engine vehicles, an inline 4-cylinder (I-4) diesel engine with 
displacement varying around 2 liters to meet vehicle performance 
requirements was assumed for Subcompact, Performance Subcompact, 
Compact, and Midsize Passenger Car and Small Truck vehicle subclasses, 
and it was also assumed that these vehicles would utilize LNT 
aftertreatment systems.
    In the NPRM, NHTSA estimated that LNT-based diesels could 
incrementally reduce fuel consumption by 8 to 15 percent at an 
incremental RPE cost of $1,500 to $1,600 compared to a direct injected 
turbocharged and downsized

[[Page 14282]]

spark-ignition engine, in agreement with confidential manufacturer 
data. These costs were based on a ``bottom up'' cost analysis that was 
performed with EPA, which then subtracted the costs of all previous 
steps on the decision tree prior to diesel engines.
    Comments submitted in response to the NPRM including both 
manufacturers' confidential data and non-confidential data sources for 
diesel engines was in the range of 16.7 percent to 26.7 \187\ percent 
fuel consumption benefit over a baseline gasoline engine at a variable 
cost of $2,000 to $11,200. Confidentially submitted diesel cost and 
effectiveness estimates generally did not differentiate between car and 
truck applications, engine size and aftertreatement systems leading to 
large ranges for both cost and effectiveness estimates. Additionally, 
most of the costs appeared to be stated as variable costs not RPE but 
this was not always completely discernible.
---------------------------------------------------------------------------

    \187\ The 26.7 percent fuel consumption reduction is a maximum 
estimate cited in a June 2008 Sierra Research report (Docket No. 
NHTSA-2008-089-0179.1) for a CAFE estimate in a midsize car, whereas 
an April 2008 Sierra report (Docket No. NHTSA-2008-089-0046) cites a 
maximum estimate of 22.4 percent for the same vehicle class; NHTSA 
was unable to discern why the estimates differed.
---------------------------------------------------------------------------

    For purposes of the final rule, NHTSA estimated the net fuel 
consumption benefit for an I-4 diesel engine with LNT aftertreatment to 
be approximately 20 to 26 percent improvement over a baseline gasoline 
engine. This equates to a 5.3 to 7.7 percent improvement for DSLT, 
which is incremental to a turbocharged downsized gasoline engine 
(TRBDS) with EGRB, and a 15.0 to 15.3 percent incremental improvement 
for DSLC, which is incremental to a gasoline engine with combustion 
restart (CBRST). The 2008 Martec report was relied upon for cost 
estimates and the diesel cost was adjusted by removing the downsizing 
credit and applying a 1.5 RPE marked up factor to arrive at a cost of 
$4007 compared to a baseline gasoline engine. This results in an 
incremental RPE cost of $1,567 to $1,858 for DSLT and $2,963 to $3,254 
for DSLC. NHTSA's independent review concurred with all the costs in 
this bill-of-material-based cost analysis.
    A large part of the explanation for the cost increase since the 
NPRM is the dramatic increase in commodity costs for the aftertreatment 
systems, namely the platinum group metals. The updated cost estimates 
of Martec 2008 and others reflect the rise of global costs for raw 
materials since Martec 2004 and other prior referenced cost estimates 
were conducted. As described in Martec 2008, engine technologies 
employing high temperature steels or catalysts with considerable 
platinum group metals usage have experienced tremendous inflation of 
raw material prices. These updated estimates account for current spot 
prices of platinum and rhodium which have demonstrated cost inflation 
amounting to between 300 and 750 percent of global prices.\188\
---------------------------------------------------------------------------

    \188\ Martec, ``Variable Costs of Fuel Economy Technologies,'' 
June 1, 2008, at 13-20. Docket No. NHTSA-2008-0089-0169.1.
---------------------------------------------------------------------------

(ii) Diesel Engine With Selective Catalytic Reduction (SCR) After-
Treatment
    An SCR aftertreatment system uses a reductant (typically, ammonia 
derived from urea) that is continuously injected into the exhaust 
stream ahead of the SCR catalyst. Ammonia combines with NOX 
in the SCR catalyst to form N2 and water. The hardware 
configuration for an SCR system is more complicated than that of an 
LNT, due to the onboard urea storage and delivery system (which 
requires a urea pump and injector into the exhaust stream). While a 
rich engine-operating mode is not required for NOX 
reduction, the urea is typically injected at a rate of 3 to 4 percent 
of the fuel consumed. Manufacturers designing SCR systems intend to 
align urea tank refills with standard maintenance practices such as oil 
changes.
    The fuel consumption penalty associated with the SCR aftertreatment 
system is taken into account in the values reported here. Similar to 
the LNT system, extra fuel is needed to warm up the SCR system to an 
effective operating temperature. The estimated fuel consumption penalty 
on the CAFE test cycle associated with the SCR aftertreatment system is 
5 percent on the EPA city cycle and none on the highway cycle, as 
described in the report to the EPA.\189\ A recent report, however, 
suggests a fuel economy benefit associated with the use of a SCR 
system, based on the supposition that the engine calibration is shifted 
towards improved fuel consumption and more of the NOX 
reduction is being handled by the SCR system.\190\ Nevertheless, since 
this benefit is not yet proven for high-volume production, it has not 
been applied for purposes of the final rule.
---------------------------------------------------------------------------

    \189\ Ricardo, ``A Study of Potential Effectiveness of Carbon 
Dioxide Reducing Vehicle Technologies, Revised Final Report,'' at 
62. Available at http://www.epa.gov/otaq/technology/420r08004a.pdf 
(last accessed Oct. 4, 2008).
    \190\ Timothy V. Johnson, ``Diesel Emission Control in Review,'' 
Society of Automotive Engineers Technical Series, 2008-01-0069, 
2008. Available at  http://www.sae.org/technical/papers/2008-01-0069 
(last accessed Nov. 9, 2008).
---------------------------------------------------------------------------

    In order to maintain equivalent performance to comparable gasoline-
engine vehicles, a V-6 diesel engine, with displacement varying around 
3 liters was assumed for Performance Compact, Performance Midsize, 
Large Passenger Car, Minivan, and Midsize Truck. A V-8 diesel engine, 
with displacement varying around 4.5 liters to meet vehicle performance 
requirements, was assumed for Large Truck and Performance Large Car 
vehicle classes. It was also assumed that these classes with V-6 and V-
8 diesel engines utilize SCR aftertreatment systems instead of LNT.
    In the NPRM, NHTSA estimated incremental fuel consumption reduction 
for diesel engines with an SCR system to range from 11 to 20 percent at 
an incremental RPE cost of $2,051 to $2,411 compared to a direct 
injected turbocharged and downsized spark-ignition engine. These costs 
were based on a ``bottom up'' cost analysis that was performed with 
EPA, which then subtracted the costs of all previous steps on the 
decision tree prior to diesel engines.
    As explained above for LNT, confidential manufacturer and non-
confidential comment data submitted in response to the NPRM for diesel 
engines was in the range of 16.7 percent to 26.7 percent fuel 
consumption benefit over a baseline gasoline engine at variable cost of 
$2,000 to $11,200 with no detail about the aftertreatment, engine size 
or application. Additionally, Ricardo's vehicle simulation work for EPA 
found an incremental fuel economy benefit of 19 percent for a 4.8L 
diesel in a Large Truck.\191\ However, when the baseline 4-speed 
automatic transmission shift and torque converter lockup scheduling was 
optimized for the diesel engine, an additional 5 percent fuel economy 
benefit was obtained to yield an incremental benefit for a diesel of 24 
percent. As noted in the report on page 84, however, this does not 
represent an optimized result, as only the final packages complete with 
all technologies were optimized. Nevertheless, this is a reasonable 
estimate for diesel engine fuel economy benefit over a baseline 
gasoline engine with coordinated cam phasing (CCP). This estimate did 
not have the aftertreatment penalty, however, so applying the 5 percent

[[Page 14283]]

penalty associated with diesel oxidation catalyst, diesel particulate 
filter, and SCR aftertreatment brings the fuel economy benefit for 
diesel engine with aftertreatment down to 19 percent, which is equal to 
a 16 percent fuel consumption benefit.
---------------------------------------------------------------------------

    \191\ Ricardo, ``A Study of Potential Effectiveness of Carbon 
Dioxide Reducing Vehicle Technologies, Revised Final Report,'' Table 
7-9 shows incremental fuel economy and CO2 benfits for 
Truck with technology package 11, p. 87. Available at http://www.epa.gov/otaq/technology/420r08004a.pdf (last accessed Oct. 4, 
2008).
---------------------------------------------------------------------------

    For purposes of the final rule, NHTSA estimated the net fuel 
consumption benefit for a V-6 diesel engine with SCR aftertreatment to 
be approximately 20 to 26 percent improvement over a baseline gasoline 
engine. This equates to a 4.0 to 7.7 percent improvement for DSLT, 
which is incremental to a turbocharged downsized gasoline engine 
(TRBDS) with EGRB, and a 9.9 to 13.1 percent incremental improvement 
for DSLC, which is incremental to a gasoline engine with combustion 
restart (CBRST.) The 2008 Martec report was relied upon for cost 
estimates and the diesel cost was adjusted by removing the downsizing 
credit and applying a 1.5 RPE marked up factor to arrive at a cost of 
$5,603 compared to a baseline gasoline engine. This results in an 
incremental RPE cost of $3,110 to $3,495 for DSLT and $4,105 to $4,490 
for DSLC. NHTSA's independent review concurred with all the costs in 
this bill-of-material-based cost analysis for V-6 engines.
    NHTSA estimated the net fuel consumption benefit for a V-8 diesel 
engine with SCR aftertreatment to be approximately 19 to 25 percent 
improvement over a baseline gasoline engine. This equates to a 4.0 to 
6.5 percent improvement for DSLT, which is incremental to a 
turbocharged downsized gasoline engine (TRBDS) with EGRB, and a 10.0 to 
12.0 percent incremental improvement for DSLC, which is incremental to 
CBRST. The 2008 Martec report was relied upon for cost estimates and 
the diesel cost was adjusted by removing the downsizing credit and 
applying a 1.5 RPE marked up factor to arrive at a cost of $7,002 
compared to a baseline gasoline engine. This results in an incremental 
RPE cost of $3,723 to $4,215 for DSLT and $5,125 to $5,617 for DSLC. 
NHTSA's independent review concurred with all the costs in this bill-
of-material-based cost analysis for V-8 engines.
    The diesel engine with SCR has an incremental cost that is 
significantly higher for the final rule than the NPRM. NHTSA believes 
the increase is explained by the improved accuracy of the final rule 
analysis which relied on the updated cost estimates from the 2008 
Martec Report as described previously \192\. In addition, comments from 
the Alliance suggested that the incremental diesel cost for a midsize 
car was $6,198 and $7,581 \193\ for a pickup truck.
---------------------------------------------------------------------------

    \192\ Martec, ``Variable Costs of Fuel Economy Technologies,'' 
June 1, 2008, at 13-20. Docket No. NHTSA-2008-0089-0169.1.
    \193\ These cost estimates are taken from the April 2008 Sierra 
Research report (Docket No. NHTSA-2008-089-0046). A June 2008 Sierra 
Research report (Docket No. NHTSA-2008-089-0179.1) contained lower 
estimates of $5,947 and $7,271 for the same vehicles; NHTSA was 
unable to discern the reason for the difference.
---------------------------------------------------------------------------

    The economic breakeven point for diesel engine aftertreatment 
options is based on public information\194\ and on recent discussions 
that NHTSA and EPA have had with auto manufacturers and aftertreatment 
device manufacturers. NHTSA explained in the NPRM that it had received 
strong indications that LNT systems would probably be used on smaller 
vehicles while the SCR systems would be used on larger vehicles and 
trucks. The economic break-even point between LNT and SCR is dependent 
on the quantity of catalyst used, the market price for the metals in 
those catalysts, and the cost of the urea injection system. The NPRM 
estimated that the breakeven point would occur around 3 liters engine 
displacement, based on discussions with auto manufacturers and 
aftertreatment device manufacturers. Thus, NHTSA tentatively concluded 
that it would be cheaper to manufacture diesel engines smaller than 3 
liters with an LNT system, and that conversely, it would be cheaper to 
manufacturer diesel engines larger than 3.0 liters with a SCR system. 
No comments were submitted to NHTSA regarding the breakeven point 
between a LNT and SCR system. However, according to one source of 
recently published data the breakeven point occurs between 2.0 to 
2.5L.\195\ Considering that continuing developments are being made in 
this area and the wide range of precious metal content required, NHTSA 
believes that an economic breakeven point of 2 to 3 liters is 
reasonable and that other factors will strongly influence which system 
is chosen by any given vehicle manufacturer.
---------------------------------------------------------------------------

    \194\ Timothy V. Johnson, ``Diesel Emission Control in Review,'' 
Diesel Engine-Efficiency and Emissions Research (DEER) Conference, 
Detroit, MI, August 20-24, 2006. Available at http://www1.eere.energy.gov/vehiclesandfuels/pdfs/deer_2006/session2/2006_deer_johnson.pdf (last accessed Nov. 9, 2008). See also Tim 
Johnson, ``Diesel Engine Emissions and Their Control,'' Platinum 
Metals Review, 52, at 23-37 (2008). Available at http://www.platinummetalsreview.com/dynamic/article/view/52-1-23-37 (last 
accessed Nov. 9, 2008)
    \195\ Id.
---------------------------------------------------------------------------

    Cummins commented that LNT systems should be considered for more 
than just the compact and subcompact vehicles, and stated that a number 
of large vehicles and trucks currently use LNT. Cummins argued that a 
LNT after-treatment system can be a cost-effective technology on both 
small and larger engines. For the final rule, NHTSA assumed the use of 
a LNT after-treatment system for three additional vehicle subclasses 
compared to the NPRM. However, following the rationale explained in the 
preceding paragraph, the SCR type after-treatment system is assumed for 
larger vehicle subclasses. As is the case with all technologies in the 
analysis, technology application assumptions are based on the general 
understanding of what a manufacturer could do in response to meeting 
emissions compliance but other manufacturer specific factors will 
dictate the actual technology applications.
    In the NPRM, NHTSA assumed a 3 percent phase in rate per year for 
diesel technologies. For the final rule, passenger cars, as defined by 
the technology class, retained the 3 percent combined (for DSLT and 
DSLC) phase-in cap for MY 2011. However, diesel technologies for truck 
technology classes were allowed to be applied at a 4 percent combined 
(for DSLT and DSLC) phase-in cap for MY 2011 to account for the higher 
application rates observed in the submitted product plans and diesel's 
favorable characteristics in truck applications. Volume-based learning 
was assumed for the NPRM, however, confidential product plans indicated 
that this technology would be in high-volume in the 2011 time frame, 
thus time-based learning was assumed for the final rule. For the final 
rule, diesel technologies can only be applied at redesign, which is 
consistent with the NPRM.
(c) Transmission Technologies
    NHTSA has also reconsidered the way it applies transmission 
technologies in the Volpe model to obtain increased fuel savings. The 
revised decision tree for transmission technologies reflects the fact 
that baseline vehicles now include either 4- or 5-speed automatic 
transmissions, given that many manufacturers are already employing 5-
speed automatic transmissions or are going directly to 6-speed 
automatics.\196\ The decision tree in the final rule also combines 
``aggressive shift logic'' and

[[Page 14284]]

``early torque converter lockup,'' although the NPRM considered them 
separately, because NHTSA concluded upon further review that the two 
technologies could be optimized simultaneously due to the fact that 
adding both of them primarily required only minor modifications to the 
transmission or calibration software. Cost and effectiveness numbers 
have also been thoroughly reexamined, as have learning rates and phase-
in caps, based on comments received. The section below describes each 
of the transmission technologies considered.
---------------------------------------------------------------------------

    \196\ Confidential product plans indicate that future products 
manufactured within the rulemaking period may not go from 4- or 5-
speed transmission, but will instead introduce 6- or 7-speed 
automatic transmissions as replacements.
---------------------------------------------------------------------------

(i) Improved Transmission Controls and Externals (IATC)
    During operation, an automatic transmission's controller manages 
the operation of the transmission by scheduling the upshift or 
downshift, and locking or allowing the torque converter to slip based 
on a preprogrammed shift schedule. The shift schedule contains a number 
of lookup table functions, which define the shift points and torque 
converter lockup based on vehicle speed and throttle position, and 
other parameters such as temperature. Aggressive shift logic (ASL) can 
be employed in such a way as to maximize fuel efficiency by modifying 
the shift schedule to upshift earlier and inhibit downshifts under some 
conditions, which reduces engine pumping losses and engine friction as 
noted in the gas engine section. Early torque converter lockup \197\ in 
conjunction with ASL can further improve fuel economy by locking the 
torque converter sooner, thus reducing inherent torque converter 
slippage or losses. As discussed above, the NPRM separated these two 
technologies, but they are combined for purposes of the final rule 
since the calibration software can be optimized for both functions 
simultaneously.
---------------------------------------------------------------------------

    \197\ Although only modifications to the transmission 
calibration software are considered as part of this technology, very 
aggressive early torque converter lock up may require an adjustment 
to damper stiffness and hysteresis inside the torque converter. 
Internal transmission hardware changes associated with this 
technology are addressed in 6/7/8-Speed Automatic Transmission with 
Improved Internals section.
---------------------------------------------------------------------------

    Calibrating the transmission shift schedule to improve fuel 
consumption reduces the average engine speed and increases the average 
engine load, which can lead to a perceptible increase in engine 
harshness. The degree to which the engine harshness can be increased 
before it becomes noticeable to the driver is strongly influenced by 
characteristics of the vehicle, and although it is somewhat subjective, 
it always places a limit on how much fuel consumption can be improved 
by transmission control changes. The Alliance agreed in its comments 
that ASL can be used effectively to reduce throttling losses, but at 
the expense of noise-vibration-harshness (NVH) and drivability 
concerns. The Alliance also commented that losses in the torque 
converter typically make automatic transmissions less efficient than 
manual transmissions, and suggested that efficiency can be improved by 
mechanically ``locking up'' the torque converter earlier or replacing 
the torque converter with a friction clutch of the type used on a 
manual transmission. Simply replacing a torque converter with a 
friction clutch, however, ignores the torque multiplication that torque 
converters provide at vehicle launch.
    In the NPRM, NHTSA estimated that aggressive shift logic could 
incrementally reduce fuel consumption by 1 to 2 percent at an 
incremental cost of $38 and early torque converter lockup could 
incrementally reduce fuel consumption by 0.5 percent at a $30 cost for 
the calibration effort. Confidential manufacturer comments suggested 
that less aggressive shift logic must be employed on vehicles with low 
acceleration reserve, but that a 1-3 percent improvement in fuel 
economy was attainable on vehicles with adequate acceleration reserve.
    For the final rule, NHTSA combined aggressive shift logic and early 
torque converter lockup into the IATC technology with an effectiveness 
estimate of 1.5 to 2.5 percent in agreement with most confidential 
manufacturer estimates. As aggressive shift logic and early torque 
converter lockup are both achievable with a similar calibration effort, 
the incremental cost for improved automatic transmission controls used 
the higher value of $38, converted this value to 2007 dollars, and 
applied a 1.5 RPE markup factor to arrive at an incremental cost 
estimate of $59 for the final rule.
    The IATC technology is considered to be available at the start of 
the 2011 model year, and as was the case in the NPRM, NHTSA considers 
that it can be applied during a refresh model year since NVH concerns 
must be addressed. The technology is applicable to all vehicle 
subclasses and NHTSA determined IATC type technologies will be high 
volume within the 2011 time frame so time-based learning is assumed, 
with a phase-in cap for MY 2011 of 33 percent.
(ii) Automatic 6-, 7- and 8-Speed Transmissions (NAUTO)
    Having more ``speeds'' on a transmission (i.e., having more gear 
ratios on the transmission) gives three effects in terms of vehicle 
performance and fuel economy. First, more gear ratios allow deeper 1st 
and 2nd gear ratios for improved launch performance, or increased 
acceleration. Second, a wider ratio spread also offers the ability to 
reduce the steps between gear ratios, which allows the engine to 
operate closer to optimum speed and load efficiency region. And third, 
a reduction in gear ratio step size improves internal transmission 
losses by reducing the sliding speeds across the clutches, thus 
reducing the viscous drag loss generated between two surfaces rotating 
at different speeds. Bearing spin losses are also reduced as the 
differential speed across the two bearing surfaces is reduced. This 
allows the engine to operate at a reduced load level to improve fuel 
economy.
    Although the additional gear ratios improve shift feel, they also 
introduce more frequent shifting between gears, which can be perceived 
by consumers as bothersome. Additionally, package space limitations 
prevent 7- and 8-speed automatics from being applicable to front wheel 
drive vehicles.
    Comparison between NPRM and final rule cost and effectiveness 
estimates are somewhat complicated by the revisions in the decision 
trees and technology assumptions. In the NPRM, NHTSA estimated that 6-, 
7- and 8-speed transmissions could incrementally reduce fuel 
consumption by 0.5 to 2.5 percent at an incremental cost of $76 to 
$187, relative to a 5-speed automatic transmission, a technology not 
used in the final rule decision tree, and the incremental cost for a 4-
speed to a 5-speed automatic transmission (again no longer considered 
in the final rule) was estimated to be $76 to $167.
    In response to NHTSA's request for information, confidential 
manufacturer data projected that 6-speed transmissions could 
incrementally reduce fuel consumption by 0 to 5 percent from a baseline 
4-speed automatic transmission, while an 8-speed transmission could 
incrementally reduce fuel consumption by up to 6 percent from a 
baseline 4-speed automatic transmission. The 2008 Martec report 
estimated a cost of $323 (RPE adjusted) for converting a 4-speed to a 
6-speed transmission and a cost of $638 (RPE adjusted) for converting a 
4-speed to an 8-speed transmission. GM has publicly claimed a fuel 
economy improvement of up to 4 percent for its

[[Page 14285]]

new 6-speed automatic transmissions.\198\ The 2008 EPA Staff Technical 
Report found a 4.5 to 6.5 percent fuel consumption improvement for a 6-
speed over a 4-speed automatic transmission.\199\
---------------------------------------------------------------------------

    \198\ General Motors, news release, ``From Hybrids to Six-
Speeds, Direct Injection And More, GM's 2008 Global Powertrain 
Lineup Provides More Miles with Less Fuel'' (released Mar. 6, 2007). 
Available at http://www.gm.com/experience/fuel_economy/news/2007/adv_engines/2008-powertrain-lineup-082707.jsp (last accessed Sept. 
18, 2008).
    \199\ Page 17, ``EPA Staff Technical Report: Cost and 
Effectiveness Estimates of Technologies Used to Reduce Light-duty 
Vehicle Carbon Dioxide Emissions'' Environmental Protection Agency, 
EPA420-R-08-008, March 2008.
---------------------------------------------------------------------------

    For the final rule, NHTSA estimated that the conversion to a 6-, 7- 
and 8-speed transmission (NAUTO) from a 4 or 5-speed automatic 
transmission with IATC would have an incremental fuel consumption 
benefit of 1.4 percent to 3.4 percent, for all vehicle subclasses. The 
2008 Martec report, which quoted high volume, fully learned costs, was 
relied on to develop the final rule cost estimates. Subcompact, 
Compact, Midsize, Large Car and Minivan subclasses, which are typically 
considered normal performance passenger cars, are assumed to utilize a 
6-speed automatic transmission only (as opposed to 7 or 8 speeds) 
resulting in an incremental RPE cost of $323 from Martec 2008. For 
Performance Subcompact, Performance Compact, Performance Midsize, 
Performance Large car and Small, Midsize and Large truck, where 
performance and or payload/towing may be a larger factor, NHTSA assumed 
that 6-, 7- or 8-speed transmissions are applicable thus the 
incremental RPE cost range of $323-$638 was established which used the 
Martec 2008 six speed cost and 8-speed costs for the estimates.
    This technology will be available from the start of the rulemaking 
period. Confidential manufacturer data indicates the widespread use of 
6-speed or greater automatic transmissions and introductions into the 
fleet occur primarily at vehicle redesign cycles. This prompted NHTSA 
to set the phase-in rate at 50 percent for MY 2011, but also to 
consider that the technology can only be applied at a redesign cycle, 
as opposed to the refresh cycle application of the NPRM. The technology 
is determined to be at high volume in the 2011 timeframe, and since 
these are mature and stable technologies, time-based learning factors 
are applied.
(iii) Dual Clutch Transmissions/Automated Manual Transmissions (DCTAM)
    An automated manual transmission (AMT) is similar in architecture 
to a conventional manual transmission, but shifting and launch 
functions are performed through hydraulic or electric actuation. There 
are two basic types of AMTs, single-clutch and dual-clutch transmission 
(DCT), both of which were considered in the NPRM. Upon further 
consideration and in response to manufacturer comments to only include 
dual-clutch AMTs, single-clutch AMTs are not applied in the analysis 
for the final rule.
    Single clutch transmissions exhibit a torque interruption when 
changing gears because the clutch has to be disengaged. In a 
conventional manual transmission vehicle, the driver has initiated the 
gear change, and so expects to feel the resulting torque interruption. 
With an AMT, in contrast, a control system initiates the shift, which 
is unexpected and can be disconcerting to the driver. Comments from 
Ford in response to the NPRM indicated that the acceptability of this 
torque interruption among U.S. drivers is poor, although Ford also 
commented that DCTs do not have the risk of customer acceptance that 
AMTs do. BorgWarner, a DCT supplier, echoed these comments. DCTs do not 
display the torque interrupt characteristic due to their use of two 
clutch mechanisms which allow for uninterrupted power transmission. To 
assist with launch of a DCT equipped vehicle, the first gear ratio can 
be deepened to gain back some of the performance advantage an automatic 
transmission possesses due to the torque converter's torque 
multiplication factor.
    There are two types of DCT systems, wet clutch and dry clutch, 
which are used for different types of vehicles. Wet clutch DCTs offer a 
higher torque capacity that comes from the use of a hydraulic system 
that cools the clutches, but that are less efficient than the dry 
clutch type due to the losses associated with hydraulic pumping. 
Additionally, wet DCTs have a higher cost due to the additional 
hydraulic hardware required. Wet clutch DCT systems have been available 
in the U.S. market on imported products since 2005, and Chrysler has 
publicly stated that it will have a DCT transmission in its 2010 model 
year vehicle line-up.\200\
---------------------------------------------------------------------------

    \200\ Chrysler blog, ``Dual-Clutch Transmissions Explained'' 
(released October 3, 2007) available at http://blog.chryslerllc.com/blog.do?p=entry&id=113, last accessed September 18, 2008.
---------------------------------------------------------------------------

    Consistent with manufacturers' confidential comments and based on 
its own analysis, NHTSA determined that dry clutch DCTs are applicable 
to smaller front wheel drive cars, due to their lower vehicle weight 
and torque production, and wet clutch DCTs are more applicable to 
higher torque applications with higher power requirements. Therefore 
lower cost, higher efficiency dry clutch DCTs are specified for the 
Subcompact and Compact Car vehicle classes, while all other classes 
required wet clutch DCTs.
    In the NPRM, NHTSA estimated that the incremental cost for DCTs was 
$141, independent of vehicle class, which was the midpoint of the 
NESCCAF estimates and within the range provided confidential 
manufacturer data. CARB commented that NHTSA had incorrectly cited the 
cost of AMTs from the NESCCAF study in the NPRM, stating that AMTs had 
been determined to be cost neutral (zero cost) relative to baseline 
transmission, as opposed to a $0-$240 cost justification. Confidential 
manufacturer data suggest additional DCT costs from $80 to $740, with 
dry clutch DCT costs being approximately $100 less due to reduced 
hydraulic system content. The 2008 Martec study also reported variable 
costs for AMTs.
    In the NPRM, NHTSA cited the NESCCAF study as projecting that AMTs 
could incrementally reduce fuel consumption by 5 to 8 percent and 
confidential manufacturer data projected that AMTs could incrementally 
reduce fuel consumption by 2 to 5 percent. On the basis of these 
estimates, NHTSA concluded in the NPRM that AMTs could incrementally 
reduce fuel consumption by 4.5 to 7.5 percent. Confidential 
manufacturer data received in response to the NPRM suggest a benefit of 
2 to 12 percent for DCTs over a 6-speed planetary automatic, and one 
confidential manufacturer estimates a benefit of 1 to 2 percent for a 
dry clutch DCT over a wet clutch DCT. The 2008 EPA Staff Technical 
Report also indicates a benefit of 9.5 to 14.5 percent for a DCT (wet 
or dry was not specified) over a 4-speed planetary automatic 
transmission.
    For the final rule, NHTSA estimated a 5.5 to 9.5 percent 
improvement in fuel consumption over a baseline 4/5-speed automatic 
transmission for a wet clutch DCT, which was assumed for all vehicle 
subclasses except Subcompact and Compact Car. This results in an 
incremental effectiveness estimate of 2.7 to 4.1 percent over the NAUTO 
technology. For Subcompact and Compact Cars, which were assumed to use 
a dry clutch DCT, NHTSA estimated an 8 to 13 percent fuel consumption 
improvement over a baseline 4/5-speed automatic transmission, which 
equates

[[Page 14286]]

to a 5.5 to 7.5 percent incremental improvement over the NAUTO 
technology.
    The 2008 Martec report was utilized to develop the cost estimates 
for the final rule; it estimated an RPE cost of $450 for a dry clutch 
DCT, and $600 for a wet clutch DCT, both relative to a baseline 4/5-
speed. In the transmission decision tree for the final rule, this 
yielded a dry clutch DCT incremental cost estimate of $68 for the 
Subcompact and Compact Cars relative to the NAUTO technology. For 
Midsize, Large Car and Minivan classes the wet clutch DCT incremental 
cost over NAUTO is $218, which reflects the lower, 6-speed only cost of 
the NAUTO technology applied to these vehicles. The average incremental 
cost for wet DCT for the four Performance classes and the Small, 
Midsize and Larger truck is $61, which is lower than the other vehicle 
subclasses due to the higher cost NAUTO technology (up to 8-speeds) 
that the DCTAM technology supersedes.
    NHTSA relied upon confidential manufacturer product plans showing 
DCT production will be readily available and at high volume by 2011. 
Therefore volume-based learning is not applicable, and since this is a 
mature and stable technology, time-based learning is applied. As 
production facility conversion or construction may be required to 
facilitate required capacity, NHTSA limited the production phase-in 
caps in MY 2011 to 20 percent. As with other transmission technologies, 
application was allowed at redesign only due to the vehicle changes 
required to adapt a new type transmission.
(iv) Continuously Variable Transmission (CVT)
    A continuously variable transmission (CVT) is unique in that it 
does not use gears to provide ratios for operation. Most CVTs use 
either a belt or chain on a system of two pulleys (the less common 
toroidal CVTs replace belts and pulleys with discs and rollers) that 
progressively vary the ratio, thus permitting an infinite number of 
effective gear ratios between a maximum and minimum value, and often a 
wider range of ratios than conventional automatic transmissions. This 
enables even finer optimization of the transmission ratio under 
different operating conditions and, therefore, some reduction of engine 
pumping and friction losses. In theory, the CVT has the ability to be 
the most fuel-efficient kind of transmission due to the infinite 
ability to optimize the ratio and operate the engine at its most 
efficient point. However, this effectiveness is reduced by the 
significant internal losses from high-pressure, high-flow-rate 
hydraulic pump, churning, friction loss, and bearing losses required to 
generate the high forces needed for traction.\201\
---------------------------------------------------------------------------

    \201\ ``Transmission and Driveline--Major contributors to FUEL 
efficiency, safety, fun to drive and brand differentiation'', Car 
Training Institute Symposium, May 6-7, 2008--Plenary Speech, Robert 
Lee, Vice President, Mircea Gradu, Director Transmission and 
Driveline, Chrysler LLC, USA. Available from the Car Training 
Institute, for contact information see http://www.car-training-institute.com/cti_en/html/kontakt.html (last accessed Nov. 9, 
2008).
---------------------------------------------------------------------------

    Some U.S. car manufacturers have abandoned CVT applications because 
they failed to deliver fuel economy improvements over automatic 
transmissions. GM abandoned the use of CVT before 2006.\202\ Ford 
offered a CVT in the Five Hundred and Freestyle from MYs 2005-2007 and 
discontinued it thereafter. However, Chrysler offers CVTs in the Dodge 
Caliber, the Jeep Compass, and the Jeep Patriot. Nissan was using CVTs 
in many vehicles, but appears to be restricting the use of this 
technology to passenger cars only.
---------------------------------------------------------------------------

    \202\ See http://car-reviews.automobile.com/news/general-motors-to-kill-continually-variable-transmission/166/ (last accessed Oct. 
23, 2008).
---------------------------------------------------------------------------

    In the NPRM, NHTSA estimated a CVT effectiveness of approximately 6 
percent over a 4-speed automatic, which was above the NESCCAF value but 
in the range of NAS. For costs, NHTSA concluded in the NPRM that the 
adjusted costs presented in the 2002 NESCCAF study represent the best 
available estimates, and thus estimated that CVTs could incrementally 
reduce fuel consumption by 3.5 percent when compared to a conventional 
5-speed automatic transmission (which cost an incremental $76-$167), a 
technology which is considered a baseline transmission option on the 
final rule decision tree, at an incremental cost of $100 to $139. After 
reviewing confidential manufacturer data and the Martec report, for the 
final rule NHTSA is now estimating the incremental cost of CVTs to be 
$300 for all vehicle subclasses, except for large performance cars, 
midsize light trucks and large light trucks for which the technology is 
incompatible.
    Confidential manufacturer data in response to the NPRM suggested 
that the incremental effectiveness estimate from CVTs may be 2 to 8 
percent over 4-speed planetary transmissions in simulation (however one 
commenter reported a zero percent improvement in dynamometer testing) 
at a cost of $140 to $800. Considering the NPRM conclusion and 
confidential data together with independent review, NHTSA has estimated 
the fuel consumption effectiveness for CVTs at 2.2 to 4.5 percent over 
a 4/5-speed automatic transmission, which translates into a 0.7 to 2.0 
incremental effectiveness improvement over the IATC technology. NHTSA 
estimated the CVT incremental cost to be $300 for the final rule, 
noting that the NPRM costs were incremental to a 5-speed technology 
that is no longer represented in the decision tree, hence the higher 
final rule cost.\203\
---------------------------------------------------------------------------

    \203\ Since the decision trees are configured differently, the 
net cost to CVT in the NPRM included 5-speed automatic transmission 
technology costs that are not applied in the final rule.
---------------------------------------------------------------------------

    CVTs are currently available, but due to their limited torque-
carrying capability, they are not applied to Performance Large cars and 
Midsize and Large trucks. There is limited production capability for 
CVTs, so the phase-in cap for MY 2011 is limited to 5 percent to 
account for new plants and tooling to be prepared. CVTs can be 
introduced at product redesign intervals only based on confidential 
manufacturer data and consistent with the NPRM approach (since it 
requires vehicle attribute prove-out, test and certification prior to 
introduction). Confidential manufacturer data indicates that CVTs will 
be at high volumes by 2011, and this is a mature and stable technology, 
therefore NHTSA applied time-based learning factors.
(v) 6-Speed Manual Transmissions (6MAN)
    Manual transmissions are entirely dependent upon driver input to 
change gear ratio: the driver selects when to perform the shift and 
which gear ratio to select. This is the most efficient transfer of 
energy of all transmission layouts, because it has the lowest internal 
gear losses, with a minimal hydraulic system, and the driver provides 
the energy to actuate the clutch. From a systems viewpoint, however, 
vehicles with manual transmissions have the drawback that the driver 
may not always select the optimum gear ratio for fuel economy. 
Nonetheless, increasing the number of available ratios in a manual 
transmission can improve fuel economy by allowing the driver to select 
a ratio that optimizes engine operation more often. Typically, this is 
achieved through adding overdrive ratios to reduce engine speed at 
cruising velocities (which saves fuel through reduced pumping losses) 
and pushing the torque required of the engine towards the optimum 
level. However, if the gear ratio steps are not properly designed, this 
may require the driver to

[[Page 14287]]

change gears more often in city driving resulting in customer 
dissatisfaction. Additionally, if gear ratios are selected to achieve 
improved launch performance instead of to improve fuel economy, then no 
fuel saving effectiveness is realized.
    NHTSA recognizes that while the manual transmission is very 
efficient, its effect on fuel consumption relies heavily upon driver 
input. In driving environments where little shifting is required, the 
manual transmission is the most efficient because it has the lowest 
internal losses of all transmissions. However, the manual transmission 
may have lower fuel efficiency on a drive cycle when drivers shift at 
non-optimum points.
    In the NPRM, NHTSA estimated that a 6-speed manual transmission 
could incrementally reduce fuel consumption by 0.5 percent when 
compared to a 5-speed manual transmission, at an incremental cost of 
$107. Confidential manufacturer data received in response to the NPRM 
suggests that manual transmissions could incrementally reduce fuel 
consumption by 0 to 1 percent over a base 5-speed manual transmission 
at an incremental cost of $40 to $900. Most confidential comments 
suggested that the incremental cost was within the lower quartile of 
the full range, thus $225 (the lower quartile upper-bound) was 
multiplied by the 1.5 RPE markup factor for a total of $338. Therefore, 
the final rule states that the incremental fuel consumption 
effectiveness for a 6-speed manual transmission over a 5-speed manual 
transmission is 0.5 percent at a RPE cost of $338.
    This technology is applicable to all vehicle classes considered and 
can be introduced at product redesign intervals, consistent with the 
NPRM and other final rule transmission technologies. Six-speed manuals 
are already in production at stable and mature high volumes so time-
based learning is applied with a 33 percent phase-in rate for MY 2011.
(d) Hybrid and Electrification/Accessory Technologies
(i) Overview
    A hybrid describes a vehicle that combines two or more sources of 
energy, where one is a consumable energy source (like gasoline) and one 
is rechargeable (during operation, or by another energy source). 
Hybrids reduce fuel consumption through three major mechanisms: (1) By 
turning off the engine when it is not needed, such as when the vehicle 
is coasting or when stopped; (2) by recapturing lost braking energy and 
storing it for later use; and by (3) optimizing the operation of the 
internal combustion engine to operate at or near its most efficient 
point more of the time. A fourth mechanism to reduce fuel consumption, 
available only to plug-in hybrids, is by substituting the fuel energy 
with energy from another source, such as the electric grid.
    Engine start/stop is the most basic of hybrid functions, and as the 
name suggests, the engine is shut off when the vehicle is not moving or 
when it is coasting, and restarted when needed. This saves the fuel 
that would normally be utilized to spin the engine when it is not 
needed. Regenerative braking is another hybrid function which allows 
some of the vehicle's kinetic energy to be recovered and later reused, 
as opposed to being wasted as heat in the brakes. The reused energy 
displaces some of the fuel that would normally be used to drive the 
vehicle, and thus results in reduced fuel consumption. Operating the 
engine at its most efficient operating region more of the time is made 
possible by adding electric motor power to the engine's power so that 
the engine has a degree of independence from the power required to 
drive the vehicle. Fuel consumption is reduced by more efficient engine 
operation, the degree of which depends heavily on the amount of power 
the electric motor can provide. Hybrid vehicles with large electric 
motors and battery packs can take this to an extreme and drive the 
wheels with electric power only and the engine consuming no fuel. Plug-
in hybrid vehicles can substitute fuel energy with electrical energy, 
further reducing the fuel consumption.\204\
---------------------------------------------------------------------------

    \204\ Substituting fuel energy with electrical energy may not 
actually save total overall energy used, when considering the 
inefficiencies of creating the electricity at a power plant and 
storing it in a battery pack, but it does enable use of other 
primary energy sources, and reduces the vehicle's fuel consumption. 
Plug-in hybrids are also receiving increasing attention because of 
their ability to use ``clean energy'' from the electric grid, such 
as that solar or wind, which can reduce the overall greenhouse gas 
output.
---------------------------------------------------------------------------

    Hybrid vehicles utilize some combination of the above mechanisms to 
reduce fuel consumption. The effectiveness of a hybrid, and generally 
the complexity and cost, depends on the utilization of the above 
mechanisms and how aggressively they are pursued.
    In addition to the purely hybrid technologies, which decrease the 
proportion of propulsion energy coming from the fuel by increasing the 
proportion of that energy coming from electricity, there are other 
steps that can be taken to improve the efficiency of auxiliary 
functions (e.g., power-assisted steering or air-conditioning) which 
also reduce fuel consumption. These steps, together with the hybrid 
technologies, are collectively referred to as ``vehicle 
electrification'' because they generally use electricity instead of 
engine power. Three ``electrification'' technologies are considered in 
this analysis along with the hybrid technologies: Electrical power 
steering (EPS), improved accessories (IACC), and high voltage or 
improved efficiency alternator (HVIA).
(ii) Hybrid System Sizing and Cost Estimating Methodology
    Estimates of cost and effectiveness for hybrid and related 
electrical technologies have been adjusted from those described in the 
NPRM to address commenters' concerns that NHTSA considered technologies 
not likely to be adopted by automakers (e.g., 42V electrical systems) 
or did not scale the costs for likely technologies across the range of 
vehicle subclasses considered. To address these concerns, the portfolio 
of vehicle electrification technologies has been refined based on 
commenter data as described below in the individual hybrid technologies 
sections. Ricardo and NHTSA have also developed a ``ground-up'' hybrid 
technology cost estimating methodology and, where possible, validated 
it to confidential manufacturer data. The hybrid technology cost method 
accounts for variation in component sizing across both the hybrid type 
and the vehicle platform. The method utilizes four pieces of data: (1) 
Key component sizes for a midsize car by hybrid system type; (2) 
normalized costs for each key component; (3) component scaling factors 
that are applied to each vehicle subclass by hybrid system type; and 
(4) vehicle characteristics for the subclasses which are used as the 
basis for the scaling factors.
    Component sizes were estimated for a midsize car using publicly 
available vehicle specification data and commenter data for each type 
of hybrid system as shown in Table IV-10.

[[Page 14288]]

[GRAPHIC] [TIFF OMITTED] TR30MR09.034

    In developing Table IV-10, NHTSA made several assumptions:
    (1) Hybrid controls hardware varies with the level of functionality 
offered by the hybrid technology. Assumed hybrid controls complexity 
for a 12V micro hybrid (MHEV) was 25 percent of a strong hybrid 
controls system and the complexity for an Integrated Starter Generator 
(ISG) was 50 percent. These ratios were estimates based on the 
directional need for increased functionality as system complexity 
increases.
    (2) In the time frame considered, Li-ion battery packs will have 
limited market penetration, with a majority of hybrid vehicles using 
NiMH batteries. One estimate from Anderman indicates that Li-ion market 
penetration will achieve 35 percent by 2015.\205\ For the purposes of 
this analysis, it was assumed that mild and strong hybrids will use 
NiMH batteries and plug-in hybrids will use Li-ion batteries.
---------------------------------------------------------------------------

    \205\ Anderman, Advanced Automotive Battery Conference, May 
2008. Proceedings available for purchase at http://www.advancedautobat.com/Proceedings/index.html (last accessed 
October 17, 2008).
---------------------------------------------------------------------------

    (3) The plug-in hybrid battery pack was sized for a mid-sized car 
by assuming: the vehicle has a 20 mile all electric range and consumes 
an average of 300 W-hr per mile; the battery pack can be discharged 
down to 50 percent depth of discharge; and the capacity of a new 
battery pack is 20 percent greater than at end of life (i.e., range on 
a new battery pack is 24 miles).
    (4) All hybrid systems included a DC/DC converter which was sized 
to accommodate vehicle electrical loads appropriate for increased 
vehicle electrification in the time frame considered.
    (5) High voltage wiring scaled with hybrid vehicle functionality 
and could be represented as a fraction of strong hybrid wiring. These 
ratios were estimates based on the directional need for increased 
functionality as system complexity increases.
    (6) All hybrid systems included a supplemental heater to provide 
vehicle heating when the engine is stopped, however, only stronger 
hybrids included electric air conditioning to enable engine stop/start 
when vehicle air conditioning was requested by the operator.
    In the hybrid technology cost methodology developed for cost-
scaling purposes, several strong hybrid systems replaced a conventional 
transmission with a hybrid-specific transmission, resulting in a cost 
offset for the removal of a portion of the clutches and gear sets 
within the transmission. The transmission cost in Table IV-11 below 
expresses hybrid transmission costs as a percentage of traditional 
automatic transmission cost, as described in the 2008 Martec Report, at 
$850. The method assumed that the mechanical aspect of a power-split 
transmission with a reduced number of gear sets and clutches resulted 
in a cost savings of 50 percent of a conventional transmission with 
torque converter. For a 2-mode hybrid, the mechanical aspects of the 
transmission are similar in complexity to a conventional transmission 
with a torque converter, thus no mechanical cost savings was 
appropriate. The plug-in hybrid assumed a highly simplified 
transmission for electric motor drive, thus 25 percent of the base 
vehicle transmission cost was applied.
    Estimates for the cost basis of each key component are shown in 
Table IV-11 below along with the sources of those estimates. The cost 
basis estimates assume fully learned, high-volume (greater than 1.2 
million units per annum) production. The costs shown are variable costs 
that are not RPE adjusted.

[[Page 14289]]

[GRAPHIC] [TIFF OMITTED] TR30MR09.035

    Component scaling factors were determined based on vehicle 
characteristics for each type of hybrid system as shown in Table IV-12 
below.

[[Page 14290]]

[GRAPHIC] [TIFF OMITTED] TR30MR09.036

    NHTSA's CAFE database was used to define the average vehicle 
characteristics for each vehicle subclass as shown in Table IV-13 
below, and these attributes were used as the basis of the scaling 
factors.
[GRAPHIC] [TIFF OMITTED] TR30MR09.037

    Table IV-14 shows the costs for the different types of hybrid 
systems on a midsize vehicle. The individual component costs were 
scaled from the normalized costs shown in Table IV-11 according to the 
component size shown in Table IV-10 and adjusted to a low volume cost 
by backing out volume-

[[Page 14291]]

based learning reductions.\206\ These component costs were summed to 
get the total low volume cost for each hybrid type, and a 1.5 RPE 
adjustment was applied. The ISG technology replaces the MHEV technology 
on the Electrification/Accessory technology decision tree, therefore 
the MHEV technology costs must be subtracted to reflect true costs 
($2,898-$707 = $2,191 in this example).
---------------------------------------------------------------------------

    \206\ High volume costs are multiplied by a factor of 1.56, 
which represents two cycles of 20 percent reverse learning, to 
determine the appropriate low volume, or unlearned costs.
---------------------------------------------------------------------------

    Wherever possible, the results of the hybrid technology cost method 
were compared with values as previously described in the NPRM and the 
results generally matched prior estimates. Additionally, the results 
from the hybrid technology cost method were validated with public 
literature and confidential manufactures test data as allowed. Elements 
of the 2008 Martec report identified cost data and a detailed bill of 
materials for several comparable hybrid technologies (Micro-hybrid 
systems and Full Hybrid systems), and the hybrid technology cost model 
agreed well with this data. The scalable bill of material based 
methodology described above was determined to offer the best solution 
for estimating component sizes and costs across a range of hybrid 
systems and vehicle platforms and the validation of these cost outputs 
with other data sources suggests that this approach is a reasonable 
approach.
[GRAPHIC] [TIFF OMITTED] TR30MR09.038

(iii) Electrical Power Steering (EPS)
    Electrical Power Steering (EPS) is advantageous over conventional 
hydraulic power-assisted steering in that it only draws power when the 
vehicle is being steered, which is typically a small percentage of the 
time a vehicle is operating. In fact, on the EPA test cycle no steering 
is done, so the CAFE fuel consumption effectiveness comes about by 
eliminating the losses from driving the hydraulic steering pump at 
engine speed. EPS systems use either an electric motor driving a 
hydraulic pump (this is a subset of EPS systems known as electro-
hydraulic power steering) or an electric motor directly assisting in 
turning the steering column. EPS is seen as an enabler for all vehicle 
hybridization technologies, since it provides power steering when the 
engine is off. This was a primary consideration in placing EPS at the 
top of the Electrification/Accessory decision tree.
    In the NPRM, NHTSA estimated the fuel consumption effectiveness for 
EPS at 1.5 to 2 percent at an incremental cost of $118 to $197, 
believing confidential manufacturer data most accurate. In response to 
the NPRM Sierra Research suggested EPS and high efficiency alternators 
combined is worth 1 to 1.8 percent on the CAFE test cycle,\207\ and 
confidential manufacturer data indicated a 0.7 to 2.9 percent fuel 
consumption reduction. The cost range from confidential manufacturer 
data was $70 to $300. Sierra estimated EPS for cars at $82 and $150 for 
trucks.\208\ A market study by Frost & Sullivan

[[Page 14292]]

indicated the cost of an EPS system at roughly $65 more than a 
conventional hydraulic (HPS) system.\209\ Because there is a wide range 
in the effectiveness for EPS depending on the vehicle size, NHTSA has 
increased the range from the NPRM to incorporate the lower ranges 
suggested by most manufacturers and estimates the fuel consumption 
effectiveness for EPS at 1 to 2 percent for the purpose of the final 
rule. The incremental costs are also estimated on range below the 
Sierra value for cars but above the Frost & Sullivan estimate at a 
piece cost range of $70 to $80 and included a 1.5 RPE uplift to $105 to 
$120 for the final rule.
---------------------------------------------------------------------------

    \207\ Docket No. NHTSA-2008-0089-0179.1, Attachment 2, at 53.
    \208\ Docket No. NHTSA-2008-0089-0179.1, Attachment 2, at 59.
    \209\ Cost for EPS quoted at 48 Euros, at $1.35 per Euro 
exchange rate (Oct. 7, 2008) equates to $65, from Frost & Sullivan, 
Feb. 9, 2006 ``Japanese Steering System Market Moves Into High 
Gear,'' http://www.theautochannel.com/news/2006/02/09/210036.html 
(last accessed Nov. 2, 2008).
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    EPS is currently in volume production in small to mid-sized 
vehicles with a standard 12V electrical system; however, heavier 
vehicles may require a higher voltage system, which adds cost and 
complexity. The Chevy Tahoe Hybrid, for example, uses a higher voltage 
EPS system. For purposes of the final rule, NHTSA has applied EPS to 
all vehicle subclasses except for Large trucks.
    In the NPRM, NHTSA assumed a 25 percent phase in rate of EPS 
technologies. For the purposes of the final rule, EPS phase-in caps 
were limited to 10 percent in MY 2011 to address confidential 
manufacturer concerns over lead time. In the NPRM, NHTSA assumed a 
volume-based learning effect for EPS. For the final rule, however, 
NHTSA applied time-based learning for EPS since NHTSA's analysis 
indicated that this technology would be in high-volume use at the 
beginning of its first year of availability. NHTSA also assumed in the 
NPRM that EPS could be applied during refresh model years, which was 
consistent with information provided in confidential product plans, 
therefore for the purpose of the final rule, NHTSA again applied EPS at 
refresh timing.
(iv) Improved Accessories (IACC)
    Improved accessories (IACC) was defined in the NPRM as improvements 
in accessories such as the alternator, coolant and oil pumps that are 
traditionally driven by the engine. Improving the efficiency or 
outright electrification of these accessories would provide opportunity 
to reduce the accessory loads on the engine. However, as the oil pump 
provides lubrication to the engine's sliding surfaces such as bearings 
pistons, and camshafts and oil flow is always required when the engine 
is spinning, and it is only supplied when the engine is spinning, there 
is no efficiency to be gained by electrifying the oil pump.\210\
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    \210\ Oil pump electrification comes with an additional 
potential technical and financial risk (to warranty and consumer), 
in that significant engine damage can occur should the system fail 
to provide engine lubrication, even on a momentary basis.
---------------------------------------------------------------------------

    Electrical air conditioning (EAC) could reduce fuel consumption by 
allowing the engine to be shut off when it is not needed to drive the 
vehicle. For this reason EAC is often used on hybrid vehicles. In 
highway driving, however, there is little opportunity to shut the 
engine off; furthermore, EAC is less efficient when the engine is 
running because it requires mechanical energy from the engine to be 
converted to electrical energy and then back again to mechanical. Since 
air conditioning is not required on the EPA city or highway test 
cycles, there is no CAFE fuel consumption effectiveness from EAC. 
Therefore, EAC does not improve accessory efficiency apart from the 
hybrid technologies. For the purposes of the final rule, IACC refers 
strictly to improved engine cooling, since electrical lubrication and 
air conditioning are not effective stand-alone fuel saving technologies 
and improved alternator is considered as a separate technology given 
its importance to vehicle electrification.
    Improved engine cooling, or intelligent cooling, can save fuel 
through two mechanisms: By reducing engine friction as the engine warms 
up faster; and by operating an electric coolant pump at a lower speed 
than the engine would (i.e., independent of engine speed). Intelligent 
cooling can be applied to vehicles that do not typically carry heavy 
payloads. Larger vehicles with towing capacity present a challenge for 
electrical intelligent cooling systems, as these vehicles have high 
cooling fan loads. Therefore, NHTSA did not apply IACC to the Large 
Truck and SUV class.
    In the NPRM, NHTSA estimated the fuel consumption effectiveness for 
improved accessories at 1 to 2 percent at an incremental cost of $124 
to $166 based on the 2002 NAS Report and confidential manufacturer 
data. Confidential manufacturer data received in response to the NPRM 
and Sierra Research both suggested a range for fuel consumption 
effectiveness from 0.5 to 2 percent. A comment from MEMA suggested that 
improved thermal control of the engine could produce between 4 and 8 
percent fuel economy improvement; \211\ however, NHTSA's independent 
review of intelligent cooling suggests this estimate is high and 
concurs with the estimates from NAS. Independent review found the cost 
for IACC at low volumes, assuming the base vehicle already has an 
electric fan, to be $180 to $220. These costs were adjusted to account 
for volume-based learning and then marked up to account for the 1.5 RPE 
factor. For the purposes of the final rule, NHTSA retained the fuel 
consumption effectiveness at 1 to 2 percent and estimated the 
incremental costs to be $173 to $211.
---------------------------------------------------------------------------

    \211\ Docket No. NHTSA-2008-0089-0193.1.
---------------------------------------------------------------------------

    MEMA also suggested that NHTSA consider solar glass technology to 
reduce cabin thermal loading; however, air conditioning technologies 
were not considered as part of this technology.
    In the NPRM, NHTSA proposed a 25 percent phase-in cap for Improved 
Accessories. To address manufacturer concerns over lead time in the 
early years, the IACC phase-in cap was limited to 10 percent for MY 
2011 for the final rule. In the NPRM, NHTSA assumed for improved 
accessories a volume-based learning curve. For the final rule, however, 
NHTSA applied time-based learning for IACC since NHTSA's analysis 
indicated that this technology would be in high-volume use at the 
beginning of its first year of availability. NHTSA assumed in the NPRM 
that improved accessories could be applied during any model year. For 
the purpose of the final rule, NHTSA applied intelligent cooling at 
refresh model years due to the significant changes required to the 
vehicle cooling system that necessitate recertification testing.
(v) 12V Micro Hybrid (MHEV)
    12V Micro-Hybrid (MHEV) systems are the most basic of hybrid 
systems and offer mainly idle-stop capability. Their low cost and easy 
adaptability to existing powertrains and platforms can make them 
attractive for some applications. The conventional belt-driven 
alternator is replaced with a belt-driven, enhanced power starter-
alternator and a redesigned front-end accessory drive system that 
facilitates bi-directional torque application. Also, during idle-stop, 
some functions such as power steering and automatic transmission 
hydraulic pressure are lost with conventional arrangements; so electric 
power steering and an auxiliary transmission pump are needed. These 
components are similar to those that would be used in other hybrid 
designs. Also included in this technology is the Smart Starter Motor. 
This system is comprised of an enhanced starter motor, along with some 
electronic control that

[[Page 14293]]

monitors the accelerator, brake, clutch positions, and the battery 
voltage as well as low-noise gears to provide fast and quiet engine 
starts. Despite its extended capabilities, the starter is compact and 
thus relatively easy to integrate in the vehicle.
    12V micro hybrid was added to the technology list to address 
concerns from CARB and Delphi that the hybrid classifications used in 
the NPRM did not adequately represent these technologies.\212\
---------------------------------------------------------------------------

    \212\ Docket Nos. NHTSA-2008-0089-0173 and -0144.1, 
respectively.
---------------------------------------------------------------------------

    The effectiveness estimates by NHTSA for this technology are based 
on confidential manufacturer data and independent source data. For the 
vehicles equipped with (baseline) inline 4, those with smaller 
displacements, the effectiveness is between 1 and 2.9 percent, and for 
those equipped with V-6 or V-8, the effectiveness is between 3.4 and 4 
percent. The 1 to 2.9 percent incremental fuel consumption savings 
applies to the Sub-Compact Car, Performance Sub-Compact Car, Compact 
Car, Midsized Car, and Small Truck/SUV variants. The 3.4 to 4 percent 
incremental fuel consumption applies to the remaining classes with the 
exception of Large Truck/SUV where MHEV is not applied due to payload 
and towing requirements for this class.
    Confidential manufacturer comments submitted in response to the 
NPRM indicated a $200 to $1000 cost for the MHEV. The 12V micro-hybrid 
does not have a high voltage battery, and thus does not have a high-
voltage wire cost. The 12V micro-hybrid system for the midsize vehicle 
has a 3kW electric motor. This agrees well with two commercially 
available systems used on smaller engines.\213\ The value used for the 
DC/DC converter represents the cost for a 12V power conditioning 
circuit to allow uninterrupted power to the radio and a limited number 
of other accessories when the engine starter is engaged. The sizing for 
the rest of the components is shown in Table IV-9.
---------------------------------------------------------------------------

