of MY 2017-2025 vehicles) when potential voluntary overcompliance is
taken into account. Simulation of voluntary overcompliance, therefore,
does not reduce the agency's estimate of future fuel savings over the
baseline scenario. Rather it changes the attribution of those fuel
savings to the standards, because voluntary overcompliance attributes
some of the fuel savings to the market. The same holds for the
attribution of costs, other effects, and monetized benefits--inclusion
of voluntary overcompliance does not necessarily change their amounts,
but it does attribute some of each cost, effect, or benefit to the
workings of the market, rather than to the final and augural standards.
    The agency further estimates CO2 emissions reductions
attributable to today's final and augural standards will total 1,432-
1,414 million metric tons (mmt), versus the 1,953-1,987 mmt estimated
when potential voluntary overcompliance is not taken into account:
\1296\
---------------------------------------------------------------------------

    \1296\ Differences in the application of diesel engines and
plug-in hybrid electric vehicles lead to differences in the
incremental percentage changes in fuel consumption and carbon
dioxide emissions.

                                            Table IV-127--NHTSA Estimated Avoided Carbon Dioxide Emissions (mmt) Under Final Standards--MYs 2017-2021
                                                                              [Including voluntary overcompliance]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                        MY Baseline              Earlier                  2017                   2018                   2019                  2020                  2021
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Passenger cars...................  2008.................  46-..................  29-..................  51-..................  71-..................  95-.................  110-
                                   2010.................  54...................  31...................  46...................  71...................  92..................  111
Light trucks.....................  2008.................  5-...................  8-...................  15-..................  28-..................  42-.................  56-
                                   2010.................  12...................  8....................  13...................  26...................  36..................  52
Combined.........................  2008.................  52-..................  36-..................  65-..................  99-..................  136-................  166-
                                   2010.................  66...................  39...................  58...................  98...................  127.................  162
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

                       Table IV-128--NHTSA Estimated Avoided Carbon Dioxide Emissions (mmt) Under Augural Standards--MYs 2022-2025
                                                          [Including voluntary overcompliance]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                     MY Baseline             2022                2023                2024                2025                Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Passenger cars.................  2008...............  123-..............  135-..............  155-..............  171-..............  985-
                                 2010...............  121...............  137...............  158...............  172...............  993
Light trucks...................  2008...............  64-...............  68-...............  77-...............  84-...............  447-
                                 2010...............  56................  66................  73................  80................  421
Combined.......................  2008...............  187-..............  203-..............  232-..............  255-..............  1,432-

                                 2010...............  177...............  203...............  231...............  252...............  1,414
--------------------------------------------------------------------------------------------------------------------------------------------------------

    This analysis further indicates smaller or similar incremental
outlays for additional technology under the standards when potential
voluntary overcompliance is taken into account. Table IV-129 and Table
IV-130 below show that total incremental technology costs attributable
to today's standards are estimated at $127-140 billion, as compared to
the $134-140 billion estimated when potential voluntary overcompliance
was not taken into account:

                                          Table IV-129--NHTSA Estimated Incremental Technology Outlays ($ billion) Under Final Standards--MYs 2017-2021
                                                                              [Including voluntary overcompliance]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                        MY Baseline              Earlier                  2017                   2018                   2019                  2020                  2021
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Passenger cars...................  2008.................  5-...................  3-...................  5-...................  7-...................  9-..................  12-
                                   2010.................  5....................  3....................  4....................  6....................  9...................  11
Light trucks.....................  2008.................  0-...................  0-...................  1-...................  2-...................  3-..................  4-
                                   2010.................  1....................  1....................  1....................  2....................  3...................  4
Combined.........................  2008.................  5-...................  3-...................  5-...................  8-...................  12-.................  16-
                                   2010.................  7....................  4....................  5....................  8....................  11..................  14
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

                     Table IV-130--NHTSA Estimated Incremental Technology Outlays ($ billion) Under Augural Standards--MYs 2022-2025
                                                          [Including voluntary overcompliance]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                     MY Baseline             2022                2023                2024                2025                Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Passenger cars.................  2008...............  14-...............  15-...............  19-...............  20-...............  109-
                                 2010...............  12................  13................  16................  17................  97
Light trucks...................  2008...............  5-................  5-................  6-................  6-................  31-
                                 2010...............  4.................  5.................  5.................  5.................  30
Combined.......................  2008...............  18-...............  20-...............  25-...............  26-...............  140-
                                 2010...............  16................  18................  21................  22................  127
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Because NHTSA's analysis indicated that voluntary overcompliance
with baseline standards will reduce the share of fuel savings
attributable to today's standards, the agency's estimate of the present
value of total benefits will be $484-495 billion when discounted at a 3
percent annual rate, as Tables IV-131 and IV-132 following report. This
estimate of total benefits is lower than the $671-687 billion reported
previously for the analysis in which potential voluntary overcompliance
was not taken into account:

                            Table IV-131--NHTSA Estimated Present Value of Benefits ($ billion) Under Final Standards Using a 3 Percent Discount Rate--MYs 2017-2021
                                                                              [Including voluntary overcompliance]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                        MY Baseline              Earlier                  2017                   2018                   2019                  2020                  2021
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Passenger cars...................  2008.................  15.2-................  9.5-.................  17.1-................  24.1-................  32.4-...............  38.0-
                                   2010.................  17.7.................  10.3.................  15.3.................  24.1.................  31.2................  38
Light trucks.....................  2008.................  1.7-.................  2.5-.................  4.8-.................  9.2-.................  13.8-...............  18.8-
                                   2010.................  3.9..................  2.5..................  4.2..................  8.5..................  11.7................  17.2
Combined.........................  2008.................  17.0-................  12.1-................  21.9-................  33.3-................  46.3-...............  56.9-
                                   2010.................  21.5.................  12.8.................  19.4.................  32.6.................  42.9................  55.1
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

       Table IV-132--NHTSA Estimated Present Value of Benefits ($ billion) Under Augural Standards Using a 3 Percent Discount Rate--MYs 2022-2025
                                                          [including voluntary overcompliance]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                     MY Baseline             2022                2023                2024                2025                Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Passenger cars.................  2008...............  42.7-.............  47.3-.............  55.3-.............  61.4-.............  343.1-

                                 2010...............  41.9..............  47.9..............  55.5..............  61.1..............  343.1
Light trucks...................  2008...............  21.6-.............  23.2-.............  26.6-.............  29.2-.............  151.6-
                                 2010...............  18.9..............  22.3..............  25................  27.5..............  141.6
Combined.......................  2008...............  64.3-.............  70.5-.............  81.9-.............  90.6-.............  494.6-
                                 2010...............  60.7..............  70.1..............  80.6..............  88.7..............  484.4
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Similarly, when accounting for potential voluntary overcompliance,
NHTSA estimates that the present value of total benefits will decline
from its previous estimate when future fuel savings and other benefits
are discounted at the higher 7 percent rate. Tables IV-133 and IV-134
report that the present value of benefits from requiring higher fuel
economy for MY 2017-25 cars and light trucks will total $387-395
billion when discounted using a 7 percent rate, as compared to the
previous $525-536 billion estimate of total benefits when potential
voluntary overcompliance is not taken into account:

                            Table IV-133--NHTSA Estimated Present Value of Benefits ($ Billion) Under Final Standards Using a 7 Percent Discount Rate--MYs 2017-2021
                                                                              [Including voluntary overcompliance]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                        MY Baseline              Earlier                  2017                   2018                   2019                  2020                  2021
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Passenger cars...................  2008.................  12.2-................  7.6-.................  13.7-................  19.4-................  26.0-...............  30.5-
                                   2010.................  14.1.................  8.3..................  12.3.................  19.3.................  25..................  30.4
Light trucks.....................  2008.................  1.4-.................  2.0-.................  3.8-.................  7.3-.................  11.0-...............  14.9-
                                   2010.................  3.1..................  2....................  3.3..................  6.7..................  9.3.................  13.6
Combined.........................  2008.................  13.5-................  9.7-.................  17.5-................  26.6-................  37.0-...............  45.4-
                                   2010.................  17.2.................  10.3.................  15.5.................  26...................  34.3................  44
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

       Table IV-134--NHTSA Estimated Present Value of Benefits ($ Billion) Under Augural Standards Using a 7 Percent Discount Rate--MYs 2022-2025
                                                          [Including voluntary overcompliance]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                     MY Baseline             2022                2023                2024                2025                Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Passenger cars.................  2008...............  34.2-.............  37.9-.............  44.3-.............  49.2-.............  275.0-
                                 2010...............  33.6..............  38.4..............  44.5..............  49................  275
Light trucks...................  2008...............  17.2-.............  18.4-.............  21.1-.............  23.2-.............  120.2-
                                 2010...............  15................  17.6..............  19.8..............  21.8..............  112.3
Combined.......................  2008...............  51.3-.............  56.3-.............  65.4-.............  72.4-.............  395.1-
                                 2010...............  48.5..............  56................  64.4..............  70.8..............  387
--------------------------------------------------------------------------------------------------------------------------------------------------------

The agency estimates, as shown in Tables IV-135 and IV-136, that net
benefits from the CAFE standards will be $329-335 billion. This is
compared to the previously-reported estimate of $498-507 billion which
did not incorporate the potential for voluntary overcompliance and is
based primarily on the reduction of benefits attributable to the
standards when voluntary overcompliance is taken into account.

                          Table IV-135--NHTSA Estimated Present Value of Net Benefits ($ Billion) Under Final Standards Using a 3 Percent Discount Rate--MYs 2017-2021
                                                                              [Including voluntary overcompliance]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                        MY Baseline              Earlier                  2017                   2018                   2019                  2020                  2021
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Passenger cars...................  2008.................  10-..................  6-...................  11-..................  16-..................  21-.................  24-
                                   2010.................  11...................  7....................  10...................  16...................  21..................  25
Light trucks.....................  2008.................  1-...................  2-...................  4-...................  7-...................  11-.................  14-
                                   2010.................  2....................  2....................  3....................  6....................  9...................  13
Combined.........................  2008.................  11-..................  8-...................  15-..................  23-..................  31-.................  38-
                                   2010.................  14...................  8....................  13...................  23...................  29..................  38
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

     Table IV-136--NHTSA Estimated Present Value of Net Benefits ($ Billion) Under Augural Standards Using a 3 Percent Discount Rate--MYs 2022-2025
                                                          [Including voluntary overcompliance]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                     MY Baseline             2022                2023                2024                2025                Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Passenger cars.................  2008...............  26-...............  29-...............  33-...............  38-...............  214-
                                 2010...............  28................  32................  37................  41................  228
Light trucks...................  2008...............  16-...............  17-...............  20-...............  22-...............  115-
                                 2010...............  14................  17................  19................  21................  106
Combined.......................  2008...............  43-...............  47-...............  53-...............  60-...............  329-
                                 2010...............  42................  49................  56................  62................  335
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Similarly, Tables IV-137 and IV-138 below show that NHTSA estimates
voluntary overcompliance could reduce net benefits attributable to
today's standards to $235-242 billion if a 7 percent discount rate is
applied to future benefits. This estimate is lower than the previously-
reported $372-377 billion estimate of net benefits when potential
voluntary overcompliance is not taken into account, using that same
discount rate.

