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Average Fuel Economy Standards, Passenger Cars and Light Trucks; Model Years 2011-2015
PDF Version (137 pp, 2227K, About PDF) [Federal Register: May 2, 2008 (Volume 73, Number 86)] [Proposed Rules] [Page 24351-24487] From the Federal Register Online via GPO Access [wais.access.gpo.gov] [DOCID:fr02my08-28] ----------------------------------------------------------------------- DEPARTMENT OF TRANSPORTATION National Highway Traffic Safety Administration 49 CFR Parts 523, 531, 533, 534, 536 and 537 [Docket No. NHTSA-2008-0089] RIN 2127-AK29 Average Fuel Economy Standards, Passenger Cars and Light Trucks; Model Years 2011-2015 AGENCY: National Highway Traffic Safety Administration (NHTSA), Department of Transportation (DOT). ACTION: Notice of Proposed Rulemaking (NPRM). ----------------------------------------------------------------------- SUMMARY: This document proposes substantial increases in the Corporate Average Fuel Economy (CAFE) standards for passenger cars and light trucks that would enhance energy security by improving fuel economy. Since the carbon dioxide (CO2) emitted from the tailpipes of new motor vehicles is the natural by-product of the combustion of fuel, the increased standards would also address climate change by reducing tailpipe emissions of CO2. Those emissions represent 97 percent of the total greenhouse gas emissions from motor vehicles. Implementation of the new standards would dramatically add to the billions of barrels of fuel already saved since the beginning of the CAFE program in 1975. DATES: Comments must be received on or before July 1, 2008. ADDRESSES: You may submit comments to the docket number identified in the heading of this document by any of the following methods: • Federal eRulemaking Portal: Go to http:// www.regulations.gov. Follow the online instructions for submitting comments. • Mail: Docket Management Facility, M-30, U.S. Department of Transportation, West Building, Ground Floor, Rm. W12-140, 1200 New Jersey Avenue, SE., Washington, DC 20590. • Hand Delivery or Courier: West Building Ground Floor, Room W12-140, 1200 New Jersey Avenue, SE., between 9 a.m. and 5 p.m. Eastern Time, Monday through Friday, except Federal holidays. • Fax: (202) 493-2251. Regardless of how you submit your comments, you should mention the docket number of this document. You may call the Docket Management Facility at 202-366-9826. Instructions: For detailed instructions on submitting comments and additional information on the rulemaking process, see the Public Participation heading of the Supplementary Information section of this document. Note that all comments received will be posted without change to http://www.regulations.gov, including any personal information provided. Privacy Act: Please see the Privacy Act heading under Rulemaking Analyses and Notices. 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 Schade, 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. Summary B. Energy Independence and Security Act of 2007 C. Proposal 1. Standards a. Stringency b. Benefits c. Costs d. Flexibilities 2. Credits II. Background A. Contribution of fuel economy improvements to addressing energy independence and security and climate change 1. Relationship between fuel economy and CO2 tailpipe emissions 2. Fuel economy improvements/CO2 tailpipe emission reductions since 1975 B. Chronology of events since the National Academy of Sciences called for reforming and increasing CAFE standards 1. National Academy of Sciences CAFE report (February 2002) a. Significantly increasing CAFE standards without reforming them would adversely affect safety b. Environmental and other externalities justify increasing the CAFE standards 2. Final rule establishing reformed (attribute-based) CAFE standards for MY 2008-2011 light trucks (March 2006) 3. Twenty-in-Ten Initiative (January 2007) 4. Request for passenger car and light truck product plans (February 2007) 5. Supreme Court decision in Massachusetts v. EPA (April 2007) 6. Coordination between NHTSA and EPA on development of rulemaking proposals (Summer-Fall 2007) 7. Ninth Circuit decision re final rule for MY 2008-2011 light trucks (November 2007) 8. Enactment of Energy Independence and Security Act of 2007 (December 2007) C. Energy Policy and Conservation Act, as amended 1. Vehicles subject to standards for automobiles 2. Mandate to set standards for automobiles 3. Structure of standards 4. Factors governing or considered in the setting of standards 5. Consultation in setting standards 6. Compliance flexibility and enforcement III. Fuel economy enhancing technologies A. Data sources for technology assumptions B. Technologies and estimates of costs and effectiveness 1. Engine technologies 2. Transmission technologies 3. Vehicle technologies 4. Accessory technologies 5. Hybrid technologies C. Technology synergies D. Technology cost learning curve E. Ensuring sufficient lead time 1. Linking to redesign and refresh 2. Technology phase-in caps IV. Basis for attribute-based structure for setting fuel economy standards A. Why attribute-based instead of a single industry-wide average? B. Which attribute is most appropriate? 1. Footprint-based function 2. Functions based on other attributes C. The continuous function V. Volpe model/analysis/generic description of function A. The Volpe model 1. What is the Volpe model? 2. How does the Volpe model apply technologies to manufacturers' future fleets? 3. What effects does the Volpe model estimate? 4. How can the Volpe model be used to calibrate and evaluate potential CAFE standards? 5. How has the Volpe model been updated since the April 2006 light truck CAFE final rule? a. Technology synergies b. Technology learning curves c. Calibration of reformed CAFE standards 6. What manufacturer information does the Volpe model use? 7. What economic information does the Volpe model use? a. Costs of fuel economy technologies b. Potential opportunity costs of improved fuel economy c. The on-road fuel economy `gap' d. Fuel prices and the value of saving fuel e. Consumer valuation of fuel economy and payback period f. Vehicle survival and use assumptions g. Growth in total vehicle use h. Accounting for the rebound effect of higher fuel economy i. Benefits from increased vehicle use j. Added costs from congestion, crashes and noise k. Petroleum consumption and import externalities l. Air pollutant emissions (i) Impacts on criteria air pollutant emissions (ii) Reductions in CO2 emissions (iii) Economic value of reductions in CO2 emissions [[Page 24353]] m. The value of increased driving range n. Discounting future benefits and costs o. Accounting for uncertainty in benefits and costs B. How has NHTSA used the Volpe model to select the proposed standards? 1. Establishing a continuous function standard 2. Calibration of initial continuous function standards 3. Adjustments to address policy considerations a. Curve crossings b. Steep curve for passenger cars c. Risk of upsizing VI. Proposed fuel economy standards A. Standards for passenger cars and light trucks 1. Proposed passenger car standards MY 2011-2015 2. Proposed light truck standards MY 2011-2015 3. Energy and environmental backstop 4. Combined fleet performance B. Estimated technology utilization under proposed standards C. Costs and benefits of proposed standards D. Flexibility mechanisms E. Consistency of proposed standards with EPCA statutory factors 1. Technological feasibility 2. Economic practicability 3. Effect of other motor vehicle standards of the Government on fuel economy 4. Need of the U.S. to conserve energy F. Other considerations in setting standards under EPCA 1. Safety 2. Alternative fuel vehicle incentives 3. Manufacturer credits G. Environmental impacts of the proposed standards H. Balancing the factors to determine maximum feasible CAFE levels VII. Standards for commercial medium- and heavy-duty on-highway vehicles and ``work trucks'' VIII. Vehicle classification A. Origins of the regulatory definitions B. Rationale for the regulatory definitions in light of the current automobile market C. NHTSA is not proposing to change regulatory definitions at this time IX. Enforcement A. Overview B. CAFE credits 1. Credit trading 2. Credit transferring 3. Credit carry-forward/carry-back C. Extension and phasing out of flexible-fuel incentive program X. Regulatory alternatives XI. Sensitivity and Monte Carlo analysis XII. Public participation XIII. Regulatory notices and analyses A. Executive Order 12866 and DOT Regulatory Policies and Procedures B. National Environmental Policy Act 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) I. Executive Order 13045 J. National Technology Transfer and Advancement Act K. Executive Order 13211 L. Department of Energy Review M. Plain Language N. Privacy Act XIV. Regulatory Text I. Executive overview A. Summary This document is being issued pursuant to the Energy Independence and Security Act of 2007 (EISA), which Congress passed in December 2007. EISA mandates the setting of separate maximum feasible standards for passenger cars and for light trucks at levels sufficient to ensure that the average fuel economy of the combined fleet of all passenger cars and light trucks sold by all manufacturers in the U.S. in model year (MY) 2020 equals or exceeds 35 miles per gallon. That is a 40 percent increase above the average of approximately 25 miles per gallon for the current combined fleet. Congress enabled NHTSA to require these substantial increases in fuel economy by requiring that passenger car standards be reformed through basing them on one or more vehicle attributes. The attribute- based approach was originally recommended by the National Academy of Sciences in 2002 and adopted by NHTSA for light trucks in 2006. The new approach is a substantial improvement over the old approach of specifying the same numerical standard for each manufacturer. It avoids creating undue risks of adverse safety and employment impacts and distributes compliance responsibilities among the vehicle manufacturers more equitably. This document proposes standards for MYs 2011-2015, the maximum number of model years for which NHTSA can establish standards in a single rulemaking under EISA. Since lead time is a significant consideration in determining the stringency of future standards, the agency needs to establish the standards as far in advance as possible so as to maximize the amount of lead time for manufacturers to develop and implement plans for making the vehicle design changes necessary to achieve the requirements of EISA. In developing the proposed standards, the agency considered the four statutory factors underlying maximum feasibility (technological feasibility, economic practicability, the effect of other standards of the Government on fuel economy, and the need of the nation to conserve energy) as well as other relevant considerations such as safety. After assessing what fuel saving technologies would be available, how effective they are, and how quickly they could be introduced, and then factoring that information into the computer model its uses for applying technologies to particular vehicle models, the agency then balanced the factors relevant to standard setting. In its decision making, the agency used a marginal benefit-cost analysis that placed monetary values on relevant externalities (both energy security and environmental externalities, including the benefits of reductions in CO2 emissions). In the above process, the agency consulted with the Department of Energy and particularly the Environmental Protection Agency regarding a wide variety of matters, including, for example, the cost and effectiveness of available technologies, improvements to the computer model, and the selection of appropriate analytical assumptions. This document also proposes to add a new regulation designed to give manufacturers added flexibility in using credits earned by exceeding CAFE standards. The regulation would authorize the trading of credits between manufacturers. In addition, it would permit a manufacturer to transfer its credits from one of its compliance categories to another of its categories. NHTSA is also publishing two companion documents, one requesting vehicle manufacturers to provide up-to-date product plans for the model