    \213\ Citroen uses a 2kW system for a 1.4L diesel engine, and 
Valeo has a 1.6kW system applicable for engines up to 2L in 
displacement. The midsize vehicle class has an average engine size 
of 2.9L, and thus a 3kW starter is appropriate.
---------------------------------------------------------------------------

    The MHEV technology, which will be available from the 2011 model 
year, is projected to be in high volume use at the beginning of its 
first year of availability according to NHTSA's analysis, therefore 
volume based learning reductions (two cycles at 20 percent) were 
applied to ``learn'' the hybrid method costs and time based learning 
factors were applied throughout the remaining years. For the final 
rule, NHTSA established incremental costs ranging from $372 to $549 
with the highest cost applying to the Performance Large Car class.
    The 12V micro hybrid technology is applicable across all the 
vehicle segments except for the Large Truck/SUV class. Although this 
technology was not specifically stated in the NPRM, a phase-in cap of 3 
percent for MY 2011 was assumed for hybrid technologies. For the final 
rule, this figure was retained since it is generally supportable within 
the industry as expressed at the SAE HEV Symposium in San Diego in Feb 
2008.
    The NPRM proposed that all of the hybrid technologies could be 
introduced during the redesign model year only. This view is consistent 
with manufacturer's views, therefore, for this rule making, NHTSA has 
assumed that 12V micro hybrids can only be introduced at the redesign 
model years.
(vi) High Voltage/Improved Alternator (HVIA)
    In the NPRM, a 42V accessory technology was identified in the 
decision tree for Other Technologies. Several confidential manufacturer 
comments received by NHTSA related to 42V technology, and indicated 
that the effectiveness of 42V system were not realized when electrical 
conversion efficiencies were considered, and the cost of transitioning 
the industry from a 12V to 42V system made the technology unreasonable 
for deployment in the emerging technology time frame. As a result of 
these comments, NHTSA revised the technology from 42V technology to 
High Voltage/Improved Alternator (HVIA).
    The ``High Voltage/Improved Efficiency Alternator'' technology 
block represents technologies associated with increased alternator 
efficiency. As most alternators in production vehicles today are 
optimized for cost and the process for increasing the efficiency of an 
alternator is well understood by the industry, this technology is 
applicable to all vehicle subclasses except Midsize and Large Truck and 
SUV where it is not considered applicable due to the high utility of 
these classes.
    The NPRM identified fuel economy effectiveness that were based on 
42V accessory systems, and are not directly applicable for this current 
technology definition. Confidential manufacturer data indicates that a 
midsized car with an improved efficiency alternator provided 0.2 to 0.9 
percent fuel consumption effectiveness over the CAFE drive cycles, and 
a pickup truck provided 0.6 percent fuel consumption effectiveness over 
the same cycles. As this technology can be applied over a range of 
vehicles, NHTSA believes the fuel consumption effectiveness for larger 
vehicles will be biased downward. For purposes of this final rule, 
NHTSA estimates the fuel consumption effectiveness for High Voltage/
Improved Efficiency Alternator'' technology at 0.2 to 0.9 percent.
    The NPRM identified several sources for high voltage/improved 
efficiency alternators incremental costs, but focused this technology 
on 42V systems, thus making some of these references not representative 
of the current technology description. The NPRM ``Engine accessory 
improvement'' technology discussion, however, did quote the NESCCAF 
study that indicated a $56 cost for a high efficiency generator. An 
independent confidential study estimated that the incremental cost 
increase for a high efficiency generator at high volume was similar to 
the NESCCAF quoted cost, thus NHTSA concludes that the NESCCAF study 
cost of $56 is still a representative cost for this technology. At a 
1.5 RPE value, this cost equates to $84.
    As the definition of the technology has been revised from the NPRM, 
phase-in rates identified in the NPRM are not applicable. NHTSA 
believes the High voltage/Improved Efficiency Alternator technology 
represents an adjustment to the alternator manufacturing industry 
infrastructure, so for purposes of this final rule, phase-in caps for 
this technology were estimated at 10 percent for MY 2011.
    Also, as the definition of the technology has been revised from the 
NPRM, learning curve assumptions from the NPRM are not applicable. The 
high voltage/improved alternator technology costs were based on high 
volume estimates, thus, for purposes of the final rule, NHTSA assumed 
time-based learning (3 percent YOY) for High Voltage Systems/Improved 
Alternator technology. For purposes of the final rule, NHTSA assumed 
the technology can be introduced during refresh or redesign model 
changes only.
(vii) Integrated Starter Generator (ISG)
    The next hybrid technology that is considered is the Integrated 
Starter Generator (ISG) technology. There are 2 types of integrated 
starter generator hybrids that are considered: the belt mounted type 
and the crank mounted type.
    A Belt Mounted Integrated Starter Generator (BISG) system is 
similar to a micro-hybrid system, except that here it is defined as a 
system with a 110 to 144V battery pack which thus can

[[Page 14294]]

perform some regenerative braking, whereas the 12V micro-hybrid system 
cannot. The larger electric machine and battery enables additional 
hybrid functions of regenerative braking and a very limited degree of 
operating the engine independently of vehicle load. While having a 
larger electric machine and more battery capacity than a MHEV, this 
system has a smaller electric machine than stronger hybrid systems 
because of the limited torque capacity of the belt driven design.
    BISG systems replace the conventional belt-driven alternator with a 
belt-driven, enhanced power starter-alternator and a redesigned front-
end accessory drive system that facilitates bi-directional torque 
application utilizing a common electric machine. Also, during idle-
stop, some functions such as power steering and automatic transmission 
hydraulic pressure are lost with conventional arrangements; so electric 
power steering and an auxiliary transmission pump need to be added. 
These components are similar to those that would be used in other 
hybrid designs.
    A Crank Mounted Integrated Starter Generator (CISG) hybrid system, 
also called an Integrated Motor Assist (IMA) system, utilizes a thin 
axial electric motor (100-144V) bolted to the engine's crankshaft. The 
electric machine acts as both a motor for helping to launch the vehicle 
and a generator for recovering energy while slowing down. It also acts 
as the starter for the engine and is a higher efficiency generator. An 
example of this type of a system is found in the Honda Civic Hybrid. 
For purposes of the final rule, NHTSA assumed the electric machine is 
rigidly fixed to the engine crankshaft, thus making electric-only drive 
not practical.\214\
---------------------------------------------------------------------------

    \214\ A clutch between the engine and the electric motor would 
enable pure electric drive, but the Porsche Cayenne is the only 
example of such a system that is planned in the rulemaking time 
frame. Because of limited expected volumes of this type of system, 
and in the interest of reducing complexity, that variant is not 
included here.
---------------------------------------------------------------------------

    The fuel consumption effectiveness of the ISG systems are greater 
than those of micro-hybrids, because they are able to perform the 
additional hybrid function of regenerative braking and able to utilize 
the engine more efficiently because some transient power demands from 
the driver can be separated from the engine operation. Their transient 
performance can be better as well, because the larger electric machine 
can provide torque boost. The ISG systems are more expensive than the 
micro hybrids, but have lower cost than the strong hybrids described 
below because the electrical component sizes (batteries, electric 
machines, power electronics, etc.) are sized in between the micro-
hybrid and the strong hybrid components. The engineering effort 
required to adapt conventional powertrains to these configurations is 
also in between that required for micro-hybrid and strong hybrid 
configurations. Packaging is a greater concern due to the fact that the 
engine-motor-transmission assembly is physically longer, and the 
battery pack, high voltage cabling and power electronics are larger.
    The hybrid decision tree was modified to address several 
manufacturer comments and comments from CARB and Delphi asking for more 
appropriate separation of hybrid technology classifications (i.e., 12V 
versus higher voltage Integrated Starter Generators, etc.). The 
inclusion of the ISG technology in the final rule is in response to 
these comments and those from subject matter experts.
    The NPRM had proposed a fuel consumption savings of between 5 and 
10 percent for ISG systems, and between 3.5 and 8.5 percent for the 
Honda IMA system, both of which fall in the ISG category described 
above. Confidential manufacturer comments submitted in response to the 
NPRM indicated an incremental 3.8 to 7.4 percent fuel consumption 
effectiveness and a $1,500 to $2,400 cost as compared to the baseline 
vehicle.
    The incremental fuel consumption savings for the Compact Car 
variant for ISG over a 12V Micro-hybrid with start/stop was calculated 
using published data and confidential manufacturer data, while 
published Honda Civic Hybrid data was used to calculate the fuel 
consumption gains due to the hybrid system. For the final rule, gains 
for the other technologies also included on this vehicle were 
subtracted out to give an incremental effectiveness of 5.7 to 6.5 
percent for ISG. Data for these individual gains was taken from 
confidential manufacturer data. The 5.7 to 6.5 percent incremental fuel 
consumption savings was carried over from the Compact Car to all other 
vehicle subclasses. A 2 percent incremental effectiveness was 
subtracted from the Performance subclasses to allow for the improved 
baseline performance
    The NPRM proposed a cost of $1,636 to $2,274 for these systems. For 
the final rule, NHTSA determined the cost for the ISG system using 
system sizing data for different available ISG hybrids. The 2006 Honda 
Civic has a Crank Mounted ISG and uses a 0.87 kW-hr battery pack. In 
light of the potential growth of vehicle electrification, a 1 kW-hr 
pack size was chosen for both the belt and crank mounted ISG systems. 
The crank mounted ISG was sized as 11kW continuous (15kW peak). This is 
an average of the 10kW system on the 2003 Honda Civic and the 12kW 
system on the 2005 Honda Accord. The 2006 Civic has a 15kW system. The 
belt mounted ISG has a slightly smaller electric machine (7.5kW 
continuous and 10kW peak) due to power transmission limitations of the 
belt.
    For the final rule, the hybrid technology cost method projected 
costs ranging from $2,475 to $3,290 for the Sub-Compact car class 
through the Midsize Truck classes as compared to the conventional 
baseline vehicle and the incremental costs of $1,713 to $2,457 were 
calculated by backing out the prior hybrid technology costs. The ISG 
technology is projected to be in low volume use at the beginning of the 
rulemaking period therefore low volume costs are used and volume-based 
learning factors are applied.
    Integrated starter generator systems are applicable to all vehicle 
subclasses except Large Truck. In the NPRM, a phase-in cap of 3 percent 
was assumed for both the ``ISG with idle off'' and ``IMA'' 
technologies. For the final rule, NHTSA has retained the phase-in cap 
of 3 percent for MY 2011. These values are generally supportable within 
the industry as expressed at the SAE HEV Symposium in San Diego in 
February 2008.
    The NPRM proposed that all of the hybrid technologies could be 
introduced during the redesign model year only. This view is consistent 
with manufacturer's views as well, because all of the hybrid 
technologies under consideration require redesign of the powertrain 
(ranging from engine accessory drive to transmission redesign) and 
vehicle redesign to package the hybrid components (from high voltage 
cabling to the addition of large battery packs). Given this, for 
purposes of the final rule, they can only be introduced in redesign 
model years.
(viii) Power Split Hybrid
    The Power Split hybrid (PSHEV) is described as a full or a strong 
hybrid since it has the ability to move the vehicle on electric power 
only. It replaces the vehicle's transmission with a single planetary 
gear and a motor/generator. A second, more powerful motor/generator is 
directly connected to the vehicle's final drive. The planetary gear 
splits the engine's torque between the first motor/generator and the 
final drive. The first motor/generator uses power from the engine to 
either charge the battery or supply power to the wheels. The speed of 
the first motor/

[[Page 14295]]

generator determines the relative speed of the engine to the wheels. In 
this way, the planetary gear allows the engine to operate independently 
of vehicle speed, much like a CVT. The Toyota Prius and the Ford Hybrid 
Escape are two examples of power split hybrid vehicles.
    In addition to providing the functions of idle engine stop and 
subsequent restart, regenerative braking, this hybrid system allows for 
pure EV operation. The two motor/generators are bigger and more 
powerful than those in an ISG hybrid, allowing the engine to be run in 
efficient operating zones more often. For these reasons, the power 
split system provides very good fuel consumption in city driving. 
During highway cycles, the hybrid functions of regenerative braking, 
engine start/stop and optimal engine operation cannot be applied as 
often as in city driving, and so the effectiveness in fuel consumption 
are less. Additionally, it is less efficient at highway speeds due to 
the fact that the first motor/generator must be spinning at a 
relatively high speed and therefore incurs losses.
    The battery pack for PSHEV is assumed to be 300V NiMH for the time 
period considered in this rulemaking, as is used in current PSHEV 
systems today. Their reliability is proven (having been in hybrids for 
over 10 years) and their cost is lower than Li Ion, so it is likely 
that the battery technology used in HEVs will continue to be NiMH for 
the near future for hybrids that do not require high energy storage 
capability like a plug-in hybrid does.
    The Power Split hybrid also reduces the cost of the transmission, 
replacing a conventional multi-speed unit with a single planetary gear. 
The electric components are bigger than those in an ISG configuration 
so the costs are correspondingly higher.
    However, the Power Split system is not planned for use on full-size 
trucks and SUVs due to its limited ability to efficiently provide the 
torque needed by these vehicles. The drive torque is limited to the 
first motor/generator's capacity to resist the torque of the engine. It 
is anticipated that Large Trucks would use the 2-mode hybrid system.
    In the NPRM, a phase-in rate of 3 percent was assumed for the power 
split technology. Although this system has been engineered for some 
vehicles by a couple of manufacturers, the required engineering 
resources both at OEMs and Tier 1 suppliers are high and most 
importantly, require long product development lead times. Thus NHTSA 
believes it would be extremely difficult for manufacturers to implement 
in levels greater than that of the submitted product plans for MY 2011. 
For the final rule, NHTSA limited the volumes of power split hybrids to 
zero percent in MY 2011. Power split hybrid cost and effectiveness 
estimates will not be discussed here, given that the technology is not 
applied in MY 2011 beyond product plan levels in NHTSA's analysis, and 
NHTSA will consider them further in its future rulemaking actions.
    The NPRM proposed that all of the hybrid technologies could be 
introduced during the redesign model year only, consistent with 
manufacturer's views. Given this, for this final rule NHTSA has 
retained the redesign application timing.
(ix) 2-Mode Hybrid
    The 2-mode hybrid (2MHEV) is another strong hybrid system that has 
all-electric drive capability. The 2MHEV uses an adaptation of a 
conventional stepped-ratio automatic transmission by replacing some of 
the transmission clutches with two electric motors, which makes the 
transmission act like a CVT. Like the Power Split hybrid, these motors 
control the ratio of engine speed to vehicle speed. But unlike the 
Power Split system, clutches allow the motors to be bypassed, which 
improves both the transmission's torque capacity and efficiency for 
improved fuel economy at highway speeds. This type of system is used in 
the Chevy Tahoe Hybrid.
    In addition to providing the hybrid functions of engine stop and 
subsequent restart and regenerative braking, the 2MHEV allows for pure 
EV operation. The two motor/generators are bigger and more powerful 
than those in an ISG hybrid, allowing the engine to be run in efficient 
operating zones more often. For these reasons, the 2-mode system also 
provides very good fuel economy in city driving. The primary motor/
generator is comparable in size to that in the PSHEV system, but the 
secondary motor/generator is larger. The 2-mode system cost is greater 
than that for the power split system due to the additional transmission 
complexity and secondary motor sizing.
    The battery pack for 2MHEV is assumed to be 300V NiMH for the time 
period considered in this rulemaking, as is used in current 2MHEV 
systems today. Their reliability is proven (having been in hybrids for 
over 10 years) and their cost is lower than Li Ion, so it is likely 
that the batteries will continue to be NiMH for the near future for 
hybrids that do not require high energy storage capability like a plug-
in hybrid does.
    Given the relatively large size of the 2 mode powertrain, this 
technology was assumed to be applicable to the Small through Large 
Truck/SUV classes. In the NPRM, a phase-in rate of 3 percent was 
assumed for 2 mode hybrids. The 2-modes have recently been introduced 
in the marketplace on a few vehicle platforms. The engineering 
resources that are needed both at the OEMs and Tier 1s to develop this 
across many more platforms are considerable, as discussed above for 
power split hybrids. For purposes of the final rule, the phase-in rate 
has been set to zero percent in MY 2011. 2 mode hybrid cost and 
effectiveness estimates will not be discussed here, given that the 
technology is not applied in MY 2011 beyond product plan levels in 
NHTSA's analysis, and NHTSA will consider them further in its future 
rulemaking actions.
    The NPRM proposed that all of the hybrid technologies could be 
introduced during the redesign model year only, consistent with 
manufacturer's views. Given this, for this final rule NHTSA has 
retained the redesign application timing.
(x) Plug-In Hybrid
    Plug-In Hybrid Electric Vehicles (PHEV) are very similar to other 
strong hybrid electric vehicles, but with significant functional 
differences. The key distinguishing feature is the ability to charge 
the battery pack from an outside source of electricity (usually the 
electric grid). A PHEV would have a larger battery pack with greater 
energy capacity, and an ability to be discharged further (referred to 
as ``depth of discharge'').\215\ No major manufacturer currently has a 
PHEV in production, although both GM and Toyota have publicly announced 
that they will launch plug-in hybrids in limited volumes by 2010.
---------------------------------------------------------------------------

    \215\ NHTSA notes that the fuel consumption effectiveness of 
PHEVs is heavily dependent on the all-electric range, and hence the 
battery capacity. However, the fuel consumption effectiveness from a 
PHEV is currently difficult to quantify objectively because there is 
no standardized fuel economy test procedure yet for a PHEV.
---------------------------------------------------------------------------

    PHEVs offer a significant opportunity to displace petroleum-derived 
fuels with electricity from the electrical grid. The reduction in 
petroleum use depends on the electric-drive range capability and the 
vehicle usage (i.e., trip distance between recharging, ambient 
temperature, etc.). PHEVs can have a wide variation in the All Electric 
Range (AER) that they offer. Some PHEVs are of the ``blended'' type 
where the engine is on during most of the vehicle operation, but the 
proportion of electric energy that is used to propel the vehicle is 
significantly higher than that used in a PSHEV or 2MHEV.

[[Page 14296]]

    PHEVs were not projected to be in volume use in the NPRM, but due 
to confidential manufacturer product plans, PHEVs do, in fact, appear 
in limited volumes in the final rule analysis, and therefore low 
volume, unlearned costs are assumed. However, the manufacturer-stated 
production volumes of PHEVs are very low, so the phase-in cap for MY 
2011 is zero--given the considerable engineering hurdles, the low 
availability of Li-Ion batteries in the MY 2011 time frame and the 
reasons discussed above for power split and 2 mode hybrids, NHTSA did 
not believe that PHEVs could be applied to more MY 2011 vehicles beyond 
what was indicated in the product plans. Additionally, plug-in hybrid 
cost and effectiveness estimates will not be discussed here, given that 
the technology is not applied in MY 2011 beyond product plan levels in 
NHTSA's analysis, and NHTSA will consider them further in its future 
rulemaking actions. The NPRM proposed that all of the hybrid 
technologies could be introduced during the redesign model year only, 
consistent with manufacturer's views. Given this, for this final rule 
NHTSA has allowed application of PHEVs in redesign model years only.
(e) Vehicle Technologies
(i) Material Substitution (MS1, MS2, MS5)
    The term ``material substitution'' encompasses a variety of 
techniques with a variety of costs and lead times. These techniques may 
include using lighter-weight and/or higher-strength materials, 
redesigning components, and size matching of components. Lighter-weight 
materials involve using lower-density materials in vehicle components, 
such as replacing steel parts with aluminum or plastic. The use of 
higher-strength materials involves the substitution of one material for 
another that possesses higher strength and less weight. An example 
would be using high strength alloy steel versus cold rolled steel. 
Component redesign is an ongoing process to reduce costs and/or weight 
of components, while improving performance and reliability. The 
Aluminum Association commented that lightweight structures are a 
significant enabler for the new powertrain technologies. Smaller and 
less expensive powertrains are required and the combination of reduced 
power and weight reduction positively reinforce and result in optimal 
fuel economy performance. An example would be a subsystem replacing 
multiple components and mounting hardware.
    However, the cost of reducing weight is difficult to determine and 
depends upon the methods used. For example, a change in design that 
reduces weight on a new model may or may not save money. On the other 
hand, material substitution can result in an increase in price per 
application of the technology if more expensive materials are used. As 
discussed further below in Section VIII, for purposes of this final 
rule, NHTSA has considered only vehicles weighing greater than 5,000 
lbs (curb weight) for weight reduction through materials substitution. 
A typical BOM for Material Substitution would include primarily 
substitution of high strength steels for heavier steels or other 
structural, materials on a vehicle. This BOM was established for each 
class but was not adjusted for each class due to the fact that the 
vehicle technology of Material Substitution is already scaled by it 
being based on percent of curb weight at or over 5,000 lbs.
    In the NPRM, NHTSA estimated fuel economy effectiveness of a 2 
percent incremental reduction in fuel consumption per each 3 percent 
reduction in vehicle weight. Nissan commented that NHTSA's modeling of 
material substitution application was overly optimistic, but did not 
elaborate further. Confidential manufacturer comments in response to 
the NPRM did not provide standardized effectiveness estimates, but 
ranged from 3.3 to 3.9 percent mpg improvement for a 10 percent 
reduction in mass, to 0.20 to 0.75 percent per 1 percent weight 
reduction, to 1 percent reduction on the FTP city cycle per 100 lbs 
reduced, with a maximum possible weight reduction of 5 percent.
    Bearing in mind that NHTSA only assumes material substitution for 
vehicles at or above 5,000 lbs curb weight and based on manufacturer 
comments which together suggest an incremental improvement in fuel 
consumption of approximately 0.60 percent to 0.9 percent per 3 percent 
reduction in material weight, NHTSA has estimated an incremental 
improvement in fuel consumption of 1 percent (corresponding to a 3 
percent reduction in vehicle weight, or roughly 0.35 percent fuel 
consumption per 1 percent reduction in vehicle weight). This estimate 
is consistent with the majority of the manufacturer comments.
    As for costs, in the NPRM NHTSA estimated incremental costs of 
$0.75 to $1.25 per pound reduced through material substitution. The 
costs for material substitution were not clearly commented on in the 
confidential manufacturer responses. Confidential manufacturer 
estimates ranged from $50 to $511 for 1 percent reduction, although in 
most cases the cost estimates were not for the entire range of 
substitution (1-5 percent) and did not provide any additional 
clarification on how they specifically applied to the material 
substitution technology. Consequently, for purposes of the final rule 
NHTSA retained the existing NPRM cost estimates with adjustments to 
2007 dollar levels resulting in an incremental $1 to $2 per pound of 
substituted material, which applies to the MS1 and MS2 technology, and 
$2 to $4 per pound for the MS5 technology. Costs for material 
substitution are not adjusted by vehicle subclass, as the technology 
costs are based on a percentage of the vehicle weight (per pound) and 
limited to Medium and Large Truck/SUV Van subclasses above 5,000 lbs 
curb weight.
    The agency notes that comments from the Alliance and the Aluminum 
Association associated engine downsizing with weight reduction/material 
substitution and quoted effectiveness for this action as well. NHTSA 
considers engine downsizing separately from typical material 
substitution efforts, and consequently did not include those cost and 
fuel economy effectiveness for this technology.
    In the NPRM, NHTSA assumed a 17 percent phase-in rate for material 
substitution. NHTSA received only one confidential manufacturer comment 
regarding material substitution phase-in percentage, suggesting 17 to 
30 percent, but the agency notes that it generally received comments 
suggesting a non-linear phase-in rate for this technology, that would 
start at a rate lower than the current NPRM value and increase over 
time. In response to these comments, NHTSA revised the MY 2011 phase-in 
percentage to 5 percent to account for lead time limitations.
    For material substitution technologies, neither volume-based cost 
reductions nor time-based cost reductions are applied. This technology 
does not employ a particular list of components to employ credible cost 
reduction.
    In the NPRM, NHTSA assumed that material substitution (1 percent) 
could be applied during a redesign model year only. For this final 
rule, based on confidential manufacturer comments, NHTSA estimated that 
material substitution (1 percent) could be applied during either a 
refresh or a redesign model year, due to minimal design changes with 
minimal component or vehicle-level testing required. However, NHTSA 
retained the assumption that material substitution (2 percent and 5 
percent) could be applied

[[Page 14297]]

during redesign model year only, as in the NPRM, because the agency 
neither received comments to contradict this assumption nor found other 
data to substantiate a change. The technology title was changed from 
Material Substitution (3 percent) to Material Substitution (5 percent) 
to more accurately represent the cumulative amount for the technology.
(ii) Low Drag Brakes (LDB)
    Low drag brakes reduce the sliding friction of disc brake pads on 
rotors when the brakes are not engaged because the brake pads are 
pulled away from the rotating rotor. A typical BOM for Low Drag Brakes 
would typically include changes in brake caliper speed by changing the 
brake control system, springs, etc. on a vehicles brake system. This 
BOM was established for each class and was not adjusted for each class 
due to the fact that the vehicle technology BOM would not change by 
class across vehicle classes. Confidential manufacturer comments in 
response to the NPRM indicated that most passenger cars have already 
adopted this technology, but that ladder frame trucks have not yet 
adopted this technology. Consequently, in the final rule this 
technology was assumed to be applicable only to the Large Performance 
Passenger Car and Medium and Large Truck classes.
    In the NPRM, NHTSA assumed an incremental improvement in fuel 
consumption of 1 to 2 percent for low drag brakes. Confidential 
manufacturer comments submitted in response to the NPRM indicated an 
effective range of 0.5-1.0 percent for this technology and this range 
was applied in the final rule. As for costs, NHTSA assumed in the NPRM 
incremental costs of $85 to $90 for the addition of low drag brakes. 
For the final rule, NHTSA took the average and adjusted it to 2007 
dollars to establish an $89 final rule cost.
    The NPRM assumed an annual average phase-in rate for low drag 
brakes of 25 percent. For the final rule, the MY 2011 phase-in cap is 
20 percent. No learning curve was applied in the NPRM, but for the 
final rule, low drag brakes were considered a high volume, mature and 
stable technology, and thus time-based learning was applied. Low drag 
brakes are assumed in the final rule to be applicable at refresh cycle 
only.
(iii) Low Rolling Resistance Tires (ROLL)
    Tire rolling resistance is the frictional loss associated mainly 
with the energy dissipated in the deformation of the tires under load--
and thus, influence fuel economy. Other tire design characteristics 
(e.g., materials, construction, and tread design) influence durability, 
traction control (both wet and dry grip), vehicle handling, and ride 
comfort in addition to rolling resistance. A typical low rolling 
resistance tires BOM would include: tire inflation pressure, material 
change, and constructions with less hysteresis, geometry changes (e.g., 
reduced aspect ratios), reduction in sidewall and tread deflection, 
potential spring and shock tuning. Low rolling resistance tires are 
applicable to all classes of vehicles, except for ladder frame light 
trucks and performance vehicles. NHTSA assumed that this technology 
should not be applied to vehicles in the Large truck class due to the 
increased traction and handling requirements for off-road and braking 
performance at payload and towing limits which cannot be met with low 
resistance tire designs. Likewise, this technology was not applied to 
vehicles in the Performance Car classes due to increased traction 
requirements for braking and handling which cannot be met with low roll 
resistance tire designs. Confidential manufacturer comments received 
regarding applicability of this technology to particular vehicle 
classes confirmed NHTSA's assumption.
    In the NPRM, NHTSA assumed an incremental reduction in fuel 
consumption of 1 to 2 percent for application of low rolling resistance 
tires. Confidential manufacturer comments varied widely and addressed 
the conflicting objectives of increasing safety by increasing rolling 
resistance for better tire traction, and improving fuel economy with 
lower rolling resistance tires that provide reduced traction. 
Confidential manufacturer comments suggested fuel consumption 
effectiveness of negative impact to a positive 0.1 percent per year 
over the next five years from 2008, while other confidential 
manufacturer comments indicate that the percentage effectiveness of low 
rolling resistance tires would increase each year, although it would 
apply differently for performance classes. Confidential manufacturer 
comments also indicated that some manufacturers have already applied 
this technology and consequently would receive no further effectiveness 
from this technology. The 2002 NAS Report indicated that an assumed 10 
percent rolling resistance reduction would provide an increase in fuel 
economy of 1 to 2 percent. NHTSA believes the NAS effectiveness is 
still valid and used 1 to 2 percent incremental reduction in fuel 
consumption for application of low rolling resistance tires in the 
final rule.
    NHTSA estimated the incremental cost of four low rolling resistance 
tires to be $6 per vehicle in the NPRM, independent of vehicle class, 
although not applicable to large trucks. NHTSA received few specific 
comments on the costs of applying low rolling resistance tires however 
confidential manufacturer comments that were received provided widely 
ranging and higher costs. NHTSA increased the range from the NPRM cost 
estimates to $6 to $9 per vehicle in the final rule.
    In the NPRM, NHTSA assumed an annual phase-in rate of 25 percent 
for low rolling resistance tires. Confidential manufacturer comments on 
the phase-in rate for low rolling resistance tires varied, with some 
suggesting that many vehicle classes already had high phase-in rates 
planned or accomplished. As discussed above, the comments also 
suggested a non-linear phase-in plan over the 5-year period. 
Confidential manufacturer data was in the 25-30 percent range. Based on 
confidential manufacturer comments received and NHTSA's analysis, the 
final rule includes a phase-in cap for low rolling resistance tires 
with a phase-in rate of 20 percent for MY 2011.
    For low rolling resistant tire technology, neither volume-based 
cost reductions nor time-based cost reductions are applied. This 
technology is presumed to be significantly dependent on commodity raw 
material prices and to be priced independent of particular design or 
manufacturing savings.
    In the NPRM, NHTSA assumed that low rolling resistance tires could 
be applied during any model year. However, based on confidential 
manufacturer comments NHTSA recognizes that there are some vehicle 
attribute impacts which may result from application of low rolling 
resistance tires, such as changes to vehicle dynamics and braking. 
Vehicle validation testing for safety and vehicle attribute prove-out 
is not usually planned for every model year, so NHTSA assumed that this 
technology can be applied during a redesign or refresh model year for 
purposes of the final rule.
(iv) Front or Secondary Axle Disconnect for Four-Wheel Drive Systems 
(SAX)
    To provide shift-on-the-fly capabilities, reduce wear and tear on 
secondary axles, and improve performance and fuel economy, many part-
time four-wheel drive (4WD) systems use some type of axle disconnect. 
Axle disconnects are

[[Page 14298]]

typically used on 4WD vehicles with two-wheel drive (2WD) operating 
modes. When shifting from 2WD to 4WD ``on the fly'' (while moving), the 
front axle disconnect couples the front driveshaft to the front 
differential side gear only when the transfer case's synchronizing 
mechanism has spun the front driveshaft, transfer case chain or gear 
set and differential carrier up to the same speed as the rear 
driveshaft. 4WD systems that have axle disconnect typically do not have 
either manual- or automatic-locking hubs. For example, to isolate the 
front wheels from the rest of the front driveline, front axle 
disconnects use a sliding sleeve to connect or disconnect an axle shaft 
from the front differential side gear. The effectiveness to fuel 
efficiency is created by reducing inertial, chain, bearing and gear 
losses (parasitic losses).
    Full time 4WD or all-wheel-drive (AWD) systems used for on-road 
performance and safety do not use axle disconnect systems due to the 
need for instantaneous activation of torque to wheels, and the agency 
is not aware of any manufacturer or suppliers who are developing a 
system to allow secondary axle disconnect suitable for use on AWD 
systems at this time. Secondary axle disconnect technology is primarily 
found on solid axle 4WD systems and not on the transaxle and/or 
independent axle systems typically found in AWD vehicles; thus, the 
application of this technology to AWD systems has not been considered 
for purposes of this rulemaking. The technology will be evaluated in 
future rulemakings.
    Vehicle technology BOM information was not adjusted by vehicle 
classes due to the fact that the vehicle technology is limited to 
transfer case and front axle design changes. Scaling of components 
might be impacted but the components themselves will be the same. This 
is consistent with NHTSA's assumptions in the NPRM, and is supported by 
comments from confidential supplier and manufacturers. Secondary Axle 
Disconnect BOM typically involves a transfer case which includes 
electronic solenoid with clutch system to disconnect front drive and 
using axle mounted vacuum or electric disconnect that still allows 
driveshaft rotation without connection to wheel ends.
    In the NPRM, NHTSA employed ``unibody'' and ``ladder frame'' terms 
to differentiate application of this technology, and had suggested 
``unibody'' AWD systems could apply this same technology. In actuality, 
most 4WD vehicles are ``ladder frame'' technology and AWD are 
``unibody'' designs (which for the reasons stated above will not be 
considered for this technology). Ladder frame technology is typically 
associated with greater payload, towing, and off-road capability, 
whereas unibody designs are typically used in smaller, usually front-
wheel drive vehicles, and are typically not associated with higher 
payload, towing, and off-road use. For the final rule, NHTSA removed 
these vehicle design criteria since it is not a requirement to 
incorporate axle disconnect technology, only a historical design point 
and vehicle manufacturers should not be limited to a specific vehicle 
or chassis configuration to apply this technology. Therefore, this 
technology is applicable to 4WD vehicles in all vehicle classes 
(independent of chassis or frame design).
    In the NPRM, NHTSA estimated an incremental reduction in fuel 
consumption of 1 to 1.5 percent for axle disconnect. Confidential 
manufacturer comments suggested an incremental effectiveness of 1 to 
1.5 percent. Supported by this confidential manufacturer data, NHTSA 
maintained an incremental effectiveness of 1 to 1.5 percent for axle 
disconnect for the final rule.
    As for costs, the NPRM estimated the incremental cost for adding 
axle disconnect technology at $114 for 4WD systems and the $676 
estimate was for the AWD systems which are not applied in the final 
rule. NHTSA received no specific comments on costs for this technology 
and found no additional sources to support a change from this value for 
the 4WD value of $114, so for purposes of the final rule, NHTSA revised 
the $114 figure to 2007 dollars to establish a $117 final rule cost.
    In the NPRM, NHTSA assumed a phase-in cap of 17 percent for 
secondary axle disconnect for each model year covered by the 
rulemaking. No specific comments were received regarding the phase-in 
rate for this technology, but as discussed above, manufacturers 
generally argued for a non-linear phase-in plan over the 5-year period 
covered by the rulemaking. Based on general comments received and 
NHTSA's analysis, the final rule includes a phase-in rate for secondary 
axle disconnect of 17 percent in MY 2011.
    In the NPRM, NHTSA assumed a volume-based learning curve factor of 
20 percent for secondary axle disconnect. For the final rule, secondary 
axle disconnect learning was established as time-based due to 
confidential manufacturer data demonstrating that this is a mature 
technology, such that additional volumes will provide no additional 
advantage for incorporation by manufacturers.
    In the NPRM, NHTSA assumed that secondary axle disconnect could be 
applied to a vehicle either during refresh or redesign model years. 
NHTSA received no comments and found no sources to disagree with this 
assumption, and since testing to validate the functional requirements 
and vehicle attribute prove-out testing is usually not planned for 
every model year, NHTSA has retained this assumption for the final 
rule.
(v) Aerodynamic Drag Reduction (AERO)
    Several factors affect a vehicle's aerodynamic drag and the 
resulting power required to move it through the air. While these values 
change with air density and the square and cube of vehicle speed, 
respectively, the overall drag effect is determined by the product of 
its frontal area and drag coefficient. Reductions in these quantities 
can therefore reduce fuel consumption. While frontal areas tend to be 
relatively similar within a vehicle class (mostly due to market-
competitive size requirements), significant variations in drag 
coefficient can be observed. Significant fleet aerodynamic drag 
reductions may require incorporation into a manufacturer's new model 
phase-in schedules depending on the mix of vehicle classes distributed 
across the manufacturer's lineup. However, shorter-term aerodynamic 
reductions, with less of a fuel economy effectiveness, may be achieved 
through the use of revised exterior components (typically at a model 
refresh in mid-cycle) and add-on devices that are in general 
circulation today. The latter list would include revised front and rear 
fascias, modified front air dams and rear valances, addition of rear 
deck lips and underbody panels, and more efficient exterior mirrors.
    Vehicle technology BOM information was not adjusted by vehicle 
classes due to the fact that Aero Drag Reductions are already scaled 
based on percent overall vehicle coefficient of drag CdA. Aero Drag 
Reduction BOM could include (but would not be limited to) the following 
components or subsystems: Underbody covers, front lower air dams, 
overall front fascia changes, headlights, hood, fenders, grill, 
windshield angle, A-Pillar angle, door seal gaps, roof (which would 
both be high impact and very high cost), side view mirrors, door 
handles (low impact), ride height, rear deck lip, wheels, wheel covers, 
and optimizing the cooling flow path.
    In the NPRM, NHTSA estimated an incremental aerodynamic drag 
reduction of 20 percent for cars, and 10 percent for trucks. 
Confidential

[[Page 14299]]

manufacturer comments received indicated that the 20 percent reduction 
for cars in the NPRM may have been overly optimistic, as significant 
changes in aero drag have already been applied to those vehicle 
classes. However, confidential manufacturer comments agreed with the 10 
percent aerodynamic drag reduction for trucks, since there are still 
significant opportunities to improve aero drag in trucks designed for 
truck-related utility. The Sierra Research study submitted by the 
Alliance concluded that a 10 percent incremental aerodynamic drag 
reduction for mid-size cars gives a 1.5 percent improvement in vehicle 
fuel economy. Thus, for purposes of the final rule, NHTSA has estimated 
that a fleet average of 10 percent total aerodynamic drag reduction is 
attainable (with a caveat for ``high-performance'' vehicles described 
below), which equates to incremental reductions in fuel consumption of 
2 percent and 3 percent for cars and trucks, respectively. These 
numbers are in agreement with publicly-available technical literature 
\216\ and are supported by confidential manufacturer information. 
Performance car classes are excluded from this technology improvement 
because they have largely applied this technology already.
---------------------------------------------------------------------------

    \216\ Sue Elliott-Sink, ``Improving Aerodynamics to Boost Fuel 
Economy,'' May 2, 2006. Available at http://www.edmunds.com/advice/fueleconomy/articles/106954/article.html (last accessed Oct. 5, 
2008).
---------------------------------------------------------------------------

    As for costs, in the NPRM NHTSA assumed an incremental cost of $0 
to $75 for aero drag reduction on both cars and trucks. After reviewing 
the 2008 Martec Report, however, NHTSA concluded that a lower-bound 
cost of $0 was not supportable. NHTSA replaced the lower-bound cost 
with $40 (non-RPE) based on the assumptions that the underbody cover 
and acoustic covers described in the Martec report approximates the 
cost for one large underbody cover as might be required for minimal 
aero drag reduction actions.\217\ The upper limit was determined by 
updating the NPRM upper cost to 2007 dollars and applying an RPE uplift 
thereby establishing the incremental cost, independent of vehicle 
class, to range from $60 to $116 (RPE) for the final rule
---------------------------------------------------------------------------

    \217\ 2008 Martec Report, at 25. NHTSA also assumed that the 
cost of fuel pulsation dampening technology noted in the Martec 
report grouped with the underbody cover and acoustic covers does not 
significantly impact the $40 cost as fuel pulsation dampening 
technology is very low in cost relative to the other actions. 
Therefore NHTSA did not modify the $40 estimate.
---------------------------------------------------------------------------

    In the NPRM, NHTSA assumed a 17 percent phase-in rate for aero drag 
reduction for each model year covered by the rulemaking. No specific 
comments were received regarding the phase-in rate for this technology, 
but as discussed above, manufacturers generally argued for a non-linear 
phase-in plan over a 5-year period. Based on comments received and 
NHTSA's analysis, the final rule includes a phase-in rate for aero drag 
reduction of 17 percent for MY 2011. Neither volume-based cost 
reductions nor time-based cost reductions are applied. In the NPRM, 
NHTSA assumed that aero drag reduction could be applied in either a 
refresh or a redesign model year and that assumption has been retained 
for the final rule.
(f) Technologies Considered But Not Included in the Final Rule Analysis
    Although discussed and considered as potentially viable in the 
NPRM, NHTSA has determined that three technologies will be unavailable 
in the time frame considered. These technologies have been identified 
as either pre-emerging or not technologically feasible. Pre-emerging 
technologies are those that are still in the research phase at this 
time, and which are not expected to be under development for production 
vehicles for several years. In another case, the technology depends on 
a fuel that is not readily available. Thus, for the reasons discussed 
below, these technologies were not considered in NHTSA's analysis for 
the final rule. The technologies are camless valve actuation (CVA), 
lean burn gasoline direct injection (LBDI), homogeneous charge 
compression ignition (HCCI), and electric assist turbocharging. 
Although not applied in this rulemaking, NHTSA will continue to monitor 
the industry and system suppliers for progress on these technologies, 
and should they become available, consider them for use in any future 
rulemaking activity.
(i) Camless Valve Actuation
    Camless valve actuation relies on electromechanical actuators 
instead of camshafts to open and close the cylinder valves. When 
electromechanical actuators are used to replace cams and coupled with 
sensors and microprocessor controls, valve timing and lift can be 
optimized over all conditions. An engine valvetrain that operates 
independently of any mechanical means provides the ultimate in 
flexibility for intake and exhaust timing and lift optimization. With 
it comes infinite valve overlap variability, the rapid response 
required to change between operating modes (such as HCCI and GDI), 
intake valve throttling, cylinder deactivation, and elimination of the 
camshafts (reduced friction). This level of control can enable even 
further incremental reductions in fuel consumption.
    As noted in the NPRM, this technology has been under research for 
many decades and although some progress is being made, NHTSA has found 
no evidence to support that the technology can be successfully 
implemented, costed, or have defined fuel consumption effectiveness at 
this time.
(ii) Lean-Burn Gasoline Direct Injection Technology
    One way to improve an engine's thermodynamic efficiency 
dramatically is by operating at a lean air-fuel mixture (excess air). 
Fuel system improvements, changes in combustion chamber design and 
repositioning of the injectors have allowed for better air/fuel mixing 
and combustion efficiency. There is currently a shift from wall-guided 
injection to spray guided injection, which improves injection precision 
and targeting towards the spark plug, increasing lean combustion 
stability. Combined with advances in NOX after-treatment, 
lean-burn GDI engines may eventually be a possibility in North America.
    However, as noted in the NPRM, a key technical requirement for 
lean-burn GDI engines to meet EPA's Tier 2 NOX emissions 
levels is the availability of low-sulfur gasoline, which is projected 
to be unavailable during the time frame considered. Therefore the 
technology was not applied in the final rule
(iii) Homogeneous Charge Compression Ignition
    Homogeneous charge compression ignition (HCCI), also referred to as 
controlled auto ignition (CAI), is an alternate engine operating mode 
that does not rely on a spark event to initiate combustion. The 
principles are more closely aligned with a diesel combustion cycle, in 
which the compressed charge exceeds a temperature and pressure 
necessary for spontaneous ignition. The resulting burn is much shorter 
in duration with higher thermal efficiency. Shorter combustion times 
and higher EGR tolerance permit very high compression ratios (which 
also increase thermodynamic efficiency), and additionally, pumping 
losses are reduced because the engine can run unthrottled.
    NHTSA noted in the NPRM that several manufacturers had made public 
statements about the viability of incorporating HCCI into production 
vehicles over the next 10 years. Upon

[[Page 14300]]

further review of confidential product plan information, and reviewing 
comments received in response to the NPRM, NHTSA has determined the 
technology will not be available within the time frame considered. 
Consequently, the technology was not applied in the final rule.
(iv) Electric Assist Turbocharging
    The Alliance commented that global development of electric assist 
turbocharging has not demonstrated the fuel efficiency effectiveness of 
a 12V EAT up to 2kW power levels since the 2004 NESCCAF study, and 
stated that it saw remote probability of its application over the next 
decade.\218\ While hybrid vehicles lower the incremental hardware 
requirements for higher-voltage, higher-power EAT systems, NHTSA 
believes that significant development work is required to demonstrate 
effective systems and that implementation in significant volumes will 
not occur in the time frame considered. Thus, this technology was not 
included on the decision trees.
---------------------------------------------------------------------------

    \218\ NHTSA-2008-0089-0169.1, at 41.
---------------------------------------------------------------------------

E. Cost and Effectiveness Tables

    The tables representing the Volpe model input files for incremental 
technology costs by vehicle subclass are presented below. The tables 
have been divided into passenger cars, performance passenger cars, and 
light trucks to make them easier to read.
BILLING CODE 4910-59-P

[[Page 14301]]

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[[Page 14302]]


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[[Page 14303]]


[GRAPHIC] [TIFF OMITTED] TR30MR09.041

    The tables representing the Volpe model input files for incremental 
technology effectiveness values by vehicle subclass are presented 
below. The tables have been divided into passenger cars, performance 
passenger cars, and light trucks to make them easier to read.

[[Page 14304]]

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[[Page 14305]]


[GRAPHIC] [TIFF OMITTED] TR30MR09.005


[[Page 14306]]


[GRAPHIC] [TIFF OMITTED] TR30MR09.043

BILLING CODE 4910-59-C
    The tables representing the Volpe model input files for approximate 
net (accumulated) technology costs by vehicle subclass are presented 
below. The tables have been divided into passenger cars, performance 
passenger cars, and light trucks to make them easier to read.

[[Page 14307]]

[GRAPHIC] [TIFF OMITTED] TR30MR09.044

    The tables representing the Volpe model input files for approximate 
net (accumulated) technology effectiveness values by vehicle subclass 
are presented below. The tables have been divided into passenger cars, 
performance passenger cars, and light trucks to make them easier to 
read.

[[Page 14308]]

[GRAPHIC] [TIFF OMITTED] TR30MR09.045

[GRAPHIC] [TIFF OMITTED] TR30MR09.046

V. Economic Assumptions Used in NHTSA's Analysis

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

    NHTSA's analysis of alternative CAFE standards for model year 2011 
passenger cars and light trucks relies on a range of market 
information, estimates of the cost and effectiveness of technologies to 
increase fuel economy, forecasts of critical economic variables, and 
estimates of the values of important behavioral parameters. This 
section describes the sources NHTSA has relied upon to obtain this 
information, as well as how the agency developed the specific parameter 
values used in the analysis. Like the product plan information it 
obtains from vehicle manufacturers, these economic variables, 
forecasts, and parameter values play important roles in determining the 
level of CAFE standards, although some variables have larger impacts on 
the final standards than others.
    As discussed above, the Volpe model uses the estimates of the costs 
and effectiveness of individual technologies to simulate the 
improvements that manufacturers could elect to make to the fuel economy 
of their individual vehicle models in order to comply with higher CAFE 
standards at the lowest cost, and to estimate each manufacturer's total 
costs for meeting new standards. To calculate the reductions in fuel 
use over the lifetime of each car and light truck model from the 
resulting increases in fuel economy, the model then combines those 
increases with estimates of the fraction of cars and light trucks that 
remain in service at different ages, the number of miles they are 
driven at each age, and the size of the fuel economy rebound effect. 
Forecasts of future fuel prices are then applied to these fuel savings 
to estimate their economic value during each year the vehicles affected 
by the higher CAFE standards are projected to remain in service. The 
Volpe model also uses estimates of the fractions of fuel

[[Page 14309]]

savings that will reduce U.S. imports of crude petroleum and refined 
fuel to estimate the reduction in economic externalities that result 
from U.S. imports.
    Using emission rates per mile driven by different types of vehicles 
or per gallon of fuel consumed, together with estimates of emissions 
that occur within the U.S. in the process of refining and distributing 
fuel, the Volpe model calculates changes in emissions of regulated (or 
criteria) air pollutants and carbon dioxide (CO2), the main 
greenhouse gas emitted during fuel production and vehicle use. These 
are combined with estimates of the economic damages to human health and 
property caused by regulated air pollutants, and by projected future 
changes in the global climate resulting from increases in 
CO2 emissions, to estimate the benefits from the resulting 
reductions in emissions. Finally, the model calculates benefits to 
vehicle owners from having to refuel less frequently based on the 
estimated values of vehicle occupants' time, the decline in vehicle 
operating costs due to lower fuel consumption, and the increase in 
mobility afforded by added rebound-effect driving.
    As the following discussion makes clear, the costs and 
effectiveness of fuel economy technologies, forecasts of future 
gasoline prices, and the discount rate applied to future benefits have 
the largest influence over the level of the standards. In contrast, 
estimates of the value of economic externalities generated by U.S. 
petroleum imports, the fuel economy rebound effect, the gap between 
test and on-road fuel economy, and the economic values of reducing 
emissions of greenhouse gases and regulated air pollutants each have 
more modest effects on determining the final CAFE standards. NHTSA has 
analyzed the sensitivity of the final standards and their resulting 
benefits to plausible variation in the most important of these inputs, 
both by varying their values individually and conducting a Monte Carlo-
type analysis of joint variation in their probably values. NHTSA 
recognizes that there may be other reasonable assumptions that the 
agency could have made. However, for purposes of the MY 2011 
rulemaking, NHTSA continues to believe that the assumptions made are 
the most appropriate based on the information available. The agency 
will, however, review these assumptions in future rulemakings, 
especially in light of comments received and accounting for changing 
circumstances, both domestically and globally, and consider whether 
other assumptions would be more reasonable under the circumstances at 
that time.
    For the reader's reference, Table V-1 below summarizes the values 
of many of the variables NHTSA uses to estimate the costs, fuel 
savings, and resulting economic benefits from increases in car and 
light truck CAFE standards.
BILLING CODE 4910-59-P

[[Page 14310]]

[GRAPHIC] [TIFF OMITTED] TR30MR09.047

BILLING CODE 4910-59-C

B. What economic assumptions does NHTSA use in its analysis?

1. Determining Retail Price Equivalent
    NHTSA explained in the NPRM that the technology cost estimates used 
in the agency's analysis are intended to represent manufacturers' 
direct costs for high-volume production of vehicles with these 
technologies and sufficient experience with their application so that 
all cost reductions due to ``learning curve'' effects were fully 
realized. However, NHTSA recognized that manufacturers may also incur 
additional corporate overhead, marketing, or distribution and selling 
expenses as a consequence of their efforts to improve the fuel economy 
of individual vehicle models and their overall product lines.
---------------------------------------------------------------------------

    \219\ Derived from NHTSA's $33 per metric ton estimate of the 
global value of reducing CO2 emissions.
---------------------------------------------------------------------------

    In order to account for these additional costs, NHTSA applied an 
indirect cost multiplier in the NPRM of 1.5 to the estimate of the 
vehicle manufacturers' direct costs for producing or acquiring each 
fuel economy-improving technology. Historically, NHTSA used an almost 
identical multiplier, 1.51, for the markup from variable costs or 
direct manufacturing costs to consumer costs. The markup takes into 
account fixed costs, burden, manufacturer's profit, and dealers' 
profit. NHTSA's methodology for determining this markup was peer-
reviewed in 2006.\220\
---------------------------------------------------------------------------

    \220\ See Docket No. NHTSA-2007-27453, Item 4.
---------------------------------------------------------------------------

    NHTSA stated in the NPRM that the estimate of 1.5 was confirmed by 
Argonne National Laboratory in a recent review of vehicle 
manufacturers' indirect costs. The Argonne study was specifically 
intended to improve the accuracy of future cost estimates for 
production of vehicles that achieve high fuel economy by employing many 
of the same advanced technologies considered in NHTSA's analysis.\221\ 
Thus, NHTSA stated in the NPRM that it believed that

[[Page 14311]]

applying a multiplier of 1.5 to direct manufacturing costs to reflect 
manufacturers' increased indirect costs for deploying advanced fuel 
economy technologies is appropriate for use in the analysis for this 
rulemaking. NHTSA describes this multiplier in Section IV above as the 
Retail Price Equivalent factor, or RPE factor.
---------------------------------------------------------------------------

    \221\ Vyas, Anant, Dan Santini, and Roy Cuenca, Comparison of 
Indirect Cost Multipliers for Vehicle Manufacturing, Center for 
Transportation Research, Argonne National Laboratory, April 2000. 
Available at http://www.transportation.anl.gov/pdfs/TA/57.pdf (last 
accessed August 14, 2008).
---------------------------------------------------------------------------

    Some commenters argued that NHTSA's mark-up factor of 1.5 was too 
high. NESCAUM commented that NHTSA had relied on the 2004 NESCCAF study 
as one source for its technology estimates, but appeared to have 
incorrectly reported information from that study with regard to the 
mark-up factor.\222\ NESCAUM stated that in the report, entitled 
``Reducing Greenhouse Gas Emissions from Light-Duty Motor Vehicles,'' 
NESCCAF only used a 1.4 RPE, but ``NHTSA applies a 1.5 retail price 
equivalent (RPE) factor to the manufacturer costs presented in Appendix 
C of the NESCCAF report, and at other times uses a 1.4 RPE--and 
presents both costs as NESCCAF costs.'' NESCAUM argued that ``The 
reporting of costs using the 1.5 multiplier as NESCCAF costs is 
incorrect and leads to uncertainty as to how the costs were 
developed.'' \223\ NESCAUM stated that ``All reported costs and 
benefits, attributed to NESCCAF by NHTSA, [should] be reviewed 
carefully for errors and amended accordingly.'' CARB also stated that 
there was ``inconsistency * * * in the treatment of NESCCAF costs,'' 
because NHTSA sometimes used a 1.5 markup and sometimes 1.4, and argued 
that ``These errors in citing the NESCCAF report raise doubts about 
whether RPE costs from other sources are cited accurately.''
---------------------------------------------------------------------------

    \222\ NESCAUM stated that NESCCAF, or Northeast States Center 
for a Clean Air Future, is an affiliate organization of NESCAUM.
    \223\ NESCAUM gave a specific example with regard to the cost of 
a turbocharger, as follows:
    NHTSA states the NESCCAF turbocharger cost is $600. In this 
case, NHTSA applied a 1.5 RPE factor to manufacturer costs presented 
in Appendix C of the NESCCAF report to arrive at the $600 cost. This 
is different from the cost that NESCCAF developed. Conversely, on 
page 24369 of the Federal Register notice, NHTSA accurately states 
the NESCCAF cylinder deactivation costs ranged from $161 to $210. 
This cost accurately reflects manufacturer costs presented in 
Appendix C of the NESCCAF report, multiplied by the 1.4 retail price 
equivalent used by NESCCAF.
---------------------------------------------------------------------------

    CARB further commented that NHTSA had inconsistently added costs 
for the engineering effort required to add some technologies to 
vehicles, when those costs should have been covered by the RPE markup. 
CARB cited NHTSA's language in the NPRM that ``manufacturers' actual 
costs for applying these technologies to specific vehicle models are 
likely to include additional outlays for accompanying design or 
engineering changes to each model, development and testing of prototype 
versions, recalibrating engine operating parameters, and integrating 
the technology with other attributes of the vehicle.'' (Emphasis added) 
CARB argued that adding additional costs for engineering effort to any 
technology amounted to double-counting. CARB also commented that 
NHTSA's methodology for determining the indirect cost markup was 
unsound, because ``the cost to incorporate a technology is the same 
regardless of vehicle production,'' and because ``manufacturers are 
moving toward global vehicle architectures in an effort to spread 
development costs across the largest volume of vehicles possible, thus 
reducing engineering costs.'' CARB argued that ``The engineering cost 
methodology cited in the NPRM conflicts with this trend as well.''
    Other commenters argued that NHTSA's mark-up factor of 1.5 was too 
low. The Alliance commented that the RPE mark-up factor of 1.5 used by 
NHTSA is ``far too low,'' and cited the Sierra Research report and a 
study by Wynn V. Bussman, submitted as an attachment by the Alliance, 
as concluding that ``the best estimate for RPE is more on the order of 
2.0.'' The Alliance argued that NHTSA's citation of the Argonne study 
as support for an RPE of 1.5 was incorrect and out of context, stating 
that ``As both Bussman and Sierra noted, the Argonne National 
Laboratory recommended use of 2.0 as the RPE factor.'' The Alliance 
stated that the Argonne study had simply used a 1.5 RPE for outsourced 
components, because ``Manufacturers that outsource components do not 
bear warranty and other costs under typical contractual arrangements.'' 
The Alliance argued that ``A 1.5 RPE * * * is simply unrepresentative 
for components that are developed in house by the original equipment 
manufacturers (``OEMs'').'' The Alliance further argued that ``Use of a 
1.5 RPE for all purposes also glosses over the fact that outsourced 
components can nevertheless require significant integration 
expenditures from manufacturers putting together and selling entire 
vehicles.'' \224\ Chrysler concurred separately with the Alliance that 
``NHTSA's use of an RPE of 1.5 does not adequately account for the full 
cost of implementing new technologies,'' and stated that an RPE of 2.0 
``is the appropriate factor to use for new technologies.''
---------------------------------------------------------------------------

    \224\ The Alliance cited the Sierra Research report as stating 
that ``* * * the 1.5 multiplier clearly does not apply to changes in 
engines, transmissions, or bodies in cases where the vehicle 
manufacturer designs and produces its own engines, transmissions, 
and bodies.'' Sierra Research report at 61.
---------------------------------------------------------------------------