                          Table IV-137--NHTSA Estimated Present Value of Net Benefits ($ Billion) Under Final Standards Using a 7 Percent Discount Rate--MYs 2017-2021
                                                                              [Including voluntary overcompliance]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                        MY Baseline              Earlier                  2017                   2018                   2019                  2020                  2021
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Passenger cars...................  2008.................  7-...................  4-...................  8-...................  12-..................  15-.................  17-
                                   2010.................  8....................  5....................  7....................  12...................  15..................  18
Light trucks.....................  2008.................  1-...................  2-...................  3-...................  5-...................  8-..................  10-
                                   2010.................  2....................  1....................  2....................  5....................  6...................  9
Combined.........................  2008.................  8-...................  6-...................  11-..................  17-..................  23-.................  27-
                                   2010.................  10...................  6....................  9....................  16...................  21..................  28
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

     Table IV-138--NHTSA Estimated Present Value of Net Benefits ($ Billion) Under Augural Standards Using a 7 Percent Discount Rate--MYs 2022-2025
                                                          [Including voluntary overcompliance]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                     MY Baseline             2022                2023                2024                2025                Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Passenger cars.................  2008...............  18-...............  21-...............  23-...............  26-...............  150-
                                 2010...............  20................  23................  26................  30................  164
Light trucks...................  2008...............  12-...............  13-...............  15-...............  16-...............  85-
                                 2010...............  11................  12................  14................  16................  78
Combined.......................  2008...............  31-...............  33-...............  37-...............  43-...............  235-
                                 2010...............  31................  36................  40................  45................  242
--------------------------------------------------------------------------------------------------------------------------------------------------------

    As discussed above, these reductions in fuel savings and avoided
CO2 emissions (and correspondingly, in total and net
benefits) attributable to today's standards, do not indicate that fuel
consumption and CO2 emissions will be higher when potential
voluntary overcompliance with standards is taken into account than when
it is set aside. Rather, these reductions reflect differences in
attribution; when potential voluntary overcompliance is taken into
account, portions of the avoided fuel consumption and CO2
emissions (and, correspondingly, in total and net benefits) are
effectively attributed to the actions of the market, rather than to the
CAFE standards.
    For more detailed information regarding NHTSA's sensitivity
analyses for this final rule, please see Chapter X of NHTSA's FRIA.
    Additionally, due to the uncertainty and difficulty in projecting
technology cost and efficacy through 2025, and consistent with Circular
A-4, NHTSA conducted a full probabilistic uncertainty analysis, which
is included in Chapter XII of the FRIA. Results of the uncertainty
analysis are summarized below for the model year 2017-2025 standards,
combining the passenger car and light truck fleets:
     Total Benefits at 7% discount rate: Societal benefits will
total $7.5 billion to $721 billion, with a mean estimate of $373
billion.
     Total Benefits at 3% discount rate: Societal benefits will
total $9 billion to $912 billion, with a mean estimate of $467 billion.
     Total Costs at 7% discount rate: Costs will total between
$429 million and $247 billion, with a mean estimate of $125 billion.
     Total Costs at 3% discount rate: Costs will total between
$421 million and $250 billion, with a mean estimate of $126 billion
5. How would these final standards impact vehicle sales and employment?
    The effect of this rule on sales of new vehicles depends largely on
how potential buyers evaluate and respond to its effects on vehicle
prices and fuel economy. The rule will make new cars and light trucks
more expensive, as manufacturers attempt to recover their costs for
complying with the rule by raising vehicle prices. At the same time,
the rule will require manufacturers to improve the fuel economy of many
of their models, which will lower the operating costs of those models.
While the initial purchase price of those vehicles will increase, the
overall cost of owning them--including their operating

costs--will decrease, because their fuel consumption will decline
significantly. The net effect on sales will depend on the extent to
which consumers are willing to pay for higher fuel economy and the
resulting savings in operating costs, versus their sensitivity to
changes in vehicles' initial purchase prices, and is thus challenging
to evaluate.
    The agency anticipates that consumers will place some value on
improved fuel economy, both because it reduces the operating cost of
the vehicles, and because recently promulgated EPA and DOT regulations
require vehicles sold during 2017 through 2025 to display labels that
more clearly communicate to potential buyers the fuel savings,
economic, and environmental benefits of owning more fuel-efficient
vehicles. We recognize that the magnitude of this effect cannot be
predicted at this time, and that how consumers value fuel economy is a
subject of ongoing debate. We also expect that consumers may consider
other factors besides direct purchase price increases that affect the
costs they pay for new vehicles, and have included these factors in the
analysis.
    There is a broad consensus in the economic literature that the
price elasticity of demand for automobiles is approximately -
1.0,1297,1298,1299,1300 meaning that every one percent
increase in the price of the vehicle would reduce sales by one percent
(assuming no change in fuel economy, quality, or other attributes of
vehicles). NHTSA typically assumes that manufacturers will be able to
pass all of their costs to improve fuel economy on to consumers in the
form of higher sales prices for models offering higher fuel economy.
The subsequent discussion of consumer welfare, however, suggests that
by itself, a net decrease in overall operating costs may not
necessarily produce a net increase in sales. Many consumers are more
sensitive to vehicles' initial purchase prices than to their subsequent
operating costs, and thus may not be willing to purchase vehicles with
higher fuel economy even when it appears that doing so would reduce
their overall costs to own a vehicle.
---------------------------------------------------------------------------

    \1297\ Kleit, A.N. (1990). ``The Effect of Annual Changes in
Automobile Fuel Economy Standards,'' Journal of Regulatory
Economics, vol. 2, pp 151-172. Available at http://www.springerlink.com/content/m04787480k056018/ (last accessed August
1, 2012) or Docket No. NHTSA-2010-0131.
    \1298\ Bordley, R. (1994). ``An Overlapping Choice Set Model of
Automotive Price Elasticities,'' Transportation Research B, vol 28B,
no 6, pp 401-408. Available at http://www.sciencedirect.com/science/article/B6V99-466M3VD-1/2/3ecfe61bac45f1afb8d9b370330e3f0c (last
accessed August 1, 2012).
    \1299\ McCarthy, P.S. (1996). ``Market Price and Income
Elasticities of New Vehicle Demands,'' The Review of Economics and
Statistics, vol. LXXVII, no. 3, pp. 543-547. Available at http://econpapers.repec.org/article/tprrestat/v_3a78_3ay_3a1996_3ai_3a3_3ap_3a543-47.htm (last accessed August 1, 2012) or Docket No.
NHTSA-2010-0131.
    \1300\ This elasticity is generally considered to be a short-run
elasticity, reflecting the immediate impacts of a price change on
vehicle sales. For a durable good such as an auto, the elasticity
may be smaller in the long run: though people may be able to change
the timing of their purchase when price changes in the short run,
they must eventually make the investment. Using a smaller elasticity
would reduce the magnitude of the estimates presented here for
vehicle sales, but it would not change the direction. A short-run
elasticity is more valid for initial responses to changes in price,
but, over time, a long-run elasticity may better reflect behavior;
thus, the results presented for the initial years of the program may
be more appropriate for modeling with the short-run elasticity than
the later years of the program. A search of the literature has not
found studies more recent than the 1970s that specifically
investigate long-run elasticities. See., e.g., Hymans, Saul H.,
``Consumer Durable Spending: Explanation and Prediction,'' Brookings
Papers on Economic Activity 1 (1970), which finds a short-run
elasticity of auto expenditures (not sales) with respect to price of
0.78 to 1.17, and a long-run elasticity of 0.3 to 0.46 (pp. 173-
206). Available at: http://www.brookings.edu/about/projects/bpea/
editions/~/media/Projects/BPEA/1970%202/1970b--bpea--hymans--
ackley--juster.PDF or Docket No. NHTSA-2010-0131 (last accessed
August 1, 2012).
---------------------------------------------------------------------------

    There is considerable uncertainty in the economics literature about
the extent to which consumers value fuel savings from increased fuel
economy, and there is still more uncertainty about possible changes in
consumer behavior over time (especially with the likelihood of consumer
learning) and the extent to which this final rule could affect consumer
behavior. In addition, consumers' valuation of fuel economy
improvements depends upon the price of gasoline, which has recently
been very volatile. On balance, the effect of this final rule on
vehicle sales will depend upon whether the value that potential buyers
place on the increased fuel economy that this rule requires is greater
or less than the increase in vehicle prices that results from the rule,
as well as on how automakers interpret buyers' likely responses to
higher prices and increased fuel economy. Additional data would enhance
the accuracy of predictions on these issues. In addition, it would be
helpful to assess important emerging trends, such as the degree that
longer financing terms affect consumers' decisionmaking as they weigh
operating costs versus upfront costs, and the degree to which extreme
and continued volatility itself in gas prices affects assumptions about
likely returns on upfront technology investments.
a. How do consumers value fuel economy?
    The first question to evaluate is how consumers value fuel economy,
or more accurately, how they value fuel savings attributable to
increased fuel economy. Two interrelated economic concepts are commonly
used to summarize how consumers appear to value future fuel savings
that result from higher fuel economy. The first relates to the length
of time that consumers consider when valuing fuel savings, or ``payback
period,'' while the second relates to the discount rate that consumers
apply to future savings. Although either of these two concepts can be
used by itself to indicate how buyers value future fuel savings, our
analysis uses a combination of the two to characterize consumers'
valuation of future fuel savings.
    The length of time that consumers consider when valuing future fuel
savings can significantly affect their comparisons of fuel savings to
the increased cost of purchasing a vehicle that offers higher fuel
economy. For example, there will be a significant difference in
aggregate fuel savings if consumers consider 1 year, 3 years, 5 years,
10 years, or the lifetime of the vehicle as the relevant payback
period. The discount rate that consumers use to discount future fuel
savings to their present value can also have a significant impact;
higher discount rates will reduce the importance of future fuel savings
relative to a vehicle's initial purchase price. If consumers value fuel
savings over a short payback period, such as 1 to 2 years, then the
discount rate will be less important, but if consumers consider fuel
savings over a longer period, then the discount rate will become
important.
    The payback period and discount rate are conceptual proxy measures
for consumer decisions that may often be made without any explicit
quantitative analysis. For example, some buyers choosing among a set of
vehicles may know what they have been paying recently for fuel, what
they are likely to pay to buy each of the vehicles considered, and some
attributes--including labeled fuel economies--of those vehicles.
However, these buyers may then make a choice without actually trying to
estimate how much they would pay to fuel each of the vehicles they are
considering buying; for such buyers, the idea of a payback period and
discount rate may have no explicit meaning. This does not, however,
limit the utility of these concepts for the agency's analysis. If, as a
group, buyers behave as if they value fuel consumption by considering
an

explicit payback period and discount rate, these concepts remain useful
as a basis for estimating the market response to increases in fuel
economy accompanied by increases in price.
    Information regarding the number of years that consumers value fuel
savings comes from several sources. In past analyses, NHTSA has used
five years as representing the average payback period, because this is
the average length of time of a financing agreement.\1301\ We conducted
a search of the literature for additional estimates of consumer
valuation of fuel savings, in order to determine whether the 5 year
assumption was accurate or should be revised. A recent paper by David
Greene \6\ examined studies from the past 20 years of consumers'
willingness to pay for fuel economy and found that ``the available
literature does not provide a reasonable consensus,'' although the
author states that ``manufacturers have repeatedly stated that
consumers will pay, in increased vehicle price, for only 2-4 years in
fuel savings'' based on manufacturers' own market research. The
National Research Council \1302\ also used a 3 year payback period as
one way to compare consumer valuation of benefits to a full lifetime
value. A survey conducted for the Department of Energy in 2004, which
asked 1,000 households how much they would pay for a vehicle that saved
them $400 or $1,200 per year in fuel costs, found implied payback
periods of 1.5 to 2.5 years. In reviewing this survey, Greene
concluded: ``The striking similarity of the implied payback periods
from the two subsamples would seem to suggest that consumers understand
the questions and are giving consistent and reliable responses: They
require payback in 1.5 to 2.5 years.'' However, Turrentine and Kurani's
\1303\ in-depth interviews of 57 households found almost no evidence
that consumers think about fuel economy in terms of payback periods.
When asked such questions, some consumers became confused while others
offered time periods that were meaningful to them for other reasons,
such as the length of their car loan or lease.
---------------------------------------------------------------------------