years covered by this document, and the other inviting Federal, State, and local agencies, Indian tribes, and the public to participate in identifying the environmental issues and reasonable alternatives to be examined in an environmental impact statement. B. Energy Independence and Security Act of 2007 The Energy Independence and Security Act of 2007 (EISA)\1\ builds on the President's ``Twenty in Ten'' initiative, which was announced in January 2007. That initiative sought to reduce gasoline usage by 20 percent in the next 10 years. The enactment of EISA represents a major step forward in expanding the production of renewable fuels, reducing oil consumption, and confronting global climate change. --------------------------------------------------------------------------- \1\ Pub. L. 110-140, 121 Stat. 1492 (Dec. 18, 2007). --------------------------------------------------------------------------- EISA will help reduce America's dependence on oil by reducing U.S. demand for oil by setting a national fuel economy standard of at least 35 miles per gallon by 2020--which will increase fuel economy standards by 40 percent and save billions of gallons of fuel. In January 2007, the President called for the first statutory increase in fuel economy standards for passenger [[Page 24354]] automobiles (referred to below as ``passenger cars'') since those standards were mandated in 1975, and EISA delivers on that request. EISA also includes an important reform the President has called for that allows the Transportation Department to issue ``attribute-based standards,'' which will ensure that increased fuel efficiency does not come at the expense of automotive safety. EISA also mandates increases in the use of renewable fuels by setting a mandatory Renewable Fuel Standard requiring fuel producers to use at least 36 billion gallons of renewable fuels in 2022. As the President noted in signing EISA, the combined effect of the various actions required by the Act will be to produce some of the largest CO2 emission reductions in our nation's history. EISA made a number of important changes to the Energy Policy and Conservation Act (EPCA) (Pub. L. 94-163), the 1975 statute that governs the CAFE program. EISA: • Replaces the old statutory default standard of 27.5 mpg for passenger cars with a mandate to establish separate passenger car and light truck standards annually, beginning with MY 2011, set at the maximum feasible level. The standards for MYs 2011-2020 must, as a minimum, be set sufficiently high to ensure that the average fuel economy of the combined industrywide fleet of all new passenger cars and light trucks sold in the United States during MY 2020 is at least 35 mpg.\2\ --------------------------------------------------------------------------- \2\ Although NHTSA 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, up- to-date administrative record, and consistent with EPCA as amended by EISA, to establish the standard for those light trucks. --------------------------------------------------------------------------- • Limits to five the number of years for which standards can be established in a single rulemaking. That requirement, in combination with the requirement to start rulemaking with MY 2011, necessitates limiting this rulemaking to MYs 2011-2015. • Mandates the reforming of CAFE standards for passenger cars by requiring that all CAFE standards be based on one or more vehicle attributes, thus ensuring 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, the domestic passenger cars of each manufacturer of those cars must achieve a measured average fuel economy that is not less than 92 percent of the average fuel economy of the combined fleet of domestic and non-domestic passenger cars sold in the United States in that model year. • 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 for exceeding CAFE standards, (b) allowing a manufacturer to transfer the credits it has earned from one of its classes of automobiles to another, and (c) authorizing the trading of credits between manufacturers. C. Proposal 1. Standards a. Stringency This document proposes to set attribute-based fuel economy standards for passenger cars and light trucks consistent with the Reformed CAFE approach that NHTSA used in establishing the light truck standards for MY 2008-2011 light trucks. Separate passenger car standards would be set for MYs 2011-2015, and light truck standards would be set for MYs 2011-2015. As noted above, EISA limits the number of model years for which standards may be established in a single rulemaking to five. We are proposing to establish standards for five years to maximize the amount of lead time that we can provide the manufacturers. This is necessary to make it possible to achieve the levels of average fuel economy required by MY 2020. Each vehicle manufacturer's required level of CAFE would be 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 would be defined by vehicle footprint. The level of the performance target for each footprint would reflect the technological and economic capabilities of the industry. The target for each footprint would be the same for all manufacturers, regardless of differences in their overall fleet mix. Compliance would be determined by comparing a manufacturer's harmonically averaged fleet fuel economy levels in a model year with a required fuel economy level calculated using the manufacturer's actual production levels and the targets for each footprint of the vehicles that it produces. The proposed standards were developed using a computer model (known as the ``Volpe Model'') that, for any given model year, applies technologies to a manufacturer's fleet until the manufacturer reaches compliance with the standard under consideration. The standards were tentatively set at levels such that, considering the seven largest manufacturers, the cost of the last technology application equaled the benefits of the improvement in fuel economy resulting from that application. We reviewed these proposed standards to consider the underlying increased use of technologies and the associated impact on the industry. This process recognizes that the relevance of costs in achieving benefits, and uses benefit figures that include the value of reducing the negative externalities (economic and environmental) from producing and consuming fuel. These environmental externalities include, among other things, reducing tailpipe emissions of CO2.\3\ In view of the process used to develop the proposed standards, they are also referred to as ``optimized standards.'' --------------------------------------------------------------------------- \3\ 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. --------------------------------------------------------------------------- Compared to the 2006 rulemaking that established the MY 2008-11 CAFE standards for light trucks, this rulemaking much more fully captures the value of the costs and benefits of setting CAFE standards. This is important because assumptions regarding gasoline price projections, along with assumptions for externalities, are based on changed economic and environmental and energy security conditions and play a big role in the agency's balancing of the statutory considerations in arriving at a determination of maximum feasible. 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 the climate change problem, the agency revisited the various assumptions used in the Volpe Model to determine the level of the standards. Specifically, in running the Volpe Model and stopping at a point where marginal costs equaled marginal benefits or where net benefits to society are maximized, 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 [[Page 24355]] $7.00/ton), which it did not do in the previous rulemaking, and expanded its technology list. 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. These changes to the inputs to the model had a major impact on increasing the benefits in certain model years by allowing for greater penetration of technologies. The agency cannot set out the exact level of CAFE that each manufacturer will be required to meet for each model year under the proposed passenger car or light truck standards since the levels will depend on information that will not be available until the end of each of the model years, i.e., the final actual production figures for each of those years. The agency can, however, project what the industry wide level of average fuel economy would 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 is the estimated associated level of tailpipe emissions of CO2 that would be achieved.\4\ --------------------------------------------------------------------------- \4\ 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 is stated in the above discussion both in terms of fuel economy and the associated reductions in tailpipe emissions of CO2 since the CAFE standard will 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 April 20, 2008.) The CO2 emission rates shown are 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 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.) 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 is approximately 4.5 percent. Due to the uneven distribution of new model introductions during this period and to the fact that significant technological changes can be most readily made in conjunction with those introductions, the annual percentage increases are greater in the early years in this period. Given a starting point of 31.8 mpg in MY 2015, the average annual increase for MYs 2016-2020 would need to be only 2.1 percent in order for the projected combined industry wide average to reach at least 35 mpg by MY 2020, as mandated by EISA. In addition, per EISA, each manufacturer's domestic passenger fleet is required in each model year to achieve 27.5 mpg or 92 percent of the CAFE of the industry wide combined fleet of domestic and non-domestic passenger cars \5\ for that model year, whichever is higher. This requirement results in the following alternative minimum standard (not attribute-based) for domestic passenger cars: --------------------------------------------------------------------------- \5\ Those numbers set out several paragraphs above. MY 2011: 28.7 mpg (310 g/mi of tailpipe emissions of CO2) MY 2012: 30.2 mpg (294 g/mi of tailpipe emissions of CO2) MY 2013: 31.3 mpg (284 g/mi of tailpipe emissions of CO2) MY 2014: 32.0 mpg (278 g/mi of tailpipe emissions of CO2) MY 2015: 32.9 mpg (270 g/mi of tailpipe emissions of CO2) The agency is also issuing, along with this document, a notice requesting updated product plan information and other data to assist in developing a final rule. We recognize that the manufacturer product plans relied upon in developing this proposal--those plans received in late spring of 2007 in response to an early 2007 request for information--may already be outdated in some respects. We fully expect that manufacturers have revised those plans to reflect subsequent developments, especially the enactment of EISA. We solicit comment on all aspects of this proposal, including the methodology, economic assumptions, analysis and tentative conclusions. In particular, we solicit comment on whether the proposed levels of CAFE satisfy EPCA, e.g., reflect an appropriate balancing of the explicit statutory factors and other relevant factors. Other specific areas where we request comments are identified elsewhere in this preamble and in the Preliminary Regulatory Impact Analysis (PRIA). Based on public comments and other information, including new data and analysis, and updated product plans,\6\ the standards adopted in the final rule could well be different from those proposed in this document. --------------------------------------------------------------------------- \6\ The proposed standards are, in the first instance, based on the confidential product plans submitted by the manufacturers in the spring of 2006. The final rule will be based on the confidential plans submitted in the next several months. The agency anticipates that those new plans, which presumably will reflect in some measure the enactment of EISA and the issuance of this proposal, will project higher levels of average fuel economy than the 2006 product plans. --------------------------------------------------------------------------- b. Benefits We estimate that the proposed standards for passenger cars would save approximately 18.7 billion gallons of fuel and avoid tailpipe CO2 emissions by 178 billion metric tons over the lifetime of the passenger cars sold during those model years, 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). We estimate that the value of the total benefits of the proposed passenger car standards would be approximately $31 billion \7\ over the lifetime of the 5 model [[Page 24356]] years combined. 