OMB guidance also indicates that savers appear to discount future
consumption at an average real (that is, adjusted to remove the effect
of inflation) rate of about 3 percent when they face little risk about
its likely level. Since the real rate that savers use to discount
future consumption represents a reasonable estimate of consumers' rate
of time preference, NHTSA believes that the 3 percent rate to discount
projected future benefits and costs resulting from higher CAFE
standards for MY 2012-2016 passenger cars and light trucks is more
appropriate than 7 percent, but presents both.\639\ One commenter,
NRDC, supported the agencies' use of a 3 percent discount rate as
consistent with DOE practice in energy efficiency-related rulemakings
and OMB guidance. OMB guidance actually requires that benefits and
costs be presented at both a 3 and a 7 percent discount rate.
---------------------------------------------------------------------------

    \639\ Office of Management and Budget, Circular A-4,
``Regulatory Analysis,'' September 17, 2003, 33. Available at http:/
/www.whitehouse.gov/omb/circulars/a004/a-4.pdf (last accessed August
9, 2009).
---------------------------------------------------------------------------

    Because there is some remaining uncertainty about whether vehicle
manufacturers will completely recover their costs for complying with
higher CAFE standards by increasing vehicle sales prices, however,
NHTSA also presents these benefit and cost estimates using a higher
discount rate. OMB guidance indicates that the real economy-wide
opportunity cost of capital is the appropriate discount rate to apply
to future benefits and costs when the primary effect of a regulation is
``* * * to displace or alter the use of capital in the private
sector,'' and OMB estimates that this rate currently averages about 7
percent.\640\ Thus the agency has also examined its benefit and cost
estimates for alternative MY 2012-2016 CAFE standards using a 7 percent
real discount rate.
---------------------------------------------------------------------------

    \640\ Id.
---------------------------------------------------------------------------

    In its proposed rule, NHTSA sought comment on whether it should
evaluate CAFE standards using a discount rate of 3 percent, 7 percent,
or an alternative value. NRDC not only opposed the agency's use of a 7
percent discount rate, but also opposed conducting even sensitivity
analyses with discount rates higher than 3 percent. In contrast, two
other commenters, NADA and the Institute for Energy Research, advised
that the agencies should use discount rates of 7 percent or higher.
NADA argued that the most appropriate discount rate would be one closer
to historical financing rates on motor vehicle loans (which currently
average about 6.5 percent), while the Institute for Energy Research
argued that consumers may have much higher discount rates than the
agencies assumed, perhaps even as high as 25 percent.
    After carefully considering these comments, NHTSA has elected to
use discount rates of both 3 and 7 percent in the analysis supporting
this final rule. As indicated above, the agency believes that vehicle
manufacturers will recover most or all of their added costs for
complying with the CAFE standards this rule establishes by raising
sales prices for some or all vehicle models. As a consequence, this
regulation will thus primarily affect vehicle purchases and related
consumption decisions, which suggests that its future benefits and
costs should be discounted at the rate of time preference vehicle
buyers reveal in their consumption and savings behavior. OMB's 3
percent figure appears to be a conservative (i.e., low) estimate of
this rate, because it assumes in effect that vehicle buyers face little
risk about the value of future fuel savings and other benefits from the
rule; nevertheless, in the current economic environment it appears to
represent a reasonable estimate of consumers' rate of time preference.
Thus NHTSA has mainly relied upon the 3 percent rate to discount
projected future benefits and costs resulting from higher CAFE
standards for MY 2012-2016 passenger cars and light trucks
    One important exception to the 3 percent discount rate is the rates
used to discount benefits from reducing CO2 emissions from
the years in which reduced emissions occur, which span the lifetimes of
MY 2012-2016 cars and light trucks, to their present values. In order
to ensure consistency in the derivation and use of the interagency
group's estimates of the unit values of reducing CO2
emissions, the benefits from reducing those emissions during each
future year are discounted using the same ``intergenerational''
discount rates that were used to derive each of the alternative unit
values of reducing CO2 emissions. As indicate in Table
IV.C.3-2 above, these rates are 2.5 percent, 3 percent, and 5 percent
depending on which estimate of the SCC is being considered.\641\
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    \641\ The fact that the 3 percent discount rate used by the
interagency group to derive its central estimate of the SCC is
identical to the 3 percent short-term or ``intra-generational''
discount rate used by NHTSA to discount future benefits other than
reductions in CO2 emissions is coincidental, and should
not be interpreted as a required condition that must be satisfied in
future rulemakings.
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n. Accounting for Uncertainty in Benefits and Costs
    In analyzing the uncertainty surrounding its estimates of benefits
and costs from alternative CAFE standards, NHTSA has considered
alternative estimates of those assumptions and parameters likely to
have the largest effect. These include the projected costs of fuel
economy-improving technologies and their expected effectiveness in
reducing vehicle fuel consumption, forecasts of future fuel prices, the
magnitude of the rebound effect, the reduction in external economic
costs resulting from lower U.S. oil imports, and the discount rate
applied to future benefits and costs. The range for each of these
variables employed in the uncertainty analysis is presented in the
section of this notice discussing each variable.
    The uncertainty analysis was conducted by assuming independent
normal probability distributions for each of these variables, using the
low and high estimates for each variable as the values below which 5
percent and