    The Alliance also commented that Bussman had ``considered the 
literature on RPE factors extensively,'' and ``concluded that studies 
that advised RPEs of approximately 1.5 were filled with errors and that 
when these errors were corrected, these studies also supported the 
conclusion that the proper RPE is 2.0.'' The Alliance concluded by 
arguing that the Sierra Research report had found that ``some recent 
analyses of RPE are based on unrepresentative and unsustainable profit 
levels by manufacturers,'' and that ``If realistic long-term profit 
rates are used, then the RPE increases from 2.0 to a range of 2.09 to 
2.15.''
    NADA did not expressly agree or disagree with a mark-up factor of 
1.5, but commented that since the NPRM states that the 1.5 multiplier 
includes ``dealer profit'' among other related additional costs, NHTSA 
``should review whether its estimates include all dealer costs-of-sales 
when calculating `dealer profit' and the extent to which it has 
properly accounted for the finance costs consumers typically pay when 
purchasing new automobiles.''
    Agency response: NHTSA notes that the analysis for this final rule 
relies on entirely new cost estimates for fuel economy technologies 
developed by the agency in response to comments and in coordination 
with an international engineering consulting firm, Ricardo, Inc., based 
on a bill of materials approach as described in Section IV of this 
notice and not based on the 2004 NESCCAF study, so the issue of 
apparent inconsistency in the RPE factor applied to those estimates 
noted by NESCAUM and CARB is no longer relevant. The agency also notes 
that both the production and application of fuel economy-improving 
technologies include separate engineering cost components. Developing 
these technologies and readying them for high-volume production entails 
significant initial investments in product design and engineering, 
while as the NPRM pointed out, applying individual technologies to 
specific vehicle models can entail significant additional costs for 
accompanying engineering changes to its existing drive train, 
development and testing of prototype versions, recalibrating engine 
operating parameters, and integrating the technology with other 
attributes of the vehicle. While design and engineering costs for 
developing fuel economy-improving technologies are included in the 
production cost estimates for individual technologies,

[[Page 14312]]

additional engineering costs incurred by manufacturers in applying them 
to specific vehicle models are included in NHTSA's estimate of the RPE 
factor. Finally, the agency notes that its estimate of the RPE factor 
includes high-volume production and application of fuel economy 
technologies, because it assumes that initial design and engineering 
costs to develop and begin production of these technologies will be 
recovered over large production volumes. Thus, NHTSA believes that 
CARB's concerns about potential double-counting of engineering costs 
for developing and applying fuel economy technologies reflect a failure 
to recognize that engineering costs arise in both their development and 
application. The agency also believes that CARB's concern about whether 
NHTSA's RPE factor assumes the spreading of initial design and 
engineering costs for developing these technologies over insufficiently 
high production volumes is unfounded.
    In response to the concerns expressed by the Alliance and others 
that NHTSA's RPE factor is too low, the agency notes that the RPE 
factor of 2.0 reported in the Argonne and Sierra Research studies 
includes various categories of production overhead costs (for product 
development and engineering, depreciation and amortization of 
production facilities, and warranty) that are included in NHTSA's 
estimates of production costs for fuel economy technologies. When 
applied to technology production costs defined to include these 
components, the agency's RPE factor of 1.5 is thus consistent with full 
recovery of these cost components. This conclusion is independent of 
whether overhead costs for developing and producing fuel economy 
technologies are initially borne by equipment suppliers or by vehicle 
manufacturers themselves. Consequently, NHTSA has continued to employ 
an RPE factor of 1.5 in its analysis for this final rule.
2. Potential Opportunity Costs of Improved Fuel Economy
    In the NPRM, NHTSA discussed the issue of whether achieving the 
fuel economy improvements required by alternative CAFE standards would 
require manufacturers to compromise the performance, carrying capacity, 
safety, or comfort of some vehicle models. If so, the resulting 
reduction in the value of those models to potential buyers would 
represent an additional cost of achieving the improvements in fuel 
economy required by stricter CAFE standards. While exact dollar values 
of these attributes to consumers are difficult to infer from vehicle 
purchase prices, changing vehicle attributes can affect the utility 
that vehicles provide to their owners, and thus their value to 
potential buyers. This is not to suggest that buyers typically attach 
low values to fuel economy; rather, it recognizes that buyers value 
many different attributes, so that requiring manufacturers to make 
tradeoffs among them may alter the overall value of certain vehicle 
models to individual buyers.
    NHTSA has approached this potential problem by developing tentative 
cost estimates for fuel economy-improving technologies that include any 
additional production costs necessary to maintain the product plan 
levels of performance, comfort, capacity, and safety of the models on 
which they are used. In doing so, NHTSA primarily followed the 
precedent established by the 2002 NAS Report, although the NPRM updated 
its assumptions as necessary for purposes of the current rulemaking. 
The NAS Report estimated ``constant performance and utility'' costs for 
fuel economy technologies, and NHTSA used those as the basis for its 
further efforts to develop the initial technology costs employed in 
analyzing manufacturers' costs for complying with alternative CAFE 
standards.
    NHTSA acknowledged the difficulty of estimating technology costs 
that include costs for the accompanying changes in vehicle design that 
are necessary to maintain performance, capacity, and utility. However, 
as NHTSA stated in the NPRM, the agency believes that the tentative 
cost estimates for fuel economy-improving technologies should be 
generally sufficient to prevent significant reductions in consumer 
welfare provided by vehicle models to which manufacturers apply those 
technologies. Nonetheless, the NPRM sought comment on alternative ways 
to address these issues.
    NHTSA did not receive comments that explicitly addressed NHTSA's 
question of whether there are better ways for the agency to estimate 
technology costs that capture changes in vehicle design so that fuel 
economy can be improved while maintaining performance, capacity, and 
utility. Some comments, however, expressed concern that the proposed 
CAFE standards, and more stringent CAFE standards generally, would 
prevent manufacturers from maintaining intended levels of performance, 
comfort, capacity, and/or safety of at least some of their vehicle 
models.
    For example, the American Farm Bureau Federation commented that the 
proposed standards would result in ``more expensive trucks that lack 
the power needed to perform the tasks required'' of them by farmers, 
and that ``trucks laden with expensive untested technologies may prove 
undependable and costly to repair.'' AFBF stated that farmers need 
trucks that can haul and tow heavy loads and trailers, which requires 
``heavy frames, strong engines, and adequate horsepower and torque.'' 
AFBF argued that the proposal would cause manufacturers either to 
downsize and reduce power in their vehicles, or to sell fewer powerful 
trucks and increase their cost, all of which would create hardship for 
farmers who need such trucks for their livelihoods.
    NADA similarly suggested in its comments that the proposed 
standards could constrain the ability of light truck manufacturers to 
meet ``market needs'' for towing and hauling capability, as well as 
space and power. NADA also stated that manufacturers of small high-
performance (i.e., sports) cars might be forced by the stringency of 
the proposed standards to exit the market or reduce product offerings.
    BMW expressed concern that the proposed footprint-based standards 
will ``provide a disincentive to install safety devices on vehicles,'' 
since ``In general, safety devices add mass,'' and ``additional mass 
will lead to higher fuel consumption.'' Thus, BMW argued, all 
manufacturers will think twice before adding safety equipment to a 
vehicle, in order not to hurt their chances of meeting the CAFE 
standards. Along those lines, BMW argued that its vehicles were ``high 
feature-density vehicles,'' which it defined as ``those that include 
extraordinary safety, comfort, and convenience features like 
electronic/advanced stability, braking, suspension, steering, lighting, 
and security controls.'' BMW stated that these vehicles ``have a high 
mass per footprint density,'' and suggested that the proposed 
footprint-based standards provide manufacturers with a disincentive to 
continue offering this type of vehicle.
    Agency response: The agency did not include a reduction in 
performance as one of the countermeasures that the manufacturers could 
take to meet the final rule for two main reasons. First, the agency 
believes that manufacturers could meet the standards adopted in this 
final rule at the estimated compliance costs without noticeably 
affecting vehicle performance or utility. As noted previously, NHTSA's 
cost estimates for individual fuel economy-improving technologies are 
intended to include any additional production costs necessary to 
maintain the performance,

[[Page 14313]]

comfort, capacity, and safety of the models on which they are used. The 
agency has reviewed its cost estimates for individual fuel economy 
technologies in detail, and is confident that they include sufficient 
allowances to prevent significant reductions in these critical 
attributes, and this in the utility that vehicle models to which 
manufacturers apply those technologies will provide to potential 
buyers.
    Second, NHTSA believes that the commenters' concerns about 
potential opportunity costs for reduced vehicle performance and utility 
are largely unfounded. Manufacturers are technically capable of 
producing vehicles with reduced performance, as evidenced by the fact 
that most manufacturers offer otherwise-similar vehicle models that 
feature a range of engine sizes, and thus different levels of power and 
performance. Although some manufacturers offer versions of the same 
vehicle model with a smaller engine in Europe than is sold in the 
United States, their decisions not to market these vehicles 
domestically demonstrates that they do not believe that they can 
produce and sell such vehicles to U.S. buyers in sufficient quantities 
to be profitable at this time. This is presumably because in order to 
sell vehicles that do not meet U.S. buyers' preferences for power and 
performance, manufacturers would be required to discount their prices 
sufficiently to compensate for their lower levels of these attributes.
    While it may be true that a manufacturer could produce lower-
performance versions of its vehicle models at reduced costs compared to 
a higher-performance version of that same model, this does not make 
performance reduction a zero or negative cost compliance option. 
Manufacturers apparently estimate that the reduction in the values of 
lower-performing versions to their potential buyers exceeds their 
savings in manufacturing costs to produce them, since otherwise they 
would already produce and offer lower-performance versions of their 
existing models for sale. The net cost of reducing performance, which 
is measured by the difference between the reduced value of lower-
performance models to buyers and manufacturers' cost savings for 
producing them, represents a cost of employing performance reduction as 
a compliance strategy.
    Both manufacturers and NHTSA experience difficulty in determining 
how much value consumers place on performance, as well as in 
determining whether this value would remain stable over time. While 
NHTSA recognizes that there may be specific situations where 
performance reduction may be a cost-effective compliance strategy for 
certain manufacturers, the agency believes that the net cost of 
reducing performance must generally be comparable to or higher than 
that of technological approaches to fuel economy improvement. Thus the 
outcome of this rulemaking process is not significantly affected by 
omission of performance reduction as an explicit compliance strategy.
    In response to BMW's comment that footprint-based standards may 
discourage manufacturers from offering safety and other features that 
increase vehicle weight, NHTSA notes that increased vehicle weight due 
to safety and other features will make it more difficult for 
manufacturers to comply with any CAFE standard--whether attribute-based 
or uniform--and not just with footprint-based standards. Further, NHTSA 
believes that manufacturers will continue to include features whose 
value to potential buyers exceeds manufacturers' costs for supplying 
them. Those costs will include any outlays for additional fuel economy 
technologies that are necessary to compensate for the fuel economy 
penalties imposed by features that add weight, and thus enable 
manufacturers to comply with higher CAFE standards. NHTSA notes, 
however, that buyers generally appear to value such features highly, as 
evidenced by the prices of car and light truck models on which they are 
featured, as well as by prices that manufacturers generally charge when 
they offer such features as options. Any increase in costs to achieve 
CAFE compliance that BMW or other manufacturers might experience as a 
result of providing these features likely should not, therefore, affect 
significantly the extent to which they are included as standard 
features or offered as optional features and purchased by vehicle 
buyers.
3. The On-Road Fuel Economy `Gap'
    NHTSA explained in the NPRM that actual fuel economy levels 
achieved by passenger cars and light trucks in on-road driving fall 
somewhat short of their levels measured under the laboratory-like test 
conditions that EPA uses to establish its published fuel economy 
ratings. In analyzing the fuel savings from alternative CAFE standards 
for previous light truck rulemakings, NHTSA adjusted the actual fuel 
economy performance of each light truck model downward by 15 percent 
from its rated value to reflect the expected size of this on-road fuel 
economy ``gap.''
    However, in December 2006, EPA adopted changes to its regulations 
on fuel economy labeling which were intended to bring vehicles' rated 
fuel economy levels closer to their actual on-road fuel economy 
levels.\225\ In its Final Rule, EPA estimated that actual on-road fuel 
economy for light-duty vehicles averages 20 percent lower than 
published fuel economy levels. For example, if the overall EPA fuel 
economy rating of a light truck is 20 mpg, the on-road fuel economy 
actually achieved by a typical driver of that vehicle is expected to be 
16 mpg (20 mpg x 0.8). In the NPRM, NHTSA employed EPA's revised 
estimate of this on-road fuel economy gap in its analysis of the fuel 
savings resulting from the proposed and alternative CAFE standards.
---------------------------------------------------------------------------

    \225\ 71 FR 77871 (Dec. 27, 2006).
---------------------------------------------------------------------------

    NHTSA received no explicit comments regarding the on-road fuel 
economy gap. CARB submitted a report by Greene et al. that addressed 
in-use fuel economy, but was completed prior to EPA's changes to its 
labeling regulations, and CARB did not indicate in its comments how 
this report was relevant to the CAFE rulemaking.\226\ The report by 
Sierra Research included by the Alliance did not comment specifically 
on NHTSA's use of EPA's estimate of the on-road fuel economy gap, but 
employed different ``adjustment factors'' ``to translate CAFE to 
customer service fuel economy,'' using a factor of 0.85 to ``adjust[] 
the `composite' CAFE value to what consumers are expected to achieve in 
customer service when the `city' mpg is discounted by 10% and the 
`highway' mpg is discounted by 22%.'' Sierra Research also used a 0.82 
adjustment factor for hybrid vehicles. However, these estimates were 
presented as part of Sierra's analysis with no explanation of how they 
were derived, nor why they differed from EPA's estimate of 20 percent 
(which was available at the time when Sierra developed its 
report).\227\ Moreover, neither Sierra nor the Alliance suggested that 
NHTSA use these numbers instead of EPA's for analyzing fuel savings.
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    \226\ David L. Greene et al., ``Analysis of In-Use Fuel Economy 
Shortfall Based on Voluntarily Reported MPG Estimates,'' 2005. 
Available at Docket No. NHTSA-2008-0089-0173.11.
    \227\ Sierra Research report, at 96-97. Available at Docket No. 
NHTSA-2008-0089-0179.1, Attachment 2.
---------------------------------------------------------------------------

    Because no substantive comments were received on this issue, and 
because no new information on the magnitude of the on-road fuel economy 
gap has come to NHTSA's attention since the NPRM was published, NHTSA 
has continued

[[Page 14314]]

to use the EPA estimate of a 20 percent on-road fuel economy gap for 
purposes of this final rule.
4. Fuel Prices and the Value of Saving Fuel
    NHTSA explained in the NPRM that projected future fuel prices are a 
critical input into the economic analysis of alternative CAFE 
standards, because they determine the value of fuel savings both to new 
vehicle buyers and to society. NHTSA relied on the most recent fuel 
price projections from the U.S. Energy Information Administration's 
(EIA) Annual Energy Outlook (AEO) in analyzing the proposed standards. 
Specifically, the agency used the AEO 2008 Early Release forecasts of 
inflation-adjusted (constant-dollar) retail gasoline and diesel fuel 
prices, which NHTSA stated represent the most up-to-date estimate of 
the most likely course of future prices for petroleum products.\228\ 
Federal government agencies generally use EIA's projections in their 
assessments of future energy-related policies.
---------------------------------------------------------------------------

    \228\ U.S. Department of Energy, Energy Information 
Administration, Annual Energy Outlook 2008, Early Release, Reference 
Case Table 12. Available at http://www.eia.doe.gov/oiaf/aeo/pdf/aeotab_12.pdf (last accessed October 10, 2008). EIA released the 
full AEO 2008 in June 2008, which NHTSA stated in the NPRM it would 
use in the final rule. EIA explained upon releasing the full AEO 
2008 that it had been updated from the Early Release to reflect 
EIA's expectations of the effect of EISA, which was enacted after 
the Early Release was made public. The full AEO 2008 is available at 
http://www.eia.doe.gov/oiaf/aeo/pdf/0383(2008).pdf (last accessed 
October 10, 2008).
---------------------------------------------------------------------------

    The retail fuel price forecasts presented in AEO 2008 span the 
period from 2008 through 2030. Measured in constant 2006 dollars, the 
Reference Case forecast of retail gasoline prices during calendar year 
2020 in the Early Release was $2.36 per gallon, rising gradually to 
$2.51 by the year 2030 (these values include federal, state, and local 
taxes). However, NHTSA explained in the NPRM that valuing fuel savings 
over the 36-year maximum lifetime of light trucks assumed in this 
analysis required fuel price forecasts that extended through 2050, the 
last year during which a significant number of MY 2015 vehicles would 
remain in service.\229\ To obtain fuel price forecasts for the years 
2031 through 2050, NHTSA assumed that retail fuel prices would remain 
constant (in 2006 dollars) from 2031 through 2050.
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    \229\ The agency defines the maximum lifetime of vehicles as the 
highest age at which more than 2 percent of those originally 
produced during a model year remain in service. For recent model 
years, this age has typically been 25 years for passenger cars and 
36 years for light trucks.
---------------------------------------------------------------------------

    NHTSA stated that the value to buyers of passenger cars and light 
trucks of fuel savings resulting from improved fuel economy is 
determined by the retail price of fuel, which includes federal, state, 
and any local taxes imposed on fuel sales. Total taxes on gasoline 
averaged $0.47 per gallon during 2006, while those levied on diesel 
averaged $0.53. These figures include federal taxes plus the sales-
weighted average of state fuel taxes. Because fuel taxes represent 
transfers of resources from fuel buyers to government agencies, 
however, rather than real resources that are consumed in the process of 
supplying or using fuel, NHTSA explained that their value must be 
deducted from retail fuel prices to determine the value of fuel savings 
resulting from more stringent CAFE standards to the U.S. economy.
    In estimating the economy-wide or ``social'' value of fuel savings 
due to increasing CAFE levels, NHTSA assumed that current fuel taxes 
would remain constant in real or inflation-adjusted terms over the 
lifetimes of the vehicles being regulated. In effect, this assumed that 
the average value per gallon of taxes on gasoline and diesel fuel 
levied by all levels of government would rise at the rate of inflation 
over that period. This value was deducted from each future year's 
forecast of retail gasoline and diesel prices reported in the AEO 2008 
Early Release to determine the social value of each gallon of fuel 
saved during that year as a result of improved fuel economy. 
Subtracting fuel taxes resulted in a projected value for saving 
gasoline of $1.83 per gallon during 2020, rising to $2.02 per gallon by 
the year 2030.
    In conducting the preliminary uncertainty analysis of benefits and 
costs from alternative CAFE standards, as required by OMB, NHTSA also 
considered higher and lower forecasts of future fuel prices. The 
results of the sensitivity runs were made available in the PRIA. EIA 
includes a ``High Price Case'' and a ``Low Price Case'' in each annual 
edition of its AEO, which reflect uncertainties regarding future 
conditions in the world petroleum market and the U.S. fuel refining and 
distribution system. However, EIA does not attach specific 
probabilities to either its Reference Case forecast or these 
alternative cases; instead, the High Price and Low Price cases are 
intended to illustrate the range of uncertainty that exists.\230\
---------------------------------------------------------------------------

    \230\ In AEO 2008, EIA explains the High Price Case as follows:
    The high price case assumes that non-OPEC conventional oil 
resources are less plentiful, and the overall costs of extraction 
are higher, than assumed in the reference case. The high price case 
also assumes that OPEC will choose to allow a decline in its market 
share to 38 percent of total world liquids production.
    EIA also explains the Low Price Case as follows:
    The low price case assumes that non-OPEC conventional oil 
resources are more plentiful, and the overall costs of extraction 
are lower, than in the reference case, and that OPEC will choose to 
increase its market share to 45 percent.
    AEO 2008, at 51. As the reader can see, there is nothing 
probabilistic about either the Low or High Price Case vis-[agrave]-
vis the Reference Case.
---------------------------------------------------------------------------

    The AEO 2008 Early Release included only a Reference Case forecast 
of fuel prices and did not include the High and Low Price Cases, so 
NHTSA estimated high and low fuel prices corresponding to the AEO 2008 
Reference Case forecast by assuming that high and low price forecasts 
would bear the same relationship to the Reference Case forecast as the 
High and Low Price cases in AEO 2007.\231\ These alternative scenarios 
projected retail gasoline prices that range from a low of $1.94 per 
gallon to a high of $3.26 per gallon during 2020, and from $2.03 to 
$3.70 per gallon during 2030. In conjunction with NHTSA's assumption 
that fuel taxes would remain constant in real or inflation-adjusted 
terms over this period, these forecasts implied social values of fuel 
savings ranging from $1.47 to $2.79 per gallon during 2020, and from 
$1.56 to $3.23 per gallon in 2030.
---------------------------------------------------------------------------

    \231\ EIA, Annual Energy Outlook 2007, High Price Case, Table 
12, available at http://www.eia.doe.gov/oiaf/aeo/pdf/aeohptab_12.pdf (last accessed October 10, 2008); and Annual Energy Outlook 
2007, Low Price Case, Table 12, available at http://www.eia.doe.gov/oiaf/aeo/pdf/aeolptab_12.pdf (last accessed October 10, 2008).
---------------------------------------------------------------------------

    NHTSA explained that EIA is widely recognized as an impartial and 
authoritative source of analysis and forecasts of U.S. energy 
production, consumption, and prices. EIA has published annual forecasts 
of energy prices and consumption levels for the U.S. economy since 1982 
in its Annual Energy Outlooks. These forecasts have been widely relied 
upon by federal agencies for use in regulatory analysis and for other 
purposes. Since 1994, EIA's annual forecasts have been based upon that 
agency's National Energy Modeling System (NEMS), which includes 
detailed representation of supply pathways, sources of demand, and 
their interaction to determine prices for different forms of energy.
    From 1982 through 1993, EIA's forecasts of world oil prices--the 
primary determinant of prices for gasoline, diesel, and other 
transportation fuels derived from petroleum--consistently overestimated 
actual prices during future years, often very significantly. Of the 
total of 119 forecasts of future world oil prices for

[[Page 14315]]

the years 1985 through 2005 that EIA reported in its 1982-1993 editions 
of the AEO, 109 overestimated the subsequent actual values for those 
years, on average exceeding their corresponding actual values by 75 
percent.
    Since that time, however, EIA's forecasts of future world oil 
prices show a more mixed record for accuracy. The 1994-2005 editions of 
the AEO reported 91 separate forecasts of world oil prices for the 
years 1995-2005, of which 33 subsequently proved too high, while the 
remaining 58 underestimated actual prices. The average absolute (i.e., 
regardless of its direction) error of these forecasts has been 21 
percent, but over- and underestimates have tended to offset one 
another, so that on average EIA's more recent forecasts have 
underestimated actual world oil prices by 7 percent. Although both its 
overestimates and underestimates of future world oil prices for recent 
years have often been large, the most recent editions of the AEO have 
significantly underestimated petroleum prices during those years for 
which actual prices are now available.
    However, NHTSA explained that it did not regard EIA's recent 
tendency to underestimate future prices for petroleum and refined 
products or the high level of current fuel prices as adequate 
justification to employ forecasts that differed from the Reference Case 
forecast presented in the Revised Early Release. NHTSA stated that this 
was particularly the case because this forecast was revised upward 
significantly since the initial release of AEO 2008, which in turn 
represented a major upward revision from EIA's fuel price forecast 
reported in AEO 2007. NHTSA also noted that retail gasoline prices 
across the U.S. had averaged $2.94 per gallon (expressed in 2005 
dollars) for the first three months of 2008, slightly below EIA's 
revised forecast that gasoline prices will average $2.98 per gallon 
(also in 2005 dollars) throughout 2008.
    NHTSA also considered that comparing different forecasts of world 
oil prices showed that the Reference Case forecast in AEO 2007 was 
actually the highest of all six publicly-available forecasts of world 
oil prices over the 2010-2030 time period.\232\ NHTSA stated that 
because world petroleum prices are the primary determinant of retail 
prices for refined petroleum products such as transportation fuels, 
this suggested that the Reference Case forecast of U.S. fuel prices 
reported in AEO 2007 was likely to be the highest of those projected by 
major forecasting services. Further, as indicated above, EIA's most 
recent fuel price forecasts had been revised significantly upward from 
those projected in AEO 2007.
---------------------------------------------------------------------------

    \232\ See http://www.eia.doe.gov/oiaf/archive/aeo07/pdf/forecast.pdf, Table 19, at 106.
---------------------------------------------------------------------------

    NHTSA received several thousand comments regarding its fuel price 
assumptions, mostly from individuals stating that current pump prices 
were much higher than EIA's Reference Case forecasts for future prices, 
and arguing that NHTSA should use higher fuel price assumptions for 
setting more stringent standards in the final rule. Summaries of the 
comments are presented below, grouped according to the following 
categories: (1) Fuel prices have the largest effect on CAFE stringency 
of any of NHTSA's economic assumptions; (2) EIA's Reference Case is too 
low compared to current gas prices; (3) current gas prices reflect a 
fundamental change in market conditions that will affect future prices; 
(4) why NHTSA is incorrect in its representation of the Reference Case 
as the ``most likely course'' of future oil prices; (5) NHTSA's 
sensitivity analysis in the PRIA indicates that higher fuel price 
assumptions will lead to more stringent standards; (6) EIA's tendency 
to underestimate in its fuel price forecasts; (7) EIA's recent changes 
to its Short-Term Energy Outlook; (8) recent public statements on 
NHTSA's fuel price assumptions; (9) comments in favor of or neutral 
with regard to NHTSA's use of the Reference Case for its fuel price 
assumptions; (10) what fuel price assumptions NHTSA should use in 
setting the standards in the final rule; and (11) whether NHTSA should 
hold public hearings regarding its fuel price assumptions.
(1) Fuel Prices Have the Largest Effect on CAFE Stringency of any of 
NHTSA's Economic Assumptions
    Several commenters addressed the impact that fuel price assumptions 
have on NHTSA's analysis of the appropriate stringency of CAFE 
standards. The Members of Congress\233\ stated that fuel prices have 
the largest effect of ``all the factors that could be considered on how 
high standards could be raised,'' and that therefore ``NHTSA's reliance 
on these highly unrealistic projections have the effect of artificially 
lowering the calculated `maximum feasible' fuel economy standards that 
NHTSA is directed by law to promulgate.'' CFA commented that the 
underestimation of fuel prices affected every part of NHTSA's analysis, 
while CBD stated that ``The use of an inappropriate gasoline price 
projection greatly skews the results,'' and argued that ``NHTSA has 
failed to analyze a gas price that even approaches today's prices, even 
in the sensitivity analysis.'' EDF argued that because 
``Underestimating future gasoline prices would lead NHTSA to undervalue 
the benefits to the U.S. and consumers from stronger fuel economy 
standards and set inefficiently low standards,'' NHTSA should ``perform 
extensive sensitivity analyses using higher gas price assumptions, 
including but not limited to the EIA `high price' projections.''
---------------------------------------------------------------------------

    \233\ Representative Markey authored this comment, which was 
signed by himself and 44 other Members of Congress. In this section, 
when the term ``Members of Congress'' is used, this is the comment 
to which the agency refers. Besides the comments received from 
several Representatives and Senators regarding the fuel prices 
employed in NHTSA's analysis for the NPRM, Representative Markey and 
Senator Cantwell additionally submitted bills in the House and 
Senate to require NHTSA to use fuel prices at least as high as EIA's 
High Price Case in setting CAFE standards. Representative Markey 
introduced H.R. 6643 on July 29, 2008, and Senator Cantwell 
introduced S. 3403 on July 31, 2008.
---------------------------------------------------------------------------

(2) EIA's Reference Case Is Too Low Compared to Current Gas Prices
    Many commenters, including CBD, EDF, NRDC, Sierra Club et al., UCS, 
CFA, the Attorneys General, NACAA, NESCAUM, the mayor of the City of 
Key West, 45 Members of Congress, and several thousand individual 
commenters, stated that NHTSA's fuel price assumptions based on EIA's 
Reference Case were unreasonably low given current gasoline prices. 
CBD, for example, commented that NHTSA's use of the Reference Case fuel 
price estimates was ``impossible to justify'' given current fuel prices 
and the fact that ``there is every indication that the price of oil 
will continue to increase over the short term.'' UCS argued that 
although NHTSA ``point[ed] to recent increased fuel prices in AEO 2008 
to justify use of AEO Reference Case data,'' the Reference Case 
projection ``still falls well below current gasoline prices.'' The 
Attorneys General commented that EIA's Reference Case forecast 
indicated future fuel prices much lower than current pump prices, and 
argued that ``Unless NHTSA can provide publicly-available, mainstream 
documentation supporting an almost fifty percent drop from current 
prices, it must substantially re-calibrate those estimates.'' CFA and 
the Attorneys General further argued that even EIA's High Price Case 
was too low given current gasoline prices.
    UCS also submitted nearly 7,000 form letters from individual 
citizens, which generally stated that gas prices in their home areas 
are currently significantly higher than NHTSA's fuel price assumptions 
for the proposed standards.

[[Page 14316]]

The individual citizens commented that NHTSA should ``correct'' its 
fuel price assumptions for the final rule, so as not to ``allow 
automakers to shave three to four miles per gallon off of their CAFE 
requirements,'' and so as to achieve ``a fleet average of approximately 
40 miles per gallon by 2020,'' which the letters stated ``is both 
feasible and cost effective using technology already available.'' 
Sierra Club submitted over 3,000 form letters from individual citizens 
commenting similarly that NHTSA must use ``realistic'' fuel prices for 
setting the standards in the final rule, given pump prices at that time 
of approximately $4 per gallon.
(3) Current Gas Prices Reflect a Fundamental Change in Market 
Conditions That Will Affect Future Prices
    A number of commenters argued that changed oil market conditions 
both make EIA's Reference Case out-of-date and will continue to impact 
future fuel prices. Public Citizen stated that ``Gas prices have been 
rising steadily since 2004,'' but that ``the price increases in the 
last six to 12 months have been especially dramatic, rising by over a 
third in the past six months, and by nearly 170 percent in five 
years.'' NESCAUM commented that current fuel prices are due principally 
to ``high global demand in a supply constricted market.'' NESCAUM 
further argued that ``There is little expectation that the gap between 
supply and demand will be narrowed in the foreseeable future,'' so 
``the price of gasoline should remain * * * well above the mid-$2.00 
range.'' CFA argued that ``geopolitical factors'' are responsible for 
gasoline prices setting ``record after record,'' and stated that the 
proposed standards ``do not reflect the fundamental reality of this 
crisis'' because NHTSA's ``analysis [is not based] on a value of 
gasoline savings that is consistent with the real world.'' ACEEE argued 
that the ``adherence [to the Reference Case forecast] is not justified, 
given recent changes in the oil market.'' However, ACEEE also argued 
that the High Price Case does not ``necessarily capture fully current 
understanding of how high fuel prices are likely to be in the coming 
decades.''
    CARB stated that NHTSA's use of EIA's Reference Case ``border[s] on 
the absurd given recent fuel price hikes, [and] recent assessments that 
the price hikes are structural.'' CARB cited and attached to its 
comments an ``Economic Letter'' by the Federal Reserve Bank of Dallas 
from May 2008, which stated that factors such as changes in global oil 
supply and demand, the weakening of the dollar, and the fact that much 
global oil production takes place in ``politically unstable regions * * 
* suggest the days of relatively cheap oil are over and the global 
economy faces a future of high energy prices.''
    NRDC stated that other analysts such as Goldman Sachs and Citigroup 
predict higher gasoline prices at least through 2011, due to lack of 
``spare capacity'' in either OPEC or non-OPEC supply. NRDC also cited 
EIA's June 25, 2008 International Energy Outlook (IEO), which has a 
similar reference case to AEO 2008, and which NRDC quoted as stating 
that given ``current market conditions, it appears that world oil 
prices are on a path that more closely resembles the projection in the 
high price case than in the reference case.'' \234\
---------------------------------------------------------------------------

    \234\ Energy Information Administration (2008) International 
Energy Outlook 2008: Complete Highlights. June 25.
---------------------------------------------------------------------------

(4) Why NHTSA Is Incorrect in Its Representation of the Reference Case 
as the ``Most Likely Course'' of Future Oil Prices
    UCS stated that NHTSA was incorrect to assume that EIA's Reference 
Case ``represent[s] the EIA's most up-to-date estimate of the most 
likely course of future prices for petroleum products,'' arguing that 
EIA itself does not refer to the Reference Case projection as the 
``most likely course,'' but states that the Reference Case merely 
``assumes that current policies affecting the energy sector remain 
unchanged throughout the projection period.''
(5) NHTSA's Sensitivity Analysis in the PRIA Indicates That Higher Fuel 
Price Assumptions Will Lead to More Stringent Standards
    A number of commenters, including NACAA, Public Citizen, UCS, 
Sierra Club et al. and ACEEE, cited NHTSA's sensitivity analysis using 
the EIA High Price case as evidence that, as the Members of Congress 
stated, ``demonstrates that the technology is available to cost-
effectively achieve a much higher fleet wide fuel economy of nearly 35 
mpg in 2015.'' CFA also stated that the High Price Case, which NHTSA 
ran as a sensitivity analysis using approximately $3.40 per gallon in 
2008 dollars for 2015, was a ``more realistic fuel price scenario, one 
that is not terribly high.''
(6) EIA's Tendency to Underestimate in Its Fuel Price Forecasts
    Several commenters, including UCS, CFA, NRDC, CARB, and the 
Attorneys General argued that EIA estimates were unreliable because EIA 
had underestimated in recent years. CARB cited NHTSA's statement on 
page 24406 of the NPRM (73 FR 24406, May 2, 2008) noting ``EIA's own 
recent tendency to underestimate,'' as CARB put it, as indication that 
NHTSA's use of EIA's Reference Case ``border[s] on the absurd.'' CFA 
argued that ``EIA's projections of gasoline prices have been 
consistently low and NHTSA was not obligated to use those 
projections.'' NRDC analyzed EIA's forecasting accuracy in greater 
detail, concluding that ``The past five versions of the AEO have all 
underestimated actual gasoline prices,'' in both the Reference and High 
Case scenarios, and providing a table comparing EIA Reference and High 
Case projections from one year prior to the actual average recorded 
price in 2003-2008, which showed actual prices as consistently higher 
than EIA projections.
(7) EIA's Recent Changes to Its Short-Term Energy Outlook
    Several commenters stated that recent EIA upward revisions to its 
Short-Term Energy Outlook fuel price forecasts indicate that the 
longer-term Reference Case forecasts are also in need of upward 
revision. CARB, for example, argued that recent EIA upward revisions to 
its short-term fuel price forecasts provide further evidence that ``the 
assumptions underlying the EIA long-term gasoline projections have 
significantly changed since EIA last made those long-term 
projections.'' CFA similarly argued that EIA needed to adjust its long-
term projections upward given recent increases in short-term 
projections, and stated that extrapolating EIA's short-term projections 
linearly results in a gasoline price in 2015 of $5.50 per gallon in 
2008 dollars, which might not itself be reliable for purposes of 
setting CAFE standards, but is high enough to indicate that ``EIA's 
high price scenario seems much more appropriate as the basis for 
NHTSA's economic analysis.'' NRDC and the Attorneys General made 
similar arguments. The Attorneys General suggested that consequently, 
NHTSA should attempt to ``obtain from EIA a truly current projection 
for gasoline prices over the relevant period'' for use in the final 
rule.
(8) Recent Public Statements on NHTSA's Fuel Price Assumptions
    Several commenters, including the Members of Congress, Public 
Citizen, UCS, NRDC, Sierra Club et al., and the Attorneys General cited 
testimony by EIA Administrator Guy Caruso on June 11, 2008, before the 
House Select Committee on Energy Independence and

[[Page 14317]]

Global Warming, as evidence that, as the Attorneys General argued, 
``Even EIA agrees that NHTSA should have not used its reference case 
for the analysis in this rulemaking, but instead should have used EIA's 
high price case.'' Administrator Caruso testified, in response to a 
question regarding whether NHTSA should use EIA's High Price Case 
scenario to set CAFE standards, that ``We're on the higher price path 
right now. If you were to ask me today what I would use, I would use 
the higher price.'' \235\
---------------------------------------------------------------------------

    \235\ UCS stated that this quote was taken from ``Global Warming 
Hearing on the Future of Oil,'' June 11, 2008, which it stated was 
available online at http://speaker.house.gov/blog.
---------------------------------------------------------------------------

    The Members of Congress and Sierra Club et al., also cited then-DOT 
Secretary Peters' May 17, 2008 statement that ``As we look toward the 
finalization of the rule and look again what the average fuel costs are 
then, I think we're going to make more progress on the miles per gallon 
at a lower overall cost.'' \236\ The commenters argued that this 
statement indicated an expectation that fuel prices used in the final 
rule would be higher than those used in the NPRM.
---------------------------------------------------------------------------

    \236\ Sierra Club cited David Shepardson, ``Gas prices may spur 
revision of mpg plan,'' Detroit News Washington, Saturday, May 17, 
2008, for this quote from Secretary Peters.
---------------------------------------------------------------------------

(9) Comments in Favor of or Neutral With Regard to NHTSA's Use of the 
Reference Case for Its Fuel Price Assumptions
    NADA was the only commenter arguing directly in favor of NHTSA 
continuing ``to rely on the most recent reference case fuel price 
projections of the U.S. Energy Information Administration's (EIA).'' 
NADA recognized that EIA has over- and under-estimated fuel prices in 
the past, but argued that ``Despite the inherent volatility or 
uncertainty of fuel prices, EIA and NHTSA would be remiss if they were 
to arbitrarily abandon the best models and data available or to use 
`high' or `low' price case projections that are inherently not 
probabilistic.'' NADA further commented that ``the use of a high price 
case to justify unduly costly CAFE standards could lead to decreased 
new motor vehicle sales and a commensurate lower than projected rate of 
fuel energy savings and greenhouse gas reduction benefits.''
    The Alliance did not argue that NHTSA should use any particular 
fuel price in its economic assumptions, but commented that NHTSA should 
not conclude that ``recent increases in gasoline prices nationwide'' 
would justify more stringent CAFE standards. The Alliance cited the 
Sierra Research and NERA reports, which it said performed sensitivity 
analyses using all of EIA's price scenarios (Low, Reference, and High), 
and ``did not find that use of the `high' case significantly altered 
its conclusions about the feasibility of imposing much higher costs on 
manufacturers.'' Given that Sierra and NERA both concluded that the 
proposed standards were already too stringent, this result is hardly 
surprising.
(10) What Fuel Price Assumptions NHTSA Should Use in Setting the 
Standards in the Final Rule
    Many commenters, including UCS, CARB, ACEEE, Sierra Club et al., 
the Attorneys General, and the Members of Congress stated that NHTSA 
should set standards in the final rule using fuel price assumptions 
equivalent to at least EIA's High Price Case. Wisconsin DNR suggested 
that NHTSA use the ``high price fuel scenario'' in EIA's International 
Energy Outlook (2008) for a ``suitable higher estimate from a 
recognized federal agency.'' \237\
---------------------------------------------------------------------------

    \237\ Wisconsin DNR cited the source of the ``high price fuel 
scenario'' as ``DOE-EIA Report 0484 (2008),'' which is 
EIA's International Energy Outlook (IEO) for 2008. NHTSA assumes 
that the commenter intended to cite this source, and not AEO 2008. 
However, EIA describes the forecasts of world oil prices--a primary 
determinant of U.S. fuel prices--reported in IEO 2008 as ``* * * 
consistent with those in the Annual Energy Outlook 2008,'' and cites 
AEO2008 as the source for those oil price projections. See U.S. 
Energy Information Administration, International Energy Outlook 
2008, Chapter 2, ``Liquid Fuels,'' Figure 30 and accompanying text. 
Available at http://www.eia.doe.gov/oiaf/ieo/liquid_fuels.html 
(last accessed October 4, 2008).
---------------------------------------------------------------------------

    Several commenters calling for ``at least'' the High Price Case 
also suggested other preferred alternatives. CARB suggested that NHTSA 
delay the final rule until ``recent volatility has stabilized and EIA 
can provide its final 2008 estimates in February 2009.'' The Attorneys 
General suggested NHTSA obtain ``relevant, up-to-date data directly'' 
from EIA ``specifically for the docket in this rulemaking,'' or ``wait 
for EIA's public, final 2008 estimates, which are scheduled to be 
released in December.'' ACEEE commented that NHTSA should ``Work with 
EIA to produce an up-to-date fuel price projection for purposes of the 
final rule. * * *'' Sierra Club et al., stated that NHTSA should also 
``examine other fuel price estimates, such as the oil futures market 
price predictions which project prices for a barrel of oil through 
2016.''
    Other commenters suggested that NHTSA develop estimates based on 
current pump-price equivalents for its fuel price assumptions. Public 
Citizen commented that NHTSA should ``base its final rulemaking on a 
more realistic estimate of future fuel price based on the high estimate 
and an at-the-pump price that pushes the standard in the direction of 
real-world gas prices.'' NESCAUM urged NHTSA ``to reevaluate the effect 
of a wider range of gasoline prices to the $4.00 per gallon level and 
above,'' stating that it would raise standards. EDF stated that NHTSA 
must set standards that ``reflect real world gas prices.'' CBD stated 
that ``Today's gas price must form the starting point for the analysis, 
and calculations must be performed that consider the overwhelmingly 
likely scenario that gas prices will be significantly higher than the 
projections used in the NPRM.'' NRDC stated that because both the 
Reference and High Case scenarios are too low, ``NHTSA should develop a 
plausible and realistic projection of future oil prices for use in 
determining maximum feasible fuel economy levels.''
(11) Whether NHTSA Should Hold Public Hearings Regarding Its Fuel Price 
Assumptions
    Several commenters called for NHTSA to hold hearings regarding the 
appropriate stringency of CAFE standards, specifically in light of fuel 
prices. CFA, in requesting hearings, commented that EIA's Reference 
Case resulted in fuel prices that are too low, and ``have consistently 
been used [in recent CAFE rulemakings] to undercut the use of existing 
technology to meet the statutory goals. CFA stated that ``The use of 
more realistic fuel prices make more technology cost-justified and will 
result in higher standards.'' Environment America, National Wildlife 
Federation, NRDC, Pew Environment Group, Sierra Club, and UCS also 
submitted a joint comment requesting public hearings and citing NHTSA's 
fuel price assumptions. Like CFA, the commenters stated that using the 
EIA Reference Case ``vastly undercuts the potential for higher fuel 
economy'' and that ``If NHTSA used more realistic gas prices, we could 
be on a path to achieving higher fuel economy that is both 
technologically achievable and cost effective.''
    Agency response: NHTSA has carefully considered available evidence, 
recent trends in petroleum and fuel prices, and the comments it 
received on the NPRM analysis. After doing so, NHTSA has decided to use 
EIA's High Price Case forecast in its final rule analysis and to 
determine the MY 2011 CAFE standards. As NHTSA recognized in the NPRM, 
commenters are correct that projected future fuel prices have the

[[Page 14318]]

largest effect of all the economic assumptions that NHTSA employs in 
determining benefits both to new vehicle buyers and to society, and 
thus on CAFE stringency. This is why it is vital that NHTSA base its 
fuel price assumptions on what it believes to be the most accurate 
forecast available that covers the expected lifetimes of MY 2011 
passenger cars and light trucks, which can extend up to 25-35 years 
from the date they are produced. The long time horizon of NHTSA's 
analysis also makes it critical that the agency not rely excessively on 
current price levels as an indicator of the prices that are likely to 
prevail over an extended future period. Instead, NHTSA relies largely 
on EIA's professional expertise and extensive experience in developing 
forecasts of future trends in energy prices, as do most other federal 
agencies.
    In addition, NHTSA notes that several manufacturers employed fuel 
prices consistent with or exceeding the AEO 2008 High Price Case for 
the time period covered by the rulemaking in their revised product plan 
estimates of fuel economy and sales for individual models. If the 
agency employs fuel price forecasts that differ from those used by 
manufacturers, it may incorrectly attribute the fuel savings resulting 
from increased market demand for fuel economy to higher CAFE standards, 
or conversely, underestimate the fuel savings resulting from increased 
standards by attributing too much of the increase in fuel economy to 
higher market demand. Given manufacturers' assumptions about fuel 
prices, the agency's estimates of fuel savings and economic benefits 
resulting from the standards adopted in this final rule are 
conservative, because they are likely to underestimate fuel savings 
attributable to the increase in fuel economy above its market-
determined level that CAFE standards will require.
    Although some commenters suggested that NHTSA develop its own fuel 
price forecasts based on then-current pump prices, NHTSA does not 
believe that it has the independent capability to provide a more 
reliable prediction of future fuel prices, or that it would have the 
credibility of EIA's forecasts. If NHTSA had assumed that that fuel 
prices would remain at their mid-2008 peak levels throughout the 
lifetimes of MY 2011 cars and light trucks, the agency would have 
overvalued the benefits attributed to fuel savings, and thus likely 
have established excessively stringent MY 2011 standards. While 
petroleum prices were rising at the time the NPRM was published, 
eventually reaching nearly $140 per barrel, since then global average 
prices for crude oil have declined to levels as low as $35 per 
barrel.\238\ The recent extreme volatility in petroleum and fuel prices 
illustrates the danger in relying on current prices as an indicator of 
their likely future levels, and gives NHTSA greater confidence in 
relying on EIA's forecasts of future movements in fuel prices in 
response to changes in demand and supply conditions in the marketplace.
---------------------------------------------------------------------------

    \238\ Energy Information Administration, World Crude Oil Prices, 
data for week ended 1/2/2009, available at http://tonto.eia.doe.gov/dnav/pet/pet_pri_wco_k_w.htm (last accessed February 12, 2009).
---------------------------------------------------------------------------

    While NHTSA also agrees with the commenters that the sensitivity 
analysis demonstrates that higher CAFE standards could be established 
if higher fuel price assumptions were employed, the agency cannot 
simply choose to employ higher fuel price assumptions because it wishes 
to raise CAFE levels. Doing so would be inconsistent with the agency's 
approach of using what it concludes is the most reliable estimate of 
the benefits from conserving fuel when establishing fuel economy 
standards. NHTSA recognizes that predicting future oil prices is 
difficult, particularly during periods when world economic conditions 
are as volatile as they are today. Nevertheless, NHTSA continues to 
believe that EIA's fuel price forecasts as reported in its AEO 
represent the most reliable estimates of future fuel prices, and thus 
of the benefits from reducing fuel consumption through higher CAFE 
standards. While NHTSA recognizes that other forecasts exist, the 
agency believes the EIA forecasts are preferable for its purposes, 
since they are the product of an impartial government agency with 
considerable and long-standing expertise in this field. Any simple 
extrapolation of current or recent retail fuel prices, which commenters 
recognize have shown extreme volatility in recent months, is likely to 
provide a considerably less reliable forecast of future prices than the 
current AEO. Each time EIA issues a new AEO, it considers recent and 
likely future developments in the world oil market, the effect of the 
current geopolitical situation on oil supply and prices, and conditions 
in the domestic fuel supply industry that affect pump prices.\239\
---------------------------------------------------------------------------

    \239\ AEO 2008 states as follows with regard to factors which 
EIA accounts for in developing the Reference Case:
    As noted in AEO2007, energy markets are changing in response to 
readily observable factors, which include, among others: Higher 
energy prices; the growing influence of developing countries on 
worldwide energy requirements; recently enacted legislation and 
regulations in the United States; changing public perceptions on 
issues related to emissions of air pollutants and greenhouse gases 
and the use of alternative fuels; and the economic viability of 
various energy technologies.
---------------------------------------------------------------------------

    For example, the Overview section to AEO 2008 states that because 
EISA was passed between the Early Release and the time of publication 
for AEO 2008, EIA updated the Reference Case to reflect the impact it 
expected EISA to have on fuel prices. EIA also updated its projections 
for the AEO 2008 Reference Case ``to better reflect trends that are 
expected to persist in the economy and in energy markets,'' including a 
lower projection for U.S. economic growth (a key determinant of U.S. 
energy demand), higher price projections for crude oil and refined 
petroleum products, slower projected growth in energy demand, higher 
forecasts of domestic oil production (particularly in the near term), 
and slower projected growth in U.S. oil imports.\240\ Thus NHTSA is 
confident that EIA is aware of and has accounted reasonably for current 
political and economic conditions that are likely to affect future 
trends in fuel supply, demand, and retail prices.
---------------------------------------------------------------------------

    \240\ AEO 2008 Overview, at  http://www.eia.doe.gov/oiaf/aeo/overview.html (last accessed October 10, 2008).
---------------------------------------------------------------------------

    Although a majority of commenters asserted that EIA's Reference 
Case forecast is likely to underestimate future fuel prices 
significantly, and that NHTSA's reliance on the Reference Case resulted 
in insufficiently stringent proposed CAFE standards, they did so in an 
environment when retail fuel prices were at or above $4.00 per gallon. 
Many commenters stated that at a minimum, NHTSA should use EIA's High 
Price Case as the source for its fuel price forecasts, primarily 
because those appeared to be more consistent with then-current fuel 
prices. As one illustration, NRDC cited EIA's own International Energy 
Outlook 2008, published the same month as the AEO 2008, which stated 
that given ``* * * current market conditions, it appears that world oil 
prices are on a path that more closely resembles the projection in the 
high price case than in the reference case.'' \241\ Commenters also 
cited EIA Administrator Caruso's June 2008 statement that ``We're on 
the higher price path right now. If you were to ask me today what I 
would use, I would use the higher price.'' NHTSA also notes that 
several manufacturers in their confidential product plan submissions 
indicated that they had based their product plans on gas price 
estimates

[[Page 14319]]

that were either between EIA's Reference and High Price Cases, or above 
even the High Price Case.
---------------------------------------------------------------------------

    \241\ Energy Information Administration (2008) International 
Energy Outlook 2008: Complete Highlights. June 25.
---------------------------------------------------------------------------

    The AEO High Price Case is best understood in the context of its 
relationship to the Reference Case. EIA described the Reference Case as 
follows in AEO 2008:

    The reference case represents EIA's current judgment regarding 
exploration and development costs and accessibility of oil resources 
in non-OPEC countries. It also assumes that OPEC producers will 
choose to maintain their share of the market and will schedule 
investments in incremental production capacity so that OPEC's 
conventional oil production will represent about 40 percent of the 
world's total liquids production.\242\
---------------------------------------------------------------------------

    \242\ AEO 2008, at 199. Available at http://www.eia.doe.gov/oiaf/aeo/pdf/0383(2008).pdf (last accessed October 10, 2008).

---------------------------------------------------------------------------
In contrast, EIA describes its Low Price case in the following terms:

    The low price case assumes that OPEC countries will increase 
their conventional oil production to obtain approximately a 44-
percent share of total world liquids production, and that 
conventional oil resources in non-OPEC countries will be more 
accessible and/or less costly to produce (as a result of technology 
advances, more attractive fiscal regimes, or both) than in the 
reference case. With these assumptions, non-OPEC conventional oil 
production is higher in the low price case than in the reference 
case.\243\
---------------------------------------------------------------------------

    \243\ Id.

---------------------------------------------------------------------------
Finally, EIA describes its High Price case as follows:

    The high price case assumes that OPEC countries will continue to 
hold their production at approximately the current rate, sacrificing 
market share as global liquids production increases. It also assumes 
that oil resources in non-OPEC countries will be less accessible 
and/or more costly to produce than assumed in the reference 
case.\244\
---------------------------------------------------------------------------

    \244\ Id.

    As these descriptions emphasize, EIA's Low and High Price Cases are 
based on specific assumptions about the possible behavior of oil-
producing countries and future developments affecting global demand for 
petroleum energy, and how these might differ from the behavior assumed 
in constructing its Reference Case. However, this distinction does not 
necessarily imply that EIA expects either its Low Price or High Price 
Case forecast to be more accurate than its Reference Case forecast, 
since EIA offers no assessment of which set of assumptions underlying 
its Low Price, Reference, and High Price cases it believes is most 
reliable.
    EIA did recognize that world oil prices at the time the final 
version of AEO 2008 were above even those forecast in its High Price 
Case. However, it attributed this situation to short-term developments, 
most or all of which were likely to prove transitory, as evidenced by 
its statement in the Overview to AEO 2008:

    As a result of recent strong economic growth worldwide, 
transitory shortages of experienced personnel, equipment, and 
construction materials in the oil industry, and political 
instability in some major producing regions, oil prices currently 
are above EIA's estimate of the long-run equilibrium price.\245\
---------------------------------------------------------------------------

    \245\ Id., at 5.