    \1301\ National average financing terms for automobile loans are
available from the Board of Governors of the Federal Reserve System
G.19 ``Consumer Finance'' release. See http://www.federalreserve.gov/releases/g19/ (last accessed August 25,
2011). The average new car loan at an auto finance company in the
first quarter of 2011 is for 62 months at 4.73%.
    \1302\ National Research Council (2002), ``Effectiveness and
Impact of Corporate Average Fuel Economy (CAFE) Standards'',
National Academies Press, Washington DC.
    \1303\ Turrentine, T.S. and K.S. Kurani, 2007. ``Car Buyers and
Fuel Economy,'' Energy Policy, vol. 35, pp. 1213-1223.
---------------------------------------------------------------------------

    The effective discount rate that consumers have used in the past to
value future fuel economy savings has been studied in many different
ways and by many different economists. Greene examined and compiled
many of these analyses and found: ``Implicit consumer discount rates
were estimated by Greene (1983) based on eight early multinomial logit
choice models. * * *The estimates range from 0 to 73% * * * Most fall
between 4 and 40%.'' Greene added: ``The more recent studies exhibit as
least a wide a range as the earlier studies.''
    This is an extremely broad range. With such uncertainty about how
consumers value future fuel savings and the discount rates they might
use to determine the present value of future fuel savings, NHTSA chose
for purposes of this analysis to utilize the standard 3 and 7 percent
social discount rates recommended by OMB guidance to evaluate the costs
and benefits of regulation. To the extent that some consumers appear to
apply higher discount rates, the analysis of likely sales consequences
would be different. This review leads us to conclude that consumer
valuation of future fuel savings is highly uncertain, leading to
different potential scenarios for vehicle sales. A negative impact on
sales is possible if consumers don't value the fuel savings or desire
very short payback periods, because the final rule will lead to an
increase in the perceived ownership cost of vehicles. In addition,
sales decreases are possible if gasoline prices are lower than
projected by manufacturers and the agencies or technology costs are
higher than projected. A positive impact on sales is also possible,
because the final rule will lead to a significant decrease in the
lifetime cost of vehicles, and with consumer learning over time, this
effect may produce an increase in sales. Whether a change in sales will
result from this final rule, or will result from other factors that
affect the way drivers consider fuel economy in their purchasing
decisions, is subject to uncertainty.
b. How do manufacturers believe consumers value fuel savings
attributable to higher fuel economy?
    Although some manufacturers have indicated in public remarks or
confidential statements to NHTSA that their plans to apply fuel-saving
technology depend on fuel prices and consumers' willingness to pay for
fuel economy improvements, the agency does not have specific and robust
information regarding how manufacturers interpret consumers' valuation
of fuel savings. Based on our review of the literature and available
evidence, it is not clear how accurately manufacturers are accounting
for consumer valuation of fuel economy in making their pricing
decisions, nor how that accuracy will be affected in the future as
manufacturers' costs to produce vehicles rise in response to the final
standards. In standard economic theory, if manufacturers believe that
consumers value the fuel savings at a higher dollar level than the
technology costs, then manufacturers' profit motives would lead them to
voluntarily add the cost-effective technologies to their vehicles in
the absence of government mandates, in the belief that their sales and
profits would increase.
    This concept ties into the basic question of whether manufacturers
are providing the amount of fuel economy that consumers wish to
purchase--whether there is matching between consumers' demand for fuel
economy and the firms' supply of fuel economy. It is possible that the
light-duty vehicle market is currently operating according to standard
economic assumptions, and manufacturers are providing approximately the
amount of fuel economy that consumers wish to purchase, because they
correctly interpret consumers' valuation of fuel economy. On the other
hand, it is possible that manufacturers are providing more or less fuel
economy than consumers wish to purchase, because they do not correctly
understand consumers' valuation of fuel economy. Because NHTSA does not
know which scenario is correct today, and cannot predict which will
apply in the future, we evaluate the response of sales under both
scenarios in the following sections in order to assess the range of
potential impacts that could be attributable to this final rule.
    As discussed above, it is very difficult to determine how consumers
will react to fuel economy improvements, and manufacturers presumably
face this same challenge. Consumer consideration of fuel economy
appears to evolve based on a variety of factors (fuel price,
recessions, marketing), and consumers can react quickly to changes in
these factors, sometimes more rapidly than the industry is able to
change its product offerings. There have been examples of periods when
demand for fuel efficient vehicles exceeded the available supply of
highly efficient vehicles, and other periods where very efficient
vehicle models were introduced into the market but sales stalled. If
manufacturers did not

accurately forecast consumers' demand for fuel efficient vehicles,
manufacturers' investment in vehicle technologies would not result in
desired payoff. Manufacturers may be likely to be particularly risk
averse with regard to future changes in fuel prices, in large part due
to the substantial capital investments that are necessary to develop
and market fuel-efficient models. If a manufacturer invests
substantially in fuel efficient technologies expecting higher consumer
demand than realized, then the manufacturer has incurred the costs of
investment but not reaped the benefits of those investments. On the
other hand, if a manufacturer does not invest in fuel efficient
technologies, then the manufacturer may lose some market share in the
short run if demand for fuel economy is higher than expected, but they
still retain the option of investing in fuel efficient technologies.
The predicted level of investment under uncertainty related to consumer
demand for fuel efficient vehicles and irreversibility of investment
for fuel efficient technologies would be less than the predicted level
of investment under no uncertainty and complete reversibility.
    In addition, there is reason to believe there may be risk aversion
on the consumer side. The simultaneous investment by all companies may
also encourage consumer confidence in the new technologies. If only one
company adopted new technologies, early adopters might gravitate toward
that company, but early adopters tend to be a relatively small portion
of the public. More cautious buyers, who are likely to be more
numerous, might wait for greater information before moving away from
well-known technologies. If all companies adopt advanced technologies
at the same time, though, potential buyers may perceive the new
technologies as the new norm rather than as a risky innovation. They
will then be more willing to move to the new technologies. As some
commenters have pointed out, simultaneous action required by the rule
may change buyers' expectations (their reference points) for fuel
economy, and investing in more fuel economy may seem less risky than in
the absence of the rule.\1304\
---------------------------------------------------------------------------

    \1304\ We note that this risk aversion by itself does not
indicate a market failure; but that the risk aversion leads to
under-provision of social benefits (e.g., reduction in greenhouse
gas emissions).
---------------------------------------------------------------------------

    Further, the certainty of the regulations reduces the costs of
meeting them, because there will be a) more economies of scale and more
learning curve benefits due to greater cumulative production of fuel-
efficient technologies and b) more incentive for automakers and
suppliers to invest in R&D to create future fuel-efficient
technologies.\1305\ We note that this risk aversion by itself does not
indicate a market failure; it is the fact that the risk aversion leads
to under provision of social benefits (e.g., reduction in greenhouse
gas emissions).
---------------------------------------------------------------------------

    \1305\ The literature reviewed by Popp, Newell, and Jaffe (2010)
shows that environmental regulation has played an important role in
inducing innovation that reduces the cost of achieving environmental
goals; Popp (2011) provides evidence that consumer pressure alone is
rarely sufficient to achieve broad diffusion of environmentally
friendly technologies.
---------------------------------------------------------------------------

c. How did NHTSA attempt to calculate potential impacts of the final
rule on vehicle sales under the different scenarios discussed above?
    Given the considerable uncertainty associated with consumer
valuation of fuel savings and manufacturers' understanding of that
valuation, NHTSA sought to assess potential sales impacts under two
possible basic scenarios: first, one in which the light-duty vehicle
market is currently operating according to standard theoretical
economic principles, and manufacturers are providing exactly the amount
of fuel economy that consumers wish to purchase, because they perfectly
understand consumers' valuation of fuel economy; and second, one in
which manufacturers are not providing the exact amount of fuel economy
that consumers wish to purchase (either too much or too little),
because they do not have perfect information regarding consumers'
valuation of fuel economy. In the first scenario, manufacturers and
consumers would behave as though they are assuming the same payback
period (and/or discount rate) for fuel savings attributable to higher
fuel economy; in the second, manufacturers and consumers would behave
as though they are assuming different payback periods (and/or discount
rates).
    For years, consumers have been learning about the benefits that
accrue to them from owning and operating vehicles with greater fuel
efficiency. This type of learning is expected to continue before and
during the model years affected by this rule, particularly given the
new fuel economy labels that clarify potential economic effects and
should therefore reinforce that learning. Therefore, some increase in
the demand for, and production of, more fuel efficient vehicles is
incorporated in the market driven baseline.
    The fuel savings associated with operating more fuel efficient
vehicles will be more salient to individuals who own them, causing
their subsequent purchase decisions to shift closer to minimizing the
total cost of ownership over the lifetime of the vehicle. Second, this
appreciation may spread across households through word of mouth and
other forms of communications. Third, as more motorists experience the
time and fuel savings associated with greater fuel efficiency, the
price of used cars will better reflect such efficiency, further
reducing the cost of owning more efficient vehicles for the buyers of
new vehicles (since the resale price will increase). If these induced
learning effects are strong, the rule could potentially increase total
vehicle sales over time. These increased sales would not occur in the
model years first affected by the rule, but they could occur once the
induced learning takes place. It is not possible to quantify these
learning effects years in advance and that effect may be speeded or
slowed by other factors that enter into a consumer's valuation of fuel
efficiency in selecting vehicles.
    The possibility that the rule will (after a lag for consumer
learning) increase sales need not rest on the assumption that
automobile manufacturers are failing to pursue profitable opportunities
to supply the vehicles that consumers demand. In the absence of the
rule, no individual automobile manufacturer would find it profitable to
move toward the more efficient vehicles mandated under the rule. In
particular, no individual company can fully internalize the future
boost to demand resulting from the rule. If one company were to make
more efficient vehicles, counting on consumer learning to enhance
demand in the future, that company would capture only a fraction of the
extra sales so generated, because the learning at issue is not specific
to any one company's fleet. Many of the extra sales would accrue to
that company's competitors.
    In the language of economics, consumer learning about the benefits
of fuel efficient vehicles involves positive externalities (spillovers)
from one company to the others.\1306\ These positive externalities may
lead to benefits for manufacturers as a whole. We emphasize that this
discussion has been tentative and qualified. Social learning of related
kinds has been

identified in a number of contexts,\1307\ and the agency expects that
it will influence consumers' future valuation of fuel economy. Thus,
while it is difficult to determine how consumers will react to fuel
economy improvements attributable to the final rule, we believe that it
is likely that consumers will learn more about and increasingly value
fuel economy improvements in the future. If manufacturers assume that
consumers value fuel economy less than consumers actually value fuel
economy, there will be a demand pull for better fuel economy vehicles
into the market, and by virtue of the final standards forcing
manufacturers to increase better fuel economy product offerings; it is
possible that sales could increase as a result.
---------------------------------------------------------------------------