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. --------------------------------------------------------------------------- \7\ The $22 billion estimate is based on a 7% discount rate for valuing future impacts. NHTSA estimated benefits using both 7% and 3% discount rates. Under a 3% rate, net consumer benefits for passenger car CAFE improvements total $28 million. --------------------------------------------------------------------------- We estimate that the proposed standards for light trucks would save approximately 36 billion gallons of fuel and prevent the tailpipe emission of 343 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. We estimate that the value of the total benefits of the proposed light truck standards would be approximately $57 billion \8\ over the lifetime of the 5 model years of light trucks combined. 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. --------------------------------------------------------------------------- \8\ The $56 billion estimate is based on a 7% discount rate for valuing future impacts. NHTSA estimated benefits using both 7% and 3% discount rates. Under a 3% rate, net consumer benefits for light truck CAFE improvements total $70 million. --------------------------------------------------------------------------- c. Costs The total costs for manufacturers just complying with the standards for MY 2011-2015 passenger cars would be approximately $16 billion, compared to the costs they would incur if the standards remained at the adjusted baseline. The resulting vehicle price increases to buyers of MY 2015 passenger cars would be recovered or paid back \9\ in additional fuel savings in an average of 56 months, assuming fuel prices ranging from $2.26 per gallon in 2016 to $2.51 per gallon in 2030.\10\ --------------------------------------------------------------------------- \9\ See Section V.A.7 below for discussion of payback period. \10\ The fuel prices (shown here in 2006 dollars) used to calculate the length of the payback period are those projected (Annual Energy Outlook 2008, revised early release) by the Energy Information Administration over the life of the MY 2011-2015 light trucks, not current fuel prices. --------------------------------------------------------------------------- The total costs for manufacturers just complying with the standards for MY 2011-2015 light trucks would be approximately $31 billion, compared to the costs they would incur if the standards remained at the adjusted baseline. The resulting vehicle price increases to buyers of MY 2015 light trucks would be paid back in additional fuel savings in an average of 50 months, assuming fuel prices ranging from $2.26 to $2.51 per gallon. d. Flexibilities The agency's benefit and cost estimates do 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. 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. The benefit and compliance cost estimates used by the agency in determining the maximum feasible level of the CAFE standards assume that manufacturers will rely solely on the installation of fuel economy technology to achieve compliance with the proposed standards. In reality, however, manufacturers are likely to rely to some extent on flexibility mechanisms provided by EPCA (as described in Section VI) and will thereby reduce the cost of complying with the proposed standards to a meaningful extent. 2. Credits NHTSA is also proposing 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.\11\ 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 the proposed 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 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 the proposed Part 536 is available in section IX below. --------------------------------------------------------------------------- \11\ 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. --------------------------------------------------------------------------- II. Background A. Contribution of Fuel Economy Improvements to Addressing Energy Independence and Security and Climate Change 1. Relationship Between Fuel Economy and CO2 Tailpipe Emissions Improving fuel economy reduces the amount of tailpipe emissions of CO2. CO2 emissions are directly linked to fuel consumption because CO2 is the ultimate end product of burning gasoline. The more fuel a vehicle burns, the more CO2 it emits. Since the CO2 emissions are essentially constant per gallon of fuel combusted, the amount of fuel consumption per mile is directly related to the amount of CO2 emissions per mile. Thus, requiring improvements in fuel economy indirectly, but necessarily requires reductions in tailpipe emissions of CO2 emissions. This can be seen in the table below. 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.\12\ --------------------------------------------------------------------------- \12\ 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 less. 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 higher than those of a comparable gasoline power passenger car. [[Page 24357]] Table II-1.--CAFE Standards (mpg) and the Limits They Indirectly Place on Tailpipe Emissions of CO2 (g/mi)* -------------------------------------------------------------------------------------------------------------------------------------------------------- CAFE Std CO2 CAFE Std CO2 CAFE Std CO2 CAFE Std CO2 CAFE Std CO2 CAFE Std CO2 -------------------------------------------------------------------------------------------------------------------------------------------------------- 21.0....................................... 444.4 26.0 341.8 31.0 286.7 36.0 246.9 41.0 216.8 46.0 193.2 22.0....................................... 404.0 27.0 329.1 32.0 277.7 37.0 240.2 42.0 211.6 47.0 188.3 23.0....................................... 386.4 28.0 317.4 33.0 269.3 38.0 233.9 43.0 206.7 48.0 189.1 24.0....................................... 370.3 29.0 306.4 34.0 261.4 39.0 227.9 44.0 202.0 49.0 181.4 25.0....................................... 355.5 30.0 296.2 35.0 253.9 40.0 222.2 45.0 197.5 50.0 177.7 -------------------------------------------------------------------------------------------------------------------------------------------------------- This table is based on calculations that use the figure of 8,887 grams of CO2 per gallon of gasoline consumed, based on characteristics of gasoline vehicle certification fuel. To convert a mpg value into CO2 g/mi, divide 8,887 by the mpg value. 2. Fuel Economy Improvements/CO2 Tailpipe Emission Reductions Since 1975 The need to take action to reduce greenhouse gas emissions, e.g., motor vehicle tailpipe emissions of CO2, in order to forestall and even mitigate climate change is well recognized.\13\ Less well recognized are two related facts. First, improving fuel economy is the only method available to motor vehicle manufacturers for making significant 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 in some measure to market conditions as well, have directly caused reductions in the rate of CO2 tailpipe emissions per vehicle. --------------------------------------------------------------------------- \13\ 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. --------------------------------------------------------------------------- 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 passenger cars had increased to 31.3 mpg, causing g/mi of CO2 to fall to 283.9. Similarly, in 1975, light trucks averaged 13.7 mpg (648.7 g/mi of CO2). By 2007, the average fuel economy of light trucks had risen to 23.1 mpg, causing g/mi of CO2 to fall to 384.7. Table II-2.--Improvements in MPG/Reductions in G/MI of CO2 Passenger Cars [1975-2007] ------------------------------------------------------------------------ MPG G/MI of CO2 ------------------------------------------------------------------------ 1975.......................................... 15.8 562.5 2007.......................................... 31.3 283.9 ------------------------------------------------------------------------ Table II-3.--Improvements in MPG/Reductions in G/MI of CO2 Light Trucks [1975-2007] ------------------------------------------------------------------------ MPG G/MI of CO2 ------------------------------------------------------------------------ 1975.......................................... 13.7 648.7 2007.......................................... 23.1 384.7 ------------------------------------------------------------------------ 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 [[Page 24358]] [GRAPHIC] [TIFF OMITTED] TP02MY08.000 [[Page 24359]] B. Chronology of Events Since the National Academy of Sciences Called for Reforming and Increasing CAFE Standards 1. National Academy of Sciences CAFE Report (February 2002) a. Significantly Increasing CAFE Standards Without Reforming Them Would Adversely Affect Safety In the congressionally-mandated report entitled ``Effectiveness and Impact of Corporate Average Fuel Economy (CAFE) Standards,'' \14\ 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 created an incentive for 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 these problems arose because the CAFE standards 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. 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. --------------------------------------------------------------------------- \14\ 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 April 20, 2008). 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. --------------------------------------------------------------------------- Looking to the future, the committee said that while it is technically feasible and potentially economically practicable 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 will 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 cautioned that the safety effects of downsizing and downweighting are likely to be hidden by the generally increasing safety of the light-duty vehicle fleet.\15\ 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 is one of the measures) will be more difficult to identify in light of the continuing improvement in traffic safety. Although it is anticipated that these safety innovations will improve the safety of vehicles of all sizes, that does not mean that downsizing to achieve fuel economy improvements will not have any safety costs. If two vehicles of the same size are modified, one both by downsizing it and adding the safety innovations and the other just by adding the safety innovations, the latter vehicle will in all likelihood be safer. --------------------------------------------------------------------------- \15\ 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 are structured in a way that encourages either downsizing or the increased production of smaller vehicles, some additional traffic fatalities would be expected. 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.