This observation is consistent with EIA's statement in IEO 2008 that 
current market conditions appeared to place world oil prices on a path 
closer to the High Price Case than the Reference Case. While EIA 
clearly expects prices to remain high in the near term, this does not 
necessarily imply that it expects its High Price Case forecast to be 
more reliable over the extended time horizon spanned by AEO 2008.
    NHTSA has seriously considered the comments it received on the fuel 
price forecasts used in the NPRM analysis, and paid close attention to 
recent developments in the world oil market and in U.S. retail fuel 
prices. The agency has also reviewed forecasts of world oil prices and 
U.S. fuel prices available from sources other than EIA, as well as the 
views expressed by petroleum market experts, professional publications, 
and press reports.\246\ The agency notes that although both the views 
of experts and projections of petroleum prices differ widely, the 
emerging consensus appears to be that world petroleum and U.S. retail 
fuel prices are likely to remain at levels that are more consistent 
with those forecast in the AEO 2008 High Price Case than with the 
Reference Case forecasts over the foreseeable future.\247\
---------------------------------------------------------------------------

    \246\ These include EIA, Short-Term Energy Outlook, various 
issues, available at http://www.eia.doe.gov/emeu/steo/pub/contents.html (last accessed November 13, 2008); International 
Energy Agency, World Energy Outlook 2008, summary available at 
http://www.iea.org/Textbase/npsum/WEO2008SUM.pdf (last accessed 
November 13, 2008); AJM Petroleum Consultants, The AJM Price 
Forecast, available at http://www.ajmpetroleumconsultants.com/index.php?page=price-forecast (last accessed Novemebr 13, 2008); 
PetroStrategies, Inc, Survey of Oil Price Forecasts, available at 
http://www.petrostrategies.org/Graphs/Oil_Price_Forecasts.htm 
(last accessed November 13, 2008); International Monetary Fund, 
World Economic Outlook, October 2008, Chapter 3: Is Inflation Back? 
Commodity Prices and Inflation, available at http://www.imf.org/external/pubs/ft/weo/2008/02/pdf/c3.pdf (last accessed November 13, 
2008); and Federal Reserve Bank of Dallas Economic Letter, Volume 3, 
No. 5, May 2008, available at http://www.dallasfed.org/research/eclett/2008/el0805.html (last accessed November 13, 2008).
    \247\ In the AEO High Price Case, prices for imported petroleum 
are projected to average about $75 per barrel over the next 10 
years, while U.S. retail gasoline prices are forecast to average 
$2.90 per gallon over that same period; see AEO 2008, High Price 
Case Table 12, available at http://www.eia.doe.gov/oiaf/aeo/excel/aeohptab_12.xls (last accessed October 19, 2008).
---------------------------------------------------------------------------

    Over the period from 2011, when the standards adopted in this final 
rule would take effect, and 2030, the outer time horizon of the AEO 
2008 forecasts, retail gasoline prices in the AEO 2008 High Price case 
are projected to rise steadily from $2.95 to $3.62 per gallon, 
averaging $3.28 per gallon (all prices expressed in 2007 dollars). For 
the years 2031 and beyond, the agency's analysis assumes that retail 
fuel prices will remain at their forecast values for the year 2030, or 
$3.62 per gallon. These prices are significantly higher than the AEO 
2008 Revised Early Release Reference Case forecast used in the agency's 
NPRM analysis, which averaged $2.34 per gallon (in 2006 dollars) over 
that same period.\248\ After deducting state and federal fuel taxes, 
this revised forecast results in an average value of $3.08 per gallon 
of fuel saved over the lifetimes of 2011 passenger cars and light 
trucks. Because of the uncertainty surrounding future gasoline prices, 
the agency also conducted sensitivity analyses using EIA's Reference 
and Low Price case forecasts of retail fuel prices.
---------------------------------------------------------------------------

    \248\ The fuel price forecasts reported in EIA's AEO 2008 
Revised Early Release and Final Release reflect the estimates 
effects of various provisions of EISA--including the requirement to 
achieve a combined CAFE level of 35 mpg by model year 2020--on the 
demand for and supply of gasoline and other transportation fuels. 
Thus the fuel price forecasts reported in these versions of AEO 2008 
may already account for the reduction in fuel demand expected to 
result from the CAFE standards adopted in this Final Rule, whereas 
the agency's analysis of their effects would ideally use fuel price 
forecasts that do not assume the adoption of higher CAFE standards 
for model years 2011-20. However, the agency notes that the 
difference between the Reference Case forecasts of retail gasoline 
prices for 2011-30 between EIA's Early Release of AEO 2008, which 
did not incorporate the effects of EISA, and its subsequent Revised 
Early Release, which did reflect EISA, averaged only $0.0004 (i.e., 
less than one-half cent) per gallon over the period 2011-30. This 
suggests that accounting for the effect of EISA would have had only 
a minimal effect on the fuel price forecasts used in this analysis.
---------------------------------------------------------------------------

    NHTSA is aware that EIA recently released a preliminary version of 
its Annual Energy Outlook 2009, which appears to confirm then-EIA 
Administrator Caruso's testimony before the House Select Committee in 
June 2008 that the future path of gasoline prices likely more closely 
resembles the AEO 2008 High Price Case than the 2008 Reference Case. 
However, the agency has elected not to use this

[[Page 14320]]

newly-available forecast of fuel prices in this final rule, in part 
because it did not have adequate time to replicate the entire analysis 
reported in this rule using revised forecasts of fuel prices.\249\ 
Moreover, the forecast of gasoline prices from AEO 2009 Early Release 
averages $3.45 over the period from 2009-30, only slightly higher than 
the comparable figure for the AEO 2008 High Price forecast the agency 
relied upon in preparing this analysis. Thus incorporating EIA's newest 
forecast would be unlikely to have an effect on the fuel economy 
standards adopted in this rule. The agency will continue to monitor 
fuel price forecasts available from all sources and other forecasts, 
and consider their implications for its choice among alternative price 
scenarios developed by EIA.
---------------------------------------------------------------------------

    \249\ U.S. Energy Information Administration, Annual Energy 
Outlook 2009 Early Release, available at http://www.eia.doe.gov/oiaf/aeo/index.html (last accessed February 12, 2009).
---------------------------------------------------------------------------

5. Consumer Valuation of Fuel Economy and Payback Period
    In the NPRM, NHTSA explained that in estimating the value of fuel 
economy improvements that would result from alternative CAFE standards 
to potential vehicle buyers, NHTSA assumed that buyers value the 
resulting fuel savings over only part of the expected lifetime of the 
vehicles they purchase. Specifically, we assume that buyers value fuel 
savings over the first five years of a new vehicle's lifetime, and that 
buyers behave as if they do not discount the value of these future fuel 
savings. NHTSA chose the five-year figure because it represents the 
current average term of consumer loans to finance the purchase of new 
vehicles. NHTSA recognized that the period over which individual buyers 
finance new vehicle purchases may not correspond to the time horizons 
they apply in valuing fuel savings from higher fuel economy, but NHTSA 
expressed its belief that five years represents a reasonable estimate 
of the average period over which buyers who finance their purchases of 
new vehicles receive--and thus are compelled to recognize--the monetary 
value of future fuel savings resulting from higher fuel economy.
    NHTSA explained that the value of fuel savings over the first five 
years of a vehicle model's lifetime that would result under each 
alternative fuel economy standard is calculated using the projections 
of retail fuel prices described in the section above. The value of fuel 
savings is then deducted from the technology costs incurred by the 
vehicle's manufacturer to produce the improvement in that model's fuel 
economy estimated for each alternative standard, to determine the 
increase in the ``effective price'' to buyers of that vehicle model. 
The Volpe model uses these estimates of effective costs for increasing 
the fuel economy of each vehicle model to identify the order in which 
manufacturers would be likely to select models for the application of 
fuel economy-improving technologies in order to comply with stricter 
standards. The average value of the resulting increase in effective 
cost from each manufacturer's simulated compliance strategy is also 
used to estimate the impact of alternative standards on manufacturers' 
total sales for future model years.
    However, NHTSA stated that it is important to recognize that the 
agency estimates the aggregate value to the U.S. economy of fuel 
savings resulting from alternative standards--or their ``social'' 
value--over the entire expected lifetimes of vehicles manufactured 
under those standards, rather than over this shorter ``payback period'' 
that NHTSA assumes for vehicle buyers. This point is discussed in the 
section below titled ``Vehicle survival and use assumptions.'' NHTSA 
noted that as indicated previously, the maximum vehicle lifetimes used 
to analyze the effects of alternative fuel economy standards are 
estimated to be 25 years for passenger cars and 36 years for light 
trucks.
    NADA and Sierra Research agreed with the agency's assumption of a 
5-year payback period for consumer valuation of fuel economy. NADA 
commented that NHTSA's assumption of a 5 year payback period for 
consumer valuation of fuel economy was reasonable. NADA argued that 
``Even at high fuel prices, consumers who view fuel economy as an 
important purchase criteria are hard pressed to make the case for 
buying a more fuel efficient new vehicle if the up-front capital costs 
associated with doing so cannot be recouped in short order.'' Thus, 
NADA concluded, ``NHTSA should assume that most prospective purchasers 
will not invest in fuel economy improvements that do not exhibit a 
payback of five years or sooner.'' NADA also added that factors other 
than the value of fuel savings should also be taken into account in 
calculating the length of the payback period; specifically, it stated 
that ``for purposes of calculating payback, real-world purchaser 
finance costs, opportunity costs, and additional maintenance costs all 
should be accounted for.''
    The Sierra Research report submitted by the Alliance as Attachment 
2 to its comments ``considered fuel cost savings over `payback' periods 
of 5 and 20 years,'' but stated parenthetically that ``It is more 
likely that average consumers would consider the savings during the 
period of time they expect to own the vehicle, likely closer to the 
five-year period.''
    Other commenters disagreed with the agency's assumption of a 5-year 
payback period for consumer valuation of fuel economy. Mr. Delucchi 
stated simply that NHTSA ``should not do a `payback' analysis with a 
zero discount rate and a 5-year payback period, because there is no 
economic theory or consumer behavioral evidence to support this.'' 
However, he offered no additional suggestions as to what NHTSA should 
use instead. Similarly, as part of its discussion on fuel price 
estimates, the Sierra Club commented that NHTSA had ``arbitrarily 
restricted'' the consumer payback period to 5 years, but offered no 
further comments or explanation of this point.
    CFA commented that ``the five year payback constraint plays a 
critical role in ordering the technologies that are included in the 
fleet to comply with various levels of the standard,'' and argued that 
while NHTSA should perhaps not have included a payback period at all, 
if it intended to do so, it should justify the 5-year payback period 
better and consider a longer payback period. CFA commented that ``it is 
not clear that one must assume a payback for any component of a vehicle 
purchase. But if one does, the logical connection is between the period 
of ownership and the payback, not the loan period.'' CFA further 
commented that NHTSA failed to recognize the extent to which 
``consumers and the market appreciate fuel economy,'' arguing that 
``even if one looks at the ownership period, most alternative 
investment opportunities available to consumers do not yield a five 
year payback period; hybrids, many of which have payback periods of ten 
years or more, are flying off auto dealer lots. Increasing the payback 
period by one year raises the value of the fuel savings substantially, 
by 20 percent.''
    Ford commented that NHTSA should not have used the increase in the 
``effective price'' to buyers to determine consumer valuation of fuel 
economy, for two reasons. First, Ford argued that while NHTSA 
``implicitly assumed that the technology costs incurred by the 
manufactures can be fully passed on to buyers,'' this is not true ``in 
the competitive environment of the U.S. automotive market.'' Second, 
Ford

[[Page 14321]]

commented that the estimates of ``effective price'' depend on fuel 
price assumptions, such that ``a higher gasoline price assumption will 
lower the effective price estimates, holding everything else 
constant.'' Ford cited the June 26, 2008 analysis by Sierra Research 
that ``estimates that a consumer would not break even over a 20 year 
period unless gas prices are sustained at $4.47 a gallon. Sierra also 
concluded that by using a more conservative payback period of 5 years 
the estimated breakeven gas price would have to be $6.59.''
    Ford argued that NHTSA should instead use ``hedonic pricing 
technique in estimating the consumer valuation of fuel economy,'' which 
``determines the price of a vehicle by the characteristics of the car 
such as towing, cargo volume, performance etc.'' Ford also argued that 
NHTSA should not use ``effective price'' as a way of identifying in 
which order manufacturers would apply technologies, because ``It is 
quite unlikely that manufacturers are using this metric for selecting 
models, since most manufacturers do not assume the technology costs can 
be fully passed on to the buyers.''
    Agency response: NHTSA notes that the payback period and the 
effective cost calculation affect only the order in which manufacturers 
are assumed to apply technologies in order to improve the fuel economy 
of specific vehicles, and thus have no effect on the final CAFE 
standards. Thus the assumptions about the length of the payback period 
and discount rate that affect these calculations, while subject to some 
uncertainty, are not a critical determinant of CAFE standards 
themselves. Instead, their main role is to estimate the increase in the 
value to potential buyers of the increases in fuel economy of specific 
vehicle models, and to provide some indication of the extent to which 
manufacturers are likely to be able to recoup their costs for complying 
with higher CAFE standards through increases in those vehicles' sales 
prices. The agency also reiterates that it estimates the social 
benefits of fuel savings resulting from alternative standards over the 
entire expected lifetimes of cars and light trucks subject to higher 
CAFE standards, rather than over the payback period assumed for vehicle 
buyers. Although many commenters mistakenly believe that the payback 
period has an important effect on the stringency of the fuel economy 
standards and therefore were suggesting different periods, no commenter 
provided any data to support a different number of years for payback. 
Thus NHTSA has continued to employ the same assumptions used in the 
NPRM in developing the CAFE standards adopted in this final rule.
6. Vehicle Survival and Use Assumptions
    NHTSA stated in the NPRM that its preliminary analysis of fuel 
savings and related benefits from adopting alternative standards for MY 
2011-2015 passenger cars and light trucks was based on estimates of the 
resulting changes in fuel use over their entire lifetimes in the U.S. 
vehicle fleet. NHTSA's first step in estimating lifetime fuel 
consumption by vehicles produced during a model year is to calculate 
the number of vehicles that are expected to remain in service during 
each future year after they are produced and sold.\250\ This number is 
calculated by multiplying the number of vehicles originally produced 
during a model year by the proportion expected to remain in service at 
the age they will have reached during each subsequent year, often 
referred to as a ``survival rate.''
---------------------------------------------------------------------------

    \250\ Vehicles are defined to be of age 1 during the calendar 
year corresponding to the model year in which they are produced. 
Thus, for example, model year 2000 vehicles are considered to be of 
age 1 during calendar year 2000, age 2 during calendar year 2001, 
and to reach their maximum age of 26 years during calendar year 
2025. NHTSA considers the maximum lifetime of vehicles to be the age 
after which less than 2 percent of the vehicles originally produced 
during a model year remain in service. Applying these conventions to 
vehicle registration data indicates that passenger cars have a 
maximum age of 26 years, while light trucks have a maximum lifetime 
of 36 years. See Lu, S., NHTSA, Regulatory Analysis and Evaluation 
Division, ``Vehicle Survivability and Travel Mileage Schedules,'' 
DOT HS 809 952 (January 2006), at 8-11. Available at http://www-nrd.nhtsa.dot.gov/pdf/nrd-30/NCSA/Rpts/2006/809952.pdf (last 
accessed August 21, 2008).
---------------------------------------------------------------------------

    NHTSA explained that for the number of passenger cars and light 
trucks that will be produced during future years, it relies on 
projections reported by the EIA in its AEO Reference Case 
forecast.\251\ For age-specific survival rates for cars and light 
trucks, NHTSA uses updated values estimated from yearly registration 
data for vehicles produced during recent model years, to ensure that 
forecasts of the number of vehicles in use reflect recent increases in 
the durability and expected life spans of cars and light trucks.\252\ 
These updated survival rates suggest that the typical expected 
lifetimes of recent-model passenger cars and light trucks are 13.8 and 
14.5 years, respectively.
---------------------------------------------------------------------------

    \251\ U.S. Energy Information Administration, Annual Energy 
Outlook 200, Reference Case Table 43. Available at (last accessed 
October 4, 2008).
    \252\ See Lu, supra note 250, at 8-11.
---------------------------------------------------------------------------

    NHTSA's next step in estimating fuel use was to calculate the total 
number of miles that the cars and light trucks produced in each model 
year affected by the proposed CAFE standards will be driven during each 
year of their lifetimes. To estimate total miles driven, the number of 
cars and light trucks projected to remain in use during each future 
year (calculated as described above) was multiplied by the average 
number of miles that they are expected to be driven at the age they 
will have reached in that year.
    The agency initially estimated the average number of miles driven 
annually by cars and light trucks of each age using data from the 
Federal Highway Administration's 2001 National Household Transportation 
Survey (NHTS).\253\ The agency then adjusted the NHTS estimates of 
annual vehicle use to account for the effect of differences in fuel 
cost per mile driven between the date the NHTS was conducted and the 
future years when MY 2011 cars and light trucks would be in use. This 
adjustment is intended to account for the ``rebound effect'' on vehicle 
use caused by changes in fuel cost per mile (see Section V.B.8. below). 
Fuel cost per mile driven is measured by the retail price of fuel per 
gallon forecast for a future calendar year, divided by the estimated 
on-road fuel economy in miles per gallon achieved by vehicles of each 
model year that remain in service during that future year. The agency 
made this adjustment by applying its estimate of the rebound effect to 
the difference in fuel cost per mile driven between 2001, when the NHTS 
was conducted, and the projected average fuel cost per mile over the 
lifetimes of MY 2011 cars and light trucks.
---------------------------------------------------------------------------

    \253\ For a description of the NHTS, see http://nhts.ornl.gov/quickStart.shtml (last accessed August 21, 2008).
---------------------------------------------------------------------------

    Finally, NHTSA estimated fuel consumption during each calendar year 
of model year 2011 vehicles' lifetimes by dividing the total number of 
miles that that model year's surviving vehicles are driven by the fuel 
economy that they are expected to achieve under each alternative CAFE 
standard. Lifetime fuel consumption by MY 2011 cars or light trucks is 
the sum of the fuel use by the vehicles produced during that model year 
that are projected to remain in use during each year of their expected 
lifetimes. In turn, the savings in lifetime fuel use by MY 2011 cars or 
light trucks that would result from each alternative CAFE standard 
would be the difference between its lifetime fuel use at the fuel 
economy level they are projected to attain under the Baseline (No 
Action) alternative, and their lifetime fuel use at the higher fuel 
economy level they are

[[Page 14322]]

projected to achieve under that alternative standard.
    As an illustration of this procedure, the revised estimates of new 
vehicle sales used in the final rule analysis project that 6.85 million 
light trucks will be produced during 2011, and NHTSA's updated survival 
rates showed that slightly more than half of these--50.1 percent, or 
3.43 million--are projected to remain in service during the year 2025, 
when they will have reached an age of 14 years. At that age, the 
estimates of vehicle use employed in this final rule analysis indicate 
that light trucks achieving the fuel economy level required under the 
Baseline alternative would be driven an average of 9,385 miles, 
assuming that the AEO 2008 High fuel price forecast proves to be 
correct. Thus surviving model year 2011 light trucks are projected to 
be driven a total of 32.20 billion miles (= 3.43 million surviving 
vehicles x 9,385 miles per vehicle) during 2025. Summing the results of 
similar calculations for each year of their 36-year maximum lifetime, 
the 6.85 million light trucks originally produced during MY 2011 would 
be driven a total of 1,185 billion miles under the Baseline 
alternative.
    Under the Baseline alternative, MY 2011 light trucks are projected 
to achieve a test fuel economy level of 23.0 mpg, which corresponds to 
actual on-road fuel economy of 18.4 mpg (= mpg x 80 percent). Thus, 
their lifetime fuel use under the Baseline alternative is projected to 
be 64.4 billion gallons (1,185 billion miles divided by 18.4 miles per 
gallon). Under the Optimized CAFE standard for MY 2011, light trucks 
are projected to achieve a test fuel economy of 25.0 mpg, which 
corresponds to an actual on-road mpg of 20.0. After adjusting their 
average annual mileage to reflect the increase in usage that results 
from the rebound effect of improved fuel economy, MY 2011 light trucks 
are projected to be driven a total of 1,187 billion miles over their 
expected lifetimes. Thus their lifetime fuel consumption under the 
Optimized CAFE standard is projected to amount to 59.4 billion gallons 
(1,187 billion miles divided by 20.0 miles per gallon), a reduction of 
5.0 billion gallons from the 64.4 billion gallons they would consume 
under the Baseline alternative.
    NHTSA received no specific comments regarding the assumptions about 
vehicle survival and use described in the NPRM. The exact figures for 
annual vehicle use that are employed in the agency's analysis 
supporting the final rule are updated to reflect differences in 
estimated fuel economy levels under alternative CAFE standards, but are 
otherwise unchanged from those used in the NPRM.
7. Growth in Total Vehicle Use
    In the NPRM, NHTSA also explained its assumptions for potential 
future growth in average annual vehicle use. By assuming that the 
average number of miles driven by cars and light trucks at each age--
and thus their lifetime total mileage--will remain constant over the 
future, NHTSA effectively assumes that future growth in total vehicle-
miles driven stems only from increases in the number of vehicles in 
use, rather than from continuing increases in the average number of 
miles that cars and light trucks are driven each year.\254\ Similarly, 
because the survival rates used to estimate the number of cars and 
light trucks remaining in service to various ages are assumed to remain 
fixed for future model years, growth in the total number of cars and 
light trucks in use is effectively assumed to result only from 
increasing sales of new vehicles. In order to determine the validity of 
these assumptions, the agency conducted a detailed analysis of the 
causes of recent growth in total car and light truck use.
---------------------------------------------------------------------------

    \254\ As described in the preceding section, increases in fuel 
economy required by CAFE standards are assumed to increase lifetime 
usage of cars and light trucks due to the fuel economy rebound 
effect. Because a vehicle's fuel economy is determined when it is 
produced, however, the resulting changes in its average annual use 
at each age and its expected lifetime mileage are also determined 
when it is produced. While the fuel economy rebound effect thus 
contributes to differences in annual and lifetime vehicle use 
between the Baseline alternative and Optimized CAFE standards, it is 
not a source of continuing growth in average annual miles per 
vehicle or in total annual VMT over the future.
---------------------------------------------------------------------------

    From 1985 through 2005, the total number of miles driven (usually 
referred to as vehicle-miles traveled, or VMT) by passenger cars 
increased 35 percent, equivalent to a compound annual growth rate of 
1.5 percent.\255\ During that time the total number of passenger cars 
registered in the U.S. grew by about 0.3 percent annually, almost 
exclusively as a result of increasing sales of new cars.\256\ Thus, 
growth in the average number of miles that passenger cars are driven 
each year accounted for the remaining 1.2 percent (= 1.5 percent--0.3 
percent) annual growth in total passenger car use.\257\
---------------------------------------------------------------------------

    \255\ Calculated from data reported in FHWA, Highway Statistics, 
Summary to 1995, Table VM-201a, available at http://www.fhwa.dot.gov/ohim/summary95/vm201a.xlw (last accessed August 20, 
2008), and Highway Statistics Publications, Annual Editions 1996-
2005, Table VM-1, available at http://www.fhwa.dot.gov/policy/ohpi/hss/hsspubs.cfm (last accessed October 4, 2008); follow links to 
individual annual editions, select Section V: Roadway Extent 
Characteristics, and Performance, scroll down to section entitled 
``Traffic and Travel Data,'' and select link to Table VM-1.
    \256\ An increase in the fraction of new passenger cars 
remaining in service beyond age 10 accounted for approximately one-
tenth of total growth in the U.S. automobile fleet from 1985 to 
2005, while the remaining 90 percent was accounted for by growth in 
sales of new automobiles. The fraction of new automobiles remaining 
in service to various ages was computed from R.L. Polk vehicle 
registration data for 1997 through 2005 by the agency's Center for 
Statistical Analysis.
    \257\ Id.
---------------------------------------------------------------------------

    The NPRM explained, however, that over this same period, total VMT 
by light trucks increased much faster, growing at an annual rate of 5.1 
percent. In contrast to the causes of growth in passenger car use, 
nearly all growth in light truck use over these two decades was 
attributable to rapid increases in the number of light trucks in use. 
FHWA data show that growth in total miles driven by ``Two-axle, four-
tire trucks,'' a category that includes most or all light trucks 
subject to CAFE standards, averaged 5.1 percent annually from 1985 
through 2005. However, the number of miles that light trucks are driven 
each year averaged 11,114 during 2005, almost unchanged from the 
average figure of 11,016 miles during 1985.\258\ This means that 
virtually all of the growth in total light truck VMT over this period 
resulted from growth in the number of these vehicles in service, rather 
than from growth in their average annual use. In turn, growth in the 
size of the nation's light truck fleet has resulted almost exclusively 
from rising production and sales of new light trucks, since the 
fraction of new light trucks remaining in service to various ages has 
remained stable or declined very slightly over the past two 
decades.\259\
---------------------------------------------------------------------------

    \258\ Id.
    \259\ See the Lu study, supra note 250.
---------------------------------------------------------------------------

    On the basis of this analysis, NHTSA tentatively concluded in the 
NPRM that its projections of future growth in light truck VMT account 
fully for the primary cause of its recent growth, which has been the 
rapid increase in sales of new light trucks during recent model years. 
However, the assumption that average annual use of passenger cars will 
remain fixed over the future seemed to ignore an important source of 
recent growth in their total use, the gradual increase in the average 
number of miles they are driven. NHTSA explained that to the extent 
that this factor continued to represent a significant source of growth 
in future passenger car use, the agency's analysis would be likely to 
underestimate the reductions in fuel use and related environmental 
impacts resulting from more stringent CAFE

[[Page 14323]]

standards for passenger cars.\260\ NHTSA stated that it planned to 
account explicitly for potential future growth in average annual use of 
both cars and light trucks in the analysis for the final rule. NHTSA 
received no specific comments to the NPRM about vehicle survival and 
use.
---------------------------------------------------------------------------

    \260\ NHTSA explained that assuming that average annual miles 
driven per passenger car will continue to increase over the future 
would increase the agency's estimates of total lifetime mileage for 
MY 2011 passenger cars. Their estimated lifetime fuel use would also 
increase under each alternative standard considered in the NPRM, but 
in inverse relation to their fuel economy. Thus, NHTSA explained, 
lifetime fuel use would increase by more under the No Increase 
alternative than under any of the alternatives that would increase 
passenger car CAFE standards, and by progressively less for the 
alternatives that impose stricter standards. NHTSA stated that 
taking account of this factor would thus increase the agency's 
estimates of fuel savings for those alternatives, just as omitting 
it would cause the agency's analysis to underestimate those fuel 
savings.
---------------------------------------------------------------------------

    In its analysis for this final rule, the agency has used estimates 
of the annual number of miles driven by MY 2011 passenger cars and 
light trucks at each age of their expected lifetimes that reflect the 
previously-discussed adjustment for increased use due to the fuel 
economy rebound effect. Similarly, these estimates also reflect the 
effect on vehicle use of differences in fuel prices between the year 
2001, when the National Household Travel Survey (NHTS), the agency's 
original source for its estimates of annual vehicle use by age, was 
conducted, and the AEO 2008 forecast of fuel prices for the period when 
these vehicles will be in use. As discussed briefly in the preceding 
section and in more detail in the following section, changes in fuel 
prices are also assumed to cause a rebound effect in vehicle use, 
because--like increases in fuel economy--variation in retail fuel 
prices directly affects vehicles' fuel cost per mile driven. Because 
future fuel prices are projected to be significantly higher than the 
$1.80 (2007 dollars) average that prevailed at the time the NHTS was 
conducted, this adjustment reduces projected average vehicle use during 
future years, thus partly offsetting the effect of higher fuel economy.
    Finally, the agency's estimates of vehicle use assume that the 
average number of miles driven by passenger cars will continue to rise 
by 1 percent annually, slightly below its 1.2 percent average annual 
growth rate over the past two decades. This growth is assumed to be 
independent of the changes in passenger car use that are projected to 
result from increased fuel economy and higher fuel prices through the 
rebound effect. Because average annual use of light trucks has not 
increased significantly over the past two decades, no future change in 
light truck use is assumed to occur independently of those attributable 
to higher fuel prices and improved fuel economy through the rebound 
effect.
    NHTSA received no specific comments regarding the assumptions about 
growth in total vehicle use presented in the NPRM. The assumptions 
employed in the agency's analysis supporting the final rule remain 
unchanged from those used in the NPRM.
8. Accounting for the Rebound Effect of Higher Fuel Economy
    As discussed in the NPRM, the rebound effect refers to the tendency 
of vehicle use to increase in response to higher fuel economy. The 
rebound effect occurs because an increase in a vehicle's fuel economy 
reduces its fuel cost for each mile driven (typically the largest 
single component of the cost of operating a vehicle), and vehicle 
owners take advantage of this reduced cost by driving more. Even with 
higher fuel economy, this additional driving uses some fuel, so the 
rebound effect reduces the fuel savings that would otherwise result 
when fuel economy standards require manufacturers to increase fuel 
economy. The rebound effect is usually expressed as the percentage by 
which annual vehicle use increases when the cost of driving each mile 
declines, due either to an increase in fuel economy or a reduction in 
the retail price of fuel.
    The rebound effect is an important parameter in NHTSA's evaluation 
of alternative CAFE standards for future model years, because it 
affects the actual fuel savings that are likely to result from adopting 
stricter standards. The rebound effect can be measured by estimating 
the elasticity of vehicle use with respect either to fuel economy 
itself, or to fuel cost per mile driven.\261\ When expressed as a 
positive percentage, either of these parameters gives the fraction of 
fuel savings that would be expected to result from increased fuel 
economy, but is offset by the added fuel use that occurs when vehicles 
with higher fuel economy are driven more.
---------------------------------------------------------------------------

    \261\ Fuel cost per mile is equal to the price of fuel in 
dollars per gallon divided by fuel economy in miles per gallon, so 
fuel cost per mile declines when a vehicle's fuel economy increases.
---------------------------------------------------------------------------

    In the NPRM, NHTSA summarized existing research on the rebound 
effect in order to explain its rationale for choosing the estimate of 
15 percent it employed in analyzing alternative MY 2011-2015 fuel 
economy standards; the following paragraphs repeat NHTSA's summary for 
the reader's benefit.
    Research on the magnitude of the rebound effect in light-duty 
vehicle use dates to the early 1980s, and almost unanimously concludes 
that a statistically-significant rebound effect occurs when vehicle 
fuel efficiency improves.\262\ The most common approach to estimating 
its magnitude has been to analyze household survey data on vehicle use, 
fuel consumption, fuel prices (often obtained from external sources), 
and other determinants of household travel demand to isolate the 
response of vehicle use to higher fuel economy. Other studies have 
relied on econometric analysis of annual U.S. data on vehicle use, fuel 
economy, fuel prices, and other variables to identify the response of 
total or average vehicle use to changes in fuel economy. Two recent 
studies analyzed yearly variation in vehicle ownership and use, fuel 
prices, and fuel economy among individual states over an extended time 
period in order to measure the response of vehicle use to changing fuel 
economy. Most studies measure the influence of fuel economy on vehicle 
use indirectly through its effect on fuel cost per mile driven, 
although a few attempt to measure the direct effect of fuel economy on 
vehicle use.
---------------------------------------------------------------------------

    \262\ Most studies estimate that the long-run rebound effect is 
significantly larger than the immediate response to increased fuel 
efficiency, since over a longer period drivers have more 
opportunities to adjust their vehicle use to changes in fuel costs. 
This long-run effect is more appropriate for evaluating the fuel 
savings likely to result from stricter CAFE standards, since the 
increases in fuel economy they require would reduce fuel costs over 
the entire lifetimes of vehicles they affect. These lifetimes can 
extend up to 25 years for passenger cars, and up to 36 years for 
light trucks.
---------------------------------------------------------------------------

    An important distinction among studies of the rebound effect is 
whether they assume that the effect is constant, or varies over time in 
response to prevailing fuel prices, fuel economy levels, personal 
income, and household vehicle ownership. This distinction is important 
because studies that allow the rebound effect to vary in response to 
changes in these factors are likely to provide more reliable forecasts 
of its future value.
    In order to arrive at a preliminary estimate of the rebound effect 
for use in assessing the fuel savings, emissions reductions, and other 
impacts of the alternative standards, NHTSA reviewed 22 studies of the 
rebound effect conducted from 1983 through 2007. NHTSA then conducted a 
detailed analysis of the 66 separate estimates of the long-run rebound 
effect reported in these studies, which is summarized in

[[Page 14324]]

Table V-2 below.\263\ As the table indicates, historical estimates of 
the long-run rebound effect range from as low as 7 percent to as high 
as 75 percent, with a mean of 23 percent. A higher rebound effect means 
that more of the savings in fuel use expected to result from higher 
fuel economy will be offset by additional driving, so that less fuel 
savings will actually result.
---------------------------------------------------------------------------

    \263\ Some studies did not separately present the overall 
rebound effect, so NHTSA derived estimates of the overall rebound 
effect when the studies reported more detailed results. For example, 
when studies estimated different rebound effects for households 
owning different numbers of vehicles, but did not report an overall 
rebound effect, NHTSA computed a weighted average of the reported 
values using the distribution of households among vehicle ownership 
categories.
---------------------------------------------------------------------------

    Limiting the sample of rebound effect estimates to the 50 estimates 
reported in the 17 published studies yields the same range but a 
slightly higher mean (24 percent), while focusing on the authors' 
preferred estimates from published these studies narrows this range and 
lowers its average slightly. In all three cases, the median estimate of 
the rebound effect, which is less likely to be influenced by unusually 
small and large estimates, is 22 percent. As Table V-2 indicates, 
approximately two-thirds of all estimates reviewed, all published 
estimates, and authors' preferred estimates fall in the range of 10 to 
30 percent.
BILLING CODE 4910-59-P

[[Page 14325]]

[GRAPHIC] [TIFF OMITTED] TR30MR09.048

BILLING CODE 4910-59-C
    The type of data used and authors' assumptions about whether the 
rebound effect varies over time have important effects on its estimated 
magnitude, although the reasons for these patterns are difficult to 
identify. As the table shows, the 34 estimates derived from analysis of 
U.S. annual time-series data produce a median estimate of 14 percent 
for the long-run rebound effect, while the median of the 23 estimates 
based on household survey data is more than twice as large (31 
percent). The 37 estimates from studies that assume a constant rebound 
effect produce a median of 20 percent, while the 29 estimates from 
studies allowing the rebound to vary have a slightly higher median 
value (23 percent).
    In selecting a value for the rebound effect to use in analyzing 
alternative fuel economy standards for this rulemaking, NHTSA attached 
greater significance to

[[Page 14326]]

studies that allow the rebound effect to vary in response to changes in 
the factors that affect its magnitude. The agency's view is that 
updating their estimates to reflect current economic conditions 
provides a more reliable indication of its likely magnitude over the 
lifetimes of vehicles that will be affected by those standards. As 
Table V-2 reports, recalculating these 29 original estimates using 2006 
values for retail fuel prices, average fuel economy, personal income, 
and household vehicle ownership reduces their median estimate to 16 
percent.\264\ Considering the empirical evidence on the rebound effect 
as a whole, but according greater importance to the updated estimates 
from studies allowing the rebound effect to vary, NHTSA selected a 
rebound effect of 15 percent in the NPRM to evaluate the fuel savings 
and other effects of the alternative fuel economy standards. However, 
NHTSA stated that it did not believe that evidence of the rebound 
effect's dependence on fuel prices or household income is sufficiently 
convincing to justify allowing its future value to vary in response to 
forecast changes in these variables. A range extending from 10 percent 
to at least 20 percent, and perhaps as high as 25 percent, appeared to 
NHTSA to be appropriate for the required analysis of the uncertainty 
surrounding these estimates. While the agency selected 15 percent, it 
also conducted analyses using rebound effects of 10 and 20 percent. The 
results of these sensitivity analyses are shown in the FEIS at Section 
3.4.4.2.
---------------------------------------------------------------------------

    \264\ As an illustration, Small and Van Dender (2005) allow the 
rebound effect to vary over time in response to changes in real per 
capita income as well as in response to average fuel cost per mile 
driven. While their estimate for the entire interval (1966-2001) 
that they analyze is 22 percent, updating this estimate using 2007 
values of these variables reduces the rebound effect to about 10 
percent. Similarly, updating Greene's 1992 original estimate of a 15 
percent rebound effect to reflect 2007 fuel prices and average fuel 
economy reduces it to approximately 7 percent. See David L. Greene, 
``Vehicle Use and Fuel Economy: How Big is the Rebound Effect?'' The 
Energy Journal, 13:1 (1992), at 117-143.
    In contrast, the distribution of households among vehicle 
ownership categories in the data samples used by Hensher et al. 
(1990) and Greene et al. (1999) are nearly identical to the most 
recent estimates for the U.S., so updating their original estimates 
to current U.S. conditions changes them very little. See David A. 
Hensher, Frank W. Milthorpe, and Nariida C. Smith, ``The Demand for 
Vehicle Use in the Urban Household Sector: Theory and Empirical 
Evidence,'' Journal of Transport Economics and Policy, 24:2 (1990), 
at 119-137; see also David L. Greene, James R. Kahn, and Robert C. 
Gibson, ``Fuel Economy Rebound Effect for Household Vehicles,'' The 
Energy Journal, 20:3 (1999), at 1-21.
---------------------------------------------------------------------------

    The only commenter suggesting that NHTSA use a larger rebound 
effect than 15 percent was the Alliance, which based its comments on 
analyses it commissioned from Sierra Research and NERA Economic 
Consulting, Inc. Sierra Research cited a 1999 paper by David Greene, et 
al., at ORNL as evidence that the long-run rebound effect should be 20 
percent,\265\ and stated further that NHTSA used a rebound effect of 20 
percent in its April 2003 final rule setting fuel economy standards for 
MY 2005-2007 light trucks. Sierra Research assumed a 17 percent rebound 
effect in its analysis for the Alliance ``to be conservative.'' NERA's 
report argued that NHTSA should use a rebound effect of 20 percent, 
because 15 percent gave ``disproportionate weight'' to the Small and 
Van Dender study, which NERA called ``a single study with empirical 
limitations.'' NERA stated that its analysis ``corrected'' the Small 
and Van Dender model, the primary correction apparently being to 
``properly account for differences in the cost of living across 
states,'' with respect to income and fuel prices. NERA consequently 
used a 24 percent rebound effect for its report.
---------------------------------------------------------------------------

    \265\ David L. Greene, et al., ``Fuel Economy Rebound Effect for 
U.S. Household Vehicles,'' The Energy Journal, Vol. 20, No. 3, 1999.
---------------------------------------------------------------------------

    Other commenters, including CARB, UCS, EDF, Public Citizen, CFA, 
and Mark Delucchi, argued that NHTSA should use a lower rebound effect 
than 15 percent, generally because Small and Van Dender's recent study 
found a lower rebound effect. CARB, for example, commented that while 
it is true that the consensus estimate of past studies is that the 
rebound effect should be 15 percent, Small and Van Dender had found a 
long-run rebound effect of 4.9 percent for the 1997-2001 period in 
California due to higher incomes, and that it would decline even 
further by 2020. Thus, CARB argued, NHTSA should accept ``two critical 
findings'' of the Small and Van Dender study, specifically that (1) the 
future value of the rebound effect would decline as household real 
income increases; and that (2) as fuel prices increase, people spend a 
larger share of their income on fuel purchases, thus becoming more 
sensitive to fuel prices. CARB stated that NHTSA should use a rebound 
effect of no higher than 10 percent, and conduct a sensitivity analysis 
using a rebound effect of 5 percent.
    UCS similarly commented that if NHTSA intends to ``attach greater 
significance'' to the Small and Van Dender study, as NHTSA stated in 
the NPRM, then it must accept Small and Van Dender's conclusion ``that 
the rebound effect in the U.S. is small and has been getting smaller.'' 
Thus, UCS argued, NHTSA should employ a rebound effect of no greater 
than 10 percent, and only if NHTSA used higher fuel prices in the final 
rule. UCS implied, however, that NHTSA should apply no rebound effect 
at all unless it used higher fuel prices in the final rule, citing a 
2005 final report by Small and Van Dender to CARB as stating that ``* * 
* [the authors] cannot prove that there is any rebound effect resulting 
from stricter fuel efficiency regulations * * *.'' Mr. Delucchi also 
commented that NHTSA should use a lower rebound effect because the 
agency should ``give more weight to Small and Van Dender,'' although he 
did not explain how the agency should give this additional weight. Mr. 
Delucchi also stated that a recent study by Hughes et al. ``found a 
very low short-run price elasticity of demand for gasoline.''
    EDF and Public Citizen focused on other findings in the Small and 
Van Dender study to argue for a lower rebound effect. EDF commented 
that NHTSA should not have selected a 15 percent rebound effect based 
on existing rebound effect literature, because when Small and Van 
Dender reviewed the literature, the authors suggested ``that many prior 
studies have overestimated the rebound effect because of some model 
specification problems, such as not allowing for the fact that fuel 
efficiency is endogenous, i.e., driving more efficient cars might 
encourage more driving, but long commutes might encourage purchase of 
more fuel efficient vehicles.'' EDF argued that because Small and Van 
Dender's study did not have these biases, NHTSA should use a 10 percent 
rebound effect, ``to be consistent with the latest findings and to 
reflect current conditions of income, urbanization and fuel costs.''
    EDF also suggested that the rebound effect may be zero, citing 
Greene's 2005 testimony before the House of Representatives Science 
Committee that ``the rebound effect could be reduced to negligible if 
we `[take] into account the fact that increased fuel economy will 
increase the price of vehicles together with the likelihood that 
governments will respond to losses in highway revenues by raising motor 
fuel taxes.' '' Public Citizen focused on Small and Van Dender's 
finding that ``most empirical measurements of the rebound effect rely 
heavily on variations in the fuel price,'' stating that this ``again 
raises the question of whether NHTSA's assumptions about the rebound 
effect are colored by the estimates of future fuel prices.''
    CFA commented that NHTSA should use a rebound effect of no higher 
than

[[Page 14327]]

5 percent, citing a recent analysis by the Congressional Budget Office 
that rising real incomes have made consumers much less responsive to 
short-run changes in gasoline prices. CFA thus argued that since 
gasoline is more expensive now, NHTSA was incorrect to assume ``that 
consumers irrationally burn up their fuel savings on increased driving, 
rather than use it to buy other goods and services and applied this 
`rebound' effect to analyses where it should not play a role.'' CFA 
also argued that NHTSA should have identified and provided more 
information about the conclusions in each of the studies it reviewed in 
developing its number for the rebound effect.
    Agency response: NHTSA has updated the 29 estimates from studies 
that allowed the rebound effect to vary to reflect 2008 fuel prices, 
fuel economy, vehicle ownership levels, and household income. The 
resulting updated estimates are significantly higher than those 
reported in the NPRM, primarily because of the large increase in fuel 
prices since 2006 (the date to which the estimates reported in the NPRM 
were updated). The updated 2008 estimates of the fuel economy rebound 
effect range from 8 percent to 46 percent, with a median value of 19 
percent. Using the average retail gasoline price forecast for 2011-30 
from the AEO 2008 High Price case, the projected estimates of the 
rebound effect for those years would range from 7 percent to 46 
percent, with a median value of 19 percent.
    NHTSA also notes that the forecast of fuel prices used to develop 
its adopted CAFE standards for MY 2011 projects that retail gasoline 
prices will continue to rise by somewhat more than 1 percent annually 
over the lifetimes of vehicles affected by those standards. At the same 
time, real household incomes are projected to grow by about 2 percent 
annually over this same period. Given the relative sensitivity of the 
Small and Van Dender rebound effect estimate to changes in fuel prices 
and income, these forecasts suggest that future growth in fuel prices 
is likely to offset a significant fraction of the projected decline in 
the rebound effect that would result from income growth.
    In response to the comment by EDF citing Greene's statement that 
the rebound effect could be negligible over the foreseeable future, 
NHTSA notes that increases in the purchase price or ownership cost of 
vehicles may not significantly affect the marginal cost of additional 
vehicle use, since the depreciation and financing components of vehicle 
ownership costs vary only minimally with vehicle use. In addition, the 
agency notes that Greene's assertion that governments are likely to 
respond to losses in fuel tax revenues by raising fuel tax rates (thus 
increasing retail fuel prices) is highly speculative, and there is 
limited evidence that this has actually occurred in response to recent 
declines in state fuel tax revenues.\266\
---------------------------------------------------------------------------

    \266\ Federal Highway Administration data show that fuel tax 
revenues declined in only 5 of the 50 states between 2000 and 2006, 
and that none of these states raised gasoline taxes over that same 
period; see FHWA, Highway Statistics 2006, Table MF-205, available 
at http://www.fhwa.dot.gov/policy/ohim/hs06/pdf/mf205.pdf (last 
accessed November 13, 2008), Table MF-1 available at http://www.fhwa.dot.gov/policy/ohim/hs06/xls/mf1.xls (last accessed 
November 13, 2008), and Highway Statistics 2000, Table MF-1 
available at http://www.fhwa.dot.gov/ohim/hs00/xls/mf1.xls (last 
accessed November 13, 2008).
---------------------------------------------------------------------------

    In light of these results, NHTSA has elected to continue to use a 
15 percent rebound effect in its analysis of fuel savings and other 
benefits from higher CAFE standards for this final rule. Recognizing 
the uncertainty surrounding this estimate, the agency has analyzed the 
sensitivity of its benefits estimates to a range of values for the 
rebound effect from 10 percent to 20 percent. In its future CAFE 
rulemaking activities, NHTSA will review all new available data and 
consider whether and to what extent any assumptions regarding the 
rebound effect merit revising based on that data.
9. Benefits From Increased Vehicle Use
    The NPRM explained that NHTSA also values the additional benefits 
that derive from increased vehicle use due to the rebound effect. This 
additional mobility provides drivers and their passengers better access 
to social and economic opportunities away from home, because they are 
able to make longer or more frequent trips. The amount by which the 
total benefits from this additional travel exceed its costs (for fuel 
and other operating expenses) measures the net benefits that drivers 
receive from the additional travel, usually referred to as increased 
consumer surplus. NHTSA's analysis estimates the economic value of this 
increased consumer surplus using the conventional approximation, which 
is one half of the product of the decline in vehicle operating costs 
per mile and the resulting increase in the annual number of miles 
driven. The NPRM noted that the magnitude of these benefits represents 
a small fraction of the total benefits from the alternative fuel 
economy standards considered.
    In its comment on the NPRM, NERA speculated that NHTSA ``may have 
miscalculated the `consumer surplus' associated with the additional 
driving due to the rebound effect.'' NERA stated that NHTSA

* * * describes its calculation in terms of the conventional 
triangle under the demand curve but above the price paid. However, 
it appears that instead NHTSA estimated the total area under the 
demand curve for the extra VMT traveled. That is appropriate if 
NHTSA's estimates of net savings in fuel expenditures include 
additional expenditures on the additional fuel consumed as a result 
of the rebound effect.

    NHTSA notes in response to NERA's comment that its estimates of net 
savings in fuel expenditures do reflect the costs for additional fuel 
consumed as a result of increased rebound-effect driving. Thus the 
agency has correctly calculated the increase in consumer surplus 
associated with the additional driving due to the rebound effect. Since 
it received no other comments on the estimates of benefits from 
increased vehicle use presented in the NPRM, NHTSA has calculated these 
benefits using the same procedure in its analysis supporting this final 
rule.
10. Added Costs From Congestion, Crashes, and Noise
    NHTSA also factors in the additional costs from increased traffic 
congestion, motor vehicle accidents, and highway noise that result from 
additional vehicle use associated with the rebound effect. Increased 
vehicle use can contribute to traffic congestion and delays by 
increasing traffic volumes on facilities that are already heavily 
traveled, which may cost drivers more in terms of increased travel time 
and operating expenses. Increased vehicle use can also increase the 
external costs associated with traffic accidents; although drivers may 
consider the costs they (and their passengers) might face from the 
possibility of being involved in a traffic accident when they decide to 
make additional trips, it is very unlikely that they account for the 
potential ``external'' costs that any accident imposes on the occupants 
of other vehicles or on pedestrians.
    Finally, increased vehicle use can also contribute to traffic 
noise, which causes inconvenience, irritation, and potentially even 
discomfort to occupants of other vehicles, to pedestrians and other 
bystanders, and to residents or occupants of surrounding property. 
Since drivers are unlikely to consider the effect their vehicle's noise 
has on others, noise represents another externality that NHTSA attempts 
to account for. Any increase in these externality costs, however, is 
dependent on the traffic conditions under which

[[Page 14328]]

additional rebound-effect driving takes place.
    In the NPRM, NHTSA relied on estimates developed by the Federal 
Highway Administration (FHWA) of the increased external costs of 
congestion, accidents (property damage and injuries), and noise costs 
caused by added driving due to the rebound effect.\267\ These estimates 
are intended to measure the increases in costs due to these 
externalities caused by automobiles and light trucks that are borne by 
persons other than their drivers, or ``marginal'' external costs. 
Updated to 2007 dollars, FHWA's ``Middle'' estimates for marginal 
congestion, accident, and noise costs caused by automobile use amount 
to 5.4 cents, 2.3 cents, and 0.1 cents per vehicle-mile (or 7.8 cents 
per vehicle-mile in total), while costs for light trucks are 4.8 cents, 
2.6 cents, and 0.1 cents per vehicle-mile (7.5 cents per vehicle-mile 
in total).\268\ These costs are multiplied by the annual increases in 
automobile and light truck use from the rebound effect to yield the 
estimated increases in congestion, accident, and noise externality 
costs during each future year.
---------------------------------------------------------------------------

    \267\ These estimates were developed by FHWA for use in its 1997 
Federal Highway Cost Allocation Study. See http://www.fhwa.dot.gov/policy/hcas/final/index.htm (last accessed October 5, 2008).
    \268\ Id., at Tables V-22, V-23, and V-24 (last accessed October 
5, 2008).
---------------------------------------------------------------------------

    NHTSA received comments from the Alliance and from the Mercatus 
Center on the increased costs from congestion, crashes, and noise due 
to the rebound effect. The Alliance submitted an analysis by NERA 
Economic Consulting that argued that NHTSA had underestimated the 
increased costs from congestion, crashes, and noise. The NERA analysis 
disagreed with NHTSA's method for updating the FHWA estimates, arguing 
that it was unclear exactly how NHTSA had updated the FHWA values to 
2006 dollars. The NERA analysis also argued that FHWA's estimate was 
``based on a value of $12.38 per vehicle hour (in 1994 dollars),'' 
while NHTSA used a value of $24 per vehicle hour ``to value time 
savings it estimates would result from fewer fill-ups as a result of 
higher MPG and increased range for a tank of fuel.'' Thus, the NERA 
analysis concluded that NHTSA had overvalued the time savings, which 
NERA seemed to attribute to its belief that NHTSA does not value time 
spent in traffic congestion ``at least as highly as time spent in 
service stations while filling up.'' \269\ Thus, the NERA analysis 
argued that congestion costs per mile would increase by about 68 
percent if NHTSA had updated FHWA's estimates in a ``consistent'' 
manner with ``NHTSA's valuation of time savings for vehicle occupants 
in another part of its analysis.''
---------------------------------------------------------------------------

    \269\ NERA appears to suggest that time spent in service 
stations while filling up includes the fact that ``stops at service 
stations often serve multiple purposes, not just refueling.'' NERA 
then appears to suggest that people feel similarly about time spent 
in traffic congestion.
---------------------------------------------------------------------------

    The NERA analysis also argued that the baseline 1997 congestion 
values ``should be adjusted upward even more to reflect increasing 
levels of congestion between then and now and the further increases 
likely'' within the lifetimes of the vehicles, the basis for NHTSA's 
cost analysis. The analysis stated that this was because ``With higher 
baseline congestion, the marginal impact of additional VMT will 
increase because congestion, like other queuing phenomena, increases at 
an increasing rate as capacity utilization grows.''
    NERA also argued more generally that increased costs from 
congestion, crashes, and noise are proportional to the rebound effect, 
which means that a higher rebound effect would result in higher 
costs.\270\
---------------------------------------------------------------------------

    \270\ NERA suggested using a rebound elasticity of -0.2 instead 
of -0.15, which it claimed would increase the costs from congestion, 
crashes, and noise by about one third.
---------------------------------------------------------------------------

    The NERA analysis did not cover NHTSA's estimates of accident and 
noise costs per mile, but cited the same RFF study referred to in the 
NPRM to say that it ``estimated a value per mile roughly 20 percent 
higher ($0.030 vs. $0.025) than NHTSA's.''
    The Mercatus Center focused only on congestion costs, and commented 
that NHTSA should consider ``The possibility that the cost of increased 
congestion, a product of the `rebound effect,' does not take into 
account likely increasing marginal costs as considered in NHTSA's 
model.'' The commenter stated that NHTSA's estimates ``implicitly 
assume[] a constant marginal cost of congestion across all possible 
total quantities of vehicle miles driven for each vehicle category.'' 
However, it cited the FHWA study as stating that congestion cost 
impacts are ``extremely sensitive'' to peak versus off-peak traffic 
periods. Thus, the commenter argued, if the costs can vary within a day 
(as during peak and off-peak periods), they must certainly vary across 
years, if the total amount of traffic varies across years as well. In 
essence, if VMT increases, total congestion and the marginal cost of 
congestion must also increase, all other things held constant.
    However, if all other things are not held constant, e.g., if new 
roads are built to handle increasing traffic, the commenter argued that 
``total congestion does not necessarily increase with increases in 
total vehicle miles driven.'' The commenter argued that NHTSA should 
include an estimate of the costs of building additional roads or 
altering existing ones to mitigate congestion due to the rebound 
effect. That estimate should include accounting for ``the increasing 
difficulty of building a new road in an urbanized area,'' which the 
commenter stated is ``probably one of the best examples of an activity 
that has rapidly increasing marginal costs,'' as well as the 
environmental costs of building new roads, i.e., costs due to sprawl. 
The commenter asserted that ``It is incumbent upon NHTSA and the 
Environmental Protection Agency to produce an inclusive estimate of the 
costs of the rebound effect--one that either includes both increasing 
marginal cost of congestion and the cost of the new roads that will 
lead to increased congestion.''
    The Mercatus Center also pointed out an apparent inconsistency in 
the NPRM in the reporting of FHWA's estimates of passenger car versus 
light truck costs for increased congestion, crashes, and noise.
    For this final rule, NHTSA has corrected the inconsistency in the 
NPRM's reporting of external costs from additional automobile and light 
truck use noted by the Mercatus Center.
    NHTSA notes that congestion cost associated with additional travel 
may be particularly high if it occurs during peak travel periods and on 
facilities that are already heavily utilized. However, the FHWA 
estimates of increased congestion costs from added vehicle use assume 
that the increase in travel is distributed over the hours of the day 
and among specific routes in proportion to the existing temporal and 
geographic distributions of total VMT. Thus while some of the 
additional travel may impose significant costs for additional 
congestion and delays, much of it is likely to occur at times and 
locations where excess roadway capacity is available and congestion 
costs imposed by added vehicle use are minimal.
    NHTSA believes it is reasonable to assume that additional vehicle 
use due to the fuel economy rebound effect will be distributed over the 
day and among locations in much the same way as current travel is 
distributed. As a consequence, the FHWA estimates of congestion costs 
from increased vehicle use are likely to provide more accurate 
estimates of the increased congestion

[[Page 14329]]

costs caused by added rebound-effect driving than are the estimates 
submitted by commenters, which apply to peak travel periods and 
locations that experience high traffic volumes. Thus in the analysis 
supporting the final rule, NHTSA has continued to rely upon the FHWA 
values to estimate the increase in congestion costs likely to result 
from added rebound-effect driving.
11. Petroleum Consumption and Import Externalities
    The NPRM also discussed the fact that U.S. consumption and imports 
of petroleum products also impose costs on the domestic economy that 
are not reflected in the market price for crude petroleum, or in the 
prices paid by consumers of petroleum products such as gasoline. In 
economics literature on this subject, these costs include (1) higher 
prices for petroleum products resulting from the effect of U.S. oil 
import demand on the world oil price; (2) the risk of disruptions to 
the U.S. economy caused by sudden reductions in the supply of imported 
oil to the U.S.; and (3) expenses for maintaining a U.S. military 
presence to secure imported oil supplies from unstable regions, and for 
maintaining the Strategic Petroleum Reserve (SPR) to cushion against 
resulting price increases.\271\ Higher U.S. imports of crude oil or 
refined petroleum products increase the magnitude of these external 
economic costs, thus increasing the true economic cost of supplying 
transportation fuels above the resource costs of producing them. 
Conversely, reducing U.S. imports of crude petroleum or refined fuels 
or reducing fuel consumption can reduce these external costs. Any 
reduction in their total value that results from improved passenger car 
and light truck fuel economy represents an economic benefit of setting 
more stringent CAFE standards, in addition to the value of fuel savings 
and emissions reductions themselves.
---------------------------------------------------------------------------

    \271\ See, e.g., Bohi, Douglas R. and W. David Montgomery 
(1982). Oil Prices, Energy Security, and Import Policy, Washington, 
DC, Resources for the Future, Johns Hopkins University Press; Bohi, 
D.R. and M.A. Toman (1993). ``Energy and Security: Externalities and 
Policies,'' Energy Policy 21: 1093-1109; and Toman, M.A. (1993). 
``The Economics of Energy Security: Theory, Evidence, Policy,'' in 
A.V. Kneese and J.L. Sweeney, eds. (1993). Handbook of Natural 
Resource and Energy Economics, Vol. III, Amsterdam, pp. 1167-1218.
---------------------------------------------------------------------------

    NHTSA explained that increased U.S. oil imports can impose higher 
costs on all purchasers of petroleum products, because the U.S. is a 
sufficiently large purchaser of foreign oil supplies that changes in 
U.S. demand can affect the world price. The effect of U.S. petroleum 
imports on world oil prices is determined by the degree of OPEC 
monopoly power over global oil supplies, and the degree of monopsony 
power over world oil demand exerted by the U.S. The combination of 
these two factors means that increases in domestic demand for petroleum 
products that are met through higher oil imports can cause the price of 
oil in the world market to rise, which imposes economic costs on all 
other purchasers in the global petroleum market in excess of the higher 
prices paid by U.S. consumers.\272\ Conversely, reducing U.S. oil 
imports can lower the world petroleum price, and thus generate benefits 
to other oil purchasers by reducing these ``monopsony costs.''
---------------------------------------------------------------------------

    \272\ For example, if the U.S imports 10 million barrels of 
petroleum per day at a world oil price of $20 per barrel, its total 
daily import bill is $200 million. If increasing imports to 11 
million barrels per day causes the world oil price to rise to $21 
per barrel, the daily U.S. import bill rises to $231 million. The 
resulting increase of $31 million per day is attributable to 
increasing daily imports by only 1 million barrels. This means that 
the incremental cost of importing each additional barrel is $31, or 
$10 more than the newly-increased world price of $21 per barrel. 
This additional $10 per barrel represents a cost imposed on all 
other purchasers in the global petroleum market by U.S. buyers, in 
excess of the price they pay to obtain those additional imports.
---------------------------------------------------------------------------

    NHTSA stated that although the degree of current OPEC monopoly 
power is subject to debate, the consensus appears to be that OPEC 
remains able to exercise some degree of control over the response of 
world oil supplies to variation in world oil price so that the world 
oil market does not behave completely competitively.\273\ The extent of 
U.S. monopsony power is determined by a complex set of factors, 
including the relative importance of U.S. imports in the world oil 
market, and the sensitivity of petroleum supply, and demand to its 
world price among other participants in the international oil market. 
Most evidence appears to suggest that variation in U.S. demand for 
imported petroleum continues to exert some influence on world oil 
prices, although this influence appears to be limited.\274\
---------------------------------------------------------------------------

    \273\ For a summary of this issue, see Leiby, Paul N., Donald W. 
Jones, T. Randall Curlee, and Russell Lee, Oil Imports: An 
Assessment of Benefits and Costs, ORNL-6851, Oak Ridge National 
Laboratory, November 1, 1997, at 17. Available at http://pzl1.ed.ornl.gov/ORNL6851.pdf (last accessed August 26, 2008).
    \274\ Id., at 18-19.
---------------------------------------------------------------------------

    The second component of external economic costs imposed by U.S. 
petroleum imports that NHTSA considered arises partly because an 
increase in oil prices triggered by a disruption in the supply of 
imported oil reduces the level of output that the U.S. economy can 
produce. The reduction in potential U.S. economic output depends on the 
extent and duration of the increases in petroleum product prices that 
result from a disruption in the supply of imported oil, as well as on 
whether and how rapidly these prices return to pre-disruption levels. 
Even if prices for imported oil return completely to their original 
level, however, economic output will be at least temporarily reduced 
from the level that would have been possible without a disruption in 
oil supplies.
    Because supply disruptions and resulting price increases tend to 
occur suddenly rather than gradually, they can also impose costs on 
businesses and households for adjusting their use of petroleum products 
more rapidly than if the same price increase had occurred gradually 
over time. These adjustments impose costs because they temporarily 
reduce economic output even below the level that would ultimately be 
reached once the U.S. economy completely adapted to higher petroleum 
prices. The additional costs to businesses and households reflect their 
inability to adjust prices, output levels, and their use of energy and 
other resources quickly and smoothly in response to rapid changes in 
prices for petroleum products.
    Since future disruptions in foreign oil supplies are an uncertain 
prospect, each of these disruption costs must be adjusted by the 
probability that the supply of imported oil to the U.S. will actually 
be disrupted. The ``expected value'' of these costs--the product of the 
probability that an oil import disruption will occur and the costs of 
reduced economic output and abrupt adjustment to sharply higher 
petroleum prices--is the appropriate measure of their magnitude. Any 
reduction in these expected disruption costs resulting from a measure 
that lowers U.S. oil imports represents an additional economic benefit 
beyond the direct value of savings from reduced purchases of petroleum 
products.
    While the vulnerability of the U.S. economy to oil price shocks is 
widely thought to depend on total petroleum consumption rather than on 
the level of oil imports, variation in imports is still likely to have 
some effect on the magnitude of price increases resulting from a 
disruption of import supply. In addition, changing the quantity of 
petroleum imported into the U.S. may also affect the probability that 
such a disruption will occur. If either the size of the likely price 
increase or the probability that U.S. oil supplies will be disrupted is 
affected by oil imports, the expected value of the costs from a