    \1306\ Industry-wide positive spillovers of this type are hardly
unique to this situation. In many industries, companies form trade
associations to promote industry-wide public goods. For example,
merchants in a given locale may band together to promote tourism in
that locale. Antitrust law recognizes that this type of coordination
can increase output.
    \1307\ See Hunt Alcott, Social Norms and Energy Conservation,
Journal of Public Economics (March 2011), available at http://opower.com/uploads/library/file/1/allcott_2011_jpubec_-_social_norms_and_energy_conservation.pdf (last accessed August 1, 2012);
Christophe Chamley, Rational Herds: Economic Models of Social
Learning (Cambridge, 2004), available at http://bilder.buecher.de/zusatz/21/21995/21995098_lese_1.pdf (last accessed August 1,
2012).
---------------------------------------------------------------------------

d. How did NHTSA illustrate these scenarios analytically?
    The agency examined a number of cases to illustrate these
scenarios. Sales impacts were determined for 6 cases that are
combinations of manufacturers' beliefs of how consumers value fuel
savings and consumers' valuation of fuel savings. The first two cases
assume a flat baseline (no voluntary improvement in fuel economy above
the MY 2016 standards by manufacturers absent new regulations),
consistent with the agency's main analysis in this rulemaking. In these
first two cases we assume consumers value fuel savings for a 3 year
period or a 5 year period (the average length of a loan), and we also
determine the breakeven point of consumer valuation of fuel savings,
where there would be no impact on sales, assuming all other factors
remain constant. As can be seen in Table IV-140 below, with a flat
baseline and assuming that consumers consider fuel economy benefits
over a 3 or 5 year period, benefits exceed costs to the point that
consumers will purchase more vehicles and sales will increase. NHTSA
estimates a break-even point of 2.35 years for scenarios with a flat
baseline; that is, if consumers value fuel savings over an average 2.35
years, neither an increase nor a decrease in sales is expected.
    The next 4 cases assume that manufacturers will, absent new
regulations, implement technologies in response to their belief that
consumers have either a 1 year, 3 year, or 5 year payback period, and
for 3 of these scenarios where the consumer also values fuel economy
over the same payback periods assumed by manufacturers. For example,
the agency also examined the impact on sales and employment under the
sensitivity analysis assumption that the baseline fleet included the
manufacturers voluntarily implementing any technology that had a 1 year
or less payback period for consumers. In this analysis, the least
expensive technologies relative to their effects on fuel economy
improvement (those that had a consumer payback where fuel savings over
the first year of use were higher than new vehicle price increases)
were assumed to be voluntarily implemented by manufacturers, resulting
in improved fuel economy in the baseline case which would have occurred
without adoption of this rule. The same methodology was used in the
cases where both manufacturers and consumers value fuel savings over
either a 3 year period or a 5 year period. All three of these cases
result in reductions in sales, with the impact decreasing as the
manufacturer's baseline increases from 1 year to 3 year to 5 years. In
a final case we assume that manufacturers voluntarily implement any
technology that had a 1 year or less payback period for consumers, but
that consumers value fuel savings over a 3 year period.
    Under that case, the breakeven point for consumers is about 3.1
years--meaning that if consumers valued their fuel savings over 3.1
years in this scenario, there would be no impact on sales; in other
words if the payback period of the fuel saving technologies was less
than 3.1 years, then the vehicle sales would increase and vice versa.
    For the reader's reference, Table IV-139 below shows the included
combinations of payback periods assumed--for these different cases--to
represent consumers' and manufacturers' decisions. The agency
considered these different cases to represent an illustrative range of
possible outcomes under the scenarios described above.

                          Table IV-139--Scenarios Considered for Sales Impact Analysis
----------------------------------------------------------------------------------------------------------------
                                                     Payback period representing buyers' decisions
     Payback period representing      --------------------------------------------------------------------------
       manufacturers' decisions                 1 Year                  3 Years                  5 Years
----------------------------------------------------------------------------------------------------------------
0 Years (Flat).......................  .......................   Included..............  Included.
1 Year...............................   Included..............   Included.               .......................
3 Years..............................  .......................   Included..............  .......................
5 Years..............................  .......................  .......................  Included.
----------------------------------------------------------------------------------------------------------------

    For the analysis for each of these cases, NHTSA makes several
assumptions. For the fuel savings part of the equation, as shown in the
table, we assumed that the average purchaser considers the fuel savings
they would receive over a 1, 3, or 5 year timeframe. The present values
of these savings were calculated using a 3 and 7 percent discount rate.
We used a fuel price forecast that included taxes, because this is what
consumers must pay. Fuel savings were calculated over the first 1, 3,
or 5 years and discounted back to a present value.
    The agency believes that consumers may consider several other
factors over the 5 year horizon when contemplating the purchase of a
new vehicle. The agency added some of these factors into the
calculation to represent how an increase in technology costs might
affect consumers' buying considerations.
    First, consumers might consider the sales taxes they have to pay at
the time of purchasing the vehicle. As these costs are transfer
payments, they are not included in the societal cost of the program,
but they are included as one of the increased costs to the consumer for
these standards. We took the most recent auto sales tax by state \1308\
and

weighted them by population by state to determine a national weighted-
average sales tax of 5.46 percent (hereafter rounded to 5.5 percent in
the discussion). NHTSA sought to weight sales taxes by new vehicle
sales by state; however, such data were unavailable. NHTSA recognizes
that for this purpose, new vehicle sales by state is a superior
weighting mechanism to Census population; in an effort to approximate
new vehicle sales by state NHTSA studied the change in new vehicle
registrations (using R.L. Polk data) by state across recent years and
developed a corresponding set of weights. The resulting national
weighted-average sales tax rate was almost identical to that resulting
from the use of Census population estimates as weights, just slightly
above 5.5 percent. NHTSA opted to utilize Census population rather than
the registration-based proxy of new vehicle sales as the basis for
computing this weighted average, as the end results were negligibly
different and the analytical approach involving new vehicle
registrations had not been as thoroughly reviewed.
---------------------------------------------------------------------------

    \1308\ See http://www.factorywarrantylist.com/car-tax-by-state.html (last accessed August 1, 2012). Note that county, city,
and other municipality-specific taxes were excluded from NHTSA's
weighted average, as the variation in locality taxes within states,
lack of accessible documentation of locality rates, and difficulty
in obtaining reliable sets of weights to apply to locality taxes
complicates the ability to perform this analysis. Localities with
relatively high automobile sales taxes may have relatively fewer
auto dealerships, as consumers would likely endeavor to purchase
vehicles in areas with lower locality taxes.
---------------------------------------------------------------------------

    Second, we considered insurance costs over the 5 year period. More
expensive vehicles will require more expensive collision and
comprehensive (e.g., theft) car insurance. The increase in insurance
costs is estimated from the average value of collision plus
comprehensive insurance as a proportion of average new vehicle price.
Collision plus comprehensive insurance is the portion of insurance
costs that depend on vehicle value. A recent study by Quality Planning
\1309\ provides the average value of collision plus comprehensive
insurance for new vehicles, in 2010$, is $521 ($396 of which is
collision and $125 of which is comprehensive). The average consumer
expenditure for a new passenger car in 2011, according to the Bureau of
Economic Analysis was $24,572 and the average price of a new light
truck was $31,721 in $2010.\1310\ Using sales volumes from the Bureau,
we determined an average passenger car and an average light truck price
was $27,953 in $2010 dollars.\1311\ Average prices and estimated sales
volumes are needed because price elasticity is an estimate of how a
percent increase in price \1312\ affects the percent decrease in sales.
Dividing the cost to insure a new vehicle by the average price of a new
vehicle gives the proportion of comprehensive plus collision insurance
as 1.86 percent of the price of a vehicle. As vehicles' values decline
with vehicle age, comprehensive and collision insurance premiums
likewise decline. Data on the change in insurance premiums as a
function of vehicle age are scarce; however, NHTSA utilized data from
the aforementioned Quality Planning study that cite the cost to insure
the average vehicle on the road today (average age 10.8 years)\1313\ to
enable a linear interpolation of the change in insurance premiums
during the first 11 years of a typical vehicle's life. Using this
interpolation, as a percentage of the base vehicle price of $27,953,
the cost of collision and comprehensive insurance in each of the first
five years of a vehicle's life is 1.86 percent, 1.82 percent, 1.75
percent, 1.64 percent, and 1.50 percent, respectively, or 8.57 percent
in aggregate. Discounting that stream of insurance costs back to
present value indicates that the present value of the component of
insurance costs that vary with vehicle price is equal to 8.0 percent of
the vehicle's price at a 3 percent discount rate.
---------------------------------------------------------------------------

    \1309\ ``During Recession, American Drivers Assumed More Risk to
Reduce Auto Insurance Costs,'' Quality Planning, March 2011. See
https://www.qualityplanning.com/media/4312/110329%20tough%20times_f2.pdf (last accessed August 1, 2012).
    \1310\ U.S. Department of Commerce, Bureau of Economic
Analysis,--Table 7.2.5S. Auto and Truck Unit Sales, Production,
Inventories, Expenditures, and Price, Available at http://www.bea.gov/itable/ (last accessed August 1, 2012)
    \1311\ http://www.bls.gov/cpi/cpid11av.pdf, Table 1A. Consumer
Price Index for All Urban Consumers (CPI-U): U.S. city average, by
expenditure category and commodity and service group, for new
vehicles. (Last accessed August 1, 2012)
    \1312\ When estimating the sales impact, the price of the
vehicle was increased from these MY 2011 prices based on the costs
of estimated safety and MY 2011-2016 fuel economy rules. See the
cumulative impact section for an estimate of those costs. For
passenger cars $871 was added to the average price of a MY 2011
passenger car to make the total baseline price for MY 2017 $25,443
($24,572 + $871), for light trucks $1,090 was added to the average
price of a MY 2011 light truck to make the total baseline price for
MY 2017 $32,811 ($31,721 + $1,090). All of these values are in 2010
dollars.
    \1313\ See https://www.polk.com/company/news/average_age_of_vehicles_reaches_record_high_according_to_polk (last accessed
August 1, 2012).
---------------------------------------------------------------------------

    Third, we considered that 70 percent of new vehicle purchasers take
out loans to finance their purchase.\1314\ Using proprietary forecasts
available from Global Insight, NHTSA developed an average of 48-month
\1315\ bank and auto finance company loan rates for years 2017 through
2025, which--when deflated by Global Insight's corresponding forecasts
of the CPI--is 5.16 percent. In the construction of this estimate,
NHTSA assumed an equal distribution of bank and auto finance company
loans--an assumption necessitated by the lack of data on the
distribution of the volume of loans between the differing types of
creditors. NHTSA opted to adjust future loan rates using the CPI rather
than the GDP deflator as this analysis is intended to facilitate
further analysis from the perspective of the consumer, for which the
CPI is the preferred deflation factor. At these terms the average
person taking a loan will pay 13.7 percent more (undiscounted) for
their vehicle over the 5 years than a consumer paying cash for the
vehicle at the time of purchase. Discounting future loan payments at a
3 percent discount rate, a consumer financing a vehicle purchase pays
5.43 percent more as opposed to an all cash purchase. Taking into
account to make the total baseline price for MY 2017 $25,443 ($24,572 +
$871), for light trucks $1,090 was added to the average price of a MY
2011 light truck to make the total baseline price for MY 2017 $32,811
($31,721 + $1,090). All of these values are in 2010 dollars. Assuming
that only 70 percent of vehicle purchases are financed, the average
consumer would pay 3.80 (=0.70 * 5.43 percent) percent more than the
retail price of a vehicle.
---------------------------------------------------------------------------