\16\ --------------------------------------------------------------------------- \16\ NAS, p. 9. --------------------------------------------------------------------------- In response to these conclusions, NHTSA began issuing 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. Fully realizing all of the safety and other \17\ benefits of these reforms will depend in part on whether the unreformed, non-attribute based greenhouse standards adopted by California and other states are implemented. Apart from issues of relative stringency, the effects on vehicle manufacturers of implementing those state emission standards should be substantially similar to the effects of implementing non- attribute-based CAFE standards, given the nearly identical nature of most aspects of those emission standards and CAFE standards in terms of technological means of compliance and methods of measuring performance. --------------------------------------------------------------------------- \17\ Reformed CAFE has several advantages compared to Unreformed CAFE: First, Reformed CAFE increases energy savings. The energy-saving potential of Unreformed CAFE is limited because only a few full-line manufacturers are required to make improvements. Under Reformed CAFE, which accounts for size differences in product mix, virtually all manufacturers will be required to use advanced fuel-saving technologies to achieve the requisite fuel economy for their automobiles. Second, Reformed CAFE reduces the chances of adverse safety consequences. Downsizing of vehicles as a CAFE compliance strategy is discouraged under Reformed CAFE since as vehicles become smaller, the applicable fuel economy target becomes more stringent. Third, Reformed CAFE provides a more equitable regulatory framework for different vehicle manufacturers. Under Unreformed CAFE, the cost burdens and compliance difficulties have been imposed nearly exclusively on the full-line manufacturers. Fourth, Reformed CAFE is more market-oriented because it more fully respects economic conditions and consumer choice. Reformed CAFE does not force vehicle manufacturers to adjust fleet mix toward smaller vehicles although they can make adjustments if that is what consumers are demanding. Instead, it allows the manufacturers to adjust the mix of their product offerings in response to the market place. --------------------------------------------------------------------------- b. Environmental and Other Externalities Justify Increasing the CAFE Standards The 2002 NAS report also concluded that the CAFE standards have contributed to 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 greenhouse gas), relative to what they otherwise would have been. If fuel economy had not improved, gasoline consumption (and crude oil imports) would be about 2.8 million barrels per day (mmbd) greater than it is.\18\ Reducing fuel consumption in vehicles also reduces carbon dioxide emissions. If the nation were using 2.8 mmbd more gasoline, carbon emissions would be 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 have reduced overall U.S. emissions by about 7 percent.\19\ --------------------------------------------------------------------------- \18\ NAS, pp. 3 and 20. \19\ NAS, p. 20. --------------------------------------------------------------------------- The report concluded that technologies exist that could significantly further reduce fuel consumption by passenger cars and light trucks within 15 years, while maintaining vehicle size, weight, utility and performance.\20\ Light duty trucks [[Page 24360]] were said to offer the greatest potential for reducing fuel consumption.\21\ 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. 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.'' \22\ --------------------------------------------------------------------------- \20\ NAS, p. 3 (Finding 5). \21\ NAS, p. 4 (Finding 5). \22\ 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 the dollar value of the saved fuel would be 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.\23\ --------------------------------------------------------------------------- \23\ 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 most important concern, it argued, is the one about the accumulation in the atmosphere of greenhouse gases, principally carbon dioxide.\24\ --------------------------------------------------------------------------- \24\ 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.\25\ --------------------------------------------------------------------------- \25\ 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.\26\ Further, 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.'' \27\ 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.'' \28\ --------------------------------------------------------------------------- \26\ NAS, pp. 4-5 (Finding 10). \27\ NAS, p. 29. \28\ NAS, p. 3 (Finding 2). --------------------------------------------------------------------------- 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.'' \29\ 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.\30\ --------------------------------------------------------------------------- \29\ NAS, p. 5 (Finding 12). \30\ NAS, p. 87. --------------------------------------------------------------------------- In February 2002, Secretary Mineta asked Congress ``to provide the Department of Transportation with the necessary authority to reform the CAFE program, guided by the NAS report's suggestions.'' 2. Final Rule Establishing Reformed (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 and established higher CAFE standards for MY 2008-2011 light trucks.\31\ Reforming the CAFE program enables it to achieve larger fuel savings, while enhancing safety and preventing adverse economic consequences. --------------------------------------------------------------------------- \31\ 71 FR 17566; April 6, 2006. --------------------------------------------------------------------------- During a transition period of MYs 2008-2010, manufacturers may comply with CAFE standards established under the reformed structure (Reformed CAFE) or with standards established in the traditional way (Unreformed CAFE). This permits manufacturers and the agency to gain experience with implementing the Reformed CAFE standards. Under the 2006 rule, all manufacturers were required to comply with a Reformed CAFE standard in MY 2011. Under Reformed CAFE, fuel economy standards were restructured so that they are based on a measure of vehicle size called ``footprint,'' which is the product of multiplying a vehicle's wheelbase by average 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 will be calculated as the harmonic average of the fuel economy targets for the manufacturer's vehicles, weighted by the distribution of manufacturer's production volumes among the footprint increments. Thus, each manufacturer will be 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 such technology. These targets translate into required levels of average fuel economy that are technologically feasible because manufacturers can achieve them using available technologies. Those levels also reflect the need of the nation to reduce [[Page 24361]] 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. The Unreformed CAFE standards are: 22.5 miles per gallon (mpg) for MY 2008, 23.1 mpg for MY 2009, and 23.5 mpg for MY 2010. To aid the transition to Reformed CAFE, the Reformed CAFE standards for those years were set at levels intended to ensure that the industry-wide costs of the Reformed standards are roughly equivalent to the industry- wide costs of the Unreformed CAFE standards in those model years. For MY 2011, the Reformed CAFE standard was set at the level that maximizes net benefits. Net benefits include the increase in light truck prices due to technology improvements, the decrease in fuel consumption, and a number of other factors. All of the standards were set at the maximum feasible level, while accounting for technological feasibility, economic practicability and other relevant factors. We carefully balanced the costs of the rule with the benefits of reducing energy consumption. Compared to Unreformed CAFE, Reformed CAFE enhances overall fuel savings while providing vehicle manufacturers with the flexibility they need to respond to changing market conditions. Reformed CAFE will also provide 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 eliminate the incentive to downsize some of their fleet as a CAFE compliance strategy, thereby reducing the adverse safety risks associated with the Unreformed CAFE program. 3. Twenty-in-Ten Initiative (January 2007) In his January 2007 State of the Union address, the President announced his Twenty-in-Ten initiative for increasing the supply of renewable and alternative fuels and reforming and increasing the CAFE standards. Consistent with the NAS report, he urged the authority be provided to reform CAFE for passenger cars by adopting an attribute- based system (for example, a size-based system) reduces the risk that vehicle safety is compromised, helps preserve consumer choice, and helps spread the burden of compliance across all product lines and manufacturers. He also urged that authority be provided to set the CAFE standards, based on cost/benefit analysis, using sound science, and without impacting safety. 4. Request for Passenger Car and Light Truck Product Plans (February 2007) In late February 2007, NHTSA published a notice to acquire new and updated information regarding vehicle manufacturers' future product plans to aid in implementing the President's plan for reforming and increasing CAFE standards for passenger cars and further increasing the already reformed light truck standards. More specifically, the agency said: * * * we are seeking information related to fuel economy improvements for MY 2007-2017 passenger cars and MY 2010-2017 light trucks. The agency is seeking information in anticipation of obtaining statutory authority to reform the passenger car CAFE program and to set standards under that structure for MY 2010-2017 passenger cars. The agency is also seeking this information in anticipation of setting standards for MY 2012-2017 light trucks.\32\ --------------------------------------------------------------------------- \32\ 72 FR 8664; February 27, 2007. --------------------------------------------------------------------------- 5. Supreme Court Decision in Massachusetts v. EPA (April 2007) On April 2, 2007, the U.S. Supreme Court issued its opinion in Massachusetts v. EPA.\33\ The Court ruled that the state of Massachusetts had standing because it had already lost a small 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 issuance of such an EPA regulation by EPA would reduce the risk of further harm to Massachusetts. 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 EPA makes the necessary findings and determinations under section 202 of the Act. --------------------------------------------------------------------------- \33\ 127 S.Ct. 1438 (2007). --------------------------------------------------------------------------- The Court considered EPCA briefly, noting that it and the Clean Air Act have different overall purposes. It noted further that the two acts overlap, but did not define the nature or extent of that overlap. It concluded that EPCA did not relieve EPA of its statutory obligations and expressed confidence that the two acts could be consistently administered. The Court did not address the express preemption provision in EPCA. 6. Coordination Between NHTSA and EPA on Development of Rulemaking Proposals (Summer-Fall 2007) In the wake of the Supreme Court's decision and in the absence of the legislation he called for in his 2007 State of the Union message, the President called on NHTSA and EPA to take the first steps toward regulations that would cut gasoline consumption and greenhouse gas emissions from motor vehicles, using his Twenty-in-Ten initiative as a starting point. He asked them ``to listen to public input, to carefully consider safety, science, and available technologies, and evaluate the benefits and costs before they put forth the new regulation.'' He also issued an executive order directing all of the departments and agencies to work together on the proposal. Pursuant to the President's 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 proposals being published today are based on NHTSA's assessments of how they meet EPCA, as amended by EISA. 7. Ninth Circuit 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,\34\ 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. It cautioned, however, that it had not reviewed whether the agency's balancing of the statutory factors in setting those standards was arbitrary and capricious. In that regard, it noted that much had changed since a court of appeals had last (i.e., in the late 1980's) reviewed the agency's balancing of those factors in a rulemaking. Specifically, it noted increases in scientific knowledge of climate change [[Page 24362]] and in the need to reduce importation of petroleum since that time. --------------------------------------------------------------------------- \34\ 508 F.3d 508. --------------------------------------------------------------------------- Further, the