[[Page 14330]]

supply disruption will also depend on the level of imports.
    NHTSA explained that businesses and households use a variety of 
market mechanisms, including oil futures markets, energy conservation 
measures, and technologies that permit rapid fuel switching to 
``insure'' against higher petroleum prices and reduce their costs for 
adjusting to sudden price increases. While the availability of these 
market mechanisms has likely reduced the potential costs of disruptions 
to the supply of imported oil, consumers of petroleum products are 
unlikely to take account of costs they impose on others, so those costs 
are probably not reflected in the price of imported oil. Thus, changes 
in oil import levels probably continue to affect the expected cost to 
the U.S. economy from potential oil supply disruptions, although this 
component of oil import costs is likely to be significantly smaller 
than estimated by studies conducted in the wake of the oil supply 
disruptions during the 1970s.
    The third component that NHTSA identified of the external economic 
costs of importing oil into the U.S. includes government outlays for 
maintaining a military presence to secure the supply of oil imports 
from potentially unstable regions of the world and to protect against 
their interruption. Some analysts also include outlays for maintaining 
the U.S. Strategic Petroleum Reserve (SPR), which is intended to 
cushion the U.S. economy against the consequences of disruption in the 
supply of imported oil, as additional costs of protecting the U.S. 
economy from oil supply disruptions.
    NHTSA expressed its belief that while costs for U.S. military 
security may vary over time in response to long-term changes in the 
actual level of oil imports into the U.S., these costs are unlikely to 
decline in response to any reduction in U.S. oil imports resulting from 
raising future CAFE standards for passenger cars and light trucks. U.S. 
military activities in regions that represent vital sources of oil 
imports also serve a broader range of security and foreign policy 
objectives than simply protecting oil supplies, and as a consequence 
are unlikely to vary significantly in response to changes in the level 
of oil imports prompted by higher standards.
    Similarly, NHTSA stated that while the optimal size of the SPR from 
the standpoint of its potential influence on domestic oil prices during 
a supply disruption may be related to the level of U.S. oil consumption 
and imports, its actual size has not appeared to vary in response to 
recent changes in oil imports. Thus while the budgetary costs for 
maintaining the SPR are similar to other external costs in that they 
are not likely to be reflected in the market price for imported oil, 
these costs do not appear to have varied in response to changes in oil 
import levels.
    In analyzing benefits from its recent actions to increase light 
truck CAFE standards for model years 2005-2007 and 2008-2011, NHTSA 
relied on a 1997 study by Oak Ridge National Laboratory (ORNL) to 
estimate the value of reduced economic externalities from petroleum 
consumption and imports.\275\ More recently, ORNL updated its estimates 
of the value of these externalities, using the analytic framework 
developed in its original 1997 study in conjunction with recent 
estimates of the variables and parameters that determine their 
value.\276\ These include world oil prices, current and anticipated 
future levels of OPEC petroleum production, U.S. oil import levels, the 
estimated responsiveness of oil supplies and demands to prices in 
different regions of the world, and the likelihood of oil supply 
disruptions. ORNL prepared its updated estimates of oil import 
externalities for use by EPA in evaluating the benefits of reductions 
in U.S. oil consumption and imports expected to result from its 
Renewable Fuel Standard Rule of 2007 (RFS).\277\
---------------------------------------------------------------------------

    \275\ Id.
    \276\ Leiby, Paul N., ``Estimating the Energy Security Benefits 
of Reduced U.S. Oil Imports: Final Report,'' Oak Ridge National 
Laboratory, ORNL/TM-2007/028, Revised March 14, 2008. Available at 
http://pzl1.ed.ornl.gov/energysecurity.html (click on link below 
``Oil Imports Costs and Benefits'') (last accessed August 26, 2008).
    \277\ 72 FR 23899 (May 1, 2007).
---------------------------------------------------------------------------

    The updated ORNL study was subjected to a detailed peer review by 
experts nominated by EPA, and its estimates of the value of oil import 
externalities were subsequently revised to reflect their comments and 
recommendations.\278\ Specifically, reviewers recommended that ORNL 
increase its estimates of the sensitivity of oil supply by non-OPEC 
producers and oil demand by nations other than the U.S. to changes in 
the world oil price, as well as reduce its estimate of the sensitivity 
of U.S. GDP to potential sudden increases in world oil prices.
---------------------------------------------------------------------------

    \278\ Peer Review Report Summary: Estimating the Energy Security 
Benefits of Reduced U.S. Oil Imports, ICF, Inc., September 2007.
---------------------------------------------------------------------------

    After making the revisions recommended by peer reviewers, ORNL's 
updated estimates of the monopsony cost associated with U.S. oil 
imports ranged from $2.77 to $13.11 per barrel, with a most likely 
estimate of $7.41 per barrel (in 2005 dollars). These estimates imply 
that each gallon of fuel saved as a result of adopting higher CAFE 
standards will reduce the monopsony costs of U.S. oil imports by $0.066 
to $0.312, with the most likely value $0.176 per gallon saved. ORNL's 
updated and revised estimates of the increase in the expected costs 
associated with oil supply disruptions to the U.S. and the resulting 
rapid increase in prices for petroleum products amount to $2.10 to 
$7.40 per barrel, with a likely estimate of $4.59 per barrel (again in 
2005 dollars). According to these estimates, each gallon of fuel saved 
will reduce the expected cost disruption to the U.S. economy by $0.050 
to $0.176 per gallon, with the most likely value $0.109 per gallon.
    NHTSA stated that when updated to 2006 dollars, the updated and 
revised ORNL estimates suggest that the combined reduction in monopsony 
costs and expected costs to the U.S. economy from oil supply 
disruptions resulting from lower fuel consumption total $0.120 to 
$0.504 per gallon, with a most likely estimate of $0.295 per gallon. 
This represents the additional economic benefit likely to result from 
each gallon of fuel saved by higher CAFE standards, beyond the savings 
in resource costs for producing and distributing each gallon of fuel 
saved. NHTSA explained that it employed this most likely estimate in 
its analysis of the benefits from fuel savings projected to result from 
alternative CAFE standards for MYs 2011-2015. NHTSA also analyzed the 
effect on these benefits estimates from variation in this value over 
the range from $0.120 to $0.504 per gallon of fuel saved.
    NHTSA's analysis of benefits from alternative CAFE standards for 
the NPRM did not include cost savings from either reduced outlays for 
U.S. military operations or maintaining a smaller SPR among the 
external benefits of reducing gasoline consumption and petroleum 
imports by means of tightening future standards. NHTSA stated that this 
view concurs with both the original ORNL study of economic costs from 
U.S. oil imports and its recent update, which conclude that savings in 
government outlays for these purposes are unlikely to result from 
reductions in consumption of petroleum products and oil imports on the 
scale of those likely to result from reductions in consumption of 
petroleum products and oil imports on the scale of those likely to 
result from the alternative increases in CAFE standards considered for 
MYs 2011-2015.
    All commenters addressing the issue of military costs argued that 
NHTSA should use a value higher than zero. Mr. Delucchi, CARB, and the 
Attorneys General all cited Mr. Delucchi's 2008

[[Page 14331]]

peer-reviewed article in Energy Policy \279\ to argue that military 
costs should be higher than zero. CARB commented that the study 
``undermines the 15-year-old logic from a Congressional Research Study, 
which NHTSA appears to adopt here (page 24411), which concluded we have 
so many other security interests in the Middle East that sharply 
reducing oil imports, therefore, would not affect our military expense 
there.'' CARB argued that ``to the contrary, the Energy Policy study 
authors conclude `spending on defense of the Persian Gulf is in fact 
related to U.S. interests in the region, which are mainly, but not 
entirely, oil interests.' '' CARB cited the study as stating that the 
``best estimate of this relationship translates to $0.03-$0.15 per 
gallon * * *'' The Attorneys General also cited the Energy Policy 
article as assigning ``values to the military savings attributable to 
decreased oil imports,'' and referenced the same per-gallon conclusion.
---------------------------------------------------------------------------

    \279\ Mark A. Delucchi and James J. Murphy, ``U.S. military 
expenditures to protect the use of Persian Gulf oil for motor 
vehicles,'' 36 Energy Policy 2253 (2008). Available at Docket No. 
NHTSA-2008-0089-0173.14.
---------------------------------------------------------------------------

    The Attorneys General also argued that given that ``one of the 
primary purposes of EISA is to achieve energy security,'' and given 
that the ``impact of higher CAFE standards on energy security is not 
zero,'' it was ``astounding'' that ``NHTSA assigned a value of zero to 
the government outlay aspect of energy security (increased military 
spending and purchases for the Strategic Petroleum Reserve).'' 
(Emphasis in original.) The Attorneys General compared NHTSA's decision 
not to monetize military security costs in the NPRM to NHTSA's decision 
not to monetize benefits from reducing CO2 emissions in the 
April 2006 light truck CAFE rule, and argued that the Ninth Circuit's 
decision in CBD supports their position that ``Uncertainty about a 
benefit's value is not a valid reason to assign that value at zero.'' 
\280\ The Attorneys General also argued that just as increases in CAFE 
standards cannot eliminate global warming, but are part of the overall 
global warming solution, increases in CAFE standards similarly ``will 
not'' in and of itself, eliminate these energy security costs,'' but 
are ``a necessary piece of the puzzle in assessing all of the costs and 
benefits of a CAFE standard.''
---------------------------------------------------------------------------

    \280\ Citing CBD v. NHTSA, 508 F.3d 508, 533-35.
---------------------------------------------------------------------------

    CFA cited the same Delucchi article to comment that ``A zero for 
the military and strategic value of oil reduction is simply wrong.'' 
CFA argued that ``There is a substantial policy and academic literature 
that believes oil has a military value,'' and that ``The fact the 
statute had energy independence and security in its title should have 
alerted NHTSA to the likelihood that Congress considers the military 
and strategic value of oil important.'' CFA provided a fairly long 
excerpt from the Delucchi article to argue that there may be large 
unquantifiable costs beyond specific expenditures on the military with 
regard to the ``entire relevant military or `security' cost of using 
oil,'' including

reduced flexibility in the conduct of U.S. foreign policy, strains 
on international relations due to the activities of the U.S. 
military and even due to competition for oil, anti-American 
sentiment due to the presence of the U.S. military in the Middle 
East, political destabilization of the Middle East, and the 
nonfinancial human-suffering cost of war and political instability 
related to U.S. demand for oil.\281\
---------------------------------------------------------------------------

    \281\ CFA comments at 48, citing Delucchi at 2262.
---------------------------------------------------------------------------

    CFA concluded that ``NHTSA should have quantified what it could in 
the framework of the model,'' and ``To the extent that there is a large 
and significant unquantifiable value, it should have oriented its 
considerations toward greater energy conservation.'' CFA suggested a 
value of $0.30 for military costs, apparently on the basis of this 
argument.
    Public Citizen also commented that NHTSA's value for military 
security costs should be higher than zero. Public Citizen stated that 
NHTSA's rationale for assigning a zero value was similar to its logic 
in assigning a value of zero to reducing CO2 emissions in 
the 2006 light truck CAFE final rule, and argued that the Ninth Circuit 
had ``rejected this justification in Center for Biological Diversity v. 
NHTSA, finding that uncertainty about how to assign a value was not a 
justification for setting the value at zero.'' NRDC and the Sierra Club 
et al. also made this point in their comments.
    NRDC stated that ``the undisputed fact that there are currently 
military expenditures associated with the protection of access to oil 
supplies implies that there must be a positive military cost associated 
with each gallon of gasoline consumed.'' NRDC argued that ``Since it 
can be assumed that the United States would expend little or no 
military resources to secure access to a non-strategic commodity, there 
must exist a positive benefit in moving the consumption to the point 
where oil is no longer a strategic commodity.'' NRDC described this 
value as ``the country's opportunity to decrease military expenditure 
or respond more flexibly to supply threats, and must have a positive 
magnitude.'' NRDC suggested several ``aggregate expenditure estimates 
[produced] through rigorous, data-driven analysis'' for NHTSA to 
consider, including the estimate of $0.03 to $0.17 from the Delucchi 
article, a 2004 analysis for the National Commission on Energy Policy 
estimating a ``peacetime per gallon'' cost of $0.23 to $0.28, \282\ and 
estimates of $0.14 to $0.26 per gallon based on a 2005 study by the 
International Center for Technology Assessment.\283\ NRDC stated, 
however, that because ``current expenditures may pale in comparison to 
the total future financial cost of military actions,'' ``this presents 
a strong rationale for using per-gallon cost estimates near the upper 
bound of the determined range.'' NRDC argued that ``The initial 
[literature] review herein suggests that the per gallon marginal 
benefit of reducing oil consumption may be as high as 28 cents per 
gallon of gasoline.''
---------------------------------------------------------------------------

    \282\ Jaffe, Amy Myers (2004). United States and the Middle 
East: Policies and Dilemmas. Analysis commissioned by the National 
Commission on Energy Policy.
    \283\ International Center for Technology Assessment (2005). 
``Gasoline Cost Externalities: Security and Protection Services.'' 
NRDC stated that it adjusted the estimates found in the study from 
2005 values of 13 to 23 cents into 2008 values using http://data.bls.gov/cgi-bin/cpicalc.pl.
---------------------------------------------------------------------------

    The Sierra Club et al. commented that NHTSA must ``provide an 
accurate dollar value for'' ``the national security costs of oil,'' by 
``considering the relevant research.'' Sierra Club argued that the 
national security costs of oil are twofold, coming from both climate 
change and oil dependence. Regarding the national security costs 
expected from climate change, Sierra Club commented that a recent 
``report from the National Intelligence Council * * * found that 
climate change poses a serious national security threat to our 
country,'' in the form of ``humanitarian disasters, economic migration, 
and food and water shortages'' due to climate change contributing to 
``political instability, disputes over resources, and mass migrations'' 
in many ``at-risk regions'' of the world, that will have economic 
impacts in the United States. Regarding the national security costs of 
oil dependence, Sierra Club cited the 2005 ICTA report mentioned by 
NRDC as an example of the ``numerous studies * * * [that] document 
these costs.''
    Although UCS offered no discussion of military costs in its primary 
comment document, it submitted as an attachment a report suggesting 
that NHTSA use a value of $0.35 per gallon (in 2006 dollars) for 
``improved oil security.'' The report cited ``A recent study from Oak 
Ridge National

[[Page 14332]]

Laboratory [which] assesses these energy security benefits of reduced 
oil consumption at $14.51 per barrel, or $0.35 per gallon.'' \284\ The 
report stated that ``This is a conservative assessment, as it excludes 
all military program costs, as well as the `difficult-to-quantify 
foreign policy impact of oil import reliance.' (Leiby 2007)''
---------------------------------------------------------------------------

    \284\ The report noted that it had updated this value from 2004 
dollars to 2006 dollars.
---------------------------------------------------------------------------

    NHTSA received no comments on the estimates of monopsony costs or 
potential costs from oil supply disruptions. Thus it has continued to 
employ the estimates of these costs reported in the updated ORNL study 
in establishing final CAFE standards and evaluating their benefits. The 
agency notes, however, that the monopsony cost varies directly with 
world oil prices, and that the forecast of world oil prices used in 
this analysis differs significantly from that assumed in the ORNL 
study. Thus NHTSA has adjusted the updated ORNL estimate of the 
monopsony cost to reflect the AEO 2008 High Price Case forecast of 
world oil prices, which averages $88 per barrel (in 2007 dollars) over 
the period from 2011-30. Expressed in 2007 dollars, NHTSA's revised 
estimates of the reductions in monopsony costs and expected costs from 
oil supply disruptions are $0.266 and $0.116 per gallon of fuel saved.
    NHTSA disagrees with commenters who asserted that fuel savings 
resulting from higher CAFE standards are likely to result directly in 
reductions in U.S. military expenses to protect the supply of petroleum 
imports, particularly from the Persian Gulf region. NHTSA agrees that 
by reducing fuel consumption and U.S. petroleum imports from 
politically unstable regions, higher CAFE standards might reduce the 
military and political risks posed by U.S. military deployments in 
these regions. However, the agency does not believe there is convincing 
evidence at this time that reducing these risks would necessarily 
reduce U.S. military activities or expenditures in the Persian Gulf or 
elsewhere. None of the commenters presented any evidence that 
reductions in U.S. military spending would occur in response to fuel 
savings and reductions in U.S. petroleum imports, nor do any of the 
references included in their comments provide such evidence.
    In particular, NHTSA does not agree with Public Citizen's analogy 
between energy security and ``global warming costs.'' Although the 
economic valuation of climate-related benefits from reducing carbon 
dioxide emissions is uncertain, there is nevertheless a direct causal 
link between changes in U.S. oil consumption and changes in U.S. carbon 
dioxide emissions. In contrast, no such causal linkage--either 
scientific or empirical--exists between changes in U.S. oil consumption 
or imports and changes in U.S. military expenditures in the Persian 
Gulf, or elsewhere in the world. The agency notes that one particularly 
comprehensive and authoritative treatment of the potential security 
benefits from reducing U.S. energy consumption reaches exactly this 
same conclusion.\285\
---------------------------------------------------------------------------

    \285\ Douglas R. Bohi and Michael A. Toman, Economics of Energy 
Security, Kluwer Academic Publishers, 1996.
---------------------------------------------------------------------------

    Although one recent economic analysis cited widely by commenters 
did estimate the value of U.S. military spending attributable to 
securing oil imports from the Persian Gulf region, this study does not 
estimate the extent to which U.S. military spending is likely to vary 
in response to changes in U.S. imports of Persian Gulf oil. Nor does it 
estimate the potential savings in U.S. military outlays that might 
result from reductions in U.S. oil imports of the magnitude likely to 
result from higher CAFE standards.\286\
---------------------------------------------------------------------------

    \286\ See Mark A. Delucchi and James J. Murphy, U.S. Military 
Expenditures to Protect the Use of Persian Gulf Oil Imports, 36 
Energy Policy 2253 (2008) (assigning a cost of between $0.03 and 
$0.15 per gallon). Available at Docket No. NHTSA-2008-0089-0173.14.
---------------------------------------------------------------------------

    The study argues that its purpose is to develop ``the military cost 
of highway transportation.'' The authors attempt to do this in four 
steps:
     Estimate the amount spent annually to defend all U.S. 
interests in the Persian Gulf;
     Deduct the cost of defending U.S. interests other than oil 
in the Persian Gulf;
     Deduct the cost of defending against the possibility of a 
worldwide recession due to the effects of an oil price shock or supply 
interruption originating in the Persian Gulf on other countries; and
     Deduct the cost of defending the use of oil in sectors of 
the U.S. economy other than highway transportation.
    This analysis yields an estimate of the annual ``military cost of 
oil use by motor vehicles'' in the United States ranging from $5.8 
billion to $25.4 billion in 2004. The authors then divide these figures 
by 2004 U.S. gasoline and diesel consumption by on-road motor vehicles 
to arrive at an average ``military cost of highway transportation'' 
ranging from $0.03 to $0.15 per gallon of fuel.\287\
---------------------------------------------------------------------------

    \287\ Id., at 2260.
---------------------------------------------------------------------------

    However, the authors do not argue that U.S. military spending would 
be reduced by this--or any other--amount as a consequence of 
incremental reductions in domestic consumption of transportation fuels. 
Instead, they describe their estimate in the following terms: ``The 
bottom line of our analysis is that if all motor vehicles in the U.S. 
(light-duty and heavy-duty) did not use oil, Congress might reduce 
defense spending by $6-$25 billion annually in the long run. This 
amounts to about $0.03-$0.15 per gallon ($0.01-$0.04 per liter) of all 
gasoline and diesel motor fuel in 2004.'' (p. 2260; emphasis added.)
    Thus the values they report are clearly intended as estimates of 
the total and average per-gallon costs of U.S. military activities in 
the Persian Gulf that might reasonably be related to petroleum 
consumption by U.S. motor vehicles, and not as estimates of the extent 
to which those costs might be reduced as a consequence of lower fuel 
consumption by U.S. motor vehicles. Nothing in their analysis suggests 
that this average value bears any necessary relationship to the savings 
in military outlays that might results from modest reductions in U.S. 
petroleum consumption or imports. Although the authors speculate that 
the proportional reduction in these outlays might be larger than any 
proportional reduction in U.S. petroleum imports from the Persian Gulf 
region, they provide no support for this hypothesis.\288\
---------------------------------------------------------------------------

    \288\ Id., at 2261-2262.
---------------------------------------------------------------------------

    Nor does this study attempt to demonstrate any causal or empirical 
linkage between domestic consumption of transportation fuels and the 
level of U.S. military activities or spending in the Persian Gulf (or 
elsewhere), as would be required to support any argument that military 
outlays would actually be reduced in response to lower U.S. fuel 
consumption and petroleum imports. As the authors clearly acknowledge, 
achieving any reduction in U.S. military spending that might be 
facilitated by lower U.S. oil imports would require specific actions by 
Congress, and would not result automatically or necessarily. However 
carefully their analysis of military spending might be done, defining 
some fraction of U.S. military expenditures as being allocated to the 
defense of oil interests in the Persian Gulf, and then dividing the 
resulting figure by some quantity of petroleum use does not demonstrate 
any causal linkage between changes in the numerator (military spending) 
and incremental changes in the denominator (petroleum consumption) of 
this calculation.

[[Page 14333]]

    The analysis described above is irrelevant to NHTSA's analysis of 
fuel economy standards, because NHTSA's cost-benefit analysis is 
properly concerned with comparing two alternative states of the world: 
(1) The world as we expect it to exist over the next few years, in the 
absence of any new CAFE standards, compared with (2) an alternative 
world that is identical in every respect except that new CAFE standards 
are in place. NHTSA should, therefore, consider how U.S. defense 
expenditures might vary between these two states of the world. The 
relevant question for a cost-benefit analysis is: How much would U.S. 
military expenditures change if U.S. passenger-car and light-truck fuel 
consumption is several percent lower in the next decade than it 
otherwise would have been?
    Neither the Congress nor the Executive Branch has ever attempted to 
calibrate U.S. military expenditures, force levels, or deployments to 
any oil market variable, or to some calculation of the projected 
economic consequences of hostilities in the Persian Gulf. Instead, 
changes in U.S. force levels, deployments, and thus military spending 
in that region have been largely governed by political events, emerging 
threats, and other military and political considerations, rather than 
by shifts in U.S. oil consumption or imports. NHTSA thus concludes that 
the levels of U.S. military activity and expenditures are likely to 
remain unaffected by even relatively large changes in light duty 
vehicle fuel consumption.
    Nevertheless, the agency conducted a sensitivity analysis of the 
potential effect of assuming that some reduction in military spending 
would result from fuel savings and reduced petroleum imports in order 
to investigate its impacts on the standards and fuel savings. Assuming 
that the preceding estimate of total U.S. military costs for securing 
Persian Gulf oil supplies is correct, and that approximately half of 
these expenses could be reduced in proportion to a reduction in U.S. 
oil imports from the region, the estimated savings would range from 
$0.02 to $0.08 (in 2007 dollars) for each gallon of fuel savings that 
was reflected in lower U.S. imports of petroleum from the Persian Gulf. 
If the Persian Gulf region is assumed to be the marginal source of 
supply for U.S. imports of crude petroleum and refined products, then 
each gallon of fuel saved might reduce U.S. military outlays by $0.05 
per gallon, the midpoint of this range. NHTSA employs this estimate in 
its sensitivity analysis.
    While NHTSA believes that military expenditures appropriated by the 
U.S. Congress are not directly related to changes in domestic petroleum 
consumption, the agency recognizes that reductions in petroleum 
consumption may provide other benefits that are more difficult to 
quantify, by reducing some constraints on U.S. diplomatic and military 
action. U.S. foreign policy decisions consider a wide range of U.S. 
interests, including the maintenance of secure petroleum supplies. 
Reduced consumption of petroleum might allow the U.S. to more 
vigorously pursue other foreign policy interests, by reducing concerns 
about the implications of pursuing these other interests for the 
availability and continuity of petroleum imports.
    The agency recognizes, however, that both the effect of reducing 
U.S. petroleum imports on the flexibility of its foreign policy 
initiatives and the economic value of such additional flexibility are 
highly uncertain. Reducing petroleum consumption is likely to have 
unpredictable effects on both military actions and diplomatic 
initiatives, and even if the U.S. government planned and signaled its 
foreign policy intentions under various levels of petroleum consumption 
in advance, NHTSA is unaware of any accepted methods for establishing 
the economic value of increased freedom in designing military or 
diplomatic actions. And because the nation's foreign policy intentions 
are not communicated in advance, the agency would need to develop a 
procedure for anticipating how military and diplomatic actions would 
respond to future changes in petroleum consumption. Nevertheless, in 
its future rulemaking activities, NHTSA will investigate whether 
practical methods for predicting and valuing in economic terms any 
increased flexibility in U.S. foreign policy that is likely to result 
from reduced petroleum imports exist or can be developed.
12. Air Pollutant Emissions
(a) Impacts on Criteria Pollutant Emissions
    Criteria air pollutants are common pollutants that EPA regulates 
under the Clean Air Act, by establishing permissible concentrations on 
the basis of human health-related or science-based criteria.\289\ NHTSA 
explained in the NPRM that while reductions in domestic fuel refining 
and distribution that result from lower fuel consumption will reduce 
U.S. emissions of criteria air pollutants, additional vehicle use 
associated with the rebound effect from higher fuel economy will in 
turn increase emissions of those pollutants. Thus, the net effect of 
stricter CAFE standards on emissions of each criteria pollutant depends 
on the relative magnitudes of its reduced emissions in fuel refining 
and distribution, and increases in its emissions from vehicle use. 
Because the relationship between emissions rates in fuel refining \290\ 
and in vehicle use \291\ is different for each criteria pollutant, the 
net effect of fuel savings from the proposed standards on total 
emissions of each pollutant is likely to differ. Criteria air 
pollutants emitted by vehicles and during fuel production include 
carbon monoxide (CO), hydrocarbon compounds (usually referred to as 
``volatile organic compounds'' or VOCs), nitrogen oxides 
(NOX), fine particulate matter (PM2.5) and sulfur 
oxides (SOX).
---------------------------------------------------------------------------

    \289\ Criteria pollutants regulated by EPA include ozone, 
particulate matter, carbon monoxide, nitrogen oxides, sulfur 
dioxide, and lead. For more information, see http://www.epa.gov/air/urbanair/ (last accessed October 5, 2008).
    \290\ That is, emissions per gallon of fuel refined.
    \291\ That is, emissions per mile driven.
---------------------------------------------------------------------------

    For additional vehicle use due to the rebound effect, NHTSA 
estimates the increase in emissions of these pollutants by multiplying 
the increase in total miles driven by vehicles of each model year and 
age by age-specific emission rates per vehicle-mile for each pollutant. 
NHTSA developed these emission rates using EPA's MOBILE6.2 motor 
vehicle emissions factor model.\292\ Emissions of these pollutants also 
occur during crude oil extraction and transportation, fuel refining, 
and fuel storage and distribution. The reduction in total emissions 
from each of these sources thus depends on the extent to which fuel 
savings result in lower imports of refined fuel, or in reduced domestic 
fuel refining. To a lesser extent, they also depend on whether any 
reduction in domestic gasoline refining is translated into reduced 
imports of crude oil or reduced domestic extraction of petroleum.
---------------------------------------------------------------------------

    \292\ U.S. EPA, MOBILE6 Vehicle Emission Modeling Software, 
available at http://www.epa.gov/otaq/m6.htm#m60 (last accessed 
October 5, 2008).
---------------------------------------------------------------------------

    Based on an analysis of changes in U.S. gasoline imports and 
domestic gasoline consumption forecast in AEO's 2008 Early Release, 
NHTSA tentatively estimated in the NPRM that 50 percent of fuel savings 
resulting from higher CAFE standards would result in reduced imports of 
refined gasoline, while the remaining 50 percent would

[[Page 14334]]

reduce domestic fuel refining.\293\ The reduction in domestic refining 
was assumed to leave its sources of crude petroleum unchanged from the 
mix of 90 percent imports and 10 percent domestic production projected 
by AEO.
---------------------------------------------------------------------------

    \293\ Estimates of the response of gasoline imports and domestic 
refining to fuel savings from stricter standards are variable and 
highly uncertain, but NHTSA's preliminary analysis as of the time 
the NPRM was published indicated that under any reasonable 
assumption about these responses, the magnitude of the net change in 
criteria pollutant emissions (accounting for both the rebound effect 
and changes in refining emissions) is extremely low relative to 
their current total.
---------------------------------------------------------------------------

    For fuel refining and distribution, NHTSA proposed to estimate 
criteria pollutant emission reductions using emission rates from 
Argonne National Laboratories' Greenhouse Gases and Regulated Emissions 
in Transportation (GREET) model.\294\ The GREET model provides separate 
estimates of air pollutant emissions that occur in four phases of fuel 
production and distribution: Crude oil extraction, crude oil 
transportation and storage, fuel refining, and fuel distribution and 
storage.\295\ NHTSA tentatively assumed, for purposes of the NPRM 
analysis, that reductions in imports of refined fuel would reduce 
criteria pollutant emissions during fuel storage and distribution only. 
Reductions in domestic fuel refining using imported crude oil as a 
feedstock were tentatively assumed to reduce emissions during crude oil 
transportation and storage, as well as during gasoline refining, 
distribution, and storage, because less of each of these activities 
would be occurring. Similarly, reduced domestic fuel refining using 
domestically produced crude oil was tentatively assumed to reduce 
emissions during phases of gasoline production and distribution.\296\
---------------------------------------------------------------------------

    \294\ Argonne National Laboratories, The Greenhouse Gas and 
Regulated Emissions from Transportation (GREET) Model, Version 1.8. 
Available at http://www.transportation.anl.gov/software/GREET/index.html (last accessed October 5, 2008).
    \295\ Emissions that occur during vehicle refueling at service 
stations (primarily evaporative emissions of VOCs) are already 
accounted for in the ``tailpipe'' emission factors used to estimate 
the emissions generated by increased car and light truck use. GREET 
estimates emissions in each phase of gasoline production and 
distribution in mass per unit of gasoline energy content; these 
factors are then converted to mass per gallon of gasoline using the 
average energy content of gasoline.
    \296\ As NHTSA stated in the NPRM, in effect, this assumes that 
the distances crude oil travels to U.S. refineries are approximately 
the same whether the oil travels from domestic oilfields or import 
terminals, and that the distances that gasoline travels from 
refineries to retail stations are approximately the same as those 
from import terminals to retail stations.
---------------------------------------------------------------------------

    The net changes in emissions of each criteria pollutant were 
calculated by adding the increases in their emissions that result from 
increased vehicle use and the reductions that result from lower 
domestic fuel refining and distribution. The net change in emissions of 
each criteria pollutant was converted to an economic value using 
estimates of the economic damage costs per ton emitted \297\ developed 
by EPA and submitted to OMB for review. For certain criteria 
pollutants, EPA estimates different per-ton costs for emissions from 
vehicle use than for emissions of the same pollutant during fuel 
production, reflecting differences in their typical geographic 
distributions, contributions to ambient pollution levels, and resulting 
population exposure.
---------------------------------------------------------------------------

    \297\ These costs result primarily from damages to human health.
---------------------------------------------------------------------------

    NHTSA received comments on this issue from the Alliance, NADA, the 
Air Improvement Resources Committee of the Alamo Area Council of 
Governments, and an individual, Mr. Mark Delucchi. Mr. Delucchi 
commented that NHTSA should clarify what kinds of damages are included 
in the per-ton damage cost estimates for criteria pollutants and 
CO2. He suggested that if NHTSA's estimates are based on 
EPA's damage estimates, then they do not include health damages, 
visibility, crop damages, materials damages, and natural-ecosystem 
damages. Mr. Delucchi argued that NHTSA should include estimates for 
these additional categories of damage due to pollutants, and that the 
agency ``can find peer-reviewed estimates of damages in most of these 
categories on [his] faculty web page.''
    The Air Improvement Resources Committee of the Alamo Area Council 
of Governments (Texas) did not comment specifically on NHTSA's 
estimates for criteria pollutants, but simply expressed its support for 
the proposed standards due to the fact that they would ``create net 
reductions in oxides of nitrogen over the lifetimes of Model Years 
2011-2015 vehicles, and the San Antonio region is NOX 
limited, meaning reducing NOX emissions in the region will 
have a greater impact on ozone levels than would comparable volatile 
organic compound (VOC) reductions.'' The AIRC stated that ``Although 
the proposed rulemaking would create a net increase in VOCs, the 
NOX increase is of greater benefit for ozone formation in 
our region,'' and therefore the AIRC supported the proposed standards.
    The Alliance commented more specifically on NHTSA's estimates for 
criteria pollutants, arguing that NHTSA's estimates of reductions in 
ozone precursors were overstated for two main reasons: First, because 
``NHTSA did not properly take into account the new source review 
standards [under the Clean Air Act], and otherwise assumed away federal 
(and state) laws that would have the effect of requiring offsets from 
the upstream refineries that NHTSA attempts to claim credit for;'' and 
second, because ``there is no indication that NHTSA has * * * 
considered the fleet turnover effect,'' ``meaning that the significant 
costs NHTSA will add to the price of new vehicles will delay the 
transition the market would naturally make to more fuel efficient and 
cleaner vehicles.'' NADA also argued that the ``Criteria pollutant 
reduction benefits associated with the proposed CAFE standards are 
overstated as the negative impact of inhibited fleet turnover was not 
accounted for.''
    As support for its comment that NHTSA had overlooked federal and 
state laws that would impact upstream criteria pollutant emissions, the 
Alliance cited both the Sierra Research and the NERA Reports it 
included as attachments to its comments. Sierra Research commented that 
``Most upstream emissions associated with the use of gasoline * * * in 
areas with air pollution problems'' are already subject to air 
pollution control regulations, such that ``changes in fuel type or the 
volume of fuel produced are governed by * * * offset requirements and 
credit provisions.'' Sierra Research argued that the GREET model used 
by NHTSA ignores the impacts of these regulations, by assuming that 
reductions in gasoline consumption translate directly into reductions 
in pollutant emissions. However, Sierra argued, in tightly regulated 
areas of the country, the air pollution control system will be much 
more complicated than that, such that any ``give'' in one part of the 
pollution control system will simply be absorbed by another part, and 
there will be no net reduction in emissions for that area. Sierra also 
argued that the GREET model does not properly account for ``marketing'' 
(i.e., from gasoline station) emissions, which have been reduced in 
recent years due to proliferating vapor recovery system regulations at 
the state and local levels.
    The NERA Report first argued that NHTSA had overestimated the 
amount of criteria pollutant emissions that would be reduced. It echoed 
Sierra Research's comment about New Source Review standards impacting 
criteria pollutant emissions, but argued further that their analysis of 
total emissions estimates for refineries in the National

[[Page 14335]]

Emission Inventory database for 2002 suggested that NHTSA had 
substantially overestimated NOX and PM2.5 
emissions, by ``more than two and three times * * *, respectively.'' 
NERA compared NEI database refinery emissions estimates for 2002 to 
``estimates of refining emissions based on NHTSA's emission factors for 
refineries and U.S. production of gasoline and diesel fuels in that 
same year (EPA 2002),'' assuming that NHTSA's estimates should be 
smaller, since ``refineries produce other products besides gasoline and 
diesel fuel.'' However, NERA found that ``estimates based on NHTSA's 
rates for only two refinery products (gasoline and diesel fuel) are 
larger than the NEI estimates for all refinery operations.'' NERA thus 
concluded that NHTSA had overestimated the benefits associated with 
reducing criteria pollutant emissions, because it had overestimated the 
amount of criteria pollutant emissions that would be reduced. NERA also 
stated that to the extent that fuel consumption was reduced in the 
long-run, refineries would be subject to more stringent emissions 
standards anyway, or fuel imports would be reduced, which would have no 
impact on U.S. emissions, although NERA did not attempt to quantify 
those effects.
    The NERA Report next argued that NHTSA had used ``ad hoc'' 
estimates of the value per ton of criteria pollutants based on 
recommendations from EPA's OTAQ, which were unverifiable. NERA implied 
that NHTSA should instead use ``values based on published EPA 
estimates,'' which it found included in a 2006 report by OMB to 
Congress. NERA stated that ``OMB's values are slightly higher than 
NHTSA's for VOCs, but substantially lower for PM2.5 and 
SOX.''
    The NERA Report finally argued that ``increasing quality-adjusted 
new vehicle prices will lead to an increase in the average age of the 
vehicle fleet, [which] will increase emissions both because older 
vehicles faced less stringent emission standards when sold and because 
the effectiveness of controls (especially those for NOX) 
declines as the vehicle ages.'' NERA did not, however, attempt to 
quantify these emissions impacts. The Alliance in its comments 
emphasized this point about the fleet turnover effect, stating that it 
``shows that most criteria pollutant and air toxic levels will worsen 
for decades in consequence of NHTSA's proposed standards, as consumers 
delay purchasing new, more fuel-efficient vehicles in the current 
marketplace prior to an expensive new government mandate.'' The 
Alliance argued that EPCA and principles of administrative law require 
NHTSA to consider this effect.\298\
---------------------------------------------------------------------------

    \298\ NHTSA notes that the Alliance also included a Sierra 
Research report previously submitted to EPA in connection with 
California's waiver application regarding the fleet-turnover effect 
with respect to California's proposed GHG emissions standards, as 
Attachment 14 to the Alliance's comments. NHTSA has not summarized 
the findings of that report in detail because it believes that the 
purpose for which the Alliance submitted the report is already 
captured by the NERA Report comments, and because the fleet-turnover 
effect due to California's proposed standards would have no direct 
impact on NHTSA's decision for the final rule.
---------------------------------------------------------------------------

    Agency response: In response to Mr. Delucchi's comment, NHTSA is 
confident that the damage cost estimates it used in the NPRM to value 
reductions in criteria air pollutants and their chemical precursors 
include the full range of human health impacts known to be associated 
with exposure to each of these pollutants that current scientific and 
economic knowledge allows to be quantified and valued in economic 
terms. Differences between these damage costs and the estimates by OMB 
cited by commenters reflect the fact that the estimates provided to 
NHTSA by EPA apply specifically to emissions by motor vehicles, and 
include separate costs for emissions from stationary sources such as 
petroleum refineries where such differences are appropriate. The 
estimates provided by EPA also reflect more up-to-date knowledge about 
the human health impacts of exposure to criteria air pollutants and the 
economic costs associated with those impacts than do the estimates 
reported by OMB. Thus in the analysis it conducted for this final rule, 
NHTSA has continued to use the damage cost estimates supplied by EPA to 
determine the economic costs or benefits from changes in emissions of 
criteria air pollutants that result from higher CAFE standards.
    In response to comments provided by NERA on behalf of the Alliance, 
NHTSA acknowledges that it may have overestimated reductions in 
upstream emissions of some criteria air pollutants (particularly PM and 
NOX) resulting from fuel savings in the analysis it 
conducted for the NPRM. NHTSA has taken two steps to remedy this 
possible overestimation. First, the agency used updated emission 
factors supplied by EPA for vehicles used to transport crude petroleum 
and refined fuel, including ocean tankers, railroad locomotives, 
barges, and heavy-duty trucks, to recalculate the emissions factors for 
each stage of fuel production and distribution in Argonne's GREET 
model. These updated emission factors reflect the effects of recent and 
pending EPA regulations on vehicle emissions and fuel composition, and 
result in significant reductions in the upstream emission rates for 
fuel production and distribution estimated using GREET. These lower 
upstream emission rates reduce NHTSA's estimates of emissions during 
fuel production and distribution under both Baseline and alternative 
CAFE standards, and by doing so also lower the reductions in upstream 
emissions projected to result from any increase in CAFE standards from 
their Baseline levels.
    In addition, NHTSA notes that the estimates of reductions in 
upstream emissions it reported in the NPRM incorrectly included 
reductions in ocean tanker emissions for transportation of crude 
petroleum from overseas to ports or offshore oil terminals in the U.S. 
Since most of these emissions probably occur outside of the U.S., they 
should not be included in NHTSA's estimates of upstream emissions 
reductions, since those are intended to represent changes in domestic 
emissions of criteria air pollutants.\299\ NHTSA has revised its 
analysis for this final rule to exclude reductions in ocean tanker 
emissions.
---------------------------------------------------------------------------

    \299\ Emissions from ocean tankers while in port areas, as well 
as pipeline or truck emissions occurring during transportation of 
crude petroleum from import terminals to U.S. refineries, do occur 
within the U.S., and reductions in these emissions should be 
included when estimating changes in domestic emissions. However, it 
is not possible to separate these emissions from those that occur in 
foreign ports or on the open oceans, so NHTSA's analysis does not 
include reductions in them. As a consequence, the analysis may 
underestimate reductions in upstream emissions occurring within the 
U.S.
---------------------------------------------------------------------------

    In response to comments by Sierra Research and NERA submitted by 
the Alliance, NHTSA notes that there are currently two cap-and-trade 
programs governing emissions of criteria pollutants by large stationary 
sources. The Acid Rain Program seeks to limit NOX and 
SO2 emissions, but applies only to electric generating 
facilities.\300\ The NOX Budget Trading Program is also 
primarily intended to reduce electric utility emissions, but does 
include some other large industrial sources such as refineries; 
however, as of 2003, refineries participating in the program accounted 
for less than 5 percent of total NOX emissions by U.S. 
refineries.\301\ In addition, some

[[Page 14336]]

refineries could be included among the sources of NOX 
emissions that will be controlled under EPA's Clean Air Interstate 
Rule, which is scheduled to take effect beginning in 2009. However, 
refinery NOX emissions could only be affected in states that 
specifically elect to include sources other than electric generating 
facilities in their plans to comply with the rule, and EPA has 
indicated that it expects states to achieve the emissions reductions 
required by the Clean Air Interstate Rule primarily from the electric 
power industry.\302\ Thus, the agency continues to assume that the 
reduction in domestic gasoline refining estimated to result from the 
adopted CAFE standard will be reflected in reduced refinery emissions 
of criteria pollutants.
---------------------------------------------------------------------------

    \300\ For a detailed description of the Acid Rain program, see 
http://www.epa.gov/airmarkt/progsregs/arp/basic.html#princips (last 
accessed October 6, 2008).
    \301\ Estimated from EPA, NOX Budget Trading Program 
(SIP Call) 2003 Progress Report, Appendix A, http://www.epa.gov/airmarkets/cmprpt/nox03/NBP2003AppendixA.xls, and National Air 
Quality and Emissions Trends Report 2003, Table A-4, http://www.epa.gov/air/airtrends/aqtrnd03/pdfs/a4.pdf.
    \302\ The Clean Air Interstate Rule also requires reductions in 
SO2 emissions and establishes an emissions trading 
program to achieve them, but only electric generating facilities are 
included in the rule's SO2 emissions trading program; see 
EPA, Clean Air Interstate Rule: Basic Information, http://www.epa.gov/cair/basic.html#timeline (last accessed October 6, 2008) 
and http://www.epa.gov/cair/pdfs/cair_final_fact.pdf (last 
accessed October 6, 2008). Although the rule was held to exceed the 
scope of EPA's delegated authority under the CAA, North Carolina v. 
EPA, 531 F.3d 896 (2008), the Court remanded the rule to EPA and so 
it remains in force. Order of December 23, 2008 in No. 05-1244.
---------------------------------------------------------------------------

    NHTSA also notes in response to comments by Sierra Research and 
NERA submitted by the Alliance that emissions occurring during 
refueling at retail stations are included in the emissions factors 
estimated using EPA's MOBILE emission factor model, which also accounts 
for expected future reductions in these emissions. Thus, NHTSA believes 
that reductions in refueling emissions were correctly estimated in its 
NPRM analysis, and has not revised its procedures for doing so.
    Finally, in response to comments by the Alliance and NERA, NHTSA 
acknowledges that the effect of higher prices for new vehicles on the 
retention and use of older vehicles is potentially significant, 
depending on the magnitude of expected price increases. As indicated in 
the discussion of the appropriate discount rate to use in analyzing the 
impacts of alternative CAFE standards (see Section V.B.14 below), 
however, NHTSA believes that manufacturers are likely to experience 
difficulty raising prices for new cars and light trucks sufficiently to 
recover all their costs for complying with higher CAFE standards. Based 
on a detailed econometric analysis of the effects of new vehicle prices 
and other variables on retirement rates for used vehicles very similar 
to the analysis conducted by NERA for the Alliance, NHTSA concludes 
that price increases for MY 2011 cars and light trucks likely to result 
from higher CAFE standards are unlikely to cause significant or lasting 
changes in retirement rates for older vehicles. NHTSA also notes that 
the vehicles whose retirement rates would be most affected by increases 
in prices for MY 2011 passenger cars and light trucks are those that 
will be 10-15 years of age at the time when 2011 vehicles are offered 
for sale.\303\ These include cars and light trucks produced during 
model years 2001 through 2005, and NHTSA's analysis of their emission 
rates at those ages predicted using EPA's MOBILE6.2 motor vehicle 
emission factor model suggests that they will not be dramatically 
higher than emission rates for comparable new 2011 models. Thus the 
effect on total motor vehicle emissions of criteria air pollutants 
resulting from any reduction in new vehicle sales and accompanying 
increase in use of older vehicles caused by increased prices for new 
2011 cars and light trucks is likely to be modest.
---------------------------------------------------------------------------

    \303\ This conclusion is based on unpublished econometric 
analysis of the effects of new vehicle prices and other variables on 
retirement rates for used vehicles conducted by the Volpe Center. 
This analysis concluded that retirement rates for 10-15 year old 
vehicles are most sensitive to changes in new vehicle prices.
---------------------------------------------------------------------------

    In its future CAFE rulemaking activities, NHTSA will coordinate 
with EPA to develop updated estimates for the economic benefits that 
are likely to result from reducing motor vehicle emissions of criteria 
air pollutants and the resulting atmospheric concentrations of these 
pollutants. EPA maintains an on-going research program to document, 
estimate, and value the reduction in threats to human health that occur 
in response to declines in atmospheric pollutant levels and population 
exposure to harmful concentrations of these pollutants. At the same 
time, the agency will incorporate recent improvements in EPA's motor 
vehicle emission factor models to increase the accuracy of its 
estimates of changes in criteria pollutant emissions resulting from 
increased fuel economy. Similarly, the agency will also support any 
efforts by EPA to develop comparable estimates of the economic value of 
reduced threats to human health that result from lower emissions of 
hazardous air pollutants by motor vehicles, while continuing to improve 
its methods for estimating reductions in emissions of these pollutants 
that result from increased fuel efficiency.
(b) Reductions in CO2 Emissions
    In the NPRM, NHTSA also discussed the fact that fuel savings from 
stricter CAFE standards result in lower emissions of carbon dioxide 
(CO2), the main greenhouse gas emitted as a result of 
refining, distributing, and using transportation fuels. Lower fuel 
consumption reduces CO2 emissions directly, because the 
primary source of transportation-related CO2 emissions is 
fuel combustion in internal combustion engines. NHTSA tentatively 
estimated reductions in carbon dioxide emissions resulting from fuel 
savings by assuming that the entire carbon content of gasoline, diesel, 
and other fuels is converted to carbon dioxide during the combustion 
process.\304\
---------------------------------------------------------------------------

    \304\ NHTSA explained that this assumption results in a slight 
overestimate of carbon dioxide emissions, since a small fraction of 
the carbon content of gasoline is emitted in the forms of carbon 
monoxide and unburned hydrocarbons. However, the magnitude of this 
overestimate is likely to be extremely small. This approach is 
consistent with the recommendation of the Intergovernmental Panel on 
Climate Change for ``Tier 1'' national greenhouse gas emissions 
inventories. Cf. Intergovernmental Panel on Climate Change, 2006 
Guidelines for National Greenhouse Gas Inventories, Volume 2, 
Energy, Chapter 3, ``Mobile Combustion,'' at 3.16. See http://www.ipcc-nggip.iges.or.jp/public/2006gl/pdf/2_Volume2/V2_3_Ch3_Mobile_Combustion.pdf (last accessed October 6, 2008).
---------------------------------------------------------------------------

    Reduced fuel consumption also reduces carbon dioxide emissions that 
result from the use of carbon-based energy sources during fuel 
production and distribution.\305\ For purposes of the NPRM, NHTSA 
estimated the reductions in CO2 emissions during each phase 
of fuel production and distribution using CO2 emission rates 
obtained from the GREET model discussed above, using the previous 
assumptions about how fuel savings are reflected in reductions in each 
phase. The total reduction in CO2 emissions from the 
improvement in fuel economy under each alternative CAFE standard is the 
sum of the reductions in emissions from reduced fuel use and from lower 
fuel production and distribution.
---------------------------------------------------------------------------

    \305\ NHTSA did not, for purposes of the NPRM, attempt to 
estimate changes in upstream emissions of GHGs other than 
CO2. This was because carbon dioxide from final 
combustion itself accounts for nearly 97 percent of the total 
CO2-equivalent emissions from petroleum production and 
use, even with other GHGs that result from those activities 
(principally methane and nitrous oxide) weighed by their higher 
global warming potentials (GWPs) relative to CO2. 
Calculated from EPA's Inventory of U.S. Greenhouse Gas Emissions and 
Sinks 1990-2006, Tables 3-3, 3-39, and 3-41, EPA 430-R-08-05, April 
15, 2008. Available at http://www.epa.gov/climatechange/emissions/downloads/08_CR.pdf (last accessed August 15, 2008).
---------------------------------------------------------------------------

    NHTSA stated in the NPRM that it had not attempted to estimate 
changes in emissions of other GHGs, in particular methane, nitrous 
oxide, and

[[Page 14337]]

hydrofluorocarbons,\306\ and invited comment on the importance and 
potential implications of doing so under NEPA.
---------------------------------------------------------------------------

    \306\ This was because methane and nitrous oxide account for 
less than 3 percent of the tailpipe GHG emissions from passenger 
cars and light trucks, while CO2 emissions account for 
the remaining 97 percent. Of the total (including non-tailpipe) GHG 
emissions from passenger cars and light trucks, tailpipe 
CO2 represents about 93.1 percent, tailpipe methane and 
nitrous oxide represent about 2.4 percent, and hydrofluorocarbons 
(from air conditioner leaks) represent about 4.5 percent. Calculated 
from EPA's Inventory of U.S. Greenhouse Gas Emissions and Sinks 
1990-2006, Table 215, EPA 430-R-08-05, April 15, 2008. Available at 
http://www.epa.gov/climatechange/emissions/downloads/08_CR.pdf 
(last accessed August 15, 2008).
---------------------------------------------------------------------------

    NHTSA received two comments on this issue. The Alliance commented 
that NHTSA's decision not to address other GHGs was within the agency's 
discretion for two reasons. First, because as the Alliance stated that 
NHTSA suggested in the NPRM, ``analyzing the emissions of GHGs other 
than CO2 simply does not have a large effect on any analysis 
of potential GHG benefits as connected to CAFE standard setting,'' 
which the Alliance argued CARB also implicitly agreed with by 
denominating other GHGs in CO2-equivalents. The Alliance 
stated that even though other GHGs have higher global warming 
potentials than CO2, ``even factoring GWP into the analysis 
still leaves the other GHGs with little significance to any 
consideration of the benefits of more-stringent CAFE standards.'' The 
Alliance further argued that the Ninth Circuit decision only concerned 
NHTSA's valuation of CO2, so that NHTSA had no obligation 
under case law to monetize the effects of other GHGs as long as it 
evaluates them qualitatively.\307\
---------------------------------------------------------------------------

    \307\ The Alliance cited Center for Auto Safety v. Peck, 751 
F.2d 1336, 1367, 1368 (D.C. Cir. 1985) (Scalia, J.) (upholding 
agency decision predicated upon weighing of non-monetized and 
monetized benefits against monetized costs).
---------------------------------------------------------------------------

    CBD, in contrast, agreed with NHTSA that other GHGs make up only a 
small portion of the total GHGs emitted from automobiles. However, CBD 
argued that these other GHG emissions ``* * * nonetheless represent 
large amounts of greenhouse gases and must be included in both the 
economic and environmental analyses.'' CBD gave the example that ``* * 
* nitrous oxide emissions with greenhouse gas impacts equivalent to 29 
million metric tons of CO2 are far from insignificant.'' 
NHTSA also notes that EPA's TSD on reducing GHG emissions, which was 
submitted as an attachment to EDF's comments, considers GHGs generally 
rather than focusing on CO2.
    In response to the comment from CBD, NHTSA has prepared detailed 
estimates of changes in emissions of certain non-CO2 GHGs, 
including methane and nitrous oxide, that would result from alternative 
CAFE standards for 2011-15 passenger cars and light trucks. These 
estimates are reported in the Final Environmental Impact Statement 
accompanying this rule.\308\ Because the estimated reductions in 
emissions of these non-CO2 GHGs represent a small fraction 
of reductions in CO2 emissions, however, and because they 
are less reliable than the estimates of reductions in CO2 
itself, NHTSA has not included the economic value of reductions in non-
CO2 GHGs in its estimates of economic benefits from higher 
CAFE standards.\309\
---------------------------------------------------------------------------

    \308\ The FEIS is available at Docket No. NHTSA-2008-0060-0605.
    \309\ Expressed in CO2-equivalent terms using global 
warming potentials estimated by IPCC, the reductions in methane and 
nitrous oxide emissions represent only about 3% of the estimated 
reduction in CO2 itself. NHTSA views its estimates of 
non-CO2 GHGs as less reliable than those of 
CO2 itself partly because the vehicle emission factors 
for methane and nitrous oxide obtained from documentation for EPA's 
MOVES motor vehicle emission factor model assume little or no change 
over future model years or with vehicle age, in contrast to the 
pronounced declines projected for emissions of criteria air 
pollutants and CO2. Similarly, the emission factors for 
non-CO2 GHGs during gasoline and diesel production and 
distribution that are utilized in Argonne's GREET model are assumed 
to be fixed over the period spanned by NHTSA's analysis, again in 
contrast to those for criteria air pollutants and CO2.
---------------------------------------------------------------------------

(c) Economic Value of Reductions in CO2 Emissions
    Emissions of carbon dioxide and other greenhouse gases (GHGs) occur 
throughout the process of producing and distributing transportation 
fuels, as well as from fuel combustion itself. By reducing the volume 
of fuel consumed by passenger cars and light trucks, higher CAFE 
standards will thus reduce GHG emissions generated by fuel use, as well 
as throughout the fuel supply cycle. Lowering these emissions is likely 
to slow the projected pace and reduce the ultimate extent of future 
changes in the global climate, thus reducing future economic damages 
that changes in the global climate are otherwise expected to cause. 
Further, by reducing the probability that climate changes with 
potentially catastrophic economic or environmental impacts will occur, 
lowering GHG emissions may also result in economic benefits that exceed 
the resulting reduction in the expected future economic costs caused by 
gradual changes in the earth's climatic systems.
    Quantifying and monetizing benefits from reducing GHG emissions is 
thus an important step in estimating the total economic benefits likely 
to result from establishing higher CAFE standards. Since direct 
estimates of the economic benefits from reducing GHG emissions are 
generally not reported in published literature on the impacts of 
climate change, these benefits are typically assumed to be the ``mirror 
image'' of the estimated incremental costs resulting from an increase 
in those emissions. That is, the benefits from reducing emissions are 
usually measured by the savings in estimated economic damages that an 
equivalent increase in emissions would otherwise have caused.
    Researchers usually estimate the economic costs of increased GHG 
emissions in several steps. The first is to project future changes in 
the global climate and the resulting economic damages that are expected 
to result under a baseline projection of net global GHG emissions. 
These projections are usually developed using models that relate 
concentrations of GHGs in the earth's atmosphere to changes in summary 
measures of the global climate such as temperature and sea levels, and 
in turn estimate the reductions in global economic output that are 
expected to result from changes in climate. Since the effects of GHG 
emissions on the global climate occur decades or even centuries later, 
and there is considerable inertia in the earth's climate systems, 
changes in the global climate and the resulting economic impacts must 
be estimated over a comparably long future period.
    Next, this same process is used to project future climate changes 
and resulting economic damages under the assumption that GHG emissions 
increase by some increment during a stated future year. The increase in 
projected global economic damages resulting from the assumed increase 
in future GHG emissions, which also occurs over a prolonged period 
extending into the distant future, represents the added economic costs 
resulting from the assumed increase in emissions. Discounted to its 
current value as of the year when the increase in emissions are 
expected to occur and expressed per unit of GHG emissions (usually per 
ton of carbon emissions, with non-CO2 GHGs converted to 
their equivalents in terms of carbon emissions), the resulting value 
represents the global economic cost of increasing GHG emissions by one 
unit--usually a metric ton of carbon--in a stated future year. This 
value is often referred to in published research and debates over 
climate policy as the Social Cost of Carbon (SCC), and applies

[[Page 14338]]

specifically to increased emissions during that year.
    This process involves multiple sources of uncertainty, including 
those in scientific knowledge about the effects of varying levels of 
GHG emissions on the magnitude and timing of changes in the functioning 
of regional and global climatic and ecological systems. In addition, 
significant uncertainty surrounds the anticipated extent, geographic 
distribution, and timing of the resulting impacts on the economies of 
nations located in different regions of the globe. Because the climatic 
and economic impacts of GHG emissions are projected to occur over the 
distant future, uncertainty about the correct rate at which to discount 
these future impacts also significantly affects the estimated economic 
benefits of reducing GHG emissions.
    Researchers have not yet been able to quantify many of the 
potentially significant effects of GHG emissions and their continued 
accumulation in the earth's atmosphere on the global climate. Nor have 
they developed complete models to represent the anticipated impacts of 
changes in the global climate on economic resources and the 
productivity with which they are used to generate economic output. As a 
consequence, the estimates of economic damages resulting from increased 
GHG emissions that are generated using integrated models of climate and 
economic activity exclude some potentially significant sources of costs 
that are likely to result from increased emissions. As a result, 
estimates of economic benefits derived from these models' estimates of 
the likely future climate-related economic damages caused by increased 
GHG emissions may underestimate the true economic value of reducing 
emissions, although the extent to which they are likely to do so 
remains unknown.
    In the NPRM, NHTSA explained how it accounted for the economic 
benefits of reducing CO2 emissions in this rulemaking, both 
in developing the proposed CAFE standards and in assessing the economic 
benefits of each alternative that was considered. The agency noted that 
the Ninth Circuit found in CBD v. NHTSA that NHTSA had been arbitrary 
and capricious in deciding not to monetize the benefit of reducing 
CO2 emissions, stating that the agency had not substantiated 
the conclusion in its April 2006 final rule that the appropriate course 
was not to monetize (i.e., quantify the value of) carbon emissions 
reduction at all. NHTSA's discussion in the NPRM of how it estimated 
the economic value of reductions in CO2 emissions received a 
great deal of attention from commenters, so for the reader's benefit, 
it is largely reproduced below.
    To that end, NHTSA reviewed published estimates of the ``social 
cost of carbon'' (SCC) emissions. As noted above, the SCC refers to the 
marginal cost of additional damages caused by the increase in expected 
climate impacts resulting from the emission of each additional metric 
ton of carbon, which is emitted in the form of CO2.\310\ It 
is typically estimated as the net present value of the impact over some 
extended time period (100 years or longer) of one additional ton of 
carbon emitted into the atmosphere. Because atmospheric concentrations 
of greenhouse gases are increasing over time, and the potential damages 
from global climate are believed to increase with higher atmospheric 
GHG concentrations, the economic damages resulting from an additional 
ton of CO2 emissions are expected to increase over time. 
Thus, estimates of the SCC are typically reported for a specific year, 
and these estimates are generally larger for emissions in more distant 
future years.
---------------------------------------------------------------------------

    \310\ Carbon itself accounts for 12/44, or about 27 percent, of 
the mass of carbon dioxide (12/44 is the ratio of the molecular 
weight of carbon to that of carbon dioxide). Thus, each ton of 
carbon emitted is associated with 44/12, or 3.67, tons of carbon 
dioxide emissions. Estimates of the SCC are typically reported in 
dollars per ton of carbon, and must be divided by 3.67 to determine 
their equivalent value per ton of carbon dioxide emissions.
---------------------------------------------------------------------------

    NHTSA found substantial variation among different authors' 
estimates of the SCC, much of which can be traced to differences in 
their underlying assumptions about several variables. These variables 
include the sensitivity of global temperatures and other climate 
attributes to increasing atmospheric concentrations of GHGs, discount 
rates applied to future economic damages from climate change, whether 
damages sustained by developing regions of the world should be weighted 
more heavily than damages to developed nations, how long climate 
changes persist once they occur, and the economic valuation of specific 
climate impacts.\311\
---------------------------------------------------------------------------

    \311\ For a discussion of these factors, see Yohe, G.W., R.D. 
Lasco, Q.K. Ahmad, N.W. Arnell, S.J. Cohen, C. Hope, A.C. Janetos, 
and R.T. Perez, ``Perspectives on climate change and 
sustainability,'' 2007, in Climate Change 2007: Impacts, Adaptation 
and Vulnerability, Contribution of Working Group II to the Fourth 
Assessment Report of the Intergovernmental Panel on Climate Change, 
M.L. Parry, O.F. Canziani, L.P. Palutikof, P.J. van der Linden and 
C.E. Hanson, eds., Cambridge University Press, 2007, at 821-824. 
Available at http://www.ipcc.ch/ipccreports/ar4-wg2.htm (last 
accessed March 23, 2009).
---------------------------------------------------------------------------

    NHTSA explained that, taken as a whole, recent estimates of the SCC 
may underestimate the true damage costs of carbon emissions because 
they often exclude damages caused by extreme weather events or climate 
response scenarios with low probabilities but potentially extreme 
impacts, and may underestimate the climate impacts and damages that 
could result from multiple stresses on the global climatic system. At 
the same time, however, many studies do not consider potentially 
beneficial impacts of climate change, and do not adequately account for 
how future technological innovations, development patterns, and 
adaptations could reduce potential impacts from climate change or the 
economic damages they cause.
    Given the uncertainty surrounding estimates of the SCC, NHTSA 
suggested that the use of any single study may not be advisable, since 
its estimate of the SCC will depend on many assumptions made by its 
authors. NHTSA cited the Working Group II's contribution to the Fourth 
Assessment Report of the United Nations Intergovernmental Panel on 
Climate Change (IPCC) as noting that:

    The large ranges of SCC are due in large part to differences in 
assumptions regarding climate sensitivity, response lags, the 
treatment of risk and equity, economic and non-economic impacts, the 
inclusion of potentially catastrophic losses, and discount 
rates.\312\
---------------------------------------------------------------------------

    \312\ Climate Change 2007: Impacts, Adaptation and 
Vulnerability, Contribution of Working Group II to the Fourth 
Assessment Report of the Intergovernmental Panel on Climate Change, 
at 17. Available at http://www.ipcc.ch/ipccreports/ar4-wg2.htm (last 
accessed March 23, 2009).