    \1314\ Bird, Colin. ``Should I Pay Cash, Lease or Finance My New
Car?'' http://www.cars.com/go/advice/Story.jsp?section=fin&story=should-i-pay-cash&subject=loan-quick-start&referer=advice&aff=sacbee, July 12, 2011, citing CNW Marketing
Research. (Last accessed August 1, 2012)
    \1315\ No projections were available for rates of loan terms of
60 months. NHTSA compared the historical difference of 48-month and
60-month loan rates and determined the 48-month rate to be a
suitable proxy for the 60-month rate.
---------------------------------------------------------------------------

    Fourth, we considered the residual value (or resale value) of the
vehicle after 5 years and expressed this as a percentage of the new
vehicle price. If the price of the vehicle increases due to fuel
economy technologies, the resale value of the vehicle will go up
proportionately. The average resale price of a vehicle after 5 years is
about 35 percent \1316\ of the original purchase price. Discounting the
residual value back 5 years using a 3 percent discount rate (=35
percent * .8755) gives an effective residual value of 30.64 percent.
Note that added CAFE technology could also result in more expensive or
more frequent repairs. However, we do not have data to verify the
extent to which this would be a factor during the first 5 years of
vehicle life. We add these four factors together. At a 3 percent
discount

rate, the consumer considers that he could get 30.64 percent back upon
resale in 5 years, but will pay 5.5 percent more for taxes, 8.0 percent
more in insurance, and 5.1 percent more for loans, resulting in an 12.0
percent return on the increase in price for fuel economy technology
(=30.6 percent - 5.5 percent-8.0 percent - 5.1 percent). Thus, the
increase in price per vehicle would be multiplied by 0.88 (=1 - 0.12)
before subtracting the fuel savings to determine the overall net
consumer valuation of the increase of costs on this purchase decision.
This process results in estimates of the payback period for MY 2025
vehicles of 2 years for light trucks and 4 years for passenger cars at
a 3 percent discount rate. For ease of presentation, we combine the
impact on passenger car and light truck sales for the Preferred
Alternative only for the combined 9 year period of 2017-2025, and we
compare the sales impact for both the MY 2010 baseline and for the MY
2008 baseline at the 3 percent and 7 percent discount rates. There is
not a significant difference in sales impacts depending upon the
baseline considered (2010 versus 2008) and the discount rate impact is
predictable, with sales increasing to a lesser extent under a 7 percent
discount rate than in the case of a 3 percent discount rate, since
benefits are valued lower with a higher discount rate.
---------------------------------------------------------------------------

    \1316\ Consumer Reports, August 2008, ``What That Car Really
Costs to Own,'' Available at http://www.consumerreports.org/cro/cars/pricing/what-that-car-really-costs-to-own-4-08/overview/what-that-car-really-costs-to-own-ov.htm (last accessed August 1, 2012).

                    Table IV-140--Potential Sales Impact for Passenger Cars and Light Trucks
                                             [Vehicles in thousands]
----------------------------------------------------------------------------------------------------------------
                                                   MYs 2017-2025 Sales impact in   MYs 2017-2025 Sales impact in
                                                    thousands and in percent of     thousands and in percent of
      Years fuel valued by          Years fuel       total sales  (3% discount       total sales  (7% discount
          manufacturers              valued by                 rate)                           rate)
                                     consumers   ---------------------------------------------------------------
                                                      (000's)           (%)           (000's)           (%)
----------------------------------------------------------------------------------------------------------------
                                                  2008 Baseline
----------------------------------------------------------------------------------------------------------------
0 Flat..........................           3 yr.             911             0.6             757             0.5
0 Flat..........................           5 yr.           3,784             2.7           3,232             2.3
1 yr. *.........................         1 yr. *          -2,696            -1.9          -2,322            -1.6
1 yr............................           3 yr.            -360            -0.3            -445            -0.3
3 yr. *.........................         3 yr. *            -530            -0.4            -542            -0.4
5 yr. *.........................         5 yr. *              -3            -0.0             -36            -0.0
----------------------------------------------------------------------------------------------------------------
                                                  2010 Baseline
----------------------------------------------------------------------------------------------------------------
0 Flat..........................           3 yr.             988             0.7             867             0.6
0 Flat..........................           5 yr.           3,804             2.7           3,261             2.3
1 yr. *.........................         1 yr. *          -2,405            -1.7          -2,611            -1.8
1 yr............................           3 yr.             -50            -0.0            -130            -0.1
3 yr. *.........................         3 yr. *            -309            -0.2            -314            -0.2
5 yr. *.........................         5 yr. *             124             0.1              94             0.1
----------------------------------------------------------------------------------------------------------------
* These scenarios are presented as theoretical cases. NHTSA believes it is unlikely that manufacturers and
  consumers would value improvements in fuel economy identically, and believes that on average, manufacturers
  will behave more conservatively in their assumptions of how consumers value fuel economy than how on average
  consumers will actually behave. NHTSA expects that in practice the number of years fuel is valued by
  manufacturers will be shorter than the number of years fuel is valued by consumers.

e. What have commenters and other sources said in terms of potential
sales impacts attributable to the final rule?
    A recent study on the effects on sales, attributable to NHTSA
regulatory programs, including the fuel economy program was undertaken
by the Center for Automotive Research (CAR).\1317\ CAR examined the
impacts of alternative fuel economy increases of 3%, 4%, 5%, and 6% per
year on the outlook for the U.S. motor vehicle market, including the
impacts of likely increases in costs for increased fuel economy (based
on the NAS report, which estimates higher costs than NHTSA's current
estimates) and required safety features. The CAR analysis also examined
the technologies that would be used to achieve higher fuel economy, and
how their production and use would affect the new vehicle market,
production volumes, and automotive manufacturing employment in the year
2025. The required safety mandates were assumed to cost $1,500 per
vehicle in 2025, but CAR did not evaluate the value of those safety
mandates to consumers. Thus the CAR study cannot be compared to other
studies, as it combines the cost of additional safety mandates along
with costs for fuel economy improvements. The CAR study likely
underestimates sales (that is, it overestimates the reduction in sales
resulting from increased CAFE standards alone), as it assigns no value
to consumers' perceived values of additional safety features. In any
case, unlike other analyses discussed in this final rule, sales changes
shown cannot be solely attributed to the rulemaking.
---------------------------------------------------------------------------

    \1317\ ``The U.S. Automotive Market and Industry in 2025,''
Center for Automotive Research, June 2011, available at http://www.cargroup.org/assets/files/ami.pdf (last accessed August 1,
2012).
---------------------------------------------------------------------------

    There are many factors that go into the CAR analysis of sales. CAR
assumes a 22.0 mpg baseline, two gasoline price scenarios of $3.50 and
$6.00 per gallon, VMT schedules by age, and a rebound rate of 10
percent (although it appears that the CAR report assumes a rebound
effect even for the baseline and thus negates the impact of the rebound
effect). Fuel savings are assumed to be valued by consumers over a 5
year period at a 10 percent discount rate. The impact on sales varies
by scenario, the estimates of the cost of technology, the price of
gasoline, etc. At $3.50 per gallon, the net change in consumer savings
(costs minus the fuel savings valued by consumers) is a net cost to
consumers of $359 for the 3% scenario, a net cost of $1,644 for the 4%
scenario, a net cost of $2,858 for the 5% scenario, and a net consumer
cost of $6,525 for the 6% scenario. At $6.00 per gallon, the net change
in consumer savings (costs minus the fuel savings valued by consumers)
is a net savings to consumers of $2,107 for the 3% scenario, a net
savings of $1,131 for the 4% scenario, a net savings of $258 for

the 5% scenario, and a net consumer cost of $3,051 for the 6% scenario.
Thus, the price of gasoline can be a significant factor in affecting
how consumers view whether they are getting value for their
expenditures on technology. Table 14 on page 42 of the CAR report
presents the results of their estimates of the 4 alternative mpg
scenarios and the 2 prices of gasoline on light vehicle sales and
automotive employment. The table below shows these estimates. The
baseline for the CAR report is 17.9 million sales and 877,075
employees. The price of gasoline at $6.00 per gallon, rather than $3.50
per gallon results in about 2.1 million additional sales per year and
100,000 more employees in year 2025.

   Table IV-141--Center for Automotive Research (CAR) Report Estimates of Sales and Employment Impacts in 2025
----------------------------------------------------------------------------------------------------------------
                                       CAFE Requirement   CAFE Requirement   CAFE Requirement   CAFE Requirement
                                       of a 3% increase   of a 4% increase   of a 5% increase   of a 6% increase
                                       in mpg per year    in mpg per year    in mpg per year    in mpg per year
----------------------------------------------------------------------------------------------------------------
                                                Gasoline at $3.50
----------------------------------------------------------------------------------------------------------------
Sales (millions)....................               16.4               15.5               14.7               12.5
Employment..........................          803,548            757,700            717,626            612,567
----------------------------------------------------------------------------------------------------------------
                                                Gasoline at $6.00
----------------------------------------------------------------------------------------------------------------
Sales...............................               18.5               17.6               16.9               14.5
Employment..........................          903,135            861,739            826,950            711,538
----------------------------------------------------------------------------------------------------------------

    Figure 13 on page 44 of the CAR report shows a graph of historical
automotive labor productivity, indicating that there has been a long
term 0.4 percent productivity growth rate from 1960-2008, to indicate
that there will be 12.26 vehicles produced in the U.S. per worker in
2025 (which is higher than NHTSA's estimate--see below). In addition,
the CAR report discusses the jobs multiplier. For every one automotive
manufacturing job, they estimate the economic contribution to the U.S.
economy of 7.96 jobs \1318\ stating ``In 2010, about 1 million direct
U.S. jobs were located at an auto and auto parts manufacturers; these
jobs generated an additional 1.966 million supplier jobs, largely in
non-manufacturing sectors of the economy. The combined total of 2.966
jobs generated a further spin-off of 3.466 million jobs that depend on
the consumer spending of direct and supplier employees, for a total
jobs contribution from U.S. auto manufacturing of 6.432 million jobs in
2010. The figure actually rises to 7.96 million when direct jobs
located at new vehicle dealerships (connected to the sale and service
of new vehicles) are considered.''
---------------------------------------------------------------------------

    \1318\ Kim Hill, Debbie Menk, and Adam Cooper, ``Contribution of
the Automotive Industry to the Economies of All Fifty States and the
United States,'' The Center for Automotive Research, Ann Arbor, MI,
April 2010. Available at http://www.cargroup.org/?module=Publications&event=View&pubID=16. Docket No. NHTSA-2010-
0131.
---------------------------------------------------------------------------