Court found that NHTSA had been arbitrary and capricious in its treatment of the following issues: • NHTSA's decision not to monetize the benefit of reducing CO2 emissions and use that value in 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;\35\ --------------------------------------------------------------------------- \35\ The agency has developed a value for those reductions and used it in the analyses underlying the standards proposed in this NPRM. For further discussion, see section V of this preamble. --------------------------------------------------------------------------- • NHTSA's decision not to establish a ``backstop'' (i.e., a fixed minimum CAFE standard applicable to manufacturers); \36\ --------------------------------------------------------------------------- \36\ EISA's requirement that standards be based on one or more vehicle attributes and its specification for domestic passenger cars, but not for nondomestic passenger cars or light trucks of an absolute CAFE level appear 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 decision not to proceed 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; \37\ --------------------------------------------------------------------------- \37\ In this NPRM, NHTSA examines the legislative history of the statutory definitions of ``automobile'' and ``passenger automobile'' and the term ``nonpassenger automobile'' and analyses 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 VIII 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 rating (GVWR,) to the CAFE standards; \38\ --------------------------------------------------------------------------- \38\ 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 limited assessment of cumulative impacts and regulatory alternatives in its Environmental Assessment (EA) under the National Environmental Policy Act (NEPA), and its decision to prepare and publish an EA, coupled with a finding of no significant impact, instead of an Environmental Impact Statement (EIS).\39\ --------------------------------------------------------------------------- \39\ On February 9, NHTSA filed a petition with the Ninth Circuit for rehearing en banc on the issue of whether the panel in CBD acted within its authority in ordering the agency to prepare an EIS instead of remanding the issue to the agency and directing it to conduct a new, fuller environmental analysis and decide whether an EIS is required. In addition, NHTSA has published a notice of intent to prepare an environmental impact statement, thus beginning the EIS process for this rulemaking, as discussed in Section XIII.B. of this NPRM. --------------------------------------------------------------------------- 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.\40\ Under the decision, the standards established by the April 2006 final rule would remain in effect unless and until amended by NHTSA. --------------------------------------------------------------------------- \40\ 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 is sufficient time to gather all of the necessary information, conduct the necessary analyses and complete a rulemaking is MY 2011. As noted earlier in this document, however, EISA requires that a new standard be established for that model year. This rulemaking is being conducted pursuant to that requirement. --------------------------------------------------------------------------- On February 6, 2008, the Government petitioned for en banc rehearing by the Ninth 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. As of the date of the issuance of this proposal, the Court has not yet issued its mandate in this case. 8. Enactment of 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). C. Energy Policy and Conservation Act, as Amended EPCA, which was enacted in 1975, mandates a motor vehicle fuel economy regulatory program to improve the nation's energy security and energy efficiency. It gives the authority under EPCA to regulate fuel economy to DOT, which has delegated that authority to NHTSA at 49 CFR 1.50. EPCA allocates the responsibility for implementing the program as follows: NHTSA sets CAFE standards for passenger cars and light trucks; EPA 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. We request comment on how EPCA should be implemented to achieve the goals and meet the requirements of EISA. For example, what assumptions, methodologies and computations should be used in establishing and implementing the new standards? 1. Vehicles Subject to Standards for Automobiles With two exceptions, 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 \41\ and multi-stage vehicles. Work trucks are defined as vehicles that are: --------------------------------------------------------------------------- \41\ While EISA excluded work trucks from ``automobiles,'' it did not exclude them from regulation under EPCA. EISA requires that work trucks be subjected to CAFE standards, but only first after the National Academy of Sciences completes a study and then after 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).\42\ --------------------------------------------------------------------------- \42\ 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 lbs 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.\43\ --------------------------------------------------------------------------- \43\ 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 and 10,000 lbs., GVWR. It could regulate the fuel [[Page 24363]] 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 lbs. 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 As amended by EISA, EPCA requires that the agency establish standards for all new automobiles for each model year at the maximum feasible levels for that model year. A manufacturer's individual passenger cars and light trucks are not required to meet a particular fuel economy level. Instead, the harmonically averaged fuel economy of a manufacturer's production of passenger cars (or light trucks) in a particular model year must meet the standard for those automobiles for that model year. For model years 2011-2020, several special requirements, in addition to the maximum feasible requirement, are specified.\44\ Each of the requirements must be interpreted in light of the other requirements. For those model years, 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. The 35 mpg figure is not a standard applicable to any individual manufacturer. It is a requirement, applicable to the agency, regarding the combined effect of the separate standards for passenger cars and light trucks that NHTSA is to establish for MY 2020. EISA does not specify precisely how compliance with this 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 compliance. As a practical matter, to ensure that this level is achieved, the standard for MY 2020 passenger cars would have to be above 35 mpg and the one for MY 2020 light trucks might or might not be below 35 mpg. Similarly, the CAFE of some manufacturers' combined fleet of passenger cars and light trucks would be above 35 mpg, while the combined fleet of others might or might not be below 35 mpg. The standards for passenger cars and those for light trucks must increase ratably each year. 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 passenger cars for that model year. --------------------------------------------------------------------------- \44\ Under EPCA, prior to its amendment by EISA, the standard for passenger cars was 27.5 mpg unless amended to a higher or lower level by DOT. Per EISA, the standard will remain at 27.5 mpg through MY 2010. --------------------------------------------------------------------------- EPCA, as it existed before EISA, EPCA 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. 3. Structure of Standards The standards for passenger cars and light trucks must be based on one or more vehicle attributes and expressed in terms of a mathematical function. This makes it possible to increase the CAFE standards for both passenger cars and light trucks significantly without creating incentives to improve fuel economy in ways that reduce safety. Formerly, EPCA provided authority for this approach for light trucks, but not passenger cars. 4. Factors Governing or 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. ``Technological feasibility'' means 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. ``Economic practicability'' means 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.'' \45\ 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 has limited its consideration of fuel saving technologies to be added to vehicles to those that provide benefits that match their costs. Disproportionately expensive technologies are not likely to be accepted by consumers. --------------------------------------------------------------------------- \45\ 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.''\46\ 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 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 the totality of American jobs and the overall United States economy. --------------------------------------------------------------------------- \46\ CEI-I, 793 F.2d 1322, 1352 (DC Cir. 1986). --------------------------------------------------------------------------- ``The effect of other motor vehicle standards of the Government on fuel economy'' means ``the unavoidable adverse effects on fuel economy of compliance with emission, safety, noise, or damageability standards.'' 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 [[Page 24364]] permits States to adopt and enforce State standards in lieu of the Federal ones. It does not, however, include State standards expressly preempted by EPCA.\47\ --------------------------------------------------------------------------- \47\ 49 U.S.C. 32919 and 71 FR 17566, 17654-70; April 6, 2006. --------------------------------------------------------------------------- ``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.'' 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. The agency has considered environmental issues in making decisions about the setting of standards from the earliest days of the CAFE program. As the three courts of appeal have noted in decisions stretching over the last 20 years,\48\ the agency defined the ``need of the Nation to conserve energy'' in the late 1970's 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.'' \49\ Pursuant to that view, the agency declined 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.\50\ In the late 1980's, 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 \51\ and for declining to reduce the standard for MY 1990 passenger cars.\52\ 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 balancing of the EPCA factors and aided by the 2007 reports of the United Nations Intergovernmental Panel on Climate Change \53\ and other information, NHTSA is monetizing the reductions in tailpipe emissions of CO2 that will result from the CAFE standards and is proposing to set the MY 2011-15 CAFE standards at levels that reflect the value of those reductions in CO2. as well as the value of other benefits of those standards. In setting CAFE standards, NHTSA also considers environmental impacts under NEPA, 42 U.S.C. 4321-4347. --------------------------------------------------------------------------- \48\ Center for Auto Safety v. NHTSA, 793 F.2d 1322, 1325 n. 12 (DC Cir. 1986); Public Citizen v. NHTSA, 848 F.2d 256, 262-3 n. 27 (DC 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). \49\ 42 FR 63,184, 63,188 (Dec. 15, 1977) (emphasis added). \50\ For example, the final rules establishing CAFE standards for MY 1981-84 passenger cars, 42 FR 33,533, 33,540-1 and 33,551; June 30, 1977, and for MY 1983-85 light trucks, 45 FR 81,593, 81,597; December 11, 1980. \51\ 53 FR 39,275, 39,302; October 6, 1988. \52\ 54 FR 21985, \53\ The IPCC 2007 reports can be found at http://www.ipcc.ch/.