    Although the IPCC is considered authoritative on the topic of the 
SCC, it did not recommend a single estimate. However, the IPCC did cite 
the Tol (2005) study on four separate occasions as the only available 
survey of the peer-reviewed literature that has itself been subjected 
to peer review.\313\ Tol developed a probability function using the SCC 
estimates of the peer-reviewed literature, which ranged from less than 
zero to over $200 per metric ton of carbon. In an effort to resolve 
some of the uncertainty in reported estimates of climate damage costs 
from carbon emissions, Tol (2005) reviewed and summarized 103 estimates 
of the SCC from 28 published studies. He concluded that when only peer-
reviewed studies published in recognized journals are considered, ``* * 
* climate change impacts may be very uncertain but it is unlikely that 
the marginal damage costs of carbon dioxide emissions exceed $50 per 
[metric] ton carbon,'' \314\ which is about

[[Page 14339]]

$14 per metric ton of CO2. In the NPRM, NHTSA assumed that 
the summary SCC estimates reported by Tol were denominated in U.S. 
dollars of the year of his article's publication, 2005.
---------------------------------------------------------------------------

    \313\ Id., at 17, 65, 813, and 822.
    \314\ Tol, Richard S.J., ``The marginal damage costs of carbon 
dioxide emissions: an assessment of the uncertainties,'' Energy 
Policy 33 (2005), 2064-2074, at 2072.
---------------------------------------------------------------------------

    NHTSA stated that because of the number of assumptions required by 
each study, the wide range of uncertainty surrounding these 
assumptions, and their critical influence on the resulting estimates of 
climate damage costs, some studies have undoubtedly produced estimates 
of the SCC that are unrealistically high, while others are likely to 
have estimated values that are improbably low. Using a value for the 
SCC that reflects the central tendency of estimates drawn from many 
studies reduces the chances of relying on a single estimate that 
subsequently proves to be biased.
    It is important to note that the published estimates of the SCC 
almost invariably include the value of worldwide damages from potential 
climate impacts caused by carbon dioxide emissions, and are not 
confined to damages likely to be suffered within the U.S. In contrast, 
the other estimates of costs and benefits of raising fuel economy 
standards included in this proposal include only the economic values of 
impacts that occur within the U.S. For example, the economic value of 
reducing criteria air pollutant emissions from overseas oil refineries 
is not counted as a benefit resulting from this rule, because any 
reduction in damages to health and property caused by overseas 
emissions are unlikely to be experienced within the U.S.
    In contrast, the reduced value of transfer payments from U.S. oil 
purchasers to foreign oil suppliers that results when lower U.S. oil 
demand reduces the world price of petroleum (the reduced ``monopsony 
effect'') is counted as a benefit of reducing fuel use. \315\ The 
agency states that if its analysis were conducted from a worldwide 
rather than a U.S. perspective, however, the benefit from reducing air 
pollution overseas would be included, while reduced payments from U.S. 
oil consumers to foreign suppliers would not.
---------------------------------------------------------------------------

    \315\ The reduction in payments from U.S. oil purchasers to 
domestic petroleum producers is not included as a benefit, however, 
since it represents a transfer that occurs entirely within the U.S. 
economy.
---------------------------------------------------------------------------

    In the NPRM, NHTSA tentatively concluded that in the interest of 
analytical consistency, i.e., in order to be consistent with the 
agency's use of exclusively domestic costs and benefits in prior CAFE 
rulemakings, the appropriate value to be placed on climate damages 
caused by carbon emissions should be the one that reflects the change 
in damages to the U.S. alone. Accordingly, NHTSA noted that the value 
for the benefits of reducing CO2 emissions might be 
restricted to the fraction of those benefits that are likely to be 
experienced within the U.S.
    Although no estimates are currently available for the benefits to 
the U.S. itself that are likely to result from reducing CO2 
emissions, NHTSA explained that it expected that if such values were 
developed, the agency would employ those, rather than global benefit 
estimates, in its analysis. NHTSA also stated that it anticipated that 
if such values were developed, they would be lower than comparable 
global values, since the U.S. is likely to sustain only a fraction of 
total global damages resulting from climate change.
    In the meantime, NHTSA explained that it elected to use the mean 
value of peer-reviewed estimated global value reported by Tol (2005), 
which was $43 per metric ton of carbon, as an upper bound on the global 
benefits resulting from reducing each metric ton of U.S. 
emissions.\316\ This value corresponds to approximately $12 per metric 
ton of CO2 when expressed in 2006 dollars. The Tol (2005) 
study is cited repeatedly as an authoritative survey in various IPCC 
reports, which are widely accepted as representing the general 
consensus in the scientific community on climate change science.
---------------------------------------------------------------------------

    \316\ $43 per ton of carbon emissions was reported by Tol (at 
2070) as the mean of the ``best'' estimates reported in peer-
reviewed studies (at the time). It thus differs from the mean of all 
estimates reported in the peer-reviewed studies surveyed by Tol. The 
$43 per ton value was also attributed to Tol by IPCC Working Group 
II (2007), at 822.
---------------------------------------------------------------------------

    Since Tol's estimate includes the worldwide costs of potential 
damages from carbon dioxide emissions, NHTSA elected to employ it as an 
upper bound on the estimate value of the reduction in U.S. domestic 
damage costs that is likely to result from lower CO2 
emissions.\317\ NHTSA noted that Tol had a more recent (2007) and 
inclusive survey published online with peer-review comments. NHTSA 
stated that it had elected not to rely on this study, but that it would 
consider doing so in its analysis for the final rule if the survey had 
been published, and would also consider any other newly-published 
evidence.
---------------------------------------------------------------------------

    \317\ For purposes of comparison, NHTSA noted that in the 
rulemaking to establish CAFE standards for MY 2008-11 light trucks, 
NRDC recommended a value of $10-$25 per ton of CO2 
emissions reduced by fuel savings, and both EDF and UCS recommended 
a value of $50 per ton of carbon, which is equivalent to about $14 
per ton of CO2 emissions.
---------------------------------------------------------------------------

    NHTSA noted that the IPCC Working Group II Fourth Assessment Report 
(2007, at 822) further suggests that the SCC is growing at an annual 
rate of 2.4 percent, based on estimated increases in damages from 
future emissions reported in published studies. NHTSA also elected to 
apply this growth rate to Tol's original 2005 estimate. Thus, by 2011, 
NHTSA estimated that the upper bound on the benefits of reducing 
CO2 emissions will have reached about $14 per metric ton of 
CO2, and will continue to increase by 2.4 percent annually 
thereafter.
    In setting a lower bound, the agency agreed with the IPCC Working 
Group II report (2007) that ``significant warming across the globe and 
the locations of significant observed changes in many systems 
consistent with warming is very unlikely to be due solely to natural 
variability of temperatures or natural variability of the systems.'' 
(p. 9) Although this finding suggests that the global value of economic 
benefits from reducing carbon dioxide emissions is unlikely to be zero, 
NHTSA stated that it does not necessarily rule out low or zero values 
for the benefit to the U.S. itself from reducing emissions.
    In some of the analysis it performed to develop the CAFE standards, 
NHTSA employed a point estimate for the value of reducing 
CO2 emissions. For this estimate, the agency used the 
midpoint of the range from $0 to $14, or $7.00, per metric ton of 
CO2 as the initial value for the year 2011, and assumed that 
this value would grow at 2.4 percent annually thereafter. This estimate 
was employed for the analyses conducted using the Volpe model to 
support development of the proposed standards. The agency also 
conducted sensitivity analyses of the benefits from reducing 
CO2 emissions using both the upper ($14/metric ton) and 
lower ($0/metric ton) bounds of this range.
    NHTSA sought comment on its tentative conclusion for the value of 
the SCC, the use of a domestic versus a global value for the economic 
benefit of reducing CO2 emissions, the rate at which the 
value of the SCC grows over time, the desirability of and procedures 
for incorporating benefits from reducing emissions of GHGs other than 
CO2, and any other aspects of developing a reliable SCC 
value for purposes of establishing CAFE standards.
    NHTSA received many comments on its assumptions in the NPRM about 
the SCC. The comment summaries are presented below and grouped by 
topic:
    (1) NHTSA's proposal of a single value for the SCC;

[[Page 14340]]

    (2) NHTSA's proposal of $7 as the value for the SCC;
    (3) NHTSA's proposal of $0 as the lower bound estimate for the 
domestic U.S. value for the SCC;
    (4) NHTSA's proposal of $14 as the upper bound estimate for the 
domestic U.S. value for the SCC;
    (5) other values that NHTSA could have proposed for the SCC;
    (6) NHTSA's use of a domestic versus a global value for the 
economic benefit of reducing CO2 emissions;
    (7) the rate at which the SCC grows over time;
    (8) the discount rate that should be used for SCC estimates; and
    (9) other issues raised by commenters.
(1) NHTSA's Proposal of a Single Value for the SCC
    NHTSA received a comment on its proposal of a single value for the 
SCC from Prof. Gary Yohe, an economist who has considered the SCC 
extensively and whom NHTSA cited in the NPRM. Prof. Yohe commented that 
the NPRM had stated that ``Using a value for the SCC that reflects the 
central tendency of estimates drawn from many studies reduces the 
chances of relying on a single estimate that subsequently proves to be 
biased.'' \318\ Prof. Yohe argued that proposing a single value for the 
SCC inherently creates bias, because ``Any value is based on 
presumptions about pure rate of time preference, risk and/or inequity 
aversion, and climate sensitivity.''
---------------------------------------------------------------------------

    \318\ 73 FR 24414 (May 2, 2008).
---------------------------------------------------------------------------

(2) NHTSA's Proposal of $7 as the Value for the SCC
    NHTSA received comments from 3 individuals, CARB, the Attorneys 
General, 10 U.S. Senators, 10 environmental and consumer groups, and 
the Alliance. Prof. Tol, whose 2005 paper provided the basis for 
NHTSA's proposal of an SCC number, commented that contrary to NHTSA's 
belief that the dollars used in Tol (2005) were 2005 dollars, they were 
in fact 1995 dollars. Prof. Tol also commented that NHTSA should 
``alert the reader'' that although Tol (2007) was only ``conditionally 
accepted,'' as NHTSA had noted in the NPRM, the newer study ``finds 
larger estimates than the 2005 paper.'' Sierra Club et al., in its 
comments, also stated that Prof. Tol had commented on the NPRM, arguing 
that using 1995 instead of 2005 dollars ``would make his 1995 value of 
$14 closer to a 2005 value of $19.26.''
    Several commenters disputed NHTSA's proposal of $7 as the midpoint 
between $0 and $14. UCS argued that proposing $7 puts as much weight on 
$0 as on $14, even though failing to assign a value was declared by the 
Ninth Circuit to be arbitrary and capricious. CBD commented that 
``NHTSA's methodology for the selection of an estimate of the value of 
reducing greenhouse gas emissions is arbitrary and designed to minimize 
the estimate.'' CBD argued that ``* * * simply splitting the difference 
between two points is not a defensible methodology, particularly when 
the low point of the range is not part of a valid range but simply an 
arbitrary selection of zero as an endpoint.''
    EDF also commented NHTSA's decision to propose $7 because it is the 
midpoint between $0 and $14 also ``lacks a reasoned basis,'' for which 
``NHTSA fails to provide any justification.''
    The Sierra Club et al. commented that NHTSA is wrong to place 
``equal weighting and probability'' on $0 and $14 and pick the median, 
and that $7 is ``far below current carbon estimates,'' citing the 2006 
Stern Review which found an SCC of ``on the order of'' $85/tonne 
CO2. The Sierra Club argued that this shows how ``misguided 
and unrealistic NHTSA's carbon pricing really is.''
    The Attorneys General commented that NHTSA's decision to simply 
halve Tol's estimate was ``not a reasoned judgment.''
    Public Citizen argued that there is no justification for using the 
midpoint, and that NHTSA should instead ``weight the credibility of 
each estimate,'' by making ``apples to apples'' comparisons between the 
studies by ``looking at studies based on their assumptions.'' Public 
Citizen argued that this will help NHTSA avoid skewing the result of 
averaging estimates from multiple studies. NRDC similarly argued that 
proposing $7 as ``a simple average of its proposed upper and lower 
bounds * * * assumes a normal distribution of damages, which is 
decidedly not the distribution of social cost of carbon estimates.'' 
NRDC further argued that ``* * * most social cost of carbon estimates 
are biased downwards, for the simple reason that almost all models 
assume perfect substitutability between normal consumption goods and 
environmental goods.'' NRDC cited 2007 research by Sterner and Persson 
disaggregating ``goods'' into ``environmental goods'' and ``consumption 
goods,'' which found that the price of an environmental good like 
carbon reductions increased at a faster rate as damage progressed than 
consumption goods would increase. Accordingly, NRDC argued, ``NHTSA's 
social cost of carbon is much too low.''
    Prof. Hanemann also commented that NHTSA did not justify its 
decision to pick the midpoint (between $0 and $14) and then project it 
to 2011, although he focused more particularly on NHTSA's not having 
applied ``the escalation factor of a 2.4 percent increase in real terms 
beginning in 2005.''
    The Alliance commented that proposing $7 as the midpoint between $0 
and $14 is incorrect. The Alliance argued that NHTSA must try harder to 
estimate the purely domestic effects of CO2 emissions 
reductions, and stated that NERA had found that the U.S. portion of 
world gross product ``is a much better means of allocating the United 
States' share of any benefits in reduced CO2 emissions'' 
than picking the midpoint of a range of global SCC estimates. NERA 
assumed that the U.S. portion is 20 percent, which ``reduces NHTSA's 
estimate of CO2 benefits with the `optimized standard' for 
MY2015 from $869 million to $348 million.'' NERA also argued that this 
was conservative, since the U.S., as a developed country, should be 
better able to adapt to negative global warming consequences.
    Several commenters also criticized Tol (2005) as being out of date. 
Prof. Hanemann made this point, and commented that ``more recent 
analyses show higher damage estimates.'' The Attorneys General 
similarly commented that ``It seems likely that there are better 
estimates'' than Tol's, ``Since [that] article is now three years old, 
and it itself explains in detail the many deficiencies in the economic 
literature at that time.'' The Attorneys General stated that ``NHTSA 
should consult with EPA on this issue, and conduct a review of the 
current scientific and economics literature.''
    Several commenters simply argued that $7/ton is too low a value for 
the SCC. CARB argued that ``NHTSA's assumed social cost of carbon in 
the future is also unreasonably low, and if set at defensible levels 
that also properly value cumulative impacts, could affect the 
stringency of the standards.'' Carin Skoog, an individual, similarly 
commented that ``The arbitrary decision to use $7/ton underestimates 
the economic, social, and environmental consequences of the impacts of 
global warming.'' ACEEE similarly commented that NHTSA's use of $7/ton 
is both ``inconsistent with current estimates'' and ``fails to take 
into account the potentially high probability of a catastrophic climate 
change situation.'' The 10 U.S. Senators who commented stated that 
NHTSA's value of $7 per ton

[[Page 14341]]

is ``underestimated,'' and ``likely to be found arbitrary and 
capricious.''
(3) NHTSA's Proposal of $0 as the Lower Bound Estimate for the Domestic 
U.S. Value for the SCC
    No commenters supported NHTSA's use of $0/ton as the lower bound 
estimate for the U.S. domestic SCC. Several commenters, including UCS, 
EDF, and Prof. Hanemann cited the IPCC Fourth Assessment Report as 
evidence that, as Prof. Hanemann stated, ``there is no credible 
evidence of any significant net benefit to the U.S. from the climate 
change scenarios developed for the Fourth IPCC Report.'' The U.S. 
Senators who commented also stated that in citing the IPCC as not 
precluding low or zero values to the U.S., NHTSA had ``fail[ed] to 
recognize that IPCC was looking at global estimates which are not 
disaggregated.''
    Commenters also mentioned other reports as providing evidence that 
there would be some net adverse impact on the U.S. from climate change, 
and thus a lower bound value of $0 was untenable. Prof. Hanemann cited 
the recent USCCSP report ``conclusively eliminates the notion that 
climate change is likely to have no net adverse impact on the United 
States.''
    UCS argued that proposing $0 as the lower bound ``implies the 
possibility that climate change won't have any negative consequences,'' 
which ``stands in stark contrast to recent government study findings on 
U.S. climate change effects and findings from * * * the Academies of 
Science for the G8+5.''
    EDF commented that ``A recent review of economic studies on the 
predicted impacts of climate change on different economic sectors in 
the U.S. by the Center for Integrative Environmental Research at the 
University of Maryland, `The US Economic Impacts of Climate Change and 
the Costs of Inaction: A Review and Assessment,' also demonstrates the 
range and scope of adverse impacts that climate change will have on 
different sectors and regions of the U.S. economy.'' EDF stated that 
``The study concluded that `Scientific evidence is mounting that 
climate change will directly or indirectly affect all economic sectors 
and regions of the country, though not all equally. Although there may 
be temporary benefits from a changing climate, the costs of climate 
change rapidly exceed benefits and place major strains on public sector 
budgets, personal income and job security.' ''
    Sierra Club et al. commented that ``several government reports 
[that] have clearly stated that CO2 emissions do have a 
significant impact on our economy.'' NHTSA's conclusion that ``it does 
not necessarily rule out low or zero carbon values for the benefit to 
the U.S. itself from reducing emissions'' is arbitrary given agency's 
admission that ``the global value of economic benefits from reducing 
carbon dioxide emissions is unlikely to be zero.''
    NRDC cited a U.S. government report that ``documents that many of 
the projected impacts have already begun,'' as well as the Stern Review 
which ``estimated that impacts could result in a loss of 5-20 percent 
of world GDP by 2100,'' and its own May 2008 report which ``found U.S. 
damages from four impacts alone would cost 1.8 percent of GDP by 
2100.''
    Several commenters instead raised objections to studies that may 
show a positive net benefit to the U.S. from climate change, such that 
a domestic SCC value could be $0. CBD stated that NHTSA offered 
``absolutely no evidence to support'' proposing $0 as the lower bound, 
and argued that ``only one study surveyed in Tol (2005) included 
central estimates below $0.00; and that was a non-peer-reviewed 
article, also authored by Tol.'' CBD further argued that Tol (2005) 
never found, nor included as a consideration in developing SCC 
estimates, as NHTSA suggested in the NPRM, that any studies failed ``to 
consider potentially beneficial impacts of climate change,'' or to 
account adequately ``for how future development patterns and 
adaptations could reduce potential impacts from climate change or the 
economic damages they cause.''
    Prof. Hanemann also argued that studies suggesting any possible 
positive net benefit to U.S. from global warming ``have serious flaws 
and cannot withstand serious scrutiny,'' and concluded that a value of 
$0 per ton is ``wildly unrealistic'' ``even [for] a sensitivity 
analysis.''
    NRDC commented that ``NHTSA's lower bound seems to be based upon 
the fact that some estimates exist that are zero and even negative.'' 
However, NRDC argued that ``These lower bound estimates are likely 
based on outdated science.'' NRDC ``urge[d] NHTSA to do a rigorous re-
examination of Tol's work, eliminating outdated zero estimates and 
adjusting for fat tailed upper distributions.''
    Several commenters also focused on the CBD decision to argue that 
NHTSA may not use $0 as the lower bound estimate, because as UCS 
stated, ``the Ninth Circuit found a value of $0 to be arbitrary and 
capricious.'' EDF also commented that NHTSA's decision to pick $0 as 
the lower bound ``lacks a reasoned basis,'' given the Ninth Circuit 
decision. Sierra Club et al. and the U.S. Senators similarly commented 
that $0 as the lower bound is contrary to CBD. The comment by the U.S. 
Senators stated that ``* * * we can only conclude that the purpose of 
this `low bound' estimate is to cut the more accurate value in half in 
an arbitrary manner. We recommend NHTSA remove or justify this low 
bound estimate in its final CAFE regulation.''
(4) NHTSA's Proposal of $14 as the Upper Bound Estimate for the 
Domestic U.S. Value for the SCC
    No commenters supported NHTSA's proposal of $14/ton, based on Tol 
(2005), as the upper bound estimate for the domestic U.S. value for the 
SCC. ACEEE argued that ``NHTSA's decision to use Tol's estimate of $14 
as the upper bound based on the argument that this value includes the 
worldwide costs CO2 is flawed,'' although the commenter did 
not explain why.
    Some commenters argued that NHTSA should not have picked the median 
from Tol (2005) as its upper bound estimate.
    The U.S. Senators who commented stated that NHTSA is wrong to use 
$14 as the upper bound because Tol's median is an average of multiple 
estimates, and averages should be used as averages and not as maximums. 
The Senators stated further that ``NHTSA selected the lower of Tol's 
two estimates without explanation.'' The U.S. Senators also commented 
that Tol (2007) updates the previous study and finds a median of over 
$19/ton. NRDC also cited Tol (2007) as reflecting an increase in the 
median from $14 to $20 dollars per ton of CO2.
    Sierra Club et al. commented that $14 is an incorrect ``maximum,'' 
because the maximum that Tol ``states that the maximum carbon value is 
in the range of $55-$95 per metric ton CO2.'' The commenter 
further argued that if NHTSA could justify $0 as the lower bound, 
``then it should not be able to rule out the high value of $95 per ton 
CO2 in the study, and the average value would be much 
higher.''
    NRDC commented that NHTSA should not have used Tol's median value 
of $14 as its upper bound for two reasons. First, a median value is not 
properly reflective of climate change damage estimate distributions, 
which are ``asymmetric'' with ``fat'' upper tails. And second, because 
of the unique aspects of climate change damage estimates, such as 
``nonlinearities, abrupt change, and thresholds,'' ``a full probability 
density function should be estimated, using the full range of all [SCC] 
estimates from the studies, not

[[Page 14342]]

simply a collection of their `best-guesses.' '' [Emphasis in original.] 
NRDC argued that research has shown that ``When the same traditional 
social cost of carbon analyses are rerun incorporating the potential 
for nonlinear change, the resulting policy conclusions are changed 
considerably to greater mitigation,'' and that ``Another recent study 
has shown that incorporating the potential for low-probability, high-
damage events can increase the social cost of carbon by a factor of 
20.''
    NRDC also cited Prof. Weitzman to argue that the complications of 
climate change damage estimates require any analysis to weigh more 
heavily the ``low probability/high catastrophic risks,'' because these 
will otherwise be insufficiently accounted for. In discussing the 
uncertainties associated with climate change, NRDC cited Weitzman as 
stating that

    The result of this immense cascading of huge uncertainties is a 
``reduced form'' of truly stupendous uncertainty about the 
aggregate-utility impacts of catastrophic climate change, which 
mathematically is represented by a very-spread-out very-fat-tailed 
PDF [probability density function] of what might be called (present 
discounted) ``welfare sensitivity'' * * * [T]he value of ``welfare 
sensitivity'' is effectively bounded only by some very big number 
representing something like the value of statistical civilization as 
we know it or maybe even the value of statistical life on earth as 
we know it.

Thus, NRDC argued, using an upper bound of $14 cannot possibly account 
for the uncertainties and risk of climate change. Like Sierra Club et 
al., NRDC further argued that ``* * * for consistency with the 
rationale used for proposing the lower bound, NHTSA's upper bound 
should be based upon some function of the highest estimates in the Tol 
2005 study (the very highest was $1,666).''
    Some commenters argued that NHTSA had overlooked particular aspects 
of the Tol (2005) study, and thus arrived at $14 incorrectly.
    CBD argued that NHTSA overlooked key aspects of the Tol (2005) 
analysis in proposing $14 per ton, including the fact that Tol included 
significantly higher estimates in his analysis. EDF similarly commented 
that NHTSA had failed to ``discuss the significant gaps in the existing 
research reviewed in [Tol (2005)] and focuse[d] on a specific estimate 
of the SCC that is biased toward lower value estimates.'' EDF stated 
that NHTSA's decision to use only peer-reviewed studies from Tol (2005) 
introduced particular bias, because those studies ``systematically used 
higher discount rates * * * which may have biased their results 
downward'' compared to averaging all the studies together.
    Some commenters argued that Tol (2005) was flawed to the point that 
it could not provide a reliable basis for NHTSA to use its median 
estimate as the upper bound.
    CBD commented that ``the studies cited in the Tol (2005) survey 
dated back as much as 18 years, to 1991, and 25 of the 28 studies cited 
were published more than five years ago,'' so given that climate change 
science is progressing very rapidly, these studies are probably 
outdated.
    EDF also argued that ``Most of the 28 studies surveyed by Tol'' are 
outdated and ``consider only a limited number of potential impacts from 
climate change,'' as Tol recognizes by cautioning that the estimates 
analyzed ``may understate the true cost of climate change.'' EDF stated 
that the IPCC's ``most recent compilation of SCC research'' agrees. EDF 
also commented that Tol's meta-analysis ``compares studies with widely 
different methodologies and assumptions,'' particularly discount rates, 
which EDF stated NHTSA should have controlled for because it ``can have 
a considerable impact on SCC estimates.''
    NRDC criticized Tol (2005) extensively in its comments. NRDC stated 
that Tol's estimate was based on studies which exclude (1) ``non-market 
costs, such as damage to and loss of entire ecosystems and species;'' 
and (2) ``studies of national security costs caused by conflicts over 
stressed resources and increased migration from heavily impacted 
areas,'' which ``describe global warming as a `threat multiplier.' '' 
NRDC recognized that Tol acknowledged that ``costs such as those 
described above are poorly accounted for in current social cost of 
carbon estimates,'' but insisted that NHTSA must nonetheless account 
for them.
    NRDC also argued that Tol's estimate is based on outdated studies, 
because ``there are smaller natural sinks for carbon than Tol assumed, 
higher emissions than he assumed, a higher temperature response to 
emissions than he assumed, and faster changes in observed impacts than 
he assumed.'' NRDC commented that recent events like Hurricane Katrina 
are evidence that the U.S. cannot adapt to climate change-related 
disasters as fast as previously thought. NRDC further commented that it 
was unclear whether Tol's estimate ``included any valuation for lost 
lives,'' suggesting that including this valuation could raise SCC 
considerably, and arguing that EPA accounts for it in Clean Air Act 
rulemakings.
(5) Other Values That NHTSA Could Have Chosen for the SCC
    Many commenters suggested other SCC values that they thought NHTSA 
should use instead of a value based on Tol (2005).
    Several commenters mentioned SCC values produced by EPA. In March 
2008, EPA produced an analysis for the Senate Committee on Environment 
and Public Works for S. 2191, ``America's Climate Security Act,'' also 
known as the Lieberman-Warner bill.\319\ Public Citizen commented that 
NHTSA's upper bound estimate should be at least as high as EPA's 
estimates for the Lieberman-Warner bill, which Public Citizen said 
``are more recent than the Tol estimate cited in NHTSA's notice.'' 
Public Citizen commented that EPA ``estimated the value of 
CO2 in 2015 between $22 and $40 per metric ton of 
CO2, and cited two other analyses with higher estimates of 
$48 and $50 per metric ton CO2.'' Sierra Club et al. also 
commented that NHTSA must use a higher SCC value, and stated that 
``EPA's recent analysis of America's Climate Security Act of 2007 noted 
that the value of a ton of CO2 could be as high as $22-
$40.28.'' An individual, Carin Skoog, also commented that ``The US EPA 
recently suggested the value of a ton of CO2 could be as 
high as $22-35.'' ACEEE appeared to refer obliquely to the EPA 
estimates, recommending that NHTSA use a higher CO2 
estimate. ACEEE argued that ``legislative efforts to implement a carbon 
regime in which the projected market cost of CO2 is expected 
to lie between $20 and $30--significantly higher than the average 
damage cost assumed by NHTSA--serves as evidence that the U.S. is now 
beginning to contemplate the high risk of rising greenhouse gas 
emissions.''
---------------------------------------------------------------------------

    \319\ Available at  http://www.epa.gov/climatechange/downloads/s2191_EPA_Analysis.pdf (last accessed March 23, 2009).
---------------------------------------------------------------------------

    NRDC commented that NHTSA cited ``compliance cost estimates 
provided by NRDC and others in the 2006 light truck rulemaking'' in 
describing its proposal of the upper bound estimate. NRDC argued that 
NHTSA should instead consider damage costs and not rely on compliance 
cost estimates. NRDC stated that ``If NHTSA were to consider compliance 
costs it must consider current analyses, such as EPA's analysis of S. 
2191, which finds that CO2 allowances would cost 19 to 67 
(2005) dollars per ton of CO2-equivalent in 2012 rising at 5 
percent per year real (the range for EPA's Core Scenario is $19 to $35 
in 2012, rising at 5 percent per year real).''

[[Page 14343]]

    EPA also recently released a ``Technical Support Document on the 
Benefits of Reducing GHG Emissions,'' \320\ (TSD) to accompany an 
Advance Notice of Proposed Rulemaking (ANPRM) on regulating GHG 
emissions under the Clean Air Act.\321\ EDF commented in its original 
comments that ``The higher SCC estimates contained in EPA's draft ANPR, 
and EPA's accompanying discussion of the remaining omissions and 
weaknesses in state-of-the-art SCC research, further demonstrates that 
NHTSA's estimates are underestimating the benefits of reducing carbon 
dioxide emissions, and therefore setting CAFE standards below optimal 
levels.'' After the TSD was released, EDF submitted it to NHTSA's NPRM 
docket, and submitted late additional comments arguing that NHTSA must 
``adjust its final rulemaking action in accordance with EPA's 
assessment and findings,'' because ``EPA's assessment is far more 
rigorous than NHTSA's proposal, and EPA's determinations are supported 
by a considerable and well-reasoned volume of information.'' EDF stated 
that EPA did its own meta-analysis ``building on'' Tol (2005) and 
(2007), but including ``only recent peer reviewed studies that met a 
range of quality criteria in its evaluation.'' EDF further stated that 
EPA arrived at an estimate of $40/tCO2 (using a 3 percent 
discount rate), or $60/tCO2 (using a 2 percent discount 
rate). EDF commented that EPA concluded that estimates ``likely 
underestimate costs of carbon dioxide emissions,'' because they do not 
account for all the climate change impacts identified by the IPCC, like 
``non-market damages, the effects of climate variability, risks of 
potential extreme weather, socially contingent events [(such as violent 
conflict)], and potential long-term catastrophic events.''
---------------------------------------------------------------------------

    \320\ Available at Docket No. NHTSA-2008-0089-0456.2.
    \321\ EPA's ANPRM was signed July 11, 2008, after NHTSA's NPRM 
was published. See 73 FR 44353 (July 30, 2008).
---------------------------------------------------------------------------

    The U.S. Senators who commented argued that NHTSA's use of $14/ton 
based on Tol (2005) as the ``high bound'' estimate was incorrect 
because EPA had been working since 2007 ``to develop more accurate, 
`state-of-the-art' estimates of the benefits of reducing greenhouse gas 
pollution.'' The Senators stated that ``Although EPA's estimates have 
not been finalized, the Agency used $40 per ton as the value of 
reducing carbon dioxide emissions.'' The Senators further stated that 
``NHTSA's draft rule inexplicably makes no mention of EPA's extensive 
research and analysis in this area.''
    Other commenters argued that NHTSA should have used or considered 
the value at which CO2 allowances are currently trading in 
the EU regulatory system. UCS stated that using $14 as the upper end is 
``unacceptably low,'' given that ``The European Climate Exchange, which 
provides a futures market value for global warming pollution in 
Europe's carbon constrained market, indicates 2011 contracts for carbon 
dioxide at approximately $45 (U.S.) per metric ton--well above the 
figure cited by NHTSA.'' UCS argued that ``This value represents a 
predicted marginal abatement cost (the cost of avoiding global warming 
pollution), and is likely a conservative estimate of the benefit of 
reducing global warming since the cost of avoiding climate change is 
lower than the cost of fixing the damage after it occurs.'' UCS further 
argued that this number is also ``generally consistent with other 
recent allowance price estimates, such as the EPA's assessment of GHG 
allowance prices under Lieberman-Warner: $22-$40 in 2015 and $28-$51 in 
2020 (EPA figures are in 2005 dollars per ton of CO2-
equivalent.)''
    Sierra Club et al., Public Citizen, and CARB all also commented 
that NHTSA's value for the SCC is too low, and that NHTSA should 
instead use a CO2 damage value based on the market value in 
the European Trading System, either the current value (which Public 
Citizen stated was ``recently * * * around [euro]30 per allowance (one 
metric ton CO2 equivalent),'' and CARB stated was 
``currently trading around $42 per ton''), or some future value. Sierra 
Club et al. argued that ``the futures market value for a metric ton of 
CO2 in 2011 is already up to $45,'' while CARB went on to 
argue that ``* * * Germany Deutsche Bank [is] forecasting EUA prices of 
$60 for 2008 and EUA prices as high as $100 by 2020 [citation 
removed].''
    Other commenters suggested other SCC values different from any 
discussed so far. For example, Prof. Hanemann argued that, based on his 
own research, NHTSA use a value of ``about $25 per metric ton [of 
CO2] in 2005$,'' and should apply a real growth rate of 2.4 
percent per year to determine the value of reducing emissions in future 
years. CARB, in contrast, commented that ``NHTSA should also consider 
using substantially higher estimates.'' CARB stated that ``the 
International Energy Agency (IEA) recently estimated that to limit 
global CO2 emissions by the 50 percent GHG reduction that 
the IPCC concluded is needed to keep global temperatures from rising 
more than two degrees Celsius by 2050, CO2 offset prices 
will need to rise to up to $200 per ton * * *.'' CARB further argued 
that ``* * * even this higher market price for carbon may not 
incorporate the true cost of all natural resources damages, an 
externality.''
    Mr. Montgomery commented that NHTSA should use an SCC value of $0, 
because he argued that ``If a comprehensive cap on [CO2] 
emissions is put in place, as many commentators and policymakers 
predict, then the choice of policy instrument will have no effect on 
the overall level of emissions,'' such that ``Tightening a CAFE 
standard will only result in greater mitigation in emissions from 
[motor vehicles] and less mitigation in parts of the economy where 
decisions are made in response to carbon prices without specific 
regulatory mandates.'' Thus, Mr. Montgomery concluded that ``the 
damages from global warming will be the same no matter what the level 
of the CAFE standard, so that the SCC used should be zero.''
    Mr. Montgomery also commented that an SCC based on Tol's estimates 
will be too high if the ``global policy objective toward greenhouse gas 
emissions * * * is a lower concentration than that on which the Tol 
estimates are based.'' Mr. Montgomery argued that ``Marginal damages 
depend on the level of GHG concentrations at which they are measured,'' 
so that ``If the goal for global concentrations is set at a high level 
(e.g., 750 ppm) then damages from an additional ton of CO2 
(due to higher concentrations during the period of its residence in the 
atmosphere) will be higher than if the goal is set at a low level (350 
ppm) at which point most of the damaging consequences have been 
eliminated.''
    Ford redacted much of its discussion of the SCC based on 
confidentiality concerns, but seemed to argue generally that reducing 
CO2 emissions from motor vehicles is expensive compared to 
reducing emissions in other sectors, and commented that ``All sectors 
must contribute'' to reducing emissions. Ford ``recommended that NHTSA 
consider using CO2 mitigation cost in their analysis in lieu 
of emission damage cost.''
    NADA commented that ``NHTSA should consider incorporating into its 
analysis the $2.97 per metric ton recently paid by the U.S. House of 
Representatives for carbon offsets.'' \322\
---------------------------------------------------------------------------

    \322\ NADA cited the ``Statement of Daniel P. Beard, Chief 
Administrative Officer, U.S. House of Representatives, Concerning 
the Purchase of Carbon Offsets,'' which does not list the specific 
price paid for the offsets described. Available at http://cao.house.gov/press/cao-20080205.shtml (last accessed March 23, 
2009).

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

[[Page 14344]]

    The Alliance was the only commenter to suggest that NHTSA not 
quantify the SCC at all. The Alliance argued that ``* * * given the 
fact that no published studies of which we are aware address the SCC 
apportionment issue, NHTSA would be well within its rights to decide 
that SCC will be considered purely in a qualitative balancing fashion 
and not quantified.'' The Alliance cited Transmission Access Policy 
Study Group v. FERC, 225 F.3d 667, 736 (D.C. Cir. 2000) (``Given that 
FERC's comparison of the frozen efficiency case to its base case 
yielded little difference, the agency had no reason to conduct further 
analysis. By rigorously examining the frozen efficiency case, even 
though it believed the case to be unreasonable, FERC ensured that its 
decision was `fully informed' and `well-considered.' '').
(6) NHTSA's Use of a Domestic Versus a Global Value for the Economic 
Benefit of Reducing CO2 Emissions
    NHTSA received a number of comments on its tentative decision to 
employ a domestic value for the SCC instead of a global value. Several 
commenters supported a domestic value, while other commenters supported 
a global value.
    The Alliance argued that NHTSA must consider only domestic impacts 
both because of EPCA, which refers to ``the need of the United States 
to conserve energy,'' and because of the ``extraterritoriality'' or 
``Aramco canon,'' see EEOC v. Arabian American Oil Co., 499 U.S. 244, 
260 (1991) (``It is a longstanding principle of American law `that 
legislation of Congress, unless a contrary intent appears, is meant to 
apply only within the territorial jurisdiction of the United States.') 
(quoting Foley Bros. v. Filardo, 336 U.S. 281, 285 (1949)). The 
Alliance further argued that because NHTSA must consider only domestic 
impacts, it must ``develop some mechanism for scaling down the global 
SCC estimates produced in the published literature,'' besides NHTSA's 
proposal which just took the midpoint between $0 and $14 as the 
domestic SCC value. The Alliance argued that it would be inappropriate 
to use land mass to determine the domestic portion, since so much of 
the land mass on the planet is uninhabited; and also argued that it 
would be inappropriate to use population, since ``not all human beings 
live in areas that are expected to be equally impacted by climate 
change.'' As discussed above, the Alliance cited to the NERA Report 
that it included with its comments as having found that an SCC value 
based on the U.S. share of world gross product was more appropriate.
    NADA similarly commented that ``NHTSA should account only for any 
domestic impacts of reducing the social costs of motor vehicle 
CO2, given that EPCA focuses on U.S. energy security and all 
other costs and benefits evaluated with respect to the proposed CAFE 
standards are domestic only.''
    Mr. Delucchi agreed with NHTSA's discussion that ``consistency 
requires'' that only U.S. domestic ``global warming damages'' be 
considered if NHTSA also accounts for the monopsony effect in the 
reduced value of transfer payments from U.S. oil purchasers to foreign 
oil suppliers. Mr. Delucchi suggested that NHTSA use a procedure 
described in his previous research to estimate the fraction of global 
damages from climate change that would be borne within the U.S., and 
apply this fraction to the estimated global SCC to determine the value 
of U.S. domestic benefits from reducing emissions. This procedure 
adjusts the fraction of global GDP accounted for by the U.S. by the 
relative sensitivity of the U.S. to climate damages compared to the 
remainder of the world, which Delucchi measures by the ratio of U.S. 
dollar damages from climate change per dollar of U.S. GDP to global 
economic damages from climate change per dollar of global GDP. Using 
this method, he estimates that U.S. damages from climate change are 
likely to represent 0-14 percent of total global damages, and thus that 
the value to the U.S. of reducing carbon emissions is equal to that 
same percentage of the estimated global value of the SCC.\323\
---------------------------------------------------------------------------

    \323\ Mark A. Delucchi, Summary of the Non-Monetary 
Externalities of Motor Vehicle Use, UCD--ITS-RR-96-3 (9) rev.1, 
Institute of Transportation Studies, University of California, 
Davis, originally published September 1998, revised October 2004. 
Available at http://www.its.ucdavis.edu/publications/2004/UCD-ITS-RR-96-03(09)--rev1.pdf (last accessed March 23, 2009).
---------------------------------------------------------------------------

    Mr. Montgomery argued that a domestic SCC value was appropriate, 
commenting that ``U.S. policy should be based on marginal damages to 
the U.S. from CO2 emissions in the U.S., as stated in 
relevant OMB circulars on cost-benefit analysis and suggested in the 
draft.'' Mr. Montgomery further stated that ``The consensus appears to 
be that richer countries are less vulnerable than poorer, and that 
temperature increases will be least in temperate regions like the 
U.S.'' Thus, Mr. Montgomery argued that a conservative estimate of U.S. 
damages would be a calculation ``based on the ration of U.S. GDP to 
world GDP.''
    Other commenters argued that NHTSA should use a global SCC value. 
NRDC commented that because ``Carbon dioxide is a global pollutant, and 
much of the damages other countries will experience are a result of 
U.S. emissions,'' and because ``emissions in other countries will cause 
damages in the U.S.,'' that ``It is fundamentally inconsistent with the 
global circulation of these pollutants to arbitrarily limit assessment 
of the benefits of reducing U.S. emissions to those accruing in our own 
territory.'' NRDC also commented that national security studies show 
that the global social costs of carbon will ``spill over'' to the U.S. 
and other wealthy countries. EDF also commented that NHTSA should use a 
global SCC number rather than a domestic one, because ``Climate change 
is clearly a global issue,'' so EDF ``recommend[s] that benefits of 
reducing CO2 concentrations should reflect benefits to 
society as a whole.''
    EDF and the U.S. Senators commented that use of a global SCC value 
would be consistent with OMB guidance that international impacts of 
regulations may be considered if appropriate. The Senators also 
commented that the U.S. must consider the global climate change effects 
of its regulations because it ratified the United Nations Framework 
Convention on Climate Change in 1992. If every nation considers only 
domestic effects of climate change, the Senators argued, emissions 
reduction policies will fall ``far short of the socially optimized 
level.''
    CBD similarly commented that NHTSA should use a global value for 
CO2, arguing that using $7 ``fails to incorporate the full 
economic costs of global climate change, values that are difficult to 
monetize, and costs to the world outside the boundaries of the United 
States.'' CBD stated that ``In general, the estimate of the social 
costs of climate change fails to incorporate the loss of biodiversity, 
complex and large-scale ecosystem services, and the disproportionate 
impacts of global climate change on the developing world.'' CBD also 
stated that NHTSA's use of $0 as the lower bound estimate is 
``[p]resumably * * * meant to imply that the United States might 
benefit economically by letting other countries bear the costs of 
unabated American greenhouse gas emissions. Setting aside the 
tremendous ethical implications of such a position, NHTSA provides 
absolutely no evidence to support the claim.''

[[Page 14345]]

    In its late comments accompanying its submission of EPA's TSD, EDF 
argued that EPA's TSD concluded that a global number is correct, for 
several reasons. Because GHGs are global pollutants and affect 
everyone, using ``domestic only'' estimates would ``omit potential 
impacts on the United States (e.g., economic or national security 
impacts) resulting from climate change impacts in other countries.'' 
Consequently, a global number must be used to avoid missing any 
benefits and to maximize global net benefits (i.e., ``countries would 
need to mitigate up to the point where their domestic marginal cost 
equals the global marginal benefit.'' EDF stated that EPA's TSD cites 
Nordhaus (2006), and says that ``Net present value estimates of global 
marginal benefits internalize the global and intergenerational 
externalities of reducing a unit of emissions and can therefore help 
guide policies towards an efficient level of provision of the public 
good.''
(7) The Rate at Which the SCC Grows Over Time
    Several commenters cited the IPCC Fourth Assessment Report with 
regard to the rate at which the SCC should increase over time. CBD 
commented that as part of the Fourth Assessment Report, the IPCC ``* * 
* states that `It is virtually certain that the real social cost of 
carbon and other greenhouse gases will increase over time; it is very 
likely that the rate of increase will be 2% to 4% per year.' '' The 
U.S. Senators commented that the 2.4 percent per year increase that 
NHTSA used in the NPRM is incorrect, because ``the IPCC report states 
that `it is very likely that the rate of increase will be 2% to 4% per 
year.' ''
    EDF stated that IPCC's recommendation of a 2.4 percent growth rate 
was meant to be used in combination with a low, intergenerational 
discount rate. EDF further argued that after the Fourth Assessment 
Report was released, one of the lead authors recommended using a growth 
rate of 3 percent, but that ``The OMB equivalent guidance for the UK * 
* * recommend using a 2 percent yearly increase.'' EDF thus concluded 
that the 2.4 percent growth rate could be used, but only with a maximum 
3 percent discount rate, and argued that a range of growth rates should 
be run in the sensitivity analysis ``because of considerable 
uncertainty.''
(8) The Discount Rate That Should Be Used for SCC Estimates
    Commenters urged NHTSA to consider a low or even negative discount 
rate in choosing an estimate for the SCC. CBD, for example, stated that 
Stern found that `` `If consumption falls along a path, the discount 
rate can be negative. If inequality rises over time, this would work to 
reduce the discount rate, for the social welfare functions typically 
used. If uncertainty rises as outcomes further into the future are 
contemplated, this would work to reduce the discount rate, with the 
welfare functions typically used.' '' CBD then argued that ``A negative 
discount rate would dramatically increase the cost of climate change in 
the cost-benefit analyses in the proposed rule.''
    NRDC commented that NHTSA should use a discount rate of no more 
than 3 percent for the entire rulemaking, and returned to this argument 
in its SCC discussion, criticizing Tol's estimate for relying 
``primarily upon estimates that did not use current accepted climate 
change discounting procedures of a declining discount rate over time.''
    In its initial comments, EDF stated that NHTSA should only consider 
recent studies that use a 3 percent discount rate for estimating SCC. 
In its late comments, EDF stated that EPA's TSD concluded that ``a low 
discount rate is most appropriate for SCC estimation,'' for several 
reasons. First, because OMB Circular A-4 allows agencies to use a lower 
discount rate when there are inter-generational benefits associated 
with a rulemaking. Second, because ``In this inter-generational 
context, a three percent discount rate is consistent with observed 
interest rates from long-term intra-generational investments (net of 
risk premiums) as well as interest rates relevant for monetary 
estimates of the impacts of climate change that are primarily 
consumption effects.'' Third, because EPA had found that the scientific 
literature supports the use of a discount rate of 3 percent or lower, 
as being ``* * * more consistent with conditions associated with long-
run uncertainty in economic growth and interest rates, 
intergenerational considerations, and the risk of high impact climate 
damages (which could reduce or reverse economic growth).''
(9) Other Issues Raised by Commenters
    The remaining issues raised by commenters with regard to NHTSA's 
proposal regarding the value for the SCC were as follows:
    Public Citizen commented that NHTSA should also have considered 
``the costs of inaction on reducing greenhouse gas emissions and the 
resultant consequences of global warming,'' including other 
environmental and health consequences such as those analyzed in NHTSA's 
DEIS. Public Citizen cited EPA's denial of California's waiver request 
and ``a recent report from the University of Maryland'' as evidence of 
some of these costs, and argued that NHTSA needed to estimate ``the 
costs of inaction'' in making its final decision.
    NRDC commented that emissions reductions may be ``greater than what 
CAFE accomplishes,'' such that the U.S. would ``get * * * a larger 
social cost of carbon benefits stream,'' if the U.S. actions in 
``taking a lead in reducing emissions * * * [helps to] induce other 
countries, especially China and India, to also reduce.'' NRDC also 
argued that ``Carbon dioxide has a very slow decay rate in the 
atmosphere, lasting hundreds of years into the future,'' which means 
that ``the social costs of carbon extend well past the life time of the 
vehicle.'' Thus, ``Any sensible benefits stream would extend them at 
least several decades past the lifetime of a vehicle.''
    In its original comments, EDF argued that NHTSA should have 
considered using a risk-management framework in developing an SCC 
estimate, because cost-benefit analysis ``cannot capture the range of 
uncertainty and risk that characterizes climate change.'' EDF cited 
Prof. Weitzman's work as highlighting ``that the expected damages of 
climate change may be dominated by the existence of consequences which 
have very low probability but very high damages (such as double-digit 
increases in mean global temperature), or a `fat tail' in the 
distribution of possible outcomes.'' In its late comments, EDF added 
that EPA's TSD also suggested that a risk assessment framework may be 
more appropriate than cost-benefit analysis ``in light of the ethical 
implications of climate change and the difficulty in valuing 
catastrophic risks to future generations.'' The TSD went on to say that 
``Economics alone cannot answer the questions, policy, legal, ethical 
considerations are relevant too, and many cannot be quantified. When 
there is much uncertainty, economics recommends a risk management 
framework for guiding policy.''
    Agency response: In determining its responses to the public 
comments on the value of reducing CO2 emissions, the agency 
was mindful that the 9th Circuit remanded rulemaking to NHTSA ``for it 
to include a monetized value for this benefit [the reduced risk of 
global warming as a result of reducing CO2 emissions] in its 
analysis of the proper CAFE standards.'' \324\ (Emphasis added.) NHTSA 
understands this directive to require the agency to include within its 
modeling, with at least some level of

[[Page 14346]]

specificity, actual values for the SCC. Further, as in the case of 
other public comments, the agency is required by the Administrative 
Procedure Act to respond to the relevant and significant public 
comments, including those central to the agency's decision on standards 
under EPCA, in a manner reflecting consideration of the relevant 
factors.
---------------------------------------------------------------------------

    \324\ CBD, 508 F.3d 508, 535.
---------------------------------------------------------------------------

    As noted above, in the NPRM, we tentatively selected the mean value 
($14) in Tol (2005) as a global value, and announced plans to attempt 
to develop and possibly use a domestic value for the final rule. For 
most of the analysis it performed to develop the proposed standards 
using the Volpe CAFE model, NHTSA used a single estimate for a domestic 
value of reducing CO2 emissions. The agency thus elected to 
use the midpoint of the range from $0 to $14 (or $7.00) per metric ton 
of CO2 as the initial value for the year 2011, and assumed 
that this value would grow at 2.4 percent annually thereafter. This 
estimate was employed for the analyses conducted using the Volpe CAFE 
model to support development of the proposed standards. The agency also 
conducted sensitivity analyses of the benefits from reducing 
CO2 emissions using both the upper ($14 per metric ton, 
since the domestic value could not exceed the global one) and lower ($0 
per metric ton) bounds of this range.
    After considering comments on the approach it employed in the NPRM 
and more recent estimates of the SCC, NHTSA has decided to employ a 
range of estimates for the value of reducing GHG emissions in the 
analysis it performed to support this Final Rule for MY 2011 as 
discussed in further detail below. To do so, the agency identified a 
range of estimates from current peer-reviewed estimates of the value of 
the SCC, and then tested the sensitivity of alternative CAFE standards 
to this range of uncertainty while holding the other economic 
parameters used in its analysis fixed at their estimated values. The 
range of estimates, which the agency believes fairly represents the 
uncertainty surrounding the value of the SCC, consists of a domestic 
value ($2) at the lower end, a global value ($33) equal to the mean 
value in Tol (2008) and a global value ($80) one standard deviation 
above the mean value. NHTSA believes that, based on currently available 
information and analysis, $2 is a reasonable domestic value and $33 is 
a reasonable global value, but notes the uncertainty regarding both 
values. The agency tested the sensitivity of alternative CAFE standards 
to this range of uncertainty while holding the other economic 
parameters used in its analysis fixed at their estimated values.
    On the basis of this analysis, the agency has concluded that its 
adopted standards for MY 2011 are not sensitive to the alternative 
estimates of the value of reducing CO2 emissions, so 
although it has selected global and domestic values for the SCC for use 
in analyzing the effects of different SCC values on the standards in 
this one-year rulemaking, NHTSA believes that is not necessary for 
purposes of this rulemaking to make definitive, long term choices about 
the most appropriate global or domestic value or to choose between 
using a global versus domestic value. This approach is sufficient for 
this rulemaking and will allow efforts to make more specific choices to 
be deferred until additional scientific and economic evidence can be 
accumulated, and the participation of other federal agencies in those 
efforts can enable the development of a consistent estimate for use in 
those agencies' respective regulatory and policy-making activities, 
including the next CAFE rulemaking.
    The agency is well aware that scientific and economic knowledge 
about the contribution of GHG emissions to changes in the future global 
climate and the potential resulting damages to the world economy 
continues to evolve rapidly. Thus, any value placed in this rulemaking 
on reducing CO2 emissions is subject to likely change. NHTSA 
recognizes the importance of continuing to monitor current research on 
the potential economic damages resulting from climate change, and of 
periodically updating estimates of the value of reducing CO2 
emissions to reflect continuing advances in scientific and economic 
knowledge about the nature and extent of climate change and the threat 
it poses to world economic development. NHTSA recognizes the interest 
and expertise of other federal agencies, particularly EPA and DOE, in 
the issue of valuing the reductions in climate damages that are likely 
to result from those agencies' own efforts to reduce GHG emissions. 
NHTSA will continue to work closely with those and other federal 
agencies in the development and review of the economic values of 
reducing GHG emissions that it plans to employ in its next CAFE 
rulemaking.
Global Value of Reducing CO2 Emissions
    To develop a range of estimates that accurately reflects the 
uncertainty surrounding the value of reducing emissions, NHTSA relied 
on Tol's (2008) expanded and updated survey of 211 estimates of the 
global SCC, which was published after the agency completed the analysis 
it conducted to develop its proposed CAFE standards.\325\ Tol's 2008 
survey encompasses a larger number of estimates for the global value of 
reducing carbon emissions than its previously-published counterpart, 
Tol (2005), and continues to represent the only recent, publicly-
available compendium of peer-reviewed estimates of the SCC that has 
itself been peer-reviewed and published. The wide range of estimates it 
includes reflects their authors' varying assumptions about critical 
parameters that affect the SCC, including the sensitivity of the global 
climate system to increasing atmospheric concentrations of 
CO2 and other GHGs, the extent of economic damages likely to 
result from climate change, the rate at which to discount future 
damages, the relative valuation of climate damages likely to be 
sustained by nations with different income levels, and the degree of 
collective aversion to the risk of extreme climate change and the 
resulting potential for equally extreme economic damages. NHTSA 
believes that Tol's updated survey provides a reliable and consistent 
current basis for establishing a range of plausible values for reducing 
CO2 emissions from fuel production and use.
---------------------------------------------------------------------------