    CAR uses econometric estimates of the sensitivity of new vehicle
purchases to prices and consumer incomes and forecasts of income growth
through 2025 to translate these estimated changes in net vehicle prices
to estimates of changes in sales of MY 2025 vehicles; higher net
prices--which occur when increases in vehicle prices exceeds the value
of fuel savings--reduce vehicle sales, while lower net prices increase
new vehicle sales in 2025. We do not have access to the statistical
models that CAR develops to estimate the effects of price and income
changes on vehicle sales. CAR's analysis assumes continued increases in
labor productivity over time and then translates the estimated impacts
of higher CAFE standards on net vehicle prices into estimated impacts
on sales and employment in the automobile production and related
industries.
    The agency disagrees with the cost estimates in the CAR report for
new technologies, the addition of safety mandates into the costs, and
various other assumptions. Many commenters stated that they expected
vehicle sales to increase as a result of the final rule, and cited an
analysis conducted by Ceres and Citigroup Global Markets Inc.\1319\
that examined the impact on automotive sales in 2020, with a baseline
assumption of an industry fuel economy standard of 42 mpg, a $4.00
price of gasoline, a 12.2 percent discount rate and an assumption that
buyers value 48% of fuel savings over seven years in purchasing
vehicles. The main finding on sales was that light vehicle sales were
predicted to increase by 6% from 16.3 million to 17.3 million in 2020.
That analysis has subsequently been revised to predict a 4% increase
from 15.8 million to 16.4 million.\1320\ Elasticity is not provided in
the report but it states that they use a complex model of price
elasticity and cross elasticities developed by GM. A fuel price risk
factor \1321\ was utilized. Little rationale was provided for the
baseline assumptions, but sensitivity analyses were examined around the
price of fuel ($2, $4, and $7 per gallon), the discount rate (5.2%,
12.2%, 17.2%), purchasers consider fuel savings over (3, 7, or 15
years), fuel price risk factor of (30%, 70%, or 140%), and VMT of
(10,000, 15,000, and 20,000 in the first year and declining
thereafter).
---------------------------------------------------------------------------

    \1319\ ``U.S. Autos, CAFE and GHG Emissions'', March 2011, Citi
Ceres, UMTRI, Baum and Associates, Meszler Engineering Services, and
the Natural Resources Defense Council, available at http://www.ceres.org/resources/reports/fuel-economy-focus (last accessed
August 1, 2012).
    \1320\ ``U.S. Autos, CAFE and GHG Emissions'', March 2011, Citi
Ceres, UMTRI, Baum and Associates, Meszler Engineering Services, and
the Natural Resources Defense Council, available at http://www.ceres.org/resources/reports/fuel-economy-focus (last accessed
August 1, 2012).
    \1321\ Fuel price risk factor measures the rate at which
consumers are willing to trade reductions in fuel costs for
increases in purchase price. For example, a fuel price risk factor
of 1.0 would indicate the consumers would be willing to pay $1 for
an improvement in fuel economy that resulted in reducing by $1 the
present value of the savings in fuel costs.
---------------------------------------------------------------------------

    The UAW, along with NRDC and the National Wildlife Foundation, also
submitted reports indicating their assessment that the additional
technology content needed to meet higher fuel economy standards would
lead to considerable sales and employment growth. For example, the 2010
UAW/NRDC/Center for American Progress study, ``Driving Growth,''
concluded that if 75 percent of the

additional content needed for the vehicle fleet to reach an average 40
mpg by 2020 was produced in the U.S., as many as 150,000 jobs would be
created.\1322\ Similarly, the 2011 UAW/NRDC/NWF study, ``Supplying
Ingenuity,'' found that 504 facilities across 43 states employing over
500,000 people are devoted to researching, developing, or producing
clean-car technologies, and that 67 percent of these jobs are related
to advanced conventional technologies such as better engines and
transmissions and components like electric power steering and high
strength steel.
---------------------------------------------------------------------------

    \1322\ UAW/NRDC/Center for American Progress, ``Driving Growth:
How Clean Cars and Climate Policy Can Create Jobs,'' March 2010.
NHTSA-2010-0131.
---------------------------------------------------------------------------

f. Based on all of the above, what does NHTSA believe the likely impact
on vehicle sales attributable to this final rule will be?
    While NHTSA conducted and considered a variety of vehicle sales
``cases'' as presented above, we do not believe that we can state with
certainty that any given case is ``correct'' for the rulemaking
timeframe. Given that this final rule affects multiple years, many
years in the future, and that during that time there will be a dynamic
situation occurring with dramatically changing fuel economy levels and
technology being added to vehicles, we anticipate that consumers'
consideration of fuel economy will evolve over time. NHTSA believes
that there is much uncertainty in how much consumers' consideration of
fuel economy will change as a result of this final rule alone, as
compared to other rules such as the MYs 2012-2016 CAFE and GHG
emissions rules and the Fuel Economy Labeling rule, or manufacturers'
marketing efforts. We anticipate that manufacturers will be tracking
consumers' behavior and marketing their products to affect consumer
behavior, as they always have. We have made several simplifying
assumptions in order to estimate the potential impact on sales, but as
discussed above, there are uncertainties in how this final rule will
affect sales and employment. We note, as is likely evident in the table
above, that the impact on sales in this analysis is heavily impacted by
the difference between manufacturers' beliefs of how consumers value
fuel savings and consumers' valuation of fuel savings.
    This uncertainty, however, supports our conclusion in Section IV.F
of the preamble that higher standards than the ones finalized in this
rulemaking may not be economically practicable. The agency has tried to
grapple with potential sales impacts as an important aspect of economic
practicability, but reaching no definitive conclusion, believes that a
conservative approach will be most likely to help us avoid setting
standards that are beyond what would be economically practicable, and
thus beyond the maximum feasible levels. NHTSA will monitor sales
trends going forward, and anticipates that the intervening years
between this final rule and the future rulemaking to develop and
establish final standards for MYs 2022-2025 will provide significant
additional insight into the questions of how consumers value fuel
savings associated with increased fuel economy, how manufacturers
believe consumers value that fuel savings, and corresponding effects on
vehicle sales attributable to CAFE standards.
    As discussed elsewhere in the preamble and FRIA, the literature
provides mixed evidence that consumers consistently value future fuel
savings consistent with shorter payback periods and/or higher discount
rate than the full lifetime value of fuel savings over the useful life
of vehicles discounted as the social discount rates. That also provides
an explanation for one of the potential reasons that manufacturers do
not voluntarily provide all of the fuel saving technologies that are
cost-effective and available, on a societal basis considered over the
lifetime of the vehicle. In the past, consumers have not been willing
to pay the additional price for such fuel economy improvements. One
question is whether consumers will place a greater value on fuel
savings as a result of this rule, and only as a result of this rule. In
the past, large spikes in gasoline prices and consistently high
gasoline prices have spurred consumers to consider fuel economy more
prevalent in their purchasing decisions. The agency believes that the
new and improved fuel economy labels and the large increase in fuel
economy required as a result of the MY 2012-2016 fuel economy
standards, may all have an impact on consumer valuation of fuel
savings. However, these effects are not due to this rule. This final
rule with its very large increase in average fuel economy, as well as
manufacturers marketing these increased fuel economy levels, should
also have a significant effect on consumers' realization that fuel
economy is changing rapidly and significantly. As a result, we believe
consumers will pay more attention to fuel savings as a result of this
final rule assuming that fuel prices do not decrease significantly, but
there is uncertainty whether all sales impacts will be the result of
this final rule alone. It is possible that consumers will not demand
increased fuel economy even when such increases would reduce overall
costs for them. Some vehicle owners may also react to persistently
higher vehicle costs by owning fewer vehicles, and keeping existing
vehicles in service for somewhat longer. For these consumers, the
possibility exists that there may be permanent sales losses, compared
with a situation in which vehicle prices are lower. There is a wide
variety in the number of miles that owners drive per year. Some drivers
only drive 5,000 miles per year and others drive 25,000 miles or more.
Rationally those that drive many miles have more incentive to buy
vehicles with high fuel economy levels. In summary, there are a variety
of types of consumers that are in different financial situations and
drive different mileages per year. Since consumers are different and
use different reasoning in purchasing vehicles, and we do not yet have
an account of the distribution of their preferences or how that may
change over time as a result of this rulemaking, the answer is quite
ambiguous. Some may be induced by better fuel economy to purchase
vehicles more often to keep up with technology, some may purchase no
new vehicles because of the increase in vehicle price, and some may
purchase fewer vehicles and hold onto their vehicles longer. There is
great uncertainty about how consumers value fuel economy, and for this
reason, the impact of this fuel economy proposal on sales is uncertain.
    While it is difficult to determine how consumers will react to fuel
economy improvements attributable to the final rule, we believe that it
is likely that consumers will learn more about and increasingly value
fuel economy improvements in the future, but we also believe that
manufacturers and consumers are unlikely to place identical valuation
on fuel economy benefits. We believe for the reasons discussed above
that manufacturers will behave more conservatively in their assumptions
of how consumers value fuel economy than how on average consumers will
actually behave.
    Some commenters stated that sales will increase as a result of the
rule, as evidenced above in the above discussion of comments from Ceres
and the UAW. Others, including NADA, expressed concern that sales may
fall.

g. How does NHTSA plan to address this issue in the future?
    NHTSA is currently sponsoring work to develop a vehicle choice
model for potential use in the agency's future rulemaking analyses--
this work may help to better estimate the market's effective valuation
of future fuel economy improvements. This rule did not rely on a
vehicle choice model. With an integrated market share model, the CAFE
model would estimate how the sales volumes of individual vehicle models
would change in response to changes in fuel economy levels and prices
throughout the light vehicle market, possibly taking into account
interactions with the used vehicle market. Having done so, the model
would replace the sales estimates in the original market forecast with
those reflecting these model-estimated shifts, repeating the entire
modeling cycle until converging on a stable solution. We sought comment
on the potential for this approach to help the agency estimate sales
effects. Several commenters wanted the agency to either have the
vehicle choice model go through a full peer review (the Alliance) or to
be provided for public comment and review (NRDC) before being used.
There was wide disparity in the comments on the concept of using a
vehicle choice model to estimate the impacts on sales. The Alliance
supported the use of a vehicle choice model. The American Fuel and
Petrochemical Manufacturers \1323\ stated that it was concerned that
the analysis is not based on a model that considered consumer choices
and the impacts on different industries and individuals that would be
affected. The Natural Resources Defense Council (NRDC) \1324\ and Union
of Concerned Scientists (UCS) \1325\ did not support the use of a
consumer choice model and stated that the agencies should not rely on a
highly uncertain and idealized consumer choice model.
---------------------------------------------------------------------------

    \1323\ See EPA Docket EPA-HQ-OAR-2010-0799-9485.
    \1324\ See EPA Docket EPA-HQ-OAR-2010-0799-0284.
    \1325\ Id.
---------------------------------------------------------------------------

    NRDC stated that a consumer choice model could only rely on stated
or revealed preferences based on existing vehicles in the market place
and such a model is inappropriate for standards that drive the use of
new technology. In response, NHTSA agrees that further work on the
vehicle choice model is necessary, and is continuing to develop it.
Section IV.C.4 of the preamble discusses the current progress with the
choice model and next steps, and we refer the reader there for more
information.
h. Potential Impact on Employment in the Automotive Industry in the
Short Run
    There are three potential areas of employment in the automotive
industry that fuel economy standards could affect.\1326\ We briefly
outline those areas here.
---------------------------------------------------------------------------