). The large ranges of SCC are due in the 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. [[Page 24414]] Although the IPCC does not recommend a single estimate of the SCC, it does cite the Tol (2005) study on four separate occasions (pages 17, 65, 813, 822) as the only available survey of the peer-reviewed literature that has itself been subjected to peer review. Tol developed a probability function using the SCC estimates of the peer reviewed literature and found estimates ranging 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 one hundred and three 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 is unlikely that the marginal damage costs of carbon dioxide emissions exceed $50 per [metric] ton carbon [about $14 per metric ton of CO2].'' \141\ He also concluded that the costs may be less than $14. --------------------------------------------------------------------------- \141\ Tol, Richard. The marginal damage costs of carbon dioxide emissions: an assessment of the uncertainties. Energy Policy 33 (2005) 2064-2074, 2072. The summary SCC estimates reported by Tol are assumed to be denominated in U.S. dollars of the year of publication, 2005. --------------------------------------------------------------------------- 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 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 increasing fuel economy 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.\142\ If the agency's analysis was 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. --------------------------------------------------------------------------- \142\ The reduction in payments from U.S. oil purchasers to domestic petroleum producers is not included as a benefit, since it represents a transfer that occurs entirely within the U.S. economy. --------------------------------------------------------------------------- In order to be consistent with NHTSA's use of exclusively domestic costs and benefits in prior CAFE rulemakings, the appropriate value to be placed on changes climate damages caused by carbon emissions should be one that reflects the change in damages to the United States alone. Accordingly, NHTSA notes 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 United States. Although no estimates of benefits to the U.S. itself that are likely to result from reducing CO2 emissions are currently available, NHTSA expects that if such values were developed, the agency would employ those rather than global benefit estimates in its analysis. NHTSA also anticipates 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, the agency has elected to use the IPCC estimate of $43 per metric ton of carbon as an upper bound on the benefits resulting from reducing each metric ton of U.S. emissions.\143\ This corresponds to approximately $12 per metric ton of CO2 when expressed in 2006 dollars. This estimate is based on the 2005 Tol study.\144\ The Tol 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. Since the IPCC estimate includes the worldwide costs of potential damages from carbon dioxide emissions, NHTSA has elected to employ it as an upper bound on the estimated value of the reduction in U.S. domestic damage costs that is likely to result from lower CO2 emissions.\145\ --------------------------------------------------------------------------- \143\ The estimate of $43 per ton of carbon emissions is reported by Tol (p. 2070) as the mean of the ``best'' estimates reported in peer-reviewed studies (see fn. 144). It thus differs from the mean of all estimates reported in the peer-reviewed studies surveyed by Tol. The $43 per ton value is also attributed to Tol by IPCC Working Group II (2007), p. 822. \144\ Tol's more recent (2007) and inclusive survey has been published online with peer-review comments. The agency has elected not to rely on the estimates it reports, but will consider doing so in its analysis of the final rule if the survey has been published, and will also consider any other newly-published evidence. \145\ For purposes of comparison, we note that in the rulemaking to establish CAFE standards for MY 2008-11 light trucks, NRDC recommended a value of $10 to $25 per ton of CO2 emissions reduced by fuel savings and both Environmental Defense and Union of Concerned Scientists recommended a value of $50 per ton of carbon (equivalent to about $14 per ton of CO2 emissions). --------------------------------------------------------------------------- The IPCC Working Group II Fourth Assessment Report (2007, p. 822) further suggests that the SCC of carbon is growing at an annual 2.4 percent growth rate, based on estimated increases in damages from future emissions reported in published studies. NHTSA has also elected to apply this growth rate to Tol's original 2005 estimate. Thus by 2011, the agency estimates 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 agrees with the IPCC Working Group II (2007) report 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'' (pp. 9). Although this finding suggests that the global value of economic benefits from reducing carbon dioxide emissions is unlikely to be zero, it does not necessarily rule out low or zero values for the benefit to the U.S. itself from reducing emissions. For most of the analysis it performed to develop this proposal, NHTSA required a single estimate for the 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 is 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) and lower ($0 per metric ton) bounds of this range. NHTSA seeks comment on its tentative conclusions for the value of [[Page 24415]] the SCC, the use of a domestic versus 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 greenhouse gases other than CO2, and any other aspects of developing a reliable SCC value for purposes of establishing CAFE standards. m. The Value of Increased Driving Range Improving vehicles' fuel economy may also 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 thus provides some additional benefits to their owners. (Alternatively, if manufacturers respond to improved fuel economy by reducing the size of fuel tanks to maintain a constant driving range, the resulting cost saving will presumably be reflected in lower vehicle sales prices.) 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 required 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.\146\ As an 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) to 400 miles (= 16 gallons x 25 mpg). Assuming that it is driven 12,000 miles/year, this reduces the number of times it needs to be refueled each year 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. --------------------------------------------------------------------------- \146\ 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 October 20, 2007); update available at http://ostpxweb.dot.gov/policy/Data/ VOTrevision1_2-11-03.pdf (last accessed October 20, 2007). --------------------------------------------------------------------------- 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 $24.00 (in 2006 dollars).\147\ 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 10/ 60 x 1.3 x $24.00). This calculation is repeated for each future calendar year that vehicles of each model year affected by the alternative CAFE standards proposed in this rule would remain in service. Like fuel savings and other benefits, however, the value of this benefit declines over a model year's lifetime, because a smaller number of vehicles originally produced during that model year remain in service each year, and those remaining in service are driven fewer miles. n. Discounting Future Benefits and Costs --------------------------------------------------------------------------- \147\ The hourly wage rate during 2006 is estimated to be $24.00. Personal travel (94.4 percent of urban travel) is valued at 50 percent of the hourly wage rate. Business travel (5.6 percent or urban travel) is valued at 100 percent of the hourly wage rate. For intercity travel, personal travel (87 percent) is valued at 70 percent of the wage rate, while business travel (13 percent) is valued at 100 percent of the wage rate. The resulting values of travel time are $12.67 for urban travel and $17.66 for intercity travel, and must be multiplied by vehicle occupancy (1.6) to obtain the estimate value of time per vehicle hour. --------------------------------------------------------------------------- Discounting future fuel savings and other benefits is intended to account for the reduction in their value to society when they are deferred until some future date rather than received immediately. The discount rate expresses the percent decline in the value of these benefits--as viewed from today's perspective--for each year they are deferred into the future. NHTSA uses a rate of 7 percent per year to discount the value of future fuel savings and other benefits to analyze the potential impacts of alternative CAFE standards. However, the agency also performed an alternative analysis of benefits from alternative increases in CAFE standards using a 3 percent discount rate, and seeks comment on whether the standards should be set using a 3 percent rate instead of a 7 percent rate. There are several reasons that NHTSA relies primarily on 7 percent as the appropriate rate for discounting future benefits from increased CAFE standards. First, OMB Circular A-4 indicates that this rate reflects the economy-wide opportunity cost of capital.\148\ It also states that this ``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.''\149\ We believe that a substantial portion of the cost of this regulation may come at the expense of other investments the auto manufacturers might otherwise make. Several large manufacturers are resource-constrained with respect to their engineering and product-development capabilities. As a result, other uses of these resources will be foregone while they are required to be applied to technologies that improve fuel economy. --------------------------------------------------------------------------- \148\ Office of Management and Budget, Circular A-4, ``Regulatory Analysis,'' September 17, 2003, 33. Available at http:// www.whitehouse.gov/omb/circulars/a004/a-4.pdf (last accessed Feb. 14, 2008). \149\ Id. --------------------------------------------------------------------------- Second, 7 percent also appears to be an appropriate rate to the extent that the costs of the regulation come at the expense of consumption as opposed to investment. NHTSA believes that financing rates on vehicle loans represent an appropriate discount rate, because they reflect the opportunity costs faced by consumers when buying vehicles with greater fuel economy and a higher purchase price. Most new and used vehicle purchases are financed, and because most of the benefits from higher fuel economy standards accrue to vehicle purchasers in the form of fuel savings, the appropriate discount rate is the interest rate buyers pay on loans to finance their vehicle purchases.\150\ --------------------------------------------------------------------------- \150\ Some empirical evidence also demonstrates that used car purchasers are willing to pay higher prices for greater fuel economy; see, e.g., James A. Kahn, ``Gasoline Price Expectations and the Used Automobile Market: A Rational Expectations Asset Price Approach,'' Quarterly Journal of Economics, Vol. 101 (May 1986), 323-339. --------------------------------------------------------------------------- According to the Federal Reserve, the interest rate on new car loans made through commercial banks has closely tracked the rate on 10- year treasury notes, but exceeded it by about 3 percent.\151\ The official Administration forecast is that real (or inflation-adjusted) interest rates on 10-year treasury notes will average about 3 percent through 2016, implying that 6 percent is a reasonable forecast for the real interest rate on new car loans.\152\ In turn, the interest rate on used car loans [[Page 24416]] made through automobile financing companies has closely tracked the rate on new car loans made through commercial banks, but exceeded it by about 3 percent.