    \325\ Richard S.J. Tol (2008), The social cost of carbon: 
Trends, outliers, and catastrophes, Economics--the Open-Access, 
Open-Assessment E-Journal, 2 (25), 1-24.
---------------------------------------------------------------------------

    Tol's updated survey includes 125 estimates of the SCC published in 
peer-reviewed journals through the year 2006. Each of these represents 
an independent estimate of the world-wide value of increased economic 
damages from global climate change that would be likely to result from 
a small increase in carbon emissions, and by implication, the global 
value of the reduction in future economic damages from climate change 
that would result from an incremental decline in GHG emissions. Tol 
reports that the mean value of these estimates is $71 per ton of carbon 
emissions, and that the standard deviation of this estimate--a measure 
of how much a typical estimate differs from their average value--is $98 
per ton; the fact that this latter measure is significantly larger than 
the mean value indicates the broad range spanned by the estimates.
    NHTSA staff confirmed in conversations with the author that these 
values apply to carbon emissions occurring during the mid-1990s time 
frame, and are expressed in

[[Page 14347]]

approximately 1995 dollars.\326\ The $71 mean value of the social cost 
of increased carbon emissions reported by Tol corresponds to a global 
value of $19 per metric ton of CO2 emissions reduced or 
avoided when expressed in 1995 dollars, while the $98 standard 
deviation for carbon emissions corresponds to $27 per ton of 
CO2.\327\ Adjusted to reflect increases since the mid-1990s 
in the marginal damage costs of emissions at now-higher atmospheric 
concentrations of GHGs, and expressed in 2007 dollars, Tol's mean value 
corresponds to a global damage cost of $33 per ton of CO2 
emitted during the year 2007, with a standard deviation of nearly $47 
per ton. Thus, the value that is one standard deviation above the $33 
figure is $80 per ton of CO2.
---------------------------------------------------------------------------

    \326\ Tol (2008), Table 1, p. 16.
    \327\ As noted in an earlier footnote, carbon itself accounts 
for 12/44, or about 27 percent, of the mass of carbon dioxide (12/44 
is the ratio of the molecular weight of carbon to that of carbon 
dioxide). Thus, each ton of carbon emitted is associated with 44/12, 
or 3.67, tons of carbon dioxide emissions. Estimates of the SCC are 
typically reported in dollars per ton of carbon, and must be divided 
by 3.67 to determine their equivalent value per ton of carbon 
dioxide emissions.
---------------------------------------------------------------------------

    Many commenters noted that some recent estimates of the SCC are 
significantly higher that those reported by Tol (2005), and suggested 
that NHTSA employ these higher estimates of the SCC to determine the 
value of reducing CO2 emissions. Specifically, commenters 
highlighted the widely-cited Stern Review's estimate that the current 
SCC is likely to be in excess of $300 per metric ton of carbon, or 
approximately $80 per ton of CO2.\328\ Some commenters 
argued that Stern's estimate should be given substantial weight in 
determining the value of reducing CO2 emissions used to 
develop the agency's final CAFE standards. Although Stern's estimate is 
reported in Tol's 2008 survey, it is not included in the estimates that 
form the basis for NHTSA's revised range of values, because Stern's 
study has not yet been subjected to formal peer review.
---------------------------------------------------------------------------

    \328\ Stern, N.H., S.Peters, V.Bakhshi, A.Bowen, C.Cameron, 
S.Catovsky, D.Crane, S.Cruickshank, S.Dietz, N.Edmonson, S.-
L.Garbett, L.Hamid, G.Hoffman, D.Ingram, B.Jones, N.Patmore, 
H.Radcliffe, R.Sathiyarajah, M.Stock, C.Taylor, T.Vernon, H.Wanjie, 
and D.Zenghelis (2006), Stern Review: The Economics of Climate 
Change Cambridge University Press, Cambridge, England.
---------------------------------------------------------------------------

    NHTSA notes that the Stern Report's estimate of the SCC employs a 
low value for the discount rate it applies to future economic damages 
from climate change, and that this assumption is largely responsible 
for its high estimate of the SCC. Hope and Newbury demonstrate that 
substituting a more conventional discount rate would reduce Stern's 
estimate of the benefits from reducing emissions to the range of $20-25 
per ton of CO2, which is well within the range of other 
estimates summarized in Tol's 2008 survey, and significantly below the 
$33 equivalent of the mean of peer-reviewed estimates Tol reports.\329\
---------------------------------------------------------------------------

    \329\ See Hope, Chris, and David Newbery, ``Calculating the 
Social Cost of Carbon,'' unpublished paper, Cambridge University, 
May 2006, p. 15.
---------------------------------------------------------------------------

    Other commenters noted that EPA has recently developed preliminary 
estimates of the value of reducing CO2 emissions, and 
recommended that NHTSA employ these values in its analysis of 
alternative CAFE standards. EPA's estimates are reported in that 
agency's Technical Support Document on Benefits of Reducing GHG 
Emissions (GHG Benefits TSD) accompanying its Advance Notice of 
Proposed Rulemaking on motor vehicle CO2 emissions.\330\ In 
that document, EPA derives estimates of the SCC using the subset of 
estimates included in Tol's 2008 survey drawn from peer-reviewed 
studies published after 1995 that do not employ so-called equity 
weighting.\331\ Updated from their original mid-1990s values to reflect 
increases in the marginal damage costs of emissions at growing 
atmospheric concentrations of CO2 and expressed in 2006 
dollars, EPA reports average values of $40 per ton of CO2 
for studies using a 3 percent discount rate, and $68 per ton for 
studies using a 2 percent discount rate.\332\ (The discount rates 
employed in developing the 125 peer-reviewed estimates surveyed by Tol 
ranged from 1 to 10 percent.\333\)
---------------------------------------------------------------------------

    \330\ U.S. EPA, Technical Support Document on Benefits of 
Reducing GHG Emissions, EPA-HQ-OAR-2008-318-0078.pdf, June 12, 2008.
    \331\ Equity weighting assigns higher weights per dollar of 
economic damage from climate change that are expected to be borne by 
lower-income regions of the globe, in an attempt to make the welfare 
changes corresponding to those damages more comparable to the 
damages expected to be sustained by higher-income world regions.
    \332\ These values are reported in EPA, Table 1. p. 12. Using 
the original estimates included in Tol's 2008 survey, which were 
supplied to NHTSA by the author, the agency calculates these values 
at $38 per ton and $62 per ton for 3% and 2% discount rates, 
slightly below the estimates reported by EPA. These differences may 
be attributable to the two agencies' use of different measures of 
inflation to update the original estimates from mid-1990s to 2007 
price levels (NHTSA employs the Implicit Price Deflator for U.S. 
GDP, generally considered to be an accurate index of economy-wide 
price inflation).
    \333\ Tol (2008), Table A1.
---------------------------------------------------------------------------

    NHTSA recognizes that in a recent rulemaking, DOE used a range of 
values from $0 to $20 (in 2007 dollars) per ton to estimate the 
benefits of reductions in CO2 emissions resulting from new 
energy conservation standards for commercial air conditioning 
equipment.\334\ DOE derived the upper bound of this range from the mean 
of published estimates of the SCC reported in the same earlier survey 
by Tol (2005) that NHTSA relied upon for the value it used to analyze 
the CAFE standards proposed in the NPRM, and the lower bound from the 
assumption that reducing CO2 emissions would produce no 
economic benefit. However, NHTSA believes that the estimates of the 
mean and standard deviation derived from Tol's more recent (2008) and 
comprehensive survey of published estimates of the SCC provides a more 
up-to-date range of values for reductions in CO2 emissions 
resulting from higher CAFE standards, primarily because Tol's 2008 
survey includes a larger number of estimates of the SCC, as well as 
more recently-published estimates.
---------------------------------------------------------------------------

    \334\ Department of Energy, 10 CFR Part 431, Energy Conservation 
Program for Commercial and Industrial Equipment: Packaged Terminal 
Air Conditioner and Packaged Terminal Heat Pump Energy Conservation 
Standards: Final Rule, Federal Register, October 7, 2008, pp. 58813-
58814.
---------------------------------------------------------------------------

    The agency is aware that rapid advances in modeling climate change 
and its potential economic damages have occurred over the past decade, 
and that the choice of discount rates has an important influence on 
estimates of the SCC. In its next CAFE rulemaking, NHTSA will be 
working closely with EPA and other federal agencies to review the 
arguments for more selective use of published estimates of the SCC 
advocated by the EPA. However, based on the information gathered and 
analysis performed by the agency through last fall, and in view of the 
fact that this is a one model year rulemaking and the agency will 
review matters in considerable detail for the post MY 2011 proposal to 
be issued later this year, NHTSA is not now taking that step. Thus, for 
the purposes of this final rule, NHTSA has elected to use all 125 SCC 
estimates from peer-reviewed studies reported by Tol, instead of the 
more limited subset of these estimates relied upon by EPA. Including 
the full array of studies provides a reasonable basis for valuing 
reductions in CO2 emissions. Specifically, NHTSA believes 
that there is still value at this time in considering pre-1995 studies 
and those that employ equity weighting (which account for 58 of the 125 
peer-reviewed estimates included in Tol's survey), particularly 
recognizing that those studies have been published in peer-reviewed 
journals.\335\
---------------------------------------------------------------------------

    \335\ Again using the original estimates from Tol's 2008 survey 
supplied by the author, NHTSA estimates that excluding the 18 pre-
1995 estimates from the 125 used to develop the $33 per ton mean 
estimate would increase it to $36 per ton, while excluding the 40 
estimates that employ equity weighting would reduce the mean 
estimate to $23 per ton. Excluding both pre-1995 estimates and those 
that employ equity weighting would eliminate a total of 58 of the 
125 peer-reviewed estimates, and reduce their mean value to $20 per 
ton.

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

[[Page 14348]]

    For the purpose of this rulemaking, NHTSA has also elected not to 
base its estimates of the value of reducing CO2 emissions 
solely on estimates that utilize a single discount rate. NHTSA 
acknowledges that the varying discount rates employed by different 
researchers are an important source of the significant differences in 
their resulting estimates of the SCC. However, the agency believes that 
the appropriate rate at which to discount economic damages occurring in 
the distant future is an economic parameter whose correct value for the 
purpose of analyzing future climate change and the resulting economic 
damages is subject to significant uncertainty, analogous to that 
surrounding other critical scientific and economic parameters in 
climate analysis. In the agency's view, it is reasonable to consider 
estimates based on different discount rates at the present time instead 
of attempting to resolve this uncertainty in the time left to complete 
this one-year rulemaking by limiting the sample of estimates to those 
that employ the single discount rate it regards as most appropriate. In 
its next CAFE rulemaking, NHTSA will work with EPA, DOE and other 
federal agencies to consider anew the issue of whether to rely 
exclusively on values of the SCC that are developed using discount 
rates that are consistent with the rate the agency uses to discount the 
value of reductions in future GHG emissions reductions to their present 
values.\336\
---------------------------------------------------------------------------

    \336\ Climate economic studies report estimates of the SCC for 
specific future years, often in the form of a value for some stated 
base year and an estimate of the annual rate at which it will grow, 
as total atmospheric concentrations of GHGs are assumed to increase. 
These studies use some assumed rate to discount economic damages 
that are projected to occur over a very long span of future years to 
their present values as of the future year when emissions increases 
are assumed to occur. These estimates of the SCC during specific 
future years are used to value the reductions in GHG emissions that 
would result each year over the lifetimes of vehicles affected by 
CAFE standards; for example, higher CAFE standards for model year 
2011 cars and light trucks would reduce GHG emissions each year from 
2011 through approximately 2047, and the value of reducing those 
emissions by one ton will rise each year over that span. The 
estimated economic values of the reductions in GHG emissions during 
each of those future years must in turn be discounted to their 
present values as of today, so that they can be compared with the 
present values of other benefits and with vehicle manufacturers' 
costs for meeting higher CAFE standards. The rate used to perform 
this latter discounting must be selected by NHTSA, and the choice of 
its value is discussed in detail in Section V.B.14.
---------------------------------------------------------------------------

    As some commenters pointed out, another approach NHTSA could rely 
on to estimate the value of reducing GHG emissions would be to use 
actual or projected prices for CO2 emission permits in 
nations that have adopted or proposed GHG emission cap and trade 
systems. In theory, permit prices would reflect the incremental costs 
for achieving the last emissions reductions necessary to comply with 
the overall emissions cap. If this cap were based on an estimate of the 
level of global emissions required to prevent an unacceptable degree of 
climate change, permit prices could provide an estimate of the benefits 
of reducing GHG emissions to a level that forestalls unacceptable 
climate change. A related approach would be to use estimates of the 
cost of reducing emissions from specific sources other than passenger 
cars or light trucks to estimate the value of reducing CO2 
emissions via higher CAFE standards, under the reasoning that requiring 
higher fuel economy for cars and light trucks would allow these costs 
to be avoided or saved.
    NHTSA considered the use of CO2 permit prices to measure 
the benefits from reducing emissions via higher CAFE standards, but did 
not select this approach primarily because of the current difficulty in 
deciding what is considered an ``acceptable'' degree of climate change. 
The answer to that question cannot be provided by environmental, 
technological or economic analyses alone or even in combination; 
answering that question also involves policy judgment. The agency also 
notes that there would also be considerable scientific uncertainty in 
determining the level of emissions reduction that would be necessary to 
limit climate change to any degree that was deemed acceptable, even if 
agreement on the latter could be achieved. Since permit prices would 
depend on the level of emission reduction that is required, they are 
likely to reflect this uncertainty. Additionally, as a general matter, 
permit prices reflect avoided costs of emission reductions and there is 
no direct or necessary relationship between avoided costs and benefits.
    Finally, still other commenters urged the agency to take into 
account the economic value of any reduction in the risk of catastrophic 
climate events resulting from lower GHG emissions when estimating the 
benefits from reducing emissions. Most of the estimates of the SCC that 
are included in Tol's updated review treat the risks and potential 
damages from catastrophic events using conventional probabilistic 
methods to compute the ``expected'' value of a wide range of potential 
changes in climate and associated economic damages. However, few 
studies of the SCC attempt to include explicit premiums that measure 
the population's aversion to accepting the risks of catastrophic 
climate damages.\337\ Further, most published studies of climate 
damages report insufficiently detailed results to allow the calculation 
of appropriate risk premiums.
---------------------------------------------------------------------------

    \337\ Under the conventional assumption that successive 
increases in consumption produce progressively smaller improvements 
in economic welfare, the welfare level associated with the mean of a 
range of possible consumption levels is higher than the mean of the 
welfare levels associated with each possible level of consumption. 
Moreover, the difference between these welfare levels increases as 
the span of possible consumption levels is broadened, as would occur 
if increased GHG emissions have the potential to cause drastic 
climate changes and result in similarly drastic economic damages. In 
this situation, the true economic costs of increased emissions 
include not only the resulting increase in the probabilistic 
expected value of climate-related economic damages, but also the 
compensation that those suffering these damages would require in 
order to willingly accept the increased risk of catastrophic 
damages, even if that risk is extremely small. Conversely, the value 
of reducing GHG emissions should include not only the resulting 
reduction in the expected value of future climate-related economic 
damages, but also the added amount people would be willing to pay 
for the associated reduction in the risk that such catastrophic 
damage might occur.
---------------------------------------------------------------------------

    NHTSA acknowledges that including an appropriate premium to reflect 
the value of reducing the risks of catastrophic climate events could 
significantly increase its estimate of the value of reducing 
CO2 emissions, but it has not attempted to do so at this 
time.\338\ (For discussion of NHTSA's consideration of abrupt climate 
change, see Sec.  3.4.3.2.4 of the FEIS.) However, the agency is aware 
of recent research suggesting that including an appropriate risk 
premium can significantly increase estimates of the SCC, and by 
implication increase the estimated value of reducing CO2 
emissions.\339\ In working with EPA, DOE and other federal agencies in 
the development of revised estimates of the benefits from reducing 
CO2 emissions that could be used in the next CAFE 
rulemaking, NHTSA will carefully consider any new research that 
explicitly estimates risk premiums, and evaluate their applicability to 
the issue of estimating economic benefits from reductions in 
CO2 emissions resulting from future CAFE standards. The 
agency will also work with those agencies and departments in exploring 
the possibility

[[Page 14349]]

of calculating an appropriate risk premium using results reported in 
published studies of the SCC together with any necessary assumptions 
about the underlying economic behavior, such as the response of welfare 
to successive increases in consumption levels.
---------------------------------------------------------------------------

    \338\ Tol estimates that including an appropriate risk premium 
would increase the mean estimate of the SCC included in his more 
recent survey by 15-27%; see Tol (2008), Table 2.
    \339\ Hope, Chris, and David Newbery (2006), Calculating the 
social cost of carbon, University of Cambridge, May 2, 2006.
---------------------------------------------------------------------------

Domestic Value of Reducing CO2 Emissions
    The agency was able to develop a domestic value by using the mean 
estimate of the global value of reduced economic damages from climate 
change resulting from reducing CO2 emissions as a starting 
point; estimating the fraction of the reduction in global damages that 
is likely to be experienced within the U.S.; and applying this fraction 
to the mean estimate of global benefits from reducing emissions to 
obtain an estimate of the U.S. domestic benefits from lower GHG 
emissions.
    The agency constructed an estimate of the U.S. domestic benefits 
from reducing CO2 emissions using estimates of U.S. domestic 
and global benefits from reducing greenhouse gas emissions developed by 
EPA and reported in that agency's Technical Support Document 
accompanying its advance notice of proposed rulemaking on motor vehicle 
CO2 emissions.\340\ Specifically, NHTSA calculated the ratio 
of domestic to global values of reducing CO2 emissions 
estimated by EPA using the Climate Framework for Uncertainty, 
Negotiation, and Distribution (FUND) integrated assessment model.
---------------------------------------------------------------------------

    \340\ U.S. EPA, Technical Support Document on Benefits of 
Reducing GHG Emissions, June 12, 2008.
---------------------------------------------------------------------------

    EPA's central estimates of domestic and global values for reducing 
GHG emissions during 2007 using the FUND model using a 3 percent 
discount rate were $1 and $17 per metric ton (in 2006$), which suggests 
that benefits to the U.S. from reducing CO2 emissions are 
likely to represent about 6 percent of their global total. The 
comparable figures derived using a 2 percent discount rate are $4 and 
$88 for 2007, suggesting that U.S. domestic benefits from reductions in 
CO2 emissions would amount to less than 5 percent of their 
global total. EPA's results also suggest that these fractions are 
likely to remain roughly constant over future decades.\341\ Applying 
the 5-6 percent figure to the $33 per metric ton mean estimate of the 
global value of reducing CO2 emissions derived previously 
yields an estimate of approximately $2 per metric ton for the domestic 
benefit from reducing U.S. CO2 emissions in 2007.
---------------------------------------------------------------------------

    \341\ These values are reported in EPA, Table 1. p. 12.
---------------------------------------------------------------------------

    NHTSA also constructed a second estimate of the fraction of global 
economic damages from climate change likely to be borne by the U.S., 
using the procedure described by Delucchi in his comments on the 
NPRM.\342\ Delucchi noted that the fraction of global damages from 
climate change borne within the U.S. can be estimated by adjusting the 
U.S. share of world economic output, measured by the ratio of U.S. GDP 
to gross world product, by the relative sensitivity of U.S. and world 
economic output to damages resulting from climate change. Using data on 
the U.S. share of world economic output (which ranges from 20-28 
percent) and published estimates of the relative sensitivity of the 
U.S. economy to climate damages compared to the world economy as a 
whole, Delucchi estimated that the U.S. fraction of global economic 
damages from climate change is likely to range from 0-14 percent. 
Applying the midpoint of this range (7 percent) to the $33 per ton mean 
estimate of the global value of reducing CO2 emissions also 
yields an estimate of approximately $2 per metric ton for the domestic 
benefit from reducing U.S. CO2 emissions in 2007.
---------------------------------------------------------------------------

    \342\ Mark A. Delucchi, Summary of the Non-Monetary 
Externalities of Motor Vehicle Use, UCD-ITS-RR-96-3 (9) rev. 1, 
Institute of Transportation Studies, University of California, 
Davis, originally published September 1998, revised October 2004, 
pp. 49-51. Available at http://www.its.ucdavis.edu/publications/2004/UCD-ITS-RR-96-03(09)--rev1.pdf (last accessed March 23, 2009).
---------------------------------------------------------------------------

Choosing Between a Global Value and a Domestic Value, and Estimating 
the Global Values
    As the IPCC has noted, CO2 and other GHGs are chemically 
stable, and thus remain in the atmosphere for periods of a decade to 
centuries or even longer, becoming well-mixed throughout the earth's 
atmosphere. As a consequence, emissions of these gases have extremely 
long-term effects on the global climate. Further, emissions from any 
particular geographic area (for example, the U.S.) are expected to 
contribute to changes in the global climate that will affect many other 
countries around the world. Similarly, emissions occurring in other 
countries will contribute to changes in the earth's future climate that 
are expected to affect the well-being of the U.S. The long-lived nature 
of atmospheric GHGs means that emissions of these gases from any 
location or source can affect the global climate over a prolonged 
period, and can thus result in economic damages to many other nations 
as well as over subsequent generations.
    In view of the global effects of GHG emissions, reducing those 
emissions to an economically efficient level, i.e., one that maximizes 
the difference between the total benefits from limiting the extent of 
climate change and the total costs of achieving the reduction in 
emissions necessary to do so, would require each individual nation to 
limit its own domestic emissions to the point where its domestic costs 
for further reducing emissions within its borders equal the global 
value of reduced economic damages that result from limiting climate 
change. NHTSA believes that this argument has considerable merit from 
the standpoint of economic theory.
    If individual nations were instead to consider only the domestic 
benefits they receive from limiting the pace or extent of climate 
change, each nation would reduce emissions only to the point where its 
costs for achieving further reductions equal the benefits to its 
domestic economy from limiting the impacts of climate change. As a 
result, the combined global reduction in emissions resulting from 
individual nations' comparisons of their domestic benefits from 
limiting climate change to their domestic costs for reducing emissions 
might be inadequate to slow or limit climate change.
    At the same time, however, the agency must also consider the 
economic, environmental and other effects on the U.S. that a choice of 
a global value in this rulemaking might have, given the current stage 
of ongoing domestic legislative activity and negotiations regarding 
effective international cooperation and coordination. NHTSA notes that 
there might be risks to nations that unilaterally attempt to reduce 
their emissions by adopting policies or regulations whose domestic 
marginal costs equal the global marginal benefits from reducing the 
threat of climate change. Such actions could induce economic activity 
within their borders--particularly production by emissions-intensive 
industries--to shift to nations that adopt less stringent regulations 
or lower economic penalties on emissions within their respective 
borders. Such a shift would cause emissions abroad to increase, 
offsetting at least some of the benefits of domestic emissions 
reductions.
    The agency recognizes that the arguments for using global versus 
domestic values of reducing GHG emissions are complex, and cannot be 
resolved satisfactorily by the unilateral actions of any single federal 
agency. Instead, resolution of whether to use a domestic or global 
value for reducing

[[Page 14350]]

emissions, and developing reliable estimates of those values, as 
relevant, will require active participation by all federal agencies 
whose regulatory and policy-making activities will be affected by this 
decision, as well as leadership from the Administration. In reaching 
such a consensus, participants will need to assess not only the 
economic arguments favoring global versus domestic values of reducing 
emissions, but also the prospects for effective international 
cooperation to reduce global GHG emissions, the likelihood that 
leadership by the U.S. in seeking emissions reductions would spur 
international efforts to reduce emissions, and the precedents 
established by federal agencies that have previously evaluated benefits 
from regulations that lower GHG emissions. They will also need to 
consider arguments that U.S. citizens may attach some value to 
reductions in the threat of climate impacts occurring in other regions 
of the globe, and that reducing the impacts of climate change on other 
nations may have important ``spillover'' benefits to the U.S. itself. A 
position has not been adopted by the relevant entities.
    In these circumstances, NHTSA decided to take a pragmatic approach 
to estimating the value of reducing GHG emissions for the immediate and 
limited purpose of this rulemaking. As noted above, we used the mean 
value in Tol (2008). To develop a reasonable upper-bound estimate of 
that value for purposes of this rule, the agency used a value one 
standard deviation above the $33 mean value.\343\ As also noted above, 
the standard deviation of peer-reviewed estimates from Tol's 2008 
survey is $47 per ton when expressed in comparable terms, which yields 
an upper-bound estimate of $80 per ton (equal to $33 plus $47) of 
CO2 emissions avoided.\344\ Because the $80 per ton value is 
higher than those corresponding to nearly 90% of the 125 peer-reviewed 
estimates of the SCC included in the survey, the agency views it as a 
reasonable upper bound on the likely global value of reducing 
CO2 emissions.\345\ For the purposes of this rulemaking, 
NHTSA believes that the range extending from the $2 per ton estimate of 
the domestic value of reducing CO2 emissions to the $80 per 
ton estimate of the global value is sufficiently broad to illustrate 
the sensitivity of alternative MY 2011 CAFE standards and the resulting 
fuel savings and emissions reductions to plausible differences in the 
SCC.
---------------------------------------------------------------------------

    \343\ A two-standard deviation range around the agency's $33 per 
ton central estimate would extend from minus $59 to $126 per ton of 
CO2 emissions. The agency notes that the lower end of 
this range implies economic benefits of $59 for each additional ton 
of CO2 emissions during 2007, while its upper end 
significantly exceeds all but two of the 125 peer-reviewed estimates 
included in Tol's 2008 survey.
    \344\ A value one standard deviation below the $33 mean would be 
-$14 per ton, which implies economic benefits of $14 for each 
additional ton of emissions. Because of this implication, NHTSA 
regards the $2 per ton estimate of the domestic value of reducing 
emissions as a more plausible lower bound on the value of reducing 
emissions than the $-14 per ton figure.
    \345\ Tol reports that the 90% confidence limit of the 
distribution of peer-reviewed values is $170 per ton, while adding 
one standard deviation to his reported mean yields a value of $169; 
see Tol (2008), Table 1.
---------------------------------------------------------------------------

Rate of Growth of SCC
    The marginal cost per ton of additional CO2 emissions is 
generally expected to rise over time, because the increased pace and 
degree of climate change--and thus the resulting economic damages--
caused by additional emissions are both expected to rise in proportion 
to the existing concentration of CO2 in the earth's 
atmosphere. The IPCC Fourth Assessment Report variously reported that 
the climate-related economic damages resulting from an additional ton 
of carbon emissions are likely to grow at a rate of 2.4 percent 
annually, and at a rate of 2-4 percent annually.\346\ Virtually all 
commenters who addressed this issue indicated that the IPCC intended 
the 2.4 percent growth rate it reported for the SCC in one passage to 
instead read ``2-4 percent,'' and many urged NHTSA to apply a 3 percent 
or higher growth rate to determine the future value of the SCC.
---------------------------------------------------------------------------

    \346\ Yohe et al. (2007), p. 13 reports that ``* * * it is very 
likely that the rate of increase [in the social cost of carbon] will 
be 2% to 4% per year.'' However, p. 822 states that ``* * * the SCC 
will increase over time; current knowledge suggests a 2.4% per year 
rate of growth.''
---------------------------------------------------------------------------

    NHTSA staff reviewed the underlying references from which the 
disputed figure was derived, and those sources clearly report the 
growth rate implied by their estimates of the future value of the SCC 
for different future years as 2.4 percent, instead of the 2-4 percent 
asserted by commenters.\347\ Although most studies that estimate 
economic damages caused by increased GHG emissions in future years 
produce an implied growth rate in the SCC, neither the rate itself nor 
the information necessary to derive its implied value is commonly 
reported. NHTSA has been unable to locate other published research that 
reports the likely future rate of growth in damage costs from 
CO2 emissions or the information required to derive it. 
NHTSA understands that other researchers may be using alternative 
growth rates. The agency may revise the estimated rate of growth it 
uses in its future analyses based on emerging estimates in the 
literature and on interagency coordination with the EPA, DOE and other 
federal agencies.
---------------------------------------------------------------------------

    \347\ Hope, C.W. (2006), The Marginal Impact of CO2 
from PAGE2002: An Integrated Assessment Model Incorporating the 
IPCC's Five Reasons for Concern, Integrated Assessment Journal, 6, 
(1), 19-56; and Hope, Chris, and David Newbery (2006), Calculating 
the social cost of carbon, University of Cambridge, May 2, 2006.
---------------------------------------------------------------------------

    For the purposes of this rulemaking, NHTSA used the 2.4 percent 
annual growth rate to calculate the future increases in its estimates 
of both the domestic ($2/metric ton in 2007) and global ($33/metric ton 
and $80/metric ton in 2007) values of reducing CO2 
emissions. Over the lifetimes of cars and light trucks subject to the 
CAFE standards it is establishing for model year 2011, these values 
average nearly $4, $61, and $157 per ton of CO2 emissions, 
approximately twice their estimated values during 2007. The agency is 
unaware of the basis for EDF's assertion that the 2.4 percent growth 
rate is to be used only in conjunction with an intergenerational 
discount rate with a maximum of 3 percent. Although the agency's 
analysis did follow EDF's suggestion in any case, NHTSA selected the 
growth rate in the future value of reducing CO2 emissions 
and the discount rate applied to these benefits for separate reasons, 
as discussed in detail previously.
Insensitivity of MY 2011 Standards to Different Values of SCC
    NHTSA examined the sensitivity of alternative CAFE standards for MY 
2011 to the choice among three different estimates of the value of 
reducing CO2 emissions from fuel production and use: (1) The 
mean estimate of the global value of reducing emissions derived as 
discussed previously from Tol's 2008 survey--$33 per ton; (2) a value 
one standard deviation above this mean estimate--$80 per ton; and (3) 
the estimate of the value of U.S. domestic benefits from lower 
emissions derived as discussed above--$2 per ton.\348\
---------------------------------------------------------------------------

    \348\ In all analyses that employ its estimated value of the 
global benefits from reducing CO2 emissions, NHTSA 
reduces the value of the savings in monopsony costs from lower U.S. 
petroleum consumption and imports to zero. This is consistent with 
the fact that when viewed from the same global perspective that 
justifies the use of a global value for reducing emissions, these 
monopsony payments represent a transfer of economic resources from 
consumers of petroleum products to petroleum producers, rather than 
an actual savings in economic resources, and thus do not constitute 
a real economic benefit.
---------------------------------------------------------------------------

    The agency tested the sensitivity of its ``optimized'' CAFE 
standards for MY 2011 passenger cars and light trucks to

[[Page 14351]]

the choice among those three alternative values for reducing 
CO2 emissions. The agency's analysis revealed that the 
optimized CAFE standards for MY 2011 cars and light trucks were 
unaffected by the choice among those values for reducing CO2 
emissions from fuel production and use. The detailed results of this 
analysis are reported in the agency's previously-released Final 
Environmental Impact Statement for MY 2011-15 CAFE standards.
    There are several reasons for the insensitivity of the MY 2011 
standards to the different values of the SCC. First, not more than 15 
percent of all models are being redesigned for MY 2011, thus limiting 
the changes that can be made. Second, in any year, the value of 
gasoline has a far greater effect on the potential level of the CAFE 
standards than the SCC. Third, in the analyses that employ the $33 or 
$80 per ton global values of the benefits from reducing CO2 
emissions, NHTSA reduces the savings in monopsony costs from lower U.S. 
petroleum consumption and imports to zero.\349\ This is done in order 
to be consistent with the fact that monopsony payments are a transfer 
rather than a real economic benefit when viewed from the same global 
perspective. This reduction partly offsets the effect of the higher 
CO2 value on the optimized CAFE standards and resulting 
benefits. It does not do so completely, however, because the value of 
reducing CO2 emissions continues to grow at the assumed 2.4 
percent rate over the period spanned by the analysis, nearly doubling 
over the lifetimes of MY 2011 vehicles.
---------------------------------------------------------------------------

    \349\ As noted above earlier in the discussion of SCC, NHTSA 
plans to review this practice in the next CAFE rulemaking.
---------------------------------------------------------------------------

Decision Regarding the Value of SCC
    Given the insensitivity of the potential standards to the various 
values of SCC used in the above analysis, NHTSA concludes that it is 
unnecessary for the agency to select a single estimate of the value of 
reducing CO2 emissions for inclusion in its analysis as part 
of this rulemaking. For that reason and in view of the significance 
that announcing the selection of either a domestic or global value in 
this rulemaking might have in the context of ongoing legislative 
activities and international negotiations, we are deferring the choice 
between a domestic SCC and a global SCC and, for the appropriate 
choice, the monetized value for the benefit of reduction, until the 
next CAFE rulemaking. This will provide the time necessary for more 
refined analysis and for the various affected federal agencies to work 
together and identify a consistent value for use in their respective 
regulatory and policy-making activities. NHTSA expects to participate 
actively in the process of developing an appropriate range of estimates 
for that value. By the time we issue a proposal this summer for MY 2012 
and beyond, we anticipate those activities and efforts will have 
progressed sufficiently to enable the federal agencies to make an 
informed choice that we can use as a basis for that rulemaking. NHTSA 
expects that the economic value of reducing CO2 emissions 
will play an important role in developing and analyzing standards in 
the next CAFE rulemaking which, unlike this rulemaking, we expect to be 
a five-year rulemaking.
13. The Value of Increased Driving Range
    NHTSA also considered the fact that improving vehicles' fuel 
economy may increase their driving range before they require refueling. 
By reducing the frequency with which drivers typically refuel their 
vehicles, and by extending the upper limit of the range they can travel 
before requiring refueling, improving fuel economy provides some 
additional benefits to drivers. Alternatively, if manufacturers respond 
to improved fuel economy by reducing the size of fuel tanks to maintain 
a constant driving range, the resulting savings in manufacturing costs 
will presumably be reflected in lower vehicle sales prices.
    NHTSA stated in the NPRM that no direct estimates of the value of 
extended vehicle range are readily available, so NHTSA's analysis 
calculates the reduction in the annual number of refueling cycles that 
results from improved fuel economy, and applies DOT-recommended values 
of travel time savings to convert the resulting time savings to their 
economic value.\350\ The NPRM provided the following illustration of 
how the value of extended refueling range is estimated: A typical small 
light truck model has an average fuel tank size of approximately 20 
gallons. Assuming that drivers typically refuel when their tanks are 20 
percent full (i.e., 4 gallons in reserve), increasing this model's 
actual on-road fuel economy from 24 to 25 mpg would extend its driving 
range from 384 miles (16 gallons x 24 mpg = 384 miles) to 400 miles (16 
gallons x 25 mpg = 400 miles). Assuming that the truck is driven 12,000 
miles per year, this reduces the number of times it needs to be 
refueled from 31.3 (12,000 miles per year / 384 miles per refueling) to 
30.0 (12,000 miles per year / 400 miles per refueling), or by 1.3 
refuelings per year.
---------------------------------------------------------------------------

    \350\ See Department of Transportation, Guidance Memorandum, 
``The Value of Saving Travel Time: Departmental Guidance for 
Conducting Economic Evaluations,'' Apr. 9, 1997. Available at http://ostpxweb.dot.gov/policy/Data/VOT97guid.pdf (last accessed August 
20, 2008); update available at http://ostpxweb.dot.gov/policy/Data/VOTrevision1_2-11-03.pdf (last accessed August 20, 2008).
---------------------------------------------------------------------------

    Weighted by the nationwide mix of urban (about 2/3) and rural 
(about 1/3) driving and average vehicle occupancy for all driving trips 
(1.6 persons), the DOT-recommended value of travel time per vehicle-
hour is slightly below $24.00 (in 2006 dollars).\351\ Assuming that 
locating a station and filling up requires ten minutes, the annual 
value of time saved as a result of less frequent refueling amounts to 
$5.20 (calculated as 1.3 refuelings/year x 10/60 hours/refueling x 
$24.00/hour). This calculation is repeated for each future calendar 
year that vehicles affected by the alternative CAFE standards evaluated 
in this rule would remain in service. Like fuel savings and other 
benefits, however, the total value of this benefit for vehicles 
produced during a model year declines over their expected lifetime, 
because a smaller number of those vehicles remain in service each year, 
and those remaining in service are driven fewer miles.
---------------------------------------------------------------------------

    \351\ The average hourly wage rate during 2006 was estimated to 
be approximately $25.00 per hour. For urban travel, the DOT guidance 
recommends that personal travel (which accounts for 94.4 percent of 
urban automobile travel) be valued at 50 percent of the hourly wage 
rate, while business travel (5.6 percent of urban auto travel) 
should be valued at 100 percent of the hourly wage rate. For 
intercity travel, personal travel (which represents 87 percent of 
intercity automobile travel) is valued at 70 percent of the wage 
rate, while business travel (the remaining 13 percent) is valued at 
100 percent of the wage rate. The resulting average values of travel 
time are $13.20 for urban travel and $18.48 for intercity travel. 
Multiplying these by average vehicle occupancy (1.6) produces 
estimates of $21.12 and $29.56 for the value of time per vehicle-
hour in urban and rural travel. Using the fractions of urban and 
rural travel reported above, the weighted average of these values is 
$23.91 per hour. Departmental Guidance for Valuation of Travel Time 
in Economic Analysis, 1997. Available at http://ostpxweb.dot.gov/policy/Data/VOT97guid.pdf (last accessed Nov. 2, 2008).
---------------------------------------------------------------------------

    NHTSA received comments only from the Alliance regarding the 
benefits that drivers receive from increased driving range. The 
Alliance stated that ``NHTSA incorrectly assumes that its new fuel 
economy standards will improve vehicle range and thus reduce the number 
of times a vehicle owner would have to refill the tank (creating 
consumer benefits).'' The Alliance comments focused on two points: 
first, that analysis by Sierra Research demonstrates ``the complete 
absence of

[[Page 14352]]

any relationship between fuel economy and range in the light truck 
fleet,'' and second, that manufacturers ``design fuel-storage capacity 
to achieve the basic range requirements consumers demand,'' and will 
reduce the space necessary for fuel tanks in order to devote it to 
other uses (such as increasing cargo space) if fuel economy levels 
rise. The Alliance argued that NHTSA's assumption that raising fuel 
economy levels will improve vehicle range and thus result in more miles 
driven (i.e., the rebound effect) are ``not supported by existing 
data'' and contradicted by the Sierra Research analysis. For example, 
Sierra Research found that the driving range for the Chevrolet Suburban 
has decreased from 588 to 527 miles as its fuel economy has improved 
from 1992 to 1999, because the gas tank capacity was decreased in the 
new body from 42 gallons to 31 gallons.
    Agency response: In response to the Alliance's comments, NHTSA 
notes that the most likely explanation for the absence of a 
relationship between fuel economy and refueling range is that 
manufacturers adjust fuel tank size to achieve some target level of 
refueling range. If by doing so, manufacturers are able to reduce the 
space occupied by fuel tanks and devote it to increased passenger or 
cargo carrying capacity, as the Alliance asserts, this presumably 
reflects manufacturers' view that those attributes are more valuable to 
vehicle owners than increased refueling range, or that the resulting 
savings in vehicle production costs are more valuable to buyers than 
extended refueling range. If manufacturers respond in either of these 
ways, they apparently estimate that the resulting increase in the 
vehicle's utility to potential buyers is more valuable than the 
increase in refueling range that would result from holding tank size 
fixed. Thus, NHTSA's estimate of the value of increased refueling range 
is likely to underestimate the true benefits from the resulting changes 
in vehicle attributes or prices. As a consequence, the agency has 
chosen not to modify the procedure it uses to estimate the economic 
value of this benefit.
14. Discounting Future Benefits and Costs
    The discount rate applied to future benefits and costs of reduced 
fuel consumption has a significant effect on the stringency of the 
final standards. Discounting converts the economic values of benefits 
and costs that are expected to occur in the future to their equivalent 
values today (or present values), to account for the reduction in their 
value when they are deferred until some later date rather than received 
immediately. Discounting reflects the fact that most people view 
economic outcomes that are not expected to occur until some future date 
as less valuable than equivalent outcomes that occur sooner. 
Discounting is particularly important to enable consistent comparison 
of economic costs and benefits that are expected to occur in the future 
to those occurring in the present, or when the future time profiles of 
benefits and costs are not expected to be similar. The discount rate 
expresses the percent decline in the value of future benefits or 
costs--as viewed from today's perspective--for each year they are 
deferred into the future.
    In the NPRM, NHTSA proposed to use a rate of 7 percent per year to 
discount the value of future fuel savings and other benefits when 
analyzing the potential impacts of alternative CAFE standards. NHTSA 
relied primarily on the 7 percent discount rate for two reasons. First, 
OMB guidance states that 7 percent reflects the economy-wide 
opportunity cost of capital, and that it ``is the appropriate discount 
rate whenever the main effect of a regulation is to displace or alter 
the use of capital in the private sector.'' \352\ NHTSA believes that 
much of the cost of CAFE compliance to manufacturers is likely to come 
at the expense of other investments the auto manufacturers might 
otherwise make, for example, in research and development of new 
technologies. Second, NHTSA's analysis in the NPRM determined that 7 
percent is a reasonable estimate of the interest rate that vehicle 
buyers who finance their purchases are currently willing to pay to 
defer the added costs of purchasing vehicles with higher fuel 
economy.\353\
---------------------------------------------------------------------------

    \352\ Office of Management and Budget, Circular A-4, 
``Regulatory Analysis,'' September 17, 2003, at 33. Available at 
http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf (last accessed 
November 13, 2008).
    \353\ See NPRM discussion at 73 FR 24415-16 (May 2, 2008).
---------------------------------------------------------------------------

    However, the agency also performed an analysis of benefits from 
alternative increases in CAFE standards using a 3 percent discount 
rate, and sought comment on whether the final rule standards should be 
set using a 3 percent rate instead of a 7 percent rate. OMB guidance 
also states that when a regulation primarily and directly affects 
private consumption (e.g., through higher consumer prices for goods and 
services), instead of primarily affecting the allocation of capital, a 
lower discount rate may be more appropriate. OMB argues that the 
consumption rate of time preference would be the most appropriate 
discount rate in this situation, since it reflects the rate at which 
consumers discount future consumption to determine its value at the 
present time. One measure of the consumption rate of time preference is 
the rate at which savers are willing to defer consumption into the 
future when there is no risk that the borrower will fail to repay them, 
and a readily available source of this measure is the real rate of 
return on long-term government debt. After adjusting to remove the 
effect of inflation, OMB reports that this rate has averaged about 3 
percent over the past 30 years.
    The NPRM analyzed and sought comment on both the 7 percent and 3 
percent discount rates because in the context of CAFE standards for 
motor vehicles, the appropriate discount rate depends on one's view of 
how the costs of complying with more stringent standards are ultimately 
distributed between vehicle manufacturers and consumers. Compared to 
the proposed standards set with the 7 percent discount rate, NHTSA 
determined that using a 3 percent discount rate would raise the 
combined passenger car and light truck standards by about 2 mpg in MY 
2015 (to 33.6 mpg from 31.6 mpg), and would reduce lifetime 
CO2 emissions of the vehicles affected by the proposed 
standards for MY 2011-15 by an additional 29 percent (to 672 mmt, 
instead of 521 mmt). However, NHTSA estimated that complying with the 
higher standards would cost an additional 89 percent more in technology 
outlays over the five model years ($85 billion versus of $45 billion).
Commenters Calling for NHTSA To Use a Lower Discount Rate
    Several commenters, including environmental and consumer groups, 
state agencies and Attorneys General, and three individuals, called for 
lower discount rates than 7 percent. The commenters' argument for lower 
discount rates is essentially two-fold. First, commenters argued that 
the proposed CAFE standards actually affect private consumption and not 
capital investments, so consistency with OMB guidance requires NHTSA to 
use a discount rate lower than 7 percent. Second, commenters argued 
that because reducing CO2 emissions and thus the pace or 
degree of climate change is an important component of the benefits from 
higher CAFE standards, the fact that these benefits are likely to occur 
in the distant future--and thus to be experienced by future 
generations--requires NHTSA to apply a lower ``intergenerational'' 
discount rate. Commenters were unclear about

[[Page 14353]]

whether this lower discount rate should also be applied to the other 
components of benefits resulting from higher CAFE standards, which are 
expected to occur within 25-35 years.
    UCS, EDF, NRDC, CARB, and the Attorneys General commented that 
NHTSA should use a discount rate of 3 percent or less for setting the 
CAFE standards. Some commenters, like UCS, based their comments on OMB 
Circular A-4. UCS commented that although manufacturers will absorb 
some of the costs of the standards by reallocating capital from other 
potential uses, ``the amounts involved will be markedly smaller than 
the benefits realized by private consumers,'' specifically, the 
benefits due to reduced ``private consumption of vehicle fuels.'' Thus, 
UCS argued, the standards ``primarily and directly affect private 
consumption'' much more than the allocation of capital, so a discount 
rate of 3 percent should be used. CARB similarly stated that the fuel 
economy standards will affect private consumption over the long-term, 
so OMB guidance indicates that 3 percent is a more appropriate discount 
rate. EDF also drew on OMB guidance, but emphasized the increased costs 
to consumers of more-expensive passenger cars and light trucks as 
justification for using a 3 percent discount rate, rather than the 
benefits from reduced fuel consumption. Comments from the Attorneys 
General included both points in favor of a 3 percent discount rate 
according to OMB guidance--that consumers would face higher vehicle 
costs, but also gain benefits like reduced fuel consumption, a better 
environment, and a more secure energy future.
    Other comments made in favor of a 3 percent discount rate focused 
on the ``intergenerational benefits'' of reducing climate change by 
raising fuel economy standards. OMB Circular A-4 suggests that it may 
be appropriate to use a lower discount rate than those used for intra-
generational analysis when comparing costs and benefits that are likely 
to be experienced by different generations. Specifically, Circular A-4 
notes that ``Special ethical considerations arise when comparing 
benefits and costs across generations. Although most people demonstrate 
time preference in their own consumption behavior, it may not be 
appropriate for society to demonstrate a similar preference when 
deciding between the well-being of current and future generations.'' 
(p. 35) On this basis, OMB advises that ``If your rule will have 
important intergenerational benefits or costs you might consider a 
further sensitivity analysis using a lower but positive discount rate 
in addition to calculating net benefits using discount rates of 3 and 7 
percent.'' (p. 36)
    EDF commented that ``The benefits from mitigating climate change 
will occur over decades or even centuries; as a result, CAFE's 
implications for carbon dioxide emissions should trigger EPA and OMB 
guidelines for estimating costs or benefits that affect multiple 
generations.'' EDF cited EPA's draft ANPRM on greenhouse gas regulation 
under the Clean Air Act as stating that ``[w]hen there are important 
benefits or costs that affect multiple generations of the population, 
EPA and the Office of Management and Budget (OMB) allow for low but 
positive discount rates (e.g. 0.5-3 percent noted by US EPA, 1-3 
percent by OMB). Rates of three percent or lower are consistent with 
long-run uncertainty in economic growth and interest rates, 
considerations of issues associated with the transfer of wealth between 
generations, and the risk of high impact climate damages.'' \354\ EDF 
also stated that using a discount rate of 3 percent or lower ``is also 
in full agreement with the guidance with the blue ribbon panel of 
economists, including a Nobel laureate, who recommended that the rate 
at which future benefits and costs should be discounted to present 
values will generally not equal the rate of return on private 
investment.'' \355\ Thus, EDF argued that NHTSA should use a 3 percent 
discount rate, with a sensitivity analysis using 0.5 and 1 percent.
---------------------------------------------------------------------------

    \354\ EPA's ANPRM is available at 73 FR 44354 (July 30, 2008). 
EDF also cited OMB Circular A-4 and EPA ``Guidelines for Preparing 
Economic Analyses,'' EPA 240-R-00-003 (2000), available at http://yosemite.epa.gov/EE/epa/eed.nsf/pages/Guidelines.html (last accessed 
August 6, 2008).
    \355\ EDF cited Kenneth J. Arrow et al., Is there a Role for 
Benefit-Cost Analysis in Environmental, Health, and Safety 
Regulation?, 272 Science 173, 221-222 (April 12, 1996).
---------------------------------------------------------------------------

    NRDC offered a similar comment, arguing that this is a multi-
generational rulemaking because it impacts climate change, and that 
therefore an ``intergenerational discount rate'' must be used of not 
more than 3 percent. NRDC argued that ``The discount rate is often the 
single most important parameter in benefit cost analyses of 
environmental regulations, due to the fact that high discount rates 
disadvantage projects whose benefits accrue in the future but whose 
costs are borne up front.'' NRDC's comment included four reasons why 
the intergenerational discount rate must be 3 percent or less. First, 
NRDC argued that a ``social'' discount rate must be used when there are 
``social (i.e., non-private) costs and benefits.'' The CAFE standards 
will reduce fuel consumption, which means that society will experience 
the benefits of reduced global warming and other air pollution. Second, 
NRDC stated that the proper rate is the ``net national welfare'' or 
NNW, which represents ``the real rate of growth in the economy, which 
takes GDP and subtracts from it depreciation of natural and man made 
capital, pollution abatement expenses, and negative externalities, and 
then adds to it the value of non-market goods, such as household 
labor.'' NRDC asserted that this rate is likely to range from 0 to 1 
percent. Third, NRDC argued that because CAFE standards are 
``precautionary'' in nature and ``reduce the likelihood of potentially 
catastrophic climate change or serious military security costs,'' 
society may be willing to pay more to avoid these extreme risks, such 
that a negative social discount rate may be appropriate. And finally, 
NRDC argued that ``the use of a declining discount rate is the newly 
supported method for climate damages.'' For these reasons, NRDC argued 
that NHTSA should use a discount rate no higher than 3 percent for 
setting CAFE standards, and should conduct a sensitivity analysis using 
lower rates.
    An individual commenter, Mark Eads, also stated that the choices 
made primarily involve long-term inter-generational environmental 
benefits and costs rather than intra-generational benefits and costs. 
Mr. Eads presented his summary and comparison of a number of scholarly 
papers considering discount rate over the past several years, and 
suggested that NHTSA apply a declining discount rate that begins at 2.6 
percent in year one and declines to 0.6 percent in year 300.
    UCS, EDF, NRDC, CARB, the Attorneys General, and Mr. Eads did not 
address the issue of whether a lower intergenerational discount rate 
should also be applied to the other components of benefits resulting 
from higher CAFE standards, which are likely to be experienced by 
current generations.
    Other commenters urged NHTSA to use discount rates besides 7 or 3 
percent. CBD commented that both 7 percent and 3 percent are too high, 
arguing that they ``artificially reduce'' the value of future benefits 
from improved fuel efficiency, and that using a lower discount rate 
will result in higher standards. Although CBD did not specify what 
discount rate would be preferable, other than to recommend a lower one, 
CBD appeared to approve of Stern's use of a discount rate below 1 
percent. CFA and NESCAUM, in contrast, both supported NHTSA's use

[[Page 14354]]

of a 5 percent discount rate. CFA argued that NHTSA should have 
``picked the middle road'' between 3 percent and 7 percent, to avoid 
``emphasizing the importance of economic factors and capital goods at 
the expense of the need to conserve energy,'' and used 3 and 7 percent 
for sensitivity analyses. NESCAUM argued that a 7 percent discount rate 
``inappropriately devalues the technologies designed to achieve 
increased fuel economy,'' and stated that EPA had used a 5 percent 
discount rate in its 2000 rulemaking on Tier 2 emissions 
standards.\356\
---------------------------------------------------------------------------

    \356\ EPA calculated the value of a statistical life year for 
the Tier 2 benefits analysis by amortizing the $5.9 million mean 
value of a statistical life (VSL) estimate over the 35 years of life 
expectancy associated with subjects in the labor market studies, 
discounting it at 5 percent to get $360,000 per life-year saved in 
1999 dollars. See 68 FR 6698, 6784, fn. 107 (Feb. 10, 2000).
---------------------------------------------------------------------------

    Professor Michael Hanemann commented that NHTSA's decision to use a 
discount rate of 7 percent was ``utterly unfounded in the climate 
change context,'' and that NHTSA should use a discount rate of no 
higher than 4 percent, although even 4 percent had been criticized in 
recent articles on climate change economics. Thus, Prof. Hanemann 
argued, NHTSA should use a discount rate of no higher than 4 percent, 
and conduct sensitivity analyses with lower numbers, like 2 percent. 
The Attorneys General commented that NHTSA should take account of 
Professor Hanemann's suggestion of 4 percent as an example of ``the 
discount rates that scholars and economists are using to evaluate the 
costs and benefits related to global warming.''
    Professor Gary Yohe commented that the appropriate discount rate 
for benefits from public investments in an economy where returns to 
private capital investment are taxed should be lower than the rate of 
return on private capital, in order to reflect the fact that public 
investment can increase returns to private investment by reducing 
distortions caused by the corporate profits tax. Although they are not 
specifically public investments, Prof. Yohe noted that investments that 
reduce GHG emissions by improving vehicle fuel economy are likely to 
increase returns to a broad range of private investments, including 
investments in mechanisms that facilitate adaptation to climate change. 
Although he did not recommend a specific discount rate, Prof. Yohe 
clearly suggested that the appropriate rate should be below 7 percent. 
He also noted that OMB's definition and 3 percent estimate of the 
social rate of time preference did not correspond to the conventional 
definition of that concept, which is a constant-utility rather than a 
constant-consumption discount rate.
Commenters Calling for NHTSA To Use a 7 Percent or Higher Discount Rate
    Other commenters, including manufacturers and dealers, as well as 
one individual, called for NHTSA to use a discount rate of 7 percent or 
higher. AIAM commented simply that it ``support[s] the discount rates 
used by NHTSA as reasonable for analytical purposes.'' David Montgomery 
of CRA International also commented that NHTSA's use of a 7 percent 
discount rate was reasonable, arguing that ``the correct discount rate 
to use [for CAFE purposes] is the marginal social return on investment, 
which measures what society would have earned on other investment 
foregone in order to make the investment in more costly motor vehicles 
with higher fuel economy.'' Mr. Montgomery stated that ``The chosen 7% 
real discount is a reasonable, and probably conservative, estimate of 
the long run, real, pre-tax return on investment in the U.S.''
    Ford commented that the discount rate ``should represent society's 
opportunity cost of money, which should be close to a `risk-free' rate 
such as that of the U.S. Treasury.'' However, Ford then argued that the 
short-term costs to invest in technology are very high for domestic 
manufacturers, and that manufacturers must ``borrow the necessary 
capital for such investment.'' Thus, Ford stated, it did not support 
the use of a 3 percent discount rate, although it did not recommend an 
alternative discount rate.
    NADA commented that NHTSA should use a discount rate of at least 7 
percent or higher to estimate the future costs and benefits of the 
proposed standards. NADA stated that ``financing rates on motor vehicle 
loans are indicative of appropriate discount rates since they reflect 
the real-world opportunity costs faced by consumers when buying 
vehicles'' with higher fuel economy, but argued that NHTSA had not 
``generated accurate historical loan rates, let alone justified 
projections for what those rates will be in MY 2015.'' NADA further 
stated that a too-low discount rate ``will result in overly costly CAFE 
standards, decreased new motor vehicle sales, and lower than projected 
fuel savings and greenhouse gas reduction benefits.''
    The Alliance commented that NHTSA should use a discount rate closer 
to 12 percent, although it urged NHTSA to rely on a ``nested logit'' 
model developed by NERA for ``modeling consumer behavior instead of the 
ad hoc analysis NHTSA performs of private benefits without attempting 
to explain whether there is a market failure.'' The Alliance argued 
that OMB Circular A-4 allows the use of a higher discount rate than 7 
percent in certain cases if appropriate, and that ``other prominent 
studies relevant to this issue have settled on much higher interest 
rates than seven percent,'' including the Congressional Budget Office, 
which ``discounts consumers' fuel savings at a rate of 12 percent per 
year,'' and Sierra Research's study submitted by the Alliance in 
support of its comments, which used a rate of 12.4 percent. A discount 
rate of 12 percent makes sense, the Alliance argued, because 
``Consumers can be expected to discount the value of future fuel 
savings at a rate at least as high as their cost of borrowing funds,'' 
so they ``would be unwilling to spend an extra dollar on fuel economy 
improvements that would lower their fuel costs by ten cents per year 
because the cost savings would be less than the annual interest on that 
dollar.''
    Responding to the Alliance's assertion that rates as high as 12 
percent might be appropriate for discounting future benefits from fuel 
savings, the Attorneys General noted in a supplemental comment that a 
more recent study of vehicle buyer's tradeoffs between higher purchase 
prices and savings in operating expenses than that relied upon by NERA 
estimates that buyers discount future fuel savings using nominal rates 
that average 9 percent. After adjusting it to remove the effect of 
expected future inflation, the Attorneys General estimated that the 
corresponding real discount rate was 5.4 percent, and urged NHTSA to 
use this rate in its analysis of future benefits from fuel savings and 
other consequences of higher CAFE standards.\357\
---------------------------------------------------------------------------

    \357\ The agency has reviewed the study relied upon by the 
Attorneys General in its comment recommending a 5.4 percent discount 
rate, and notes that the estimates of vehicle buyers' implicit 
discount rates it reports average 10.2 percent before adjusting for 
inflation, rather than the 9 percent reported by the Attorneys 
General. Adjusting this average rate to remove the effects of actual 
inflation over the most recent decade produced a value of 7.5 
percent, rather than the 5.4 percent reported in the recent comment 
by the Attorneys General.
---------------------------------------------------------------------------

    Agency response: In response to the extensive comments it received 
to the NPRM and the DEIS on this issue, NHTSA has carefully reviewed 
published research and OMB guidance on appropriate discount rates, 
including discount rates that should be applied to benefits that are 
expected to occur in the distant future and thus be experienced