    \1326\ For a general analysis of the potentially complex
employment effects of regulation, see Morgenstern, Richard D.,
William A. Pizer, and Jhih-Shyang Shih. ``Jobs Versus the
Environment: An Industry-Level Perspective.'' Journal of
Environmental Economics and Management 43 (2002): 412-436 (Docket
EPA-HQ-OAR-2010-0799).
---------------------------------------------------------------------------

     The first is the hiring of additional engineers by
automobile companies and their suppliers to do research and development
and testing on new technologies to determine their capabilities,
durability, platform introduction, etc. The agency anticipates that
there may be some level of additional job creation due to the added
research and development, overall program management, and subsequent
sales efforts required to market vehicles that have been redesigned for
significant improvements in fuel economy, especially for revolutionary
technologies such as hybrid and electric vehicles. In this respect, the
final rule will likely have a positive effect on employment. At the
same time, the levels of added employment are uncertain. In addition,
it is not clear how much of this effort will be accomplished by added
employment and how much by diverting existing employees to focus on
CAFE instead of other company priorities such as improved acceleration
performance, styling, marketing, new vehicle concepts, etc.
     The second area is the impact that new technologies would
have on production employment, both at suppliers and at auto
assemblers. Added parts, like turbochargers, or complexity of assembly
could have a positive impact on employment. The use of more exotic
steels, aluminum, or other materials to save weight could affect the
number of welds or attachment methods. It is uncertain to what extent
new CAFE technologies would require added steps in the assembly process
that would necessitate new hiring, but generally when content is added,
the number of employees in the supplier industry and on the assembly
line goes up.
     The third area is the potential impact that sales gains or
losses could have on production employment. This area is potentially
much more sensitive to change than the first two areas discussed above,
although for reasons discussed above its estimation is highly
uncertain. An increase in sales, produced for example by consumer
attention to overall costs and learning over time, would have a
positive effect on employment. A decrease in sales, produced by
increases in initial costs, would have a negative effect.
    We received a number of comments (from the Defour Group and some
private individuals) asserting that there will be decreases in
employment as a result of the costs of the rule, and a number of
comments (from the United Auto Workers, environmental organizations,
sustainable business groups, some private individuals, and others)
asserting increases in employment, based on the development of advanced
technologies and the reduction in net costs due to fuel savings. An
assessment by the Defour Group predicts a loss of 155,000 jobs in
manufacturing and supply, plus another 50,000 in distribution.\1327\ A
study by Ceres predicts job gains of 43,000 in the auto industry and
484,000 economy-wide.\1328\ Some comments cite a study by the Natural
Resources Defense Council, National Wildlife Federation, and United
Auto Workers that 150,000 auto workers already are working to supply
clean, fuel-efficient technologies.\1329\ The differences in results
for quantitative employment impacts are mainly due to difference in the
price impacts.
---------------------------------------------------------------------------

    \1327\ Walton, Thomas F., and Dean Drake, Defour Group LLC
(February 13, 2012). ``Comments on the Notice of Proposed Rulemaking
and Preliminary Regulatory Impact Analysis for MY 2017 to 2025 Fuel
Economy Standards.'' Docket EPA-HQ-OAR-2010-0799-9319.
    \1328\ Management Information Services, Inc. (July 2011). ``More
Jobs per Gallon: How Strong Fuel Economy/GHG Standards Will Fuel
American Jobs.'' Boston, MA: Ceres. Docket EPA-HQ-OAR-2010-0799-
0709.
    \1329\ Natural Resources Defense Council, National Wildlife
Federation, and United Auto Workers (August 2011). ``Supplying
Ingenuity: U.S. Suppliers of Clean, Fuel-Efficient Vehicle
Technologies,'' available at http://www.nrdc.org/transportation/autosuppliers/files/SupplierMappingReport.pdf (last accessed August
1, 2012). (Docket EPA-HQ-OAR-2010-0799)
---------------------------------------------------------------------------

    Estimates of decreases in employment commonly come from studies
that use cost estimates higher than those estimated by the agencies,
and sometimes lower benefits estimates, resulting in reductions in
vehicle sales. For instance, some comments from individuals cite the
National Automobile Dealers Association and Center for Automotive
Research for cost estimates of $5,000 to $6,000 per vehicle, much
higher than those

estimated by the agencies. Those studies commonly look at the
employment associated with vehicle sales, but not the employment
associated with producing the technologies needed to comply with the
standards, or changes in labor intensity of production. Analyses that
find increases in employment commonly start with increased vehicle
sales as a result of the rule. Many of these analyses also note that
even without increased unit sales, employment is likely to rise due to
the additional technology content of the vehicles sold.\1330\ In both
cases, ``multiplier'' effects, which extend employment impacts beyond
the auto sector to impacts on suppliers, other sectors, and expenditure
changes by workers, lead to large estimates, either positive or
negative, of the employment effects of the rule. We received the
suggestion to include in our analysis an alternative scenario where
there is less than full employment; the implication of less than full
employment is that multiplier effects are more likely. While we
examined all of these different employment estimates, we decided to
continue using our methodology from previous analyses, with some
updates to our method of calculating the impacts.
---------------------------------------------------------------------------

    \1330\ UAW/NRDC/Center for American Progress, ``Driving Growth:
How Clean Cars and Climate Policy Can Create Jobs,'' March 2010, p.
11.
---------------------------------------------------------------------------

    In order to obtain an estimate of potential job increases per unit
sales increase, we examined recent U.S. employment (original equipment
manufacturers and suppliers) and U.S. production. Total employment in
2000 reached a peak in the Motor Vehicle and Parts Manufacturing sector
of the economy averaging 1,313,500 workers (NAICS codes of 3361, 2, 3).
Then there was a steady decline to 1,096,900 in 2006 and more rapid
decreases in 2008, and 2009. Employment in 2009 averaged 664,000,
employment in 2010 averaged 675,000 and employment in the first six
months of 2011 has averaged 699,000. Table VII-19 shows how many
vehicles are produced by the average worker in the industry. Averaging
the information shown for the even years of 2000-2010, the average U.S.
domestic employee produces 11.3 vehicles (the same number as in 2008
and 2010). Thus, assuming that a projected sales gain or loss divided
by 11.3 would be one method of estimating the potential employment gain
or loss in any one year. This provides a measurement in job years. This
method underestimates the number of jobs per vehicle sold under the
rule, because it does not take into account the additional employment
associated with the additional fuel-saving technologies.
    We also examined the employment impact for production and non-
supervisory workers from the Bureau of Labor Statistics to see if there
was a more direct link between their employment level and production
than the white collar workers. There is a closer link between light
vehicle production in the U.S. and the number of production and non-
supervisory workers (for example, from 2002 to 2010, production fell by
44 percent; the number of production and non-supervisory workers in the
industry fell by 44 percent and the number of white collar workers fell
by 31 percent). However, in some years (2004 and 2006) the white-collar
jobs had a higher percentage loss than the blue-collar jobs. In this
analysis, the agency examines all jobs in the industry.

                         Table IV-142--U.S. Light Duty Vehicle Production and Employment
----------------------------------------------------------------------------------------------------------------
                                                                                Motor vehicle
                                                               U.S. Light      and parts U.S.    Production per
                           Year                                  vehicle         employment         employee
                                                               production          \1331\
----------------------------------------------------------------------------------------------------------------
2000......................................................        12,773,714         1,313,500               9.7
2002......................................................        13,568,385         1,151,300              11.8
2004......................................................        13,527,309         1,112,700              12.2
2006......................................................        12,855,845         1,069,800              11.7
2008......................................................         9,870,473           875,400              11.3
2010......................................................         7,597,147           674,600              11.3
                                                           -----------------------------------------------------
    Total/Average.........................................        70,192,873         6,197,300              11.3
----------------------------------------------------------------------------------------------------------------

    The Administration projects that full employment will return in
2018.\1332\ When the economy is at full employment, a fuel economy
regulation is unlikely to have much impact on net overall U.S.
employment; instead, labor would primarily be shifted from one sector
to another. These shifts in employment impose an opportunity cost on
society, approximated by the wages of the employees, as regulation
diverts workers from other activities in the economy. In this
situation, any effects on net employment are likely to be transitory as
workers change jobs (e.g., some workers may need to be retrained or
require time to search for new jobs, while shortages in some sectors or
regions could bid up wages to attract workers). On the other hand, if a
regulation comes into effect during a period of high unemployment, a
change in labor demand due to regulation may affect net overall U.S.
employment because the labor market is not in equilibrium. Schmalansee
and Stavins point out that net positive employment effects are possible
in the near term when the economy is at less than full employment due
to the potential hiring of idle labor resources by the regulated sector
to meet new requirements (e.g., to install new equipment) and new
economic activity in sectors related to the regulated sector longer
run, the net effect on employment is more difficult to predict and will
depend on the way in which the related industries respond to the
regulatory requirements. This program is expected to affect employment
in the regulated sector (auto manufacturing) and other sectors directly
affected by the final rule: auto parts suppliers, auto dealers, the
fuel supply market (which will face reduced petroleum production due to
reduced fuel demand but which may see additional demand for electricity
or other fuels). As discussed in the CAR and Ceres reports above, each
of these sectors could potentially have ripple

effects throughout the rest of the economy. These ripple effects depend
much more heavily on the state of the economy than do the direct
effects. As noted above, though, in a full-employment economy, any
changes in employment will result from people changing jobs or
voluntarily entering or exiting the workforce. In a full-employment
economy, employment impacts of this proposal will change employment in
specific sectors, but it will have small, if any, effect on aggregate
employment.
---------------------------------------------------------------------------

    \1331\ U.S. employment data is from the Bureau of Labor
Statistics, available at http://data.bls.gov/timeseries/CES3133600101?data_tool=XGtable (last accessed Aug. 10, 2012).
    \1332\ Based on the Congressional Budget Office January 2012
Report, ``The Budget and Economic Outlook, Fiscal Years 2012-2022,''
which predicted unemployment levels of 5.5% in 2018. See http://www.cbo.gov/publication/42905 (last accessed Aug. 10, 2012).
---------------------------------------------------------------------------

    This rule would take effect in 2017 through 2025; by then, the
current high unemployment may be moderated or ended. The Congressional
Budget Office has predicted full employment by 2018.\1333\ To the
extent that full employment is achieved, increases in employment are
not possible. For that reason, this analysis does not include
multiplier effects, but instead focuses on employment impacts in the
most directly affected industries. Those sectors are likely to face the
most concentrated employment impacts.
---------------------------------------------------------------------------

    \1333\ Based on the Congressional Budget Office January 2012
Report, ``The Budget and Economic Outlook, Fiscal Years 2012-2022,''
which predicted unemployment levels of 5.5% in 2018. See http://www.cbo.gov/publication/42905 (last accessed Aug. 10, 2012).
---------------------------------------------------------------------------

    Table IV-143 shows the potential cumulative impact on auto sector
employment over the MY 2017-2025 period in job years, without
considering or quantifying the ripple effect. This table takes the
results from sales and divides by 11.3 to obtain the impact on auto
sector employment. To estimate the proportion of domestic employment
affected by the change in sales, we use data from Ward's Automotive
Group for total car and truck production in the U.S. compared to total
car and truck sales in the U.S. For the period 2001-2010, the
proportion is 66.7 percent. We thus weight sales by this factor to get
an estimate of the effect on U.S. employment in the motor vehicle
manufacturing sector due to this rule. As in the sales analysis, the
table shows the potential impact for the preferred alternative for both
the MY 2010 baseline and for the MY 2008 baseline at the 3 percent and
7 percent discount rates for 6 different cases.
    Since the impact of this final rule on sales is very difficult to
predict, and sales have the largest potential effect on employment, the
impact of this final rule on employment is also very difficult to
predict. As with sales, the impact on employment is heavily affected by
the difference between manufacturers' investments in fuel-saving
technologies \1334\ and consumers' valuation of fuel savings. However,
since any negative impact of the rule on unit sales is partially offset
by increased employment per vehicle sold, it is highly unlikely that
the rule would lead to significant job losses in the short term in the
automotive industry.
---------------------------------------------------------------------------

    \1334\ As discussed above, these investments are affected both
by manufacturers' beliefs about consumers' valuation of fuel
economy, and by competitive dynamics, since the industry is composed
of multiple firms, each of which considers the case where a
competitor that doesn't invest ends up in a better position due to
gas prices at the low end of the expected distribution.