\153\ (We consider rates on loans that finance used car purchases, because some of the fuel savings resulting from improved fuel economy accrue to used car buyers.) Given the 6 percent estimate for new car loans, a reasonable forecast for used car loans is thus 9 percent. --------------------------------------------------------------------------- \151\ See Federal Reserve Bank, Statistical Release H.15, Selected Interest Rates (Weekly) (click on ``Historical Data,'' then ``Treasury constant maturities,'' then ``10-year, monthly''), available at http://www.federalreserve.gov/Releases/H15/data/ Monthly/H15_TCMNOM_Y10.txt (last accessed February 13, 2008); and Federal Reserve Bank, Statistical Release G.19, Consumer Credit, (click on ``Historical Data,'' then ``Terms of Credit'') available at http://www.federalreserve.gov/releases/g19/hist/cc_hist_tc.html (last accessed February 13, 2008). \152\ See The White House, Joint Press Release of the Council of Economic Advisors, the Department of the Treasury, and the Office of Management and Budget, November 29, 2007, available at http:// www.whitehouse.gov/news/releases/2007/11/20071129-4.html (last accessed February 13, 2008). \153\ See supra [2 above here] and Federal Reserve Bank, Statistical Release G.20, Finance Companies, (click on ``Historical Data,'' then ``Terms of Credit'') available at http:// www.federalreserve.gov/releases/g20/hist/fc_hist_tc.html (last accessed February 13, 2008). --------------------------------------------------------------------------- Because the benefits of fuel economy accrue to both new and used car owners, a discount rate between 6 percent and 9 percent is thus appropriate for evaluating future benefits resulting from more stringent fuel economy standards. Assuming that new car buyers discount fuel savings at 6 percent for 5 years (the average duration of a new car loan) \154\ and that used car buyers discount fuel savings at 9 percent for 5 years (the average duration of a used car loan), \155\ the single constant discount rate that yields equivalent present value fuel savings is very close to 7 percent. --------------------------------------------------------------------------- \154\ Id. \155\ Id. --------------------------------------------------------------------------- However, NHTSA also seeks comment on whether a discount rate of 3 percent would be more appropriate for this proposed rulemaking. OMB Circular A-4 also states that when 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 appropriate. The alternative discount rate that is most appropriate in this case is the social rate of time preference, which refers to the rate at which society discounts future consumption to determine its value at the present time. The rate that savers are willing to accept to defer consumption into the future when there is no risk that borrowers will fail to pay them back offers one possible measure of the social rate of time preference. As noted above, the real rate of return on long-term government debt, which has averaged around 3 percent over the last 30 years, provides a reasonable estimate of this value. In the context of CAFE standards for motor vehicles, the appropriate discount rate depends on one's view of how the costs and benefits of more stringent standards are distributed between vehicle manufacturers and consumers. Given that the discount rate plays a significant role in determining the level of the standards under a ``social optimization'' context, NHTSA conducted an analysis of what the standards and associated costs and benefits would be if the future benefits were discounted at 3 percent. The results of this analysis can be found in the PRIA. We estimated that following the same methods and criteria discussed below, but applying a 3 percent discount rate rather than a 7 percent discount rate, would suggest standards reaching about 33.6 mpg (average required fuel economy among both passenger cars and light trucks) in MY2015, 2 mpg higher than the 31.6 mpg average resulting from the standards we are proposing based on a 7 percent discount rate. The more stringent standards during MY2011-MY2015 would reduce CO2 emissions by 672 million metric tons (mmt), or 29 percent more than the 521 mmt achieved by the proposed standards. On the other hand, we estimated that standards increasing at this pace would require about $85b in technology outlays during MY2011-MY2015, or 89 percent more than the $45b in technology outlays associated with the standards proposed today. Thus, although our proposed standards are based on a 7 percent discount rate, NHTSA seeks comment on whether it should set standards based on discount rate assumptions of 3 percent, instead of 7 percent. o. Accounting for Uncertainty in Benefits and Costs In analyzing the uncertainty surrounding its estimates of benefits and costs from alternative CAFE standards, NHTSA has considered alternative estimates of those assumptions and parameters likely to have the largest effect. 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 uncertainty analysis is presented in the section of this document discussing each variable. 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. B. How Has NHTSA Used the Volpe Model To Select the Proposed Standards? 1. Establishing a Continuous Function Standard NHTSA's analysis supporting determination of the proposed continuous function standard builds on the analysis that supported the determination of the standards in NHTSA's 2006 light truck final rule. That process involved three steps.\156\ --------------------------------------------------------------------------- \156\ See 71 FR 17596-97 (Apr. 6, 2006) for a more complete discussion of this process. --------------------------------------------------------------------------- In ``phase one,'' NHTSA added fuel saving technologies to each manufacturer's fleet, model by model, for a model year until the net benefit from doing so reached its maximum value (i.e., until the incremental cost of improving its fuel economy further just equals the incremental value of fuel savings and other benefits from doing so). This was done for each of the seven largest manufacturers. Data points representing each vehicle's size and ``optimized'' fuel economy from the light truck fleets of those manufacturers were then combined into a single data set. In ``phase two,'' a preliminary continuous function was statistically fitted through these data points, subject to constraints at the upper and lower ends of the footprint range. Once a preliminary continuous function was statistically fitted to the data for a model year, ``phase three'' was performed. In that phase, the level of the function was adjusted to maximize net benefits, that is, the preliminary continuous function was raised or lowered until industry-wide (limited to the seven largest manufacturers) benefits were maximized. For NHTSA's 2006 light truck rulemaking, the optimization procedure was applied in its entirety only for MY 2011. The levels of the functions for MYs 2008-2010 were set at levels producing incremental costs approximately equivalent to those produced by the alternative Unreformed [[Page 24417]] CAFE standards promulgated for those model years in the same rulemaking. Analysis conducted by NHTSA to prepare for the current proposed rulemaking revealed several opportunities to refine the procedure described above before applying it to this action, which spans several model years. The resultant procedure is described below. 2. Calibration of Initial Continuous Function Standards For the optimized standards, the first step in the current procedure involves all three phases described above. Separately, for each of the seven largest manufacturers, the agency determined the level of additional technology that would maximize net benefits. The agency then combined the resultant fleets and used standard statistical analysis procedures to specify a continuous function (i.e., a function without abrupt changes) with asymptotes \157\ set at the average fuel economy levels of the smallest and largest vehicles in this ``optimized'' fleet.\158\ --------------------------------------------------------------------------- \157\ Some functions are not bounded. For example, a line that is not flat will increase in one direction without limit and will, in the other direction, decrease without limit. The continuous function applied by the agency is of a form with upper and lower boundaries. Even as vehicle footprint declines or increases, the function's value (in mpg or grams/mile) will never exceed or fall below a specific value. These upper and lower limits are called asymptotes. \158\ Consistent with EPCA, the passenger car and light truck fleets were analyzed separately. For passenger cars, the agency determined the asymptotes of the continuous function by calculating the average fuel economy of the smallest 8 percent and the largest 5 percent of the fleet. For light trucks, the agency considered the smallest 11 percent and the largest 10 percent of the fleet. These cohorts were determined by identifying gaps in the distribution of vehicles according to footprint. --------------------------------------------------------------------------- In the 2006 light truck final rule, NHTSA created an attribute- based fuel economy standard based upon a continuous function using a logistic curve. The 2006 rulemaking, and its antecedent advanced notice of proposed rulemaking, contain an extended discussion of alternative approaches, including a bin-based system and different potential curves. As discussed below, that final rule explains NHTSA's decision to promulgate a standard based on a logistic (``S shaped'') curve with constrained asymptotes (upper and lower limits). Although we did not explicitly discuss it in the MY 2008-2011 light truck rulemaking, NHTSA now wishes to explain that any continuous function with lower asymptotes, as was promulgated in the last rulemaking and is proposed in this rulemaking, provides an absolute lower fuel economy level which guards against manufacturers having an unlimited economic incentive to upsize their vehicles in order to lower their fuel economy requirement. As vehicle footprint continues to increase, decreases in the corresponding fuel economy target become progressively smaller, such that the target approaches but never reaches the value of the lower asymptote. Because the required level of CAFE is the harmonic average of targets applicable to a manufacturer's vehicle models, the value of the standard can approach but will never fall to the value of this lower asymptote, no matter how far the manufacturer's product mix shifts toward larger vehicles. This will limit any loss of fuel savings due to manufacturer decisions to upsize their vehicles. In a perfect world, NHTSA would develop the continuous functions for setting passenger car and light truck standards by letting the vehicle attribute (footprint) completely control the shape of the curves used for the functions in a way that provides the clearest observed relationship between this attribute and its fuel economy. But, NHTSA must balance many real world practical and public policy aspects in order to ensure that the standards are achieving the purpose set forth by EPCA and EISA. In developing the Agency's last light truck rule, the curve used to fit the data (attribute versus fuel economy) was a sales-weighted least-squares logistic curve. During this rulemaking, as NHTSA continued to look for ways to improve its standard setting methodology, consideration was given to other methods that could be used to develop the continuous functions. One such method that NHTSA explored and is using in this proposal is unweighted analysis of the data using the Mean Absolute Deviation (MAD) statistical procedure. Unweighted regression involves counting each vehicle model once, rather than as many times as vehicles included in that model are to be produced. MAD involves weighting deviations from predicted values based on their absolute rather than squared magnitude. As discussed below, NHTSA has tentatively concluded that, compared to sales-weighted least- squares analysis, unweighted MAD is better suited to data with wide disparities in weight (i.e., sales volumes) and with many outliers. In establishing footprint-based CAFE standards, the agency does not have the sole objective of seeking to reflect a clear engineering relationship between footprint and fuel economy. Attributes other than footprint would be more closely correlated with fuel economy. The agency's objective is to make CAFE regulations more consistent with public policy goals, in particular (1) a rebalancing of requirements such that full-line manufacturers are not disproportionately burdened and (2) the establishment of an incentive that discourages manufacturers from responding to