[[Page 14355]]

mainly by future generations, and discount rates that buyers of new 
vehicles apply to savings in fuel costs from higher fuel economy. For 
purposes of this final rule, the agency has elected to apply separate 
discount rates to the benefits resulting from reduced CO2 
emissions, which are expected to reduce the rate or intensity of 
climate change that will occur in the distant future, and the economic 
value of fuel savings and other benefits resulting from lower fuel 
consumption, which will be experienced over the limited lifetimes of 
newly purchased vehicles. Specifically, NHTSA has decided to discount 
future benefits from reducing CO2 emissions using a 3 
percent rate, but to discount all other benefits resulting from higher 
CAFE standards for MY 2011 cars and light trucks at 7 percent.
    As some commenters pointed out, OMB guidance on discounting permits 
the use of lower rates to discount benefits that are expected to occur 
in the distant future, and will thus be experienced by future 
generations.\358\ The main rationale for doing so is that although most 
individuals demonstrate a strong preference for current consumption 
over consumption they expect to occur later within their own lifetimes, 
it may not be appropriate for society to exercise a similarly strong 
preference for consumption by current generations over consumption 
opportunities for future generations, particularly when it is 
contemplating actions that affect the relative income levels of current 
and future generations. In addition, while market interest rates 
provide useful guidance about the rates that should be used to discount 
future benefits that will be experienced by current generations, no 
comparable market rates are available to guide the choice of rates for 
discounting benefits that will be received by future generations.
---------------------------------------------------------------------------

    \358\ White House Office of Management and Budget, Circular A-4, 
September 17, 2003, pp. 35-36.
---------------------------------------------------------------------------

    For this final rule, NHTSA has elected to use a rate of 3 percent 
to discount the future economic benefits from reduced emissions of 
CO2 that are projected to result from decreased fuel 
production and consumption. These benefits, which include reductions in 
the expected future economic damages caused by increased global 
temperatures, a rise in sea levels, and other projected impacts of 
climate change, are anticipated to extend over a period from 
approximately fifty to two hundred or more years after the impact of 
this rule on emissions by MY 2011 cars and light trucks occurs, and 
will thus be experienced primarily by generations that are not now 
living. As indicated previously, studies of the economic cost of GHG 
emissions select a rate to discount economic damages from increased 
emissions. These damages are typically projected to occur over an 
extended time span beginning many years after the future date when 
emissions increase, and the chosen rate is used to discount these 
distant future damages to their present values as of the date when the 
increased emissions that cause them were assumed to occur.
    This procedure yields estimates of the damage costs from increased 
GHG emissions during specific future years, which NHTSA uses to value 
the reductions in emissions that would occur each year over the 
lifetimes of vehicles affected by higher CAFE standards. For example, 
higher CAFE standards for MY 2011 cars and light trucks would reduce 
GHG emissions each year from 2011 through approximately 2047, and the 
estimated value of avoiding each ton of emissions rises each year over 
that span. In turn, the estimated economic values of the reductions in 
GHG emissions during each of those future years must be discounted to 
their present values as of today, so that they can be compared with the 
present values of other benefits from higher CAFE standards, and with 
vehicle manufacturers' costs for meeting higher CAFE standards.
    The 3 percent rate is consistent with OMB guidance on appropriate 
discount rates for benefits experienced by future generations, as well 
as with those used to develop many of the estimates of the economic 
costs of future climate change that form the basis for NHTSA's estimate 
of economic value of reducing CO2 emissions.\359\ Of the 125 
peer-reviewed estimates of the social cost of carbon included in Tol's 
2008 survey, which provides the basis for NHTSA's estimated value of 
reducing CO2 emissions, 83 used assumptions that imply 
discount rates of 3 percent or higher.
---------------------------------------------------------------------------

    \359\ Richard S.J. Tol, The social cost of carbon: trends, 
outliers, and catastrophes, Economics Discussion Papers, July 23, 
2008.
---------------------------------------------------------------------------

    Moreover, the 3 percent rate is consistent with widely-used 
estimates in economic analysis of climate change of the appropriate 
rate of time preference for current versus distant future consumption, 
expected future growth in real incomes, and the rate at which the 
additional utility provided by increased consumption declines as income 
increases.\360\ The Ramsey discounting rule is widely employed in 
studies of potential economic damages from climate changes in the 
distant future. The Ramsey rule states that -r = [delta] + [eta]g, 
where r is the consumption discount rate, [delta] is the pure rate of 
time preference (or the marginal rate of substitution between current 
and future consumption under the assumption that they are initially 
equal), g is the expected (percentage) rate of growth in future 
consumption, and [eta] is the elasticity of the marginal utility of 
consumption with respect to changes in the level of consumption itself. 
Commonly used values of these parameters in climate studies are [delta] 
= -1 percent per year, [eta] = -1, and g = 2 percent per year, which 
yield a value for r of 3 percent per year.\361\
---------------------------------------------------------------------------

    \360\ EPA notes that ``In this inter-generational context, a 
three percent discount rate is consistent with observed interest 
rates from long-term intra-generational investments (net of risk 
premiums) as well as interest rates relevant for monetary estimates 
of the impacts of climate change that are primarily consumption 
effects.'' See U.S. EPA, Technical Support Document on Benefits of 
Reducing GHG Emissions, June 12, 2008, p. 9.
    \361\ See Tol (2008), p. 3.
---------------------------------------------------------------------------

    The remaining future benefits and costs anticipated to result from 
higher fuel economy are projected to occur within the lifetimes of 
vehicles affected by the CAFE standards for MY 2011, which extend up to 
a maximum of 35 years from the dates those vehicles that are produced 
and sold. Because the vehicles originally produced during this model 
year will gradually be retired from service as they age, and those that 
remain in service will be driven progressively less, most of these 
benefits will occur over the period from 2011 through approximately 
2025. Thus, a conventional or ``intra-generational'' discount rate is 
appropriate to use in discounting these benefits and costs to their 
present value when analyzing the economic impacts of establishing 
higher CAFE standards.\362\
---------------------------------------------------------------------------

    \362\ NHTSA acknowledges that using different rates to discount 
the distant and nearer-term future benefits from higher CAFE 
standards presents a potential problem of time inconsistency, which 
arises from the much greater uncertainty that surrounds long-term 
future rates of growth in investment, economic output, and 
consumption than is associated with near-term estimates of these 
variables. However, the agency believes that this problem is less 
serious than those that would result from using a single rate to 
discount benefits that occur over the next 25-35 year sand those 
that are likely to occur over a 100-200 year time frame.
---------------------------------------------------------------------------

    The correct discount rate to apply to these nearer-term benefits 
and costs depends partly on how costs to vehicle manufacturers for 
improving fuel economy to comply with higher CAFE standards will 
ultimately be distributed. If manufacturers are unable to recover their 
costs for increasing fuel economy in the form of higher selling prices 
for new vehicles, those outlays will

[[Page 14356]]

displace or alter other productive investments that manufacturers could 
make, and the appropriate discount rate is their opportunity cost of 
capital investment. In contrast, if manufacturers are able to raise 
selling prices for new vehicles sufficiently to recover all their costs 
for improving fuel economy, those costs will ultimately affect private 
consumption decisions rather than capital investment opportunities. 
Under this second assumption, economic theory and OMB guidance suggest 
that a consumption discount rate, which reflects the time preferences 
of consumers rather than those of lenders or investors, is appropriate 
for discounting future benefits. Since the time preferences of savers 
and investors are probably similar, financial intermediation would be 
expected to equalize investment and consumption discount rates. In the 
presence of corporate income taxation, however, consumption discount 
rates are generally thought to be lower than the opportunity cost of 
investment capital. Finally, if competitive conditions in the new 
vehicle market manufacturers and potential buyers' valuation of higher 
fuel economy permit manufacturers to recover only part of their costs 
for meeting higher CAFE standards through higher prices for new 
vehicles, a rate between an investment discount rate and the lower 
consumption discount rate may be appropriate, with the exact rate 
depending on the distribution of compliance costs between vehicle 
manufacturers and buyers.
    OMB estimates that the real before-tax rate of return on private 
capital investment in the U.S. economy averages approximately 7 percent 
per year, and generally recommends this figure for use as a real 
discount rate in cases where the primary effect of a regulation is to 
displace private capital investment.\363\ However, this figure 
represents an economy-wide average estimate of the return on private 
investment, which incorporates no risk premium other than that 
associated with uncertainty about future growth in total economic 
output. As a consequence, it may understate the opportunity cost of 
capital for corporations facing firm- or market-specific risks on 
future investment returns. In addition, domestic motor vehicle 
manufacturers currently have little or no accumulated earnings 
available to re-invest, and may be required to enter private capital 
markets to finance the investments necessary to allow them to comply 
with higher CAFE standards.
---------------------------------------------------------------------------

    \363\ White House Office of Management and Budget, Circular A-4, 
September 17, 2003, p. 33.
---------------------------------------------------------------------------

    OMB guidance estimates that an appropriate current value for the 
consumer rate of time preference--and thus the discount rate that 
should be used if the costs of complying with a regulation are borne by 
consumers--is approximately 3 percent. However, this estimate is 
derived from rates of return demanded by consumers on highly liquid 
investments, and is intended to apply to situations where there is 
little or no risk that consumers will actually realize the future 
benefits resulting from a proposed regulation. In the case of CAFE 
standards, buyers face considerable uncertainty about future fuel 
prices, and thus about the value of fuel savings resulting from higher 
fuel economy. Uncertainty about their future levels of vehicle use and 
the actual lifetimes of new vehicles also contribute to buyers' 
uncertainty about the value of future fuel savings that is likely to 
result from purchasing a vehicle with higher fuel economy. In addition, 
buyers' initial investments in higher fuel economy are illiquid, and 
the extent to which they will be able recover the remaining value of an 
initial investment in a new vehicle that achieves higher fuel economy 
in the used vehicle market is uncertain. Finally, unlike most of the 
regulations that OMB Circular A-4 is intended to address, most (75-80 
percent) of the benefits from higher CAFE standards accrue directly to 
the parties they affect--vehicle buyers--rather than to society at 
large. Taken together, these circumstances may make the use of a 
riskless consumption discount rate, which is intended for use in 
discounting the economy-wide effects of a proposed regulation on 
consumption, inappropriate for discounting the future benefits that 
result from requiring higher fuel economy.
    Empirical studies of the discount rates that new vehicle buyers 
reveal by trading off the higher purchase prices for more fuel-
efficient vehicles against future savings in fuel costs resulting from 
higher fuel economy, which capture the effects of these uncertainties, 
conclude that buyers apply real discount rates well above the 3 percent 
rate recommended by OMB for riskless situations. Dreyfus and Viscusi 
estimate that, when adjusted to reflect differences between the current 
interest rate environment and rates at the time the data for their 
study were drawn, U.S. buyers apply real discount rates in the range of 
12 percent when weighing expected future fuel savings against higher 
purchase prices.\364\ Verboven estimates that European buyers' nominal 
discount rates for fuel savings resulting from buying more fuel-
efficient new vehicle models range from 5 to 13 percent, with an 
average estimate of slightly above 10 percent. Verboven's estimate 
corresponds to a real discount rate of approximately 7 percent when 
adjusted to reflect current and recent U.S. inflation rates.\365\ These 
studies may provide more reliable estimates of the appropriate 
consumption rate for discounting benefits from higher fuel economy than 
the 3 percent figure recommended in OMB guidance.
---------------------------------------------------------------------------

    \364\ See Dreyfus, Mark K. and W. Kip Viscusi. 1995. ``Rates of 
Time Preference and Consumer Valuations of Automobile Safety and 
Fuel Efficiency.'' Journal of Law and Economics. 38: 79-98; and the 
adjustment of discount rates reported in that source discussed in 
NERA, ``Discount Rates for Private Costs,'' pp. 4-5, attachment to 
Alliance of Automobile Manufacturers comment on NPRM, Docket Item 
NHTSA-2008-0089-50.
    \365\ See Verboven, Frank, ``Implicit Interest Rates in Consumer 
Durables Purchasing Decisions--Evidence for Automobiles,'' p. 22, 
attachment to California Department of Justice, comment on NPRM, 
Docket Item NHTSA-2008-0089-0495.
---------------------------------------------------------------------------

    Uncertainty about future developments in the international oil 
market, the U.S. economy, and the U.S. market for new cars and light 
trucks make it extremely difficult to anticipate the extent to which 
vehicle manufacturers will be able to recover costs for complying with 
higher CAFE standards in the form of higher selling prices for new 
vehicles. If new vehicle buyers expect fuel prices to remain higher 
than those used by NHTSA to establish CAFE standards for MY 2011, they 
may be willing to pay the higher prices necessary for manufacturers to 
recover their costs for complying with those standards.\366\ However, 
potential buyers who expect future fuel prices to be lower than the 
forecast NHTSA relies upon are likely to resist manufacturers' efforts 
to raise new vehicle prices sufficiently to recover all of their CAFE 
compliance costs, since those buyers' assessment of the value of higher 
fuel economy will be lower than that reflected in the CAFE standards 
NHTSA establishes.
---------------------------------------------------------------------------

    \366\ Whether they will be willing to do so, however, depends 
partly on how the combined value of the economic and environmental 
externalities used to determine CAFE standards compares to current 
fuel taxes. It also depends on whether new vehicle buyers take 
account of the value of fuel savings resulting from higher fuel 
economy over the entire expected lifetimes of the vehicles they 
purchase, or over only some part of that lifetime (such as the 
period they expect to own new vehicles).
---------------------------------------------------------------------------

    From the manufacturer perspective, the current financial condition 
of some car and light truck producers suggests

[[Page 14357]]

that they are likely to find it difficult to absorb the full cost of 
complying with higher CAFE standards. Because CAFE standards apply to 
all manufacturers, establishing higher standards may provide a ready 
opportunity for all producers to raise car and light truck prices. 
However, this opportunity may be restricted if producers that face very 
low incremental costs for complying with higher CAFE standards because 
of higher fuel economy levels in their planned model offerings compete 
aggressively with others that face significant costs for increasing 
fuel economy levels in their product plans to comply with higher CAFE 
standards.
    After considering the comments received and various arguments about 
the ultimate incidence of manufacturers' costs for complying with 
higher CAFE standards, NHTSA has concluded that the costs for complying 
with higher MY 2011 CAFE standards are likely to be shared by 
manufacturers and purchasers of new vehicles, but that the exact 
distribution fraction of these costs between manufacturers and buyers 
is extremely difficult to anticipate. Generally, NHTSA believes that 
manufacturers are likely to be able to raise prices only to the extent 
justified by potential buyers' assessments of the value of future fuel 
savings that will result from higher fuel economy, but the agency 
recognizes that buyers' valuations of fuel savings are inherently 
uncertain, and undoubtedly vary widely among individual buyers. As a 
consequence, price increases for new cars and light trucks are likely 
to allow manufacturers to recoup some fraction of their costs for 
complying with higher CAFE standards, while the remainder of those 
costs are likely to displace other investment opportunities that would 
otherwise be available to them.
    Regardless of the ultimate incidence of costs for complying with 
higher CAFE standards, however, both manufacturers' opportunity costs 
for capital investment and empirical estimates of the discount rates 
that buyers of new vehicles apply to future fuel savings suggest that a 
rate in the range of 7 percent is an appropriate rate for discounting 
the nearer-term benefits from increased fuel economy that will occur 
over the lifetimes of MY 2011 cars and light trucks. Thus for purposes 
of establishing the CAFE standards adopted in this final rule and 
estimating their economic benefits, NHTSA has continued to employ a 7 
percent rate to discount future benefits from higher CAFE standards 
other than those resulting from reduced CO2 emissions. Recognizing the 
uncertainty surrounding this assumption, NHTSA has also tested the 
sensitivity of the level of the optimized CAFE standards and their 
resulting economic benefits to the use of a 3 percent discount rate for 
all categories of benefits.
    NHTSA will consider whether to revise the discount rates used in 
this analysis when it analyzes the consequences of future CAFE 
standards. At that time, the agency will consider whether to apply a 
lower discount rate than 3 percent to the benefits from reducing future 
emissions of CO2 and other greenhouse gases, as well as 
whether to use a rate different from 7 percent to discount the nearer-
term benefits from raising CAFE standards. In making these decisions, 
the agency will consider guidance on discounting future benefits--
particularly those from reducing the threat of climate-related economic 
damages--issued by OMB, EPA, and other government agencies, and will 
also consider the discount rates used by other federal agencies in 
similar regulatory proceedings. NHTSA will also consider recent 
research on appropriate rates for discounting future benefits from 
reducing the threat of climate-related economic damages, as well as on 
the discount rates that buyers of new vehicles apply to the fuel 
savings they obtain from purchasing models with higher fuel economy, 
since such research is particularly relevant to its choice of discount 
rates. Beyond these things, the agency will also review the discount 
rate issue for future rulemakings in light of the changing economic 
situation, in terms of manufacturers' capabilities and consumers' 
preferences as fuel prices fluctuate and concern for the effects of 
climate change increases.
15. Accounting for Uncertainty in Benefits and Costs
    NHTSA explained in the NPRM that in analyzing the uncertainty 
surrounding its estimates of benefits and costs from alternative CAFE 
standards, NHTSA considered alternative estimates of those assumptions 
and parameters likely to have the largest effect. NHTSA stated that 
these include the projected costs of fuel economy-improving 
technologies and their expected effectiveness in reducing vehicle fuel 
consumption, forecasts of future fuel prices, the magnitude of the 
rebound effect, the reduction in external economic costs resulting from 
lower U.S. oil imports, the value to the U.S. economy of reducing 
carbon dioxide emissions, and the discount rate applied to future 
benefits and costs. The range for each of these variables employed in 
the agency's uncertainty analysis is presented in the section of the 
NPRM discussing each variable.
    NHTSA explained that the uncertainty analysis was conducted by 
assuming independent normal probability distributions for each of these 
variables, using the low and high estimates for each variable as the 
values below which 5 percent and 95 percent of observed values are 
believed to fall. Each trial of the uncertainty analysis employed a set 
of values randomly drawn from each of these probability distributions, 
assuming that the value of each variable is independent of the others. 
Benefits and costs of each alternative standard were estimated using 
each combination of variables. A total of 1,000 trials were used to 
establish the likely probability distributions of estimated benefits 
and costs for each alternative standard.
    NHTSA received only one comment on its methodology for accounting 
for uncertainty in benefits and costs. The Alliance commented that the 
results presented by NHTSA of its sensitivity analysis indicated 
increasing levels of certainty in the ability of the proposed standards 
to create net benefits--specifically, NHTSA concluded that there was at 
least a 99.3 percent certainty that changes made to MY 2011 vehicles to 
achieve the higher CAFE standards would produce a net benefit; at least 
a 99.6 percent certainty for MY 2012 vehicles; and 100 percent 
certainty for MY 2014-15 vehicles. The Alliance argued that 
``Traditional discounting analysis indicates that the effects of policy 
changes are more uncertain at points far into the future,'' and that 
``NHTSA should recognize that its predictive abilities in the area of 
automotive technology dim the farther it attempts to peer out into the 
future.'' The Alliance commented that NHTSA should ``reevaluate its 
statistical model in this light.''
    Agency response: NHTSA agrees that uncertainty regarding both costs 
and benefits from fuel enhancing technologies increases at points 
farther into the future. The Alliance comment seems to suggest the 
application of an increasingly wide spread of high and low value 
parameters for technology costs and effectiveness rates for each 
successive model year. However, recognizing this increasing uncertainty 
could either increase or decrease the probability that increases in 
CAFE standards will produce net benefits. The agency has no basis for 
determining whether this increased uncertainty would be likely to 
result in a higher probability of net benefits or a higher probability 
of net costs. A variety of factors such as unforeseen technology

[[Page 14358]]

breakthroughs or fluctuations in energy and materials prices could 
influence benefits and costs in the distant future, and we see little 
merit in adding additional assumptions about conditions distant in time 
without a reasonably solid basis for selecting such assumptions.
    We could simply increase the range symmetrically by some arbitrary 
factor, but, assuming the same normal distribution that is employed for 
most of the variables in our uncertainty analysis, increasing the range 
of both costs and benefits proportionally would be unlikely to 
significantly impact the conclusions of the uncertainty analysis. Thus, 
the agency would not increase this range of uncertainty by 
progressively more for successive model years, were this a multi-year 
rulemaking. As it is not, the issue of changing levels of uncertainty 
over time is largely academic for purposes of this rulemaking.

VI. How NHTSA Sets the CAFE Standards

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

    NHTSA explained in the NPRM that it had taken a fresh look for 
purposes of this rulemaking at the question of which attribute or 
attributes would be most appropriate for setting CAFE standards. NHTSA 
preliminarily concluded that a footprint-based function would be the 
most effective and efficient for both passenger car and light truck 
standards. NHTSA explained that unlike a weight-based function, a 
footprint-based function helps achieve greater fuel economy/emissions 
reductions without having a potentially negative impact on safety and 
is more difficult to modify than other attributes because it cannot be 
easily altered outside the design cycle in order to move a vehicle to a 
point at which it is subject to a lower fuel economy target. NHTSA also 
discussed other attributes on which functions could be based, including 
curb weight, engine displacement, interior volume, passenger capacity, 
and towing or cargo-hauling capability, but tentatively rejected those 
other attributes as being generally easier to game than footprint. 
NHTSA nevertheless sought comment on whether the proposed standard 
should be based on vehicle footprint alone, or whether other attributes 
such as the ones described above should be considered. NHTSA requested 
that if any commenters advocated one or more additional attributes, 
that they supply a specific, objective measure for each attribute that 
is accepted within the industry and that can be applied to the full 
range of light-duty vehicles covered by this rulemaking. NHTSA noted 
that in addition to being able to be objectively measured on all light-
duty vehicles, any attribute-based system needs to (1) minimize the 
potential for gaming (artificial manipulation of the attribute(s) to 
achieve a more favorable fuel economy target), (2) have an observable 
relationship to fuel economy, and (3) avoid adverse safety consequences 
and undue relative burden on full-line manufacturers.
    The agency received many comments on its choice of attribute. The 
Aluminum Association, Honda, IIHS, and UCS supported NHTSA's proposal 
of attribute-based standards depending upon footprint alone. Honda 
cited the use of footprint as a means of maintaining consumer choice 
and maintaining an incentive to make use of lightweight materials. The 
Aluminum Association indicated that footprint-based standards would 
assure stability between model years. UCS claimed that footprint 
compared favorably to other attributes. Honda, the Aluminum 
Association, and IIHS all argued that footprint-based standards would 
provide incentives well-aligned with highway safety objectives. Honda 
commented that incentives provided by a footprint-based system are such 
that footprint-based standards would be, from a public policy 
perspective, preferable to weight-based standards, even though fuel 
economy is more strongly related to weight.
    On the other hand, some organizations questioned the agency's 
proposal to continue basing light truck CAFE standards on footprint and 
to adopt new footprint-based standards for passenger cars. Subaru (a 
subsidiary of Fuji Heavy Industries) and BMW expressed concern that 
footprint-based standards discourage the introduction of new ``small 
vehicle concepts'' encouraged by weight-based standards under 
development in Europe and Japan. Porsche suggested that rapid changes 
in the light vehicle fleet call into question the use of footprint as 
the basis for CAFE standards. Porsche also argued that footprint is not 
an ideal attribute for passenger car standards because passenger cars 
are less prone to rollover than light trucks and the steepness of the 
curves NHTSA proposed for passenger cars would provide an incentive for 
gaming. Ferrari also expressed concern regarding the potential to 
increase footprint by mounting larger wheels, but did not compare this 
risk to the risk of, for example, increasing vehicle weight under a 
weight-based standard. Wenzel and Ross questioned the agency's judgment 
regarding the safety benefits of discouraging manufacturers from 
responding to CAFE standards by selling smaller vehicles. Cummins 
argued that other attributes, in particular weight, would provide a 
better engineering relationship to fuel economy, but acknowledged that 
NHTSA proposed to rely on footprint as a means to best ``balance public 
policy concerns.''
    GM expressed general support for footprint-based standards, but 
also proposed that the agency adopt a two-attribute system that would 
adjust targets applicable to vehicles capable of towing heavy loads. 
The Alliance, which also supported this concept, indicated that such 
vehicles ``generally achieve about five percent lower fuel economy than 
similar vehicles not designed for such duty cycles.'' Other commenters 
supporting adjustments for ``tow-capable'' vehicles included Chrysler, 
Cummins, Ford, NADA, RVIA, and several members of Congress. RVIA 
suggested that without such an adjustment, RV owners will ``have no 
choice but to attempt to pull travel trailers with undersize 
vehicles,'' thereby compromising highway safety. Honda and Toyota both 
opposed the concept based on concerns that such adjustments would 
compromise progress toward EISA's requirement that NHTSA ensure the new 
vehicle fleet reaches an average of at least 35 mpg by MY 2020.
    Similarly, the Alliance, Chrysler, and NADA proposed that the 
agency adjust targets for ``off-road capable'' vehicles including, but 
not limited to vehicles with four-wheel drive. The Alliance and 
Chrysler proposed downward adjustments of 10 percent and 1 mpg, 
respectively, based on past performance of such vehicles. Toyota 
expressed concern regarding the competitive effects of such an 
adjustment.
    In addition to these two-attribute proposals, the agency also 
received a proposal from Porsche for a three-attribute concept under 
which vehicle targets would depend on footprint, weight, and maximum 
torque. Subaru and Volkswagen expressed support for this concept. 
Porsche and Subaru argued that this three-attribute concept would 
provide a better statistical relationship to fuel economy and would 
help to reduce the steepness of the curves NHTSA proposed for passenger 
cars. Volkswagen indicated that the concept would be less burdensome 
for manufacturers with fleet mix ``challenged by'' a footprint-based 
system. Ferrari also commented that, considering the characteristics 
and fuel

[[Page 14359]]

economy of performance vehicles, the agency should adopt a two- or 
three-attribute system that also incorporates curb weight, maximum 
power, maximum torque, and/or engine displacement.
    Conversely, some organizations expressed strong opposition 
regarding standards that would rely on more than one attribute. UCS 
questioned whether any dual-attribute approach could ``deliver the 
benefits'' of a system based on footprint alone. Honda argued that 
NHTSA should ``automatically reject'' the inclusion of any additional 
attribute that could decrease overall fuel savings achieved by CAFE 
standards. Similarly, as mentioned above, Toyota expressed concern that 
inclusion of additional attributes could compromise progress toward 
EISA's requirements.
    Agency response: Having considered the comments submitted to the 
agency on what attribute(s) should be included in attribute-based CAFE 
standards for passenger cars and light trucks, NHTSA is promulgating MY 
2011 standards that depend on vehicle footprint.
    As discussed in Section VIII, in the agency's judgment, from the 
standpoint of highway safety, it is important that the agency 
promulgate CAFE standards that do not encourage manufacturers to 
respond by selling vehicles that are in any way less safe. While the 
agency's research also indicates that reductions in vehicle mass tend 
to compromise highway safety, footprint-based standards provide an 
incentive to use advanced lightweight materials and structures that 
would be discouraged by weight-based standards.
    Further, although NHTSA recognizes that weight is better correlated 
with fuel economy than is footprint, the agency continues to believe 
that there is less risk of ``gaming'' by increasing footprint under 
footprint-based CAFE standards than by increasing vehicle mass under 
weight-based CAFE standards. The agency also agrees with concerns 
raised by some commenters that there would be greater potential for 
gaming under multi-attribute CAFE standards, such as standards under 
which targets would also depend on attributes such as weight, torque, 
power, towing capability, and/or off-road capability. Standards that 
incorporate such attributes in conjunction with footprint would not 
only be significantly more complex, but by providing degrees of freedom 
with respect to more easily-adjusted attributes, they would make it 
less certain that the future fleet would actually achieve the average 
fuel economy levels projected by the agency.
    Although NHTSA recognizes that any change in the structure of the 
CAFE standards changes the relative challenge posed by those standards 
to each manufacturer, the agency notes that compliance with CAFE 
standards is determined based on average performance, such that no 
specific vehicle model need necessarily achieve its fuel economy 
target. NHTSA disagrees, therefore, that RV owners will be forced to 
use ``undersize'' vehicles as suggested by RVIA; rather, the agency 
expects that manufacturers will continue to provide a range of vehicles 
with capabilities sought by vehicle buyers.\367\
---------------------------------------------------------------------------

    \367\ In any event, the agency doubts that RV owners would, as 
asserted by RVIA, be likely to violate guidelines and laws 
concerning towing capacity.
---------------------------------------------------------------------------

    Furthermore, changes--discussed below--to NHTSA's procedure for 
determining the shape and stringency of CAFE standards for MY 2011 more 
fully incorporate the capabilities of high-performance vehicles, tow-
capable vehicles, and off-road-capable vehicles. In developing the CAFE 
standards promulgated today, the agency has included all vehicles 
produced by all manufacturers, including the high-performance vehicles 
produced by companies such as Ferrari and Porsche. Also, as discussed 
in Section IV, for purposes of analyzing potential fuel economy 
improvements to specific vehicle models, the agency has developed 
estimates specific to performance vehicles of the availability, cost, 
and effectiveness of different fuel-saving technologies. The final 
passenger car standards thus give appropriate weight to the 
capabilities of these vehicles.
    Also, as discussed below and in sections III and XI, the agency is 
tightening its definition of ``nonpassenger automobile'' such that many 
vehicles will be newly classified as passenger cars. Most of these 
changes involve two-wheel drive vehicles with relatively modest towing 
capacity, such that vehicles with off-road capabilities and/or more 
substantial towing capacity comprise an even greater share of the 
vehicles that will still be classified as light trucks. Therefore, 
NHTSA has established final light truck CAFE standards that 
appropriately account for the capabilities of such vehicles.

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

    As discussed above, Congress also recently mandated that NHTSA set 
attribute-based fuel economy standards ``and express each standard in 
the form of a mathematical function.'' \368\ As proposed in the NPRM, 
NHTSA is finalizing CAFE standards that use a continuous, constrained 
logistic function for expressing the MY 2011 passenger car and light 
truck standards, which takes the form of an S-curve, and is defined 
according to the following formula:
---------------------------------------------------------------------------

    \368\ 49 U.S.C. 32902(a)(3)(A).
    [GRAPHIC] [TIFF OMITTED] TR30MR09.050
    
    Here, TARGET is the fuel economy target (in mpg) applicable to 
vehicles of a given footprint (FOOTPRINT, in square feet), b and a are 
the function's lower and upper asymptotes (also in mpg), e is 
approximately equal to 2.718,\369\ c is the footprint (in square feet) 
at which the inverse of the fuel economy target falls halfway between 
the inverses of the lower and upper asymptotes, and d is a parameter 
(in square feet) that determines how gradually the fuel economy target 
transitions from the upper toward the lower asymptote as the footprint 
increases. Figure VI-1 below shows an example of a logistic target 
function, where b = 20 mpg, a = 30 mpg, c = 40 square feet, and d = 5 
square feet:
---------------------------------------------------------------------------

    \369\ e is the irrational number for which the slope of the 
function y = number x is equal to 1 when x is equal to 
zero. The first 8 digits of e are 2.7182818.

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

[[Page 14360]]

[GRAPHIC] [TIFF OMITTED] TR30MR09.051

    NHTSA is not required to use a constrained logistic function and, 
as discussed below, the agency may consider defining future CAFE 
standards in terms of a different mathematical function.
    Continuous function:
    NHTSA explained in the NPRM that it examined the relative merits of 
both step functions and continuous functions in its rulemaking for MY 
2008-2011 light trucks, and described the agency's rationale for 
choosing a continuous function for the CAFE program. A step function, 
in the CAFE context, would separate the vehicle models along the 
spectrum of attribute magnitudes into discrete groups, and each group 
would be assigned a single fuel economy target, so that the average of 
the groups would be the average fleet fuel economy. A continuous 
function, in contrast, would assign each vehicle model (and indeed, any 
potential vehicle model at any point along the spectrum) its own unique 
fuel economy target, based on its particular attribute magnitude. Thus, 
two vehicle models built by different manufacturers could have the same 
fuel economy target, but only if they had identical magnitudes of the 
relevant attribute. In other words, a continuous function is a 
mathematical function that defines attribute-based targets across the 
entire range of possible attribute values. These targets are then 
applied through a harmonically-weighted formula to derive regulatory 
obligations for fleet averages.
    NHTSA decided against a step function for several reasons. First, 
there would be a strong incentive for manufacturers to game the system 
at the ``edges'' of the steps, by increasing the magnitude of a vehicle 
model's attribute only slightly in order to receive the lower target of 
the next step. A continuous function tends to reduce this incentive 
because on an uninterrupted spectrum, the vehicle model's magnitude of 
the attribute must be increased much more in order to gain a 
significantly lower fuel economy target--i.e., the necessary change in 
the vehicle model must be greater in order to receive the same level of 
benefit. Second, the continuous function minimizes the incentive to 
downsize a vehicle, since any downsizing would result in higher (or the 
same, at the upper end of the curve) targets being applicable. And 
finally, the continuous function provides manufacturers with greater 
regulatory certainty, since under a step function, the boundaries of 
categories (i.e., the size of the steps) could be redefined in future 
rulemakings. Thus, NHTSA tentatively concluded that a continuous 
function was the best choice for setting CAFE standards.

[[Page 14361]]

    NHTSA received only three comments regarding its use of the 
continuous function. Ferrari commented that it supports ``the choice to 
use a continuous function instead of a step function, because for each 
vehicle model is associated the corresponding fuel economy target, 
regardless of whether the attribute is the footprint alone or another 
one or a combination of two or more.''
    Fuji/Subaru commented that ``In general, Subaru conceptually 
supports the NHTSA proposal to carryover the attribute and continuous 
logistic function structure from the prior 2008-2011 light truck fuel 
economy rulemaking.''
    IIHS commented that it ``strongly supports the extension of an 
attribute-based system to cars and the agency's proposal to index fuel 
economy to a continuous function.'' IIHS stated that a step function 
gives manufacturers an incentive ``to redesign vehicles with minimally 
larger footprints to achieve lower fuel economy targets or to downsize 
vehicles to achieve weight reductions within footprint categories.'' 
This incentive exists, IIHS argued, because of the fact that ``By 
minimally boosting the footprint of a vehicle near an upper boundary, 
an automaker can gain a large benefit in meeting fuel economy 
targets,'' and that ``By the same token, an automaker can significantly 
decrease a vehicle's size and weight as long as the changes do not 
place the vehicle below the lower boundary of its current step,'' which 
IIHS argued presented significant safety concerns. IIHS further stated 
that the continuous function presented an added benefit over a step 
function insofar as ``car buyers would be more likely to notice design 
changes incorporated to achieve a substantial CAFE benefit in a 
continuous function system.''
    Agency response: Notwithstanding concerns regarding the steepness 
of an attribute-based function--concerns that are addressed below in 
Section VI.E--these comments support the agency's decision to 
promulgate a final rule that uses a continuous function to specify fuel 
economy targets that depend on a vehicle attribute.
Constrained Logistic Function
    NHTSA explained in the NPRM that there are a variety of 
mathematical forms available to estimate the relationship between an 
attribute and fuel economy that could be used as a continuous function, 
including simple linear (straight-line) functions, quadratic (U-shaped) 
functions, exponential (curves that continuously become steeper or 
shallower) functions, and unconstrained logistic (S-shaped) functions. 
NHTSA examined these alternative mathematical forms in the MY 2008-2011 
light truck CAFE rulemaking,\370\ but concluded that none of those 
functional forms as presented would be appropriate for the CAFE program 
because they tended toward excessively high stringency levels at the 
smaller end of the footprint range, excessively low stringency levels 
at the larger end of the footprint range, or both. Too-high stringency 
levels for smaller vehicles could potentially result in target values 
beyond the technological capabilities of manufacturers, while too-low 
levels for larger vehicles would reduce fuel savings below that of the 
optimized fleet. NHTSA determined that a constrained logistic function, 
shaped like an S-curve with plateaus at the top and bottom rather than 
increasing/decreasing to infinity, provided a relatively good fit to 
the data points without creating problems associated with some or all 
of the other forms. The constrained logistic function also limited the 
potential for the curve to be disproportionately influenced by outlier 
vehicles.
---------------------------------------------------------------------------

    \370\ See 71 FR 17600-17607 (Apr. 6, 2007) for a fuller 
discussion of the agency's analysis in that rule.
---------------------------------------------------------------------------

    NHTSA defined the constrained logistic functions for the CAFE 
standards using four parameters. Two parameters, a and b, established 
the function's upper and lower bounds (asymptotes), respectively. A 
third parameter, c, specified the footprint at which the function was 
halfway between the upper and lower bounds. The last parameter, d, 
established the rate or ``steepness'' of the function's transition 
between the upper (at low footprint) and lower (at high footprint) 
boundaries. The resulting curve was an elongated reverse ``S'' shape, 
with fuel economy targets decreasing as footprint increased. The 
definitions of the constrained logistic functions and NHTSA's process 
for fitting the curves is described in much more detail in Section VI.E 
below.
    NHTSA tentatively concluded in the NPRM that a constrained logistic 
function was appropriate for setting CAFE standards for both passenger 
cars and light trucks, but sought comment on whether another 
mathematical function might result in improved standards consistent 
with EPCA and EISA.
    Although NHTSA received a number of comments requesting alternative 
standards for certain manufacturers, which are discussed in Section 
VI.D, only Ferrari commented specifically regarding the constrained 
logistic function. Ferrari stated that it agreed with NHTSA ``about the 
use of a constrained logistic function to avoid a too high standard for 
smaller vehicles, and too low for larger vehicles, being the attribute 
the footprint.'' Ferrari further stated that ``the almost flattened 
tails of the curve (i.e., asymptotes) are helpful to avoid either 
vehicle downsizing or over sizing which could produce negative effects 
for safety and vehicle compatibility in case of accidents.''
    Agency response: As a potential alternative to the constrained 
logistic function, NHTSA did also present information regarding a 
constrained linear function. As shown in the NPRM, a constrained linear 
function has the potential to avoid creating a localized region (in 
terms of vehicle footprint) over which the slope of the function is 
relatively steep. However, NHTSA did not receive comments on this 
option, and the agency remains concerned about possible unintended 
consequences of the ``corners'' in such a function. Therefore, the 
agency is promulgating standards for MY 2011 that, as proposed in the 
NPRM, use a constrained logistic function to specify attribute-based 
fuel economy targets. The agency still believes a linear function 
constrained by upper (on a gpm basis) and possibly lower limits may 
merit reconsideration in future CAFE rulemakings.

C. What other types of standards did commenters propose?

    In the NPRM, NHTSA explained that it is obligated under 49 U.S.C. 
32902(a)(3)(A), recently added by Congress, to set attribute-based fuel 
economy standards for passenger cars and light trucks.\371\ NHTSA 
stated that it welcomed Congress' affirmation through EISA of the value 
of setting attribute-based fuel economy standards, because the agency 
believes that an attribute-based structure is preferable to a single-
industry-wide average standard in the context of CAFE for several 
reasons. First, attribute-based standards increase fuel savings and 
reduce emissions when compared to an equivalent industry-wide standard 
under which each manufacturer is subject to the same numerical

[[Page 14362]]

requirement. Under such a single industry-wide average standard, there 
are always some manufacturers that are not required to make any 
improvements for the given year because they already exceed the 
standard. Under an attribute-based system, in contrast, every 
manufacturer is more likely to be required to continue improving each 
year. Because each manufacturer produces a different mix of vehicles, 
attribute-based standards are individualized for each manufacturer's 
different product mix. All manufacturers must ensure that they have 
used available technologies to enhance the fuel economy levels of the 
vehicles they sell. Therefore, fuel savings and CO2 
emissions reductions will always be higher under an attribute-based 
system than under a comparable industry-wide standard.
---------------------------------------------------------------------------

    \371\ The statutory section states as follows:
    (3) Authority of the Secretary.--The Secretary shall--
    (A) prescribe by regulation separate average fuel economy 
standards for passenger and non-passenger automobiles based on 1 or 
more vehicle attributes related to fuel economy and express each 
standard in the form of a mathematical function * * *.
---------------------------------------------------------------------------

    Second, attribute-based standards eliminate the incentive for 
manufacturers to respond to CAFE standards in ways harmful to 
safety.\372\ Because each vehicle model has its own target (based on 
the attribute chosen), attribute-based standards provide no incentive 
to build smaller vehicles simply to meet a fleet-wide average, because 
the smaller vehicles will be subject to more stringent fuel economy 
targets.
---------------------------------------------------------------------------

    \372\ The 2002 NAS Report described at length and quantified the 
potential safety problem with average fuel economy standards that 
specify a single numerical requirement for the entire industry. See 
NAS Report at 5, finding 12.
---------------------------------------------------------------------------

    Third, attribute-based standards provide a more equitable 
regulatory framework for different vehicle manufacturers.\373\ A single 
industry-wide average standard imposes disproportionate cost burdens 
and compliance difficulties on the manufacturers that need to change 
their product plans and no obligation on those manufacturers that have 
no need to change their plans. Attribute-based standards spread the 
regulatory cost burden for fuel economy more broadly across all of the 
vehicle manufacturers within the industry.
---------------------------------------------------------------------------

    \373\ Id. at 4-5, finding 10.
---------------------------------------------------------------------------

    And fourth, attribute-based standards respect economic conditions 
and consumer choice, instead of having the government mandate a certain 
fleet mix. Manufacturers are required to invest in technologies that 
improve the fuel economy of the vehicles they sell, regardless of size.
    All commenters recognized that NHTSA must set attribute-based 
standards per Congress' mandate in EISA, but several commenters, mostly 
small and limited-line manufacturers, requested that NHTSA develop some 
kind of alternative standard besides the attribute-based passenger car 
and light truck standards proposed in the NPRM.\374\ These 
manufacturers generally argued that the proposed passenger car 
standards were set without regard to 15 percent of the passenger car 
market and were disproportionately burdensome to them (NHTSA notes, 
however, that full-line manufacturers argued to the contrary that the 
proposed standards were disproportionately burdensome to them). Most 
requested that the agency set an alternative standard that required 
them to raise their CAFE levels by a certain set percentage each year, 
rather than at the rate required by the proposed standards. Commenters 
generally reasoned that these alternative standards would improve fuel 
savings, because otherwise small and limited-line manufacturers will be 
unable to meet the proposed standards and will just pay fines.
---------------------------------------------------------------------------

    \374\ The Alliance comment on this issue simply stated that 
``For some manufacturers, whose model proliferation may not 
correlate well with footprint-based CAFE standards, the burden of 
required fuel economy increases is particularly high,'' and 
suggested that ``NHTSA should consider the appropriateness of 
implementing an alternative fuel economy standard option'' for those 
manufacturers, but left it to the individual manufacturers to 
comment further.
---------------------------------------------------------------------------

    Several manufacturers suggested alternative standards that increase 
at set percentages each year. BMW suggested, and Mitsubishi supported, 
an alternative passenger car standard allowing manufacturers for which 
the ratio of the fleet standard to the manufacturer's average footprint 
is higher than average to have the option of using a flat standard. 
This flat standard would increase at 4.5 percent per year, which was 
the same annualized increase as NHTSA's proposed passenger car 
standards. BMW argued that the suggested approach would be consistent 
with EISA because it would be derived from the attribute-based 
standards.
    Ferrari also suggested that small manufacturers (which it argued 
should be re-defined as either producing less than 5,000 vehicles 
annually for sale in the U.S. or selling less than 15,000 vehicles 
annually in the U.S.) should be provided an option to improve their 
fuel economy by a certain percentage each year. Ferrari did not suggest 
a particular percentage by which standards should increase. At the very 
least, Ferrari argued that small manufacturers should be given more 
lead-time than full-line manufacturers for making CAFE improvements.
    Volkswagen also commented that NHTSA should consider a percent 
increase option for the manufacturers (like Volkswagen) with fleets 
that ``exhibit an unbalanced correlation to the footprint attribute,'' 
a concept which Volkswagen suggested could be applied to both passenger 
cars and light trucks. If NHTSA declined to adopt such a suggestion, 
Volkswagen requested that manufacturers be allowed to comply with the 
industry average target for each model year.
    Ford also argued in favor of passenger car and light truck 
standards that increase at a set percentage each year, specifically at 
3.8 percent per year, which Ford estimated would achieve similar CAFE 
levels by MY 2015. Ford's comment was based on its construction of the 
EISA requirement that standards ``increase ratably'' between MY 2011 
and MY 2020, and was discussed in the section above addressing other 
comments made regarding that requirement.
    Fuji/Subaru suggested that smaller-volume manufacturers should have 
the option of either meeting the average on the proposed passenger car 
curve for the fleet as a whole, or paying civil penalties based on the 
target assigned through the proposed passenger car curve. These 
alternative options would be available in the early years of the 
rulemaking for manufacturers not able to meet rapidly-increasing 
standards. Fuji/Subaru argued that smaller manufacturers could not 
feasibly meet the proposed standards and that an alternative option 
would be consistent with EISA, because the fleet average would be 
derived from the attribute-based standards.
    Similar to Fuji/Subaru, Porsche argued that smaller limited-line 
manufacturers should be allowed the option to meet a fleet average 
equivalent to the midpoint of the compliance curve for the overall 
fleet in a given model year, ``rather than being forced to leave the 
market, restrict product or pay exorbitant civil penalties.'' Porsche 
argued that such a CAFE obligation would be ``challenging but 
achievable,'' and given the rate of increase in passenger car CAFE 
standards between 2007 and 2011, would be preferable to paying 
``skyrocketing civil penalties.'' Porsche additionally argued that 
EPCA/EISA prohibits NHTSA from excluding manufacturers in setting the 
CAFE standards, because NHTSA must ``prescribe by regulation average 
fuel economy standards for automobiles manufactured by a manufacturer 
in that model year'' according to 49 U.S.C. Sec.  32902(a). Porsche 
argued that NHTSA cannot set standards without reference to a 
manufacturer's fleet, and then subject that manufacturer to

[[Page 14363]]

enforcement penalties under those standards.
    Mercedes Benz also argued that ``manufacturers not included in the 
analysis'' for passenger car standards, i.e., limited-line 
manufacturers, should be allowed either to meet the average fuel 
economy specified for the vehicle fleet, or ``to improve their fleet 
fuel economy by a percentage equal to the percentage improvement NHTSA 
estimates for the fleet as a whole.'' Mercedes Benz suggested that 
NHTSA could require manufacturers to comply with the higher of the two 
options. The commenter further argued that such an approach would be 
legal under EPCA/EISA because it ``would be based on the attribute 
based continuous function curve,'' and would be fairer because the 
proposed attribute-based standards did not take into account what the 
fleet as a whole could achieve in terms of fuel economy.
    Agency response: NHTSA disagrees that it has the authority to set 
such suggested standards for any manufacturers under EPCA and EISA for 
purposes of this rulemaking. An average standard that is ``based on'' 
an attribute-based standard is not itself attribute-based, as required 
by EISA. Many of the manufacturers arguing for an alternative standard 
were concerned that the agency had excluded them from consideration in 
developing the proposed standards. In response, the agency included all 
manufacturers subject to the standards (excluding low-volume 
manufacturers), to ensure that the curves reflected the capabilities of 
the entire fleet, and not just the seven largest manufacturers. NHTSA 
believes that this addresses many of the commenters' concerns.

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

    In the NPRM, NHTSA proposed attribute-based passenger car and light 
truck CAFE standards under which each vehicle model has a fuel economy 
target that is based on the vehicle model's footprint, and the CAFE 
levels required of each manufacturer's passenger car and light truck 
fleets are determined by calculating the sales-weighted harmonic 
averages of those targets. NHTSA proposed the following mathematical 
function relating fuel economy targets to footprint:
[GRAPHIC] [TIFF OMITTED] TR30MR09.052

    where
    [GRAPHIC] [TIFF OMITTED] TR30MR09.053
    
    and

T(x) = fuel economy target (mpg)
x = footprint (square feet)
A = highest mpg value of fuel economy target
B = lowest mpg value of fuel economy target
C = coefficient (in square feet) determining horizontal midpoint of 
f(x)
D = coefficient (in square feet) determining width of transition 
between A and B.

    In the NPRM, NHTSA determined the curves relating footprint to fuel 
economy for a given model year and vehicle type (passenger car or light 
truck) for which the harmonic average of the functional values are the 
manufacturers' fuel economy targets, using the following five-step 
process. (In the discussion below, we shall refer to these ten curves--
one for each model year and vehicle type--as the ``fuel economy 
curves.'')
    In Step 1, NHTSA determined the ``manufacturer-optimized'' fuel 
economies for each vehicle in the product plans, submitted to NHTSA 
prior to the NPRM, of the seven largest manufacturers (Chrysler, Ford, 
General Motors, Honda, Hyundai, Nissan, Toyota). The ``manufacturer-
optimized'' fuel economies were obtained by applying fuel economy 
technologies to a given manufacturer's fleet of a given vehicle type 
(cars or trucks) and model year, until the incremental benefits are 
equal to the incremental costs. The resulting fuel economies were 
``manufacturer-optimized'' in the sense that they maximize societal net 
benefits at the level of the manufacturer, model year, and vehicle 
type. This approach was used to push each manufacturer's fleet to a 
point of equal effort. NHTSA restricted data to the seven largest 
manufacturers because those manufacturers accounted for most of the 
market and because a number of other manufacturers did not submit 
product plan data and/or had histories of paying civil penalties rather 
than complying with CAFE standards.
    In Step 2, NHTSA determined initial values for parameters A and B 
(values revised in steps 4 and 5, described below) for each vehicle 
class (passenger car and light truck) and model year as follows. For 
passenger cars (and light trucks, respectively) in a given model year, 
NHTSA set the initial value of the parameter A to be the harmonic 
average fuel economy among the vehicles of the given model year and 
vehicle type (produced by the seven largest manufacturers) comprising 
the lower third (respectively, eleventh) percentile of footprint 
values. NHTSA set the initial value of B to be the harmonic average 
fuel economy among the vehicles of the given model year and vehicle 
type (produced by the seven largest manufacturers) comprising the upper 
fourth (respectively, sixth) percentile of footprint values. NHTSA set 
A and B in this manner, rather than fitting them, for example, through 
regression, in order to ensure that the upper and lower fuel economy 
values reflect the smallest and largest models in the fleet. NHTSA 
chose the percentile values it used by examining the fuel economies of 
the largest and smallest car and truck models, and determining its best 
assessment of appropriate cohorts, acknowledging that there are no 
canonical choices for the cohorts.
    In Step 3, NHTSA determined initial values for parameters C and D 
for each vehicle type and model year as follows. (Their values were 
revised for MYs 2012-2014 in Step 5.) For a given model year and 
vehicle type, NHTSA set the initial values of C and D to be the values 
for which the average (equivalently, sum) of the absolute values of the 
differences between the manufacturer-optimized fuel consumptions for 
the given model year and vehicle type and the values obtained by 
applying the function f(x) (defined above) to the corresponding vehicle 
footprints is minimal, where the values of A and B

[[Page 14364]]

are taken from those determined in Step 2 and where e denotes the base 
of the natural logarithm (which is approximately equal to 2.71828). 
That is, NHTSA determined C and D by minimizing the average absolute 
residual, commonly known as the MAD (Mean Absolute Deviation) approach, 
of the corresponding constrained logistic curve. NHTSA fit the curve in 
fuel consumption space rather than fuel economy space because the 
manufacturer targets are in terms of the harmonic average fuel economy, 
and so it is more important that the curve fit the fuel consumption 
data well than that it fit the fuel economy data well. NHTSA also 
explained in the NPRM that it chose to use MAD in this Step instead of 
minimizing the sum of the square errors (``least squares,'' another 
common approach in curve fitting) in order to lessen the influence of 
outliers. NHTSA believed that it was more appropriate to use unweighted 
data in fitting the curve rather than weighting the data by sales 
because of large variations in model sales.
    In Step 4, NHTSA determined for each model year and vehicle class 
the integer value of t that maximized the societal net benefits 
(considering the seven largest manufacturers) achieved by a fuel 
economy standard under which fuel consumption targets were defined by 
the function
[GRAPHIC] [TIFF OMITTED] TR30MR09.054

using the values of A and B determined in Step 2, and the values of C 
and D determined in Step 3.\375\ NHTSA reset the values of 1/A and 1/B 
to be 1/A + 0.0001t and 1/B + 0.0001t, respectively. (These were not 
the final values of A and B for model years 2012-2014, which were 
further adjusted in Step 5.) That is, NHTSA initially set the 
stringency of the curves to maximize societal net benefits.
---------------------------------------------------------------------------

    \375\ This procedure uniformly shifts the upward and downward 
(depending on whether t is positive or negative), but on the same 
gallon per mile basis corresponding to the harmonic averaging of 
fuel economy values.
---------------------------------------------------------------------------

    In Step 5, NHTSA adjusted the values of A, B, C, and D for 
passenger cars and light trucks in MYs 2012-2014 as follows. NHTSA 
replaced the values of A, B, C, D for passenger cars (respectively, 
light trucks) in MYs 2012-2014 with the values obtained by making even 
annual steps between the values obtained for MYs 2011 and 2015 under 
Step 4. For A and B, these steps were made evenly on a gallon per mile 
basis. For C and D, these steps were made evenly on a square foot 
basis. Having done so, NHTSA then repeated Step 4 beginning with these 
adjusted coefficients.
    NHTSA explained in the NPRM that it performed Step 5 because the MY 
2011 car curve crossed the MY 2012 car curve and the MY 2011 truck 
curve crossed the MY 2012 truck curve. This is undesirable because it 
implies that the fuel economy target for a MY 2012 car in a certain 
range of footprint values is lower than that for a MY 2011 car of the 
same size (and likewise with trucks). We note that no further curve 
crossings occurred. That is, the passenger car (respectively, light 
truck) curves for MYs 2011-2015 that resulted upon the completion of 
Step 5 were mutually non-intersecting.
    NHTSA thus set the fuel economy curve for a given model year and 
vehicle type to be
[GRAPHIC] [TIFF OMITTED] TR30MR09.055

where A, B, C, and D assume the final values determined in Steps 1-5. 
(Recall that the function f(x) above is in fuel consumption space, not 
fuel economy space.) The values of A, B, C, and D in the NPRM for each 
vehicle type and model year were as follows.
[GRAPHIC] [TIFF OMITTED] TR30MR09.056

    NHTSA noted in the NPRM that a manufacturer's CAFE standard may 
decrease in a given year, compared to the prior year, even though the 
passenger car (respectively, light truck) fuel economy curves increase 
in functional values with increasing model year. A manufacturer's 
standard may decrease as a result of increasing the

[[Page 14365]]

footprints of the vehicles it produces in the later of the two years by 
a sufficiently large amount. (In the NPRM, NHTSA referred to the 
decrease in vehicle or manufacturer fuel economy targets from one year 
to the next as ``backsliding.'') However, as explained in the NPRM, 
NHTSA believes it is unlikely that any manufacturer would take such a 
step in the final rule time frame, given what appears to be a growing 
consumer preference for smaller, higher-fuel economy vehicles.
    NHTSA noted in the NPRM that the curves obtained for passenger cars 
might be undesirably steep near the inflection point, where small 
changes in footprint can lead to not so small changes in target fuel 
economy. NHTSA requested particular comment on this issue and a number 
of other issues, including the determination of cohorts used to set 
values for the asymptotes A and B, the manner in which C and D are 
determined, the treatment of outliers, and curve crossing.
    NHTSA received several comments concerning the manner in which it 
fit the fuel economy curves.
Comments Regarding the Fact That the Car and Truck Curves Are Set 
Independently
    Three commenters (Honda, Wenzel and Ross, and Public Citizen) 
stated it would or might be better if rather than setting the car and 
truck curves independently, the car and truck fuel consumption data 
were pooled and a single curve fit to the pooled data. Honda commented 
that this would result in standards that treat cars and trucks more 
equally and could fix the steepness problem with the car curve. Wenzel 
and Ross argued that setting the same standards for passenger cars and 
light trucks would lead to manufacturers producing relatively fewer 
pickups and truck-based SUVs, compared to cars and crossover SUVs, and 
this would result in fewer deaths and injuries resulting from crashes 
of incompatibly-sized vehicles and greater fuel savings. Public Citizen 
simply stated that NHTSA failed to set ``one continuous standard for 
passenger cars and light trucks.''
    Agency response: In the NPRM, NHTSA did examine the standards that 
would result from pooling the data in this manner. However, NHTSA is 
required by statute to set separate average fuel economy standards for 
cars and trucks, and upon further reflection we believe this 
requirement extends to how the agency develops the curves. Pooling data 
for both fleets would mean applying to passenger cars a standard based, 
in part, on the technological capabilities of light trucks, and vice 
versa. NHTSA is promulgating final standards for MY 2011 that, as 
proposed, base the curve applied to each fleet only on the capabilities 
of vehicles that would be covered the curve.
Comments Concerning the Manufacturers Whose Data to Which the Curves 
Were Fit
    BMW, Mercedes, Mitsubishi, Porsche, Subaru, and the Alliance 
commented that the fuel economy curves should be fit to data from all 
manufacturers to which the fuel economy standards apply, and not just 
to data from the seven largest manufacturers. Some commenters (BMW, 
Mercedes, Mitsubishi, Porsche) argued that limiting to data from the 
seven largest manufacturers results in disproportionate burdens to 
other manufacturers subject to the standards. Mitsubishi stated that 
all manufacturers need to be included in setting the standards in order 
for the standards to comprehensively reflect the technological and 
economic feasibility for the U.S. auto industry.
    Agency response: Upon further consideration, NHTSA agrees with the 
commenters and has revised its methodology to include all manufacturers 
to which the MY 2011 standards apply: BMW, Chrysler, Daimler, Ferrari, 
Ford, General Motors, Honda, Hyundai, Maserati, Mitsubishi, Nissan, 
Porsche, Subaru, Suzuki, Tata, Toyota, Volkswagen. That is, NHTSA has 
revised Step 1 above to include the vehicles of the given model year 
and vehicle type for all 17 of these manufacturers.\376\
--------------------------------------------------------