   Table IV--143 Analysis of Alternative Scenarios in Automotive \1335\ Sector Employment--in Thousands of Job
                                                      Years
                        [Passenger cars and light trucks combined preferred alternative]
----------------------------------------------------------------------------------------------------------------
                                                                                MYs 2017-2025   MYs 2017-2025
                                                                    Years fuel      employment      employment
               Years fuel valued by manufacturers                    valued by      impact (3%      impact (7%
                                                                     consumers    discount rate)  discount rate)
                                                                                (000's)         (000's)
----------------------------------------------------------------------------------------------------------------
                                                  2008 Baseline
----------------------------------------------------------------------------------------------------------------
0 Flat..........................................................            3 yr              54              45
0 Flat..........................................................            5 yr             223             191
* 1 yr..........................................................          * 1 yr            -160            -138
1 yr............................................................            3 yr             -21             -26
* 3 yr..........................................................          * 3 yr             -31             -32
* 5 yr..........................................................          * 5 yr               0              -2
----------------------------------------------------------------------------------------------------------------
                                                  2010 Baseline
----------------------------------------------------------------------------------------------------------------
0 Flat..........................................................            3 yr              59              51
0 Flat..........................................................            5 yr             225             193
* 1 yr..........................................................          * 1 yr            -143            -155
1 yr............................................................            3 yr              -3              -8
* 3 yr..........................................................          * 3 yr             -18             -19
* 5 yr..........................................................          * 5 yr               7               6
----------------------------------------------------------------------------------------------------------------
\1335\ The analysis does not reflect the likely positive impact in industry employment due to a change in
  vehicle content resulting from this rule.
* These scenarios are presented as theoretical cases. NHTSA believes it is unlikely that manufacturers and
  consumers would value improvements in fuel economy identically, and believes that on average, manufacturers
  will behave more conservatively in their assumptions of how consumers value fuel economy than how on average
  consumers will actually behave. NHTSA expects that in practice the number of years fuel is valued by
  manufacturers will be shorter than the number of years fuel is valued by consumers.

i. Scrappage Rates
    The effect of this rule on the use and scrappage of older vehicles
will be related to its effects on new vehicle prices, the fuel
efficiency of new vehicle models, and the total sales of new vehicles.
If the value of fuel savings resulting from improved fuel efficiency to
the typical potential buyer of a new vehicle outweighs the average
increase in new models' prices, sales of new vehicles will rise, while
scrappage rates of used vehicles will increase slightly. This will
cause the ``turnover'' of the vehicle fleet--that is, the retirement of
used vehicles and their replacement by new models--to accelerate
slightly, thus accentuating the anticipated effect of the

rule on fleet-wide fuel consumption and CO2 emissions.
However, if potential buyers value future fuel savings resulting from
the increased fuel efficiency of new models at less than the increase
in their average selling price, sales of new vehicles will decline, as
will the rate at which used vehicles are retired from service. This
effect will slow the replacement of used vehicles by new models, and
thus partly offset the anticipated effects of the final rules on fuel
use and emissions.
    Because the agencies are uncertain about how the value of projected
fuel savings from the final rules to potential buyers will compare to
their estimates of increases in new vehicle prices, we have not
attempted to estimate explicitly the effects of the rule on scrappage
of older vehicles and the turnover of the vehicle fleet.
6. Social Benefits, Private Benefits, and Potential Unquantified
Consumer Welfare Impacts of the Standards
    There are two viewpoints for evaluating the costs and benefits of
the increase in CAFE standards: the private perspective of vehicle
buyers themselves on the higher fuel economy levels that the rule would
require, and the economy-wide or ``social'' perspective. In order to
appreciate how these viewpoints can diverge, it is important to
distinguish between costs and benefits that are borne privately by
those who would have purchased new vehicles in the absence of the rule,
and costs and benefits that are distributed broadly throughout the
economy. The agency's analysis of benefits and costs from requiring
higher fuel efficiency, presented in detail above, includes several
categories of benefits (identified as ``social benefits'') that are not
limited to automobile buyers, and instead extend throughout the U.S.
(and global) economy. Examples of these benefits include reductions in
the energy security costs associated with U.S. petroleum imports, and
in the economic damages expected to result from climate change and
local air pollution. In contrast, other categories of benefits--
principally future fuel savings projected to result from higher fuel
economy, but also, for example, the value of less frequent refueling--
will be experienced exclusively by the initial purchasers and
subsequent owners of vehicle models whose fuel economy manufacturers
elect to improve (and are thus referred to as ``private benefits'').
    While the economy-wide or social benefits from increased fuel
economy represent a small but important share of the total economic
benefits from raising CAFE standards, NHTSA estimates that benefits to
vehicle buyers themselves will significantly exceed vehicle
manufacturers' costs for complying with the stricter fuel economy
standards this final rule establishes. The agency also assumes that the
costs of new technologies manufacturers employ to improve fuel economy
will ultimately be borne by vehicle buyers in the form of higher
purchase prices. Thus NHTSA concludes that the benefits to vehicle
buyers from requiring higher fuel efficiency will far outweigh the
costs they will be required to pay to obtain it. As an illustration,
Tables IV-144 and IV-145 report the agency's estimates of the average
lifetime values of fuel savings for MY 2017-2025 passenger cars and
light trucks, calculated using projected future retail fuel prices
consistent with the pre-tax prices used in its analysis of social costs
and benefits. The table compares NHTSA's estimates of the average
lifetime value of fuel savings for cars and light trucks to the price
increases it expects to occur as manufacturers attempt to recover their
costs for complying with increased CAFE standards. As the table shows,
the agency's estimates of the present value of lifetime fuel savings
(discounted using the OMB-recommended 3% rate) substantially outweigh
projected vehicle price increases for both cars and light trucks in
every model year, even under the assumption that all of manufacturers'
technology outlays are passed on to buyers in the form of higher
selling prices for new cars and light trucks. By model year 2025, NHTSA
projects that average lifetime fuel savings will exceed the average
price increase by between $3,800 and $4,300 for cars, and by more than
$5,800 for light trucks.

     Table IV-144--NHTSA Estimated Value of Lifetime Fuel Savings vs. Vehicle Price Increases--MYs 2017-2021
----------------------------------------------------------------------------------------------------------------
                                                                                Model year
            Fleet                  Measure          MY    ------------------------------------------------------
                                                 baseline     2017       2018       2019       2020       2021
----------------------------------------------------------------------------------------------------------------
Passenger Cars...............  Value of fuel         2008      $872-    $1,657-    $2,390-    $3,269-    $3,852-
                                savings.
                                                     2010     $1,090     $1,609     $2,540     $3,311     $3,954
                               Average price         2008      $233-      $434-      $602-      $904-    $1,105-
                                increase.
                                                     2010       $364       $484       $659       $858       $994
                               Difference.....       2008      $639-    $1,222-    $1,789-    $2,366-    $2,747-
                                                     2010       $726     $1,125     $1,881     $2,453     $2,960
Light Trucks.................  Value of fuel         2008      $537-    $1,340-    $2,665-    $3,793-    $5,183-
                                savings.
                                                     2010       $427       $817     $2,031     $3,142     $4,621
                               Average price         2008       $78-      $191-      $422-      $620-      $853-
                                increase.
                                                     2010       $147       $196       $396       $628       $907
                               Difference.....       2008      $459-    $1,149-    $2,243-    $3,173-    $4,330-
                                                     2010       $280       $621     $1,635     $2,514     $3,714
----------------------------------------------------------------------------------------------------------------

     Table IV-145--NHTSA Estimated Value of Lifetime Fuel Savings vs. Vehicle Price Increases--MYs 2022-2025
----------------------------------------------------------------------------------------------------------------
                                                                                Model year
               Fleet                       Measure             MY    -------------------------------------------
                                                            baseline     2022       2023       2024       2025
----------------------------------------------------------------------------------------------------------------
Passenger Cars....................  Value of fuel savings       2008    $4,216-    $4,571-    $5,101-    $5,496-
                                                                2010     $4,339     $4,880     $5,440     $5,881
                                    Average price               2008    $1,219-    $1,326-    $1,666-    $1,738-
                                     increase.
                                                                2010     $1,091     $1,221     $1,482     $1,578

                                    Difference...........       2008    $2,997-    $3,245-    $3,435-    $3,758-
                                                                2010     $3,248     $3,659     $3,958     $4,303
Light Trucks......................  Value of fuel savings       2008    $5,707-    $6,094-    $6,673-    $7,180-
                                                                2010     $5,068     $5,747     $6,431     $7,017
                                    Average price               2008      $949-      $994-    $1,076-    $1,171-
                                     increase.
                                                                2010       $948     $1,056     $1,148     $1,226
                                    Difference...........       2008    $4,758-    $5,100-    $5,597-    $6,008-
                                                                2010     $4,126     $4,694     $5,289     $5,804
----------------------------------------------------------------------------------------------------------------

    The comparisons above immediately raise the question of why buyers
would not purchase vehicles with the higher fuel economy levels the
rule requires manufacturers to achieve in future model years even if
NHTSA did not adopt it. They also raise the question of whether it is
appropriate to assume that manufacturers would not elect to provide
higher fuel economy even in the absence of increases in CAFE standards,
since the comparisons in Tables IV-144 and IV-145 suggest that doing so
would increase the prices that potential buyers would be willing to pay
for many new vehicle models by far more than it would raise their
manufacturers' costs of produce them. In other words, these comparisons
suggest that increasing fuel economy would be an effective strategy for
many manufacturers to expand their sales of new vehicles and increase
profits. More specifically, why would potential buyers of new vehicles
hesitate to purchase models offering higher fuel economy, when doing so
would produce the substantial economic savings implied by the
comparisons presented in Tables IV-144 and IV-145? And why would
manufacturers voluntarily forego opportunities to increase the
attractiveness, value, and competitive positioning of their car and
light truck models--and thus their own profits--by improving their fuel
economy?
    One explanation for why this might arise is that the market for
vehicle fuel economy does not appear to work perfectly, and that higher
CAFE standards are necessary to require manufacturers to produce--and
potential buyers to purchase--models with higher fuel economy. One
source of such market imperfections might be limited availability of
information to consumers about the savings from purchasing models that