CAFE standards in ways that could compromise occupant protection and highway safety. While it is helpful that the attribute--in this case footprint--has an observed relationship to fuel economy, it is not necessary that this relationship be isolated from accompanying relationships (e.g., between weight and fuel economy) that can be better related to estimable physical processes. Similarly, it is more important that the functional form for the attribute-based standard yield desirable outcomes than that it singly seek a clear foundation in estimable physical processes. In general, public policy considerations and available vehicle data combine to suggest that the fuel economy standard should be generally downward sloping (on a fuel economy basis) with respect to NHTSA's chosen attribute, vehicle footprint. The arguments that favor an attribute-based system (maintaining consumer choice, protecting safety, more equitable distribution of costs, reducing the cost of regulation) all argue for a downward sloping curve. Larger vehicles should, in principle, have higher drag, weigh more, and therefore have greater inertia than otherwise identical smaller vehicles. Hence, all other factors remaining equal, larger vehicles should have lower fuel economy than smaller vehicles. Therefore, the selection of vehicle footprint as the reference attribute should produce downward sloping curves. Also, the tendency of larger vehicles to have lower fuel economy than smaller vehicles should provide some disincentive to shift to larger vehicles rather than adding technology; although doing so would tend to reduce the required CAFE level, it would also tend to reduce the achieved CAFE level. However, vehicle data, by itself, does not necessarily define what functional form that the curve ought to take. In the 2006 light truck rulemaking, NHTSA considered linear, quadratic, exponential, unconstrained logistic, and constrained logistic functions as possible alternatives. For light trucks, the various approaches produced broadly similar standards through the most commonly used vehicle sizes, but drastically different standards at the high and low ends of the range. • Linear functions produced very high fuel economy standards for the [[Page 24418]] smallest vehicles, and low standards for the largest vehicles. • The quadratic function generated a minimum at about 75 square feet, and then perversely turned upward for vehicles with larger footprints. The standard for very small vehicles was unreasonably high. • The exponential and unconstrained logistic functions produced unreasonably high standards for small vehicles, but flattened out for larger vehicles. • The constrained logistic function provided a broadly linear downward-sloping through the most commonly used vehicle sizes, along with basically flat standards for very large and very small vehicles. On this basis, NHTSA believed that, while the data did not dictate a particular functional form, public policy considerations made the constrained logistic function particularly attractive. The considerations include: • A relatively flat standard for larger vehicles acts as a de facto `backstop' for the standard in the event that future market conditions encourage manufacturers to build very large vehicles. Nothing prevents manufacturers from building larger vehicles. With a logistic curve, however, vehicles upsizing beyond some limit face a flat standard that is increasingly difficult to meet. • A constrained logistic curve doesn't impose unachievable fuel economy standards on vehicles that have unusually small footprints, thus continuing to keep manufacturing fuel-efficient small vehicles available as a compliance option. • A curve fitted without upper and lower constraints could reach very high fuel economy levels for small vehicles and very low fuel economy vehicles for large vehicles. While such a curve might produce similar required CAFE levels for the industry as a whole, it could have a particular adverse impact on manufacturers that specialize in very small vehicles, for example, two-seater sports cars. By the same token, it could require little or nothing of manufacturers specializing in very large vehicles. • The transition from the `flat' portions of the curve to the `slope' portions of the curve is smooth and gradual, reducing the incentive for manufacturers to achieve compliance through marginal changes in vehicle size. • The inflection points are set by the data and can potentially vary from year to year, rather than being chosen by NHTSA. On the other hand, a constrained logistic curve shares with other functional forms a risk of an excessively steep or excessively flat slope. The slope of the compliance curve may be considered as `too steep' for public policy purposes when manufacturers can achieve appreciable reductions in compliance costs by marginally increasing the size of a vehicle's footprint--e.g., the cost of compliance from upsizing is lower than other cost-effective compliance methods open to manufacturers. A slope is `too flat' for public policy purposes when it negates the advantages of an attribute-based system: Where the standard doesn't meaningfully vary with respect to changes in the underlying attribute, it cannot be said to be an attribute-based system within the meaning of the statute. NHTSA chose footprint as the best attribute for an attribute-based standard in part because we believed changing a vehicle's footprint would involve significant costs for manufacturers, probably requiring a redesign of the vehicle. While ``too steep'' or ``too flat'' inevitably cannot be defined with precision, they need to be kept in mind. For the proposed standards, the agency defined the continuous function using the following formula: [GRAPHIC] [TIFF OMITTED] TP02MY08.007 Where: T = the fuel economy target (in mpg) a = the maximum fuel economy target (in mpg) b = the minimum fuel economy target (in mpg) c = the footprint value (in square feet) at which the fuel economy target is midway between a and b \159\ --------------------------------------------------------------------------- \159\ That is, the midpoint. --------------------------------------------------------------------------- d = the parameter (in square feet) defining the rate at which the value of targets decline from the largest to smallest values e = 2.718\160\ --------------------------------------------------------------------------- \160\ For the purpose of the Reformed CAFE standard, we are carrying e out to only three decimal places. --------------------------------------------------------------------------- x = footprint (in square feet, rounded to the nearest tenth) of the vehicle model NHTSA invites comment regarding the relative importance of the curve as a means of (1) providing a basis for describing the observed relationship between footprint and fuel economy, (2) providing a basis for describing a theoretical physical relationship (assuming one can be defined) between footprint and fuel economy, and (3) providing socially desirable incentives to manufacturers. The agency further invites comment on functional forms that would be consistent with each of these purposes. As for analysis of the light truck rule promulgated in 2006, NHTSA constrained this function by determining the maximum and minimum targets (a and b) and then holding those targets constant while using statistical techniques to fit the other two coefficients (c and d) in this equation. In the current analysis for passenger cars, the upper and lower asymptotes are based on the smallest three percent and largest four percent, respectively, of the fleet. These reflect footprint values defining distinct cohorts outside the bulk of the fleet, and correspond to footprint values of less than 39.5 square feet (i.e., up to the approximate size of a Honda Fit) and greater than 52.5 square feet (i.e., at least as great as the approximate size of a Toyota Avalon), respectively: [[Page 24419]] [GRAPHIC] [TIFF OMITTED] TP02MY08.008 For light trucks, the upper asymptote (i.e., the highest mpg value of the continuous function defining fuel economy targets) is based on the smallest (in terms of footprint) eleven percent of the fleet, and the lower asymptote is based on the largest six percent of the fleet. These cohorts correspond to footprint values of less than 44.5 square feet (i.e., up to the approximate size of a Honda CR-V) and greater than 72.5 square feet (i.e., comprised primarily of extended vans and long-bed pickup trucks), respectively: [[Page 24420]] [GRAPHIC] [TIFF OMITTED] TP02MY08.009 NHTSA invites comment on the identification of vehicle cohorts for purposes of establishing upper and lower limits (asymptotes) bounding the attribute-based standard. After updating its baseline market forecast in consideration of new product plan information from manufacturers, the agency plans to reevaluate these cohorts for both passenger cars and light trucks before promulgating a final rule, and notes that changes in approach could lead to changes in stringency. Given the above asymptotes, fitting the above functional form to the ``optimized'' passenger car fleet resulted in the following initial continuous functions: [[Page 24421]] [GRAPHIC] [TIFF OMITTED] TP02MY08.010 For each model year, NHTSA then raised or lowered the resultant continuous function until net benefits were maximized for the seven largest manufacturers (in total). Without subsequent recalibrations discussed below, this produced the following continuous functions for passenger cars: [[Page 24422]] [GRAPHIC] [TIFF OMITTED] TP02MY08.011 The agency followed the same procedures for setting light truck standards and doing so resulted in the following continuous functions: [[Page 24423]] [GRAPHIC] [TIFF OMITTED] TP02MY08.012 In fitting the continuous function, NHTSA considered a range of statistical estimation techniques. In the 2006 light truck rulemaking, NHTSA estimated the parameters of the logistic function using fuel consumption (measured in gallons per mile) for each vehicle produced in a particular model year, weighted by sales. For this rulemaking, we observed that estimated fuel consumption functions for passenger cars were significantly affected by several outliers--a small number of popular vehicles that had significantly higher fuel economy than the fleet as a whole and, even more so, than vehicles of similar footprint. For passenger cars, the function, as estimated by weighted ordinary least squares, was exceptionally steep within the range considered. This observation, in turn, led NHTSA to consider alternative approaches to statistically fitting the continuous function. Among the options considered by NHTSA were the following: dropping the outlying vehicles from the estimation process, weighted and unweighted ordinary least squares, and weighted and unweighted mean absolute deviation (MAD). MAD is a statistical procedure that has been demonstrated to produce more efficient parameter estimates in the presence of significant outliers.\161\ As examples, the following two charts show the MY2015 passenger car and light truck fleets after the application of technologies to each manufacturer's fleet. These charts reveal numerous outliers for the passenger car fleet and, to a lesser extent, the light truck fleet: --------------------------------------------------------------------------- \161\ In the case of a dataset not drawn from a sample with a Gaussian, or normal, distribution, there is often a need to employ robust estimation methods rather than rely on least-squares approach to curve fitting. The least-squares approach has, as an underlying assumption, that the data are drawn from a normal distribution, and hence fits a curve using a sum-of-squares method to minimize errors. This approach will, in a sample drawn from a non-normal distribution, give excessive weight to outliers by making their presence felt in proportion to the square of their distance from the fitted curve, and, hence, distort the resulting fit. With outliers in the sample, the typical solution is to use a robust method such as a minimum absolute deviation, rather than a squared term, to estimate the fit (see, e.g., ``AI Access: Your Access to Data Modeling,'' at http://www.aiaccess.net/English/Glossaries/GlosMod/ e_gm_O_Pa.htm#Outlier).