95 percent of observed values are believed to fall. Each trial of the
uncertainty analysis employed a set of values randomly drawn from each
of these probability distributions, assuming that the value of each
variable is independent of the others. Benefits and costs of each
alternative standard were estimated using each combination of
variables. A total of 1,000 trials were used to establish the likely
probability distributions of estimated benefits and costs for each
alternative standard.
o. Where can readers find more information about the economic
assumptions?
    Much more detailed information is provided in Chapter VIII of the
FRIA, and a discussion of how NHTSA and EPA jointly reviewed and
updated economic assumptions for purposes of this final rule is
available in Chapter 4 of the Joint TSD. In addition, all of NHTSA's
model input and output files are now public and available for the
reader's review and consideration. The economic input files can be
found in the docket for this final rule, NHTSA-2009-0059, and on
NHTSA's Web site.\642\ Finally, because much of NHTSA's economic
analysis for purposes of this final rule builds on the work that was
done for the MY 2011 final rule, we refer readers to that document as
well for background information concerning how NHTSA's assumptions
regarding economic inputs for CAFE analysis have evolved over the past
several rulemakings, both in response to comments and as a result of
the agency's growing experience with this type of analysis.\643\
---------------------------------------------------------------------------

    \642\ See http://www.nhtsa.dot.gov (click on ``Fuel Economy
Standards (CAFE),'' click on ``Related Links: CAFE Compliance and
Effects Modeling System: The Volpe Model'').
    \643\ 74 FR 14308-14358 (Mar. 30, 2009).
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4. How does NHTSA use the assumptions in its modeling analysis?
    In developing today's final CAFE standards, NHTSA has made
significant use of results produced by the CAFE Compliance and Effects
Model (commonly referred to as ``the CAFE model'' or ``the Volpe
model''), which DOT's Volpe National Transportation Systems Center
developed specifically to support NHTSA's CAFE rulemakings. The model,
which has been constructed specifically for the purpose of analyzing
potential CAFE standards, integrates the following core capabilities:
    (1) Estimating how manufacturers could apply technologies in
response to new fuel economy standards,
    (2) Estimating the costs that would be incurred in applying these
technologies,
    (3) Estimating the physical effects resulting from the application
of these technologies, such as changes in travel demand, fuel
consumption, and emissions of carbon dioxide and criteria pollutants,
and
    (4) Estimating the monetized societal benefits of these physical
effects.
    An overview of the model follows below. Separate model
documentation provides a detailed explanation of the functions the
model performs, the calculations it performs in doing so, and how to
install the model, construct inputs to the model, and interpret the
model's outputs. Documentation of the model, along with model
installation files, source code, and sample inputs are available at
NHTSA's Web site. The model documentation is also available in the
docket for today's final rule, as are inputs for and outputs from
analysis of today's final CAFE standards.
a. How does the model operate?
    As discussed above, the agency uses the Volpe model to estimate how
manufacturers could attempt to comply with a given CAFE standard by
adding technology to fleets that the agency anticipates they will
produce in future model years. This exercise constitutes a simulation
of manufacturers' decisions regarding compliance with CAFE standards.
    This compliance simulation begins with the following inputs: (a)
The baseline and reference market forecast discussed above in Section
IV.C.1 and Chapter 1 of the TSD, (b) technology-related estimates
discussed above in Section IV.C.2 and Chapter 3 of the TSD, (c)
economic inputs discussed above in Section IV.C.3 and Chapter 4 of the
TSD, and (d) inputs defining baseline and potential new CAFE standards.
For each manufacturer, the model applies technologies in a sequence
that follows a defined engineering logic (``decision trees'' discussed
in the MY 2011 final rule and in the model documentation) and a cost-
minimizing strategy in order to identify a set of technologies the
manufacturer could apply in response to new CAFE standards.\644\ The
model applies technologies to each of the projected individual vehicles
in a manufacturer's fleet, until one of three things occurs:
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    \644\ NHTSA does its best to remain scrupulously neutral in the
application of technologies through the modeling analysis, to avoid
picking technology ``winners.'' The technology application
methodology has been reviewed by the agency over the course of
several rulemakings, and commenters have been generally supportive
of the agency's approach. See, e.g., 74 FR 14238-14246 (Mar. 30,
2009).
---------------------------------------------------------------------------

    (1) The manufacturer's fleet achieves compliance with the
applicable standard;
    (2) The manufacturer ``exhausts'' \645\ available technologies; or
---------------------------------------------------------------------------

    \645\ In a given model year, the model makes additional
technologies available to each vehicle model within several
constraints, including (a) whether or not the technology is
applicable to the vehicle model's technology class, (b) whether the
vehicle is undergoing a redesign or freshening in the given model
year, (c) whether engineering aspects of the vehicle make the
technology unavailable (e.g., secondary axle disconnect cannot be
applied to two-wheel drive vehicles), and (d) whether technology
application remains within ``phase in caps'' constraining the
overall share of a manufacturer's fleet to which the technology can
be added in a given model year. Once enough technology is added to a
given manufacturer's fleet in a given model year that these
constraints make further technology application unavailable,
technologies are ``exhausted'' for that manufacturer in that model
year.
---------------------------------------------------------------------------

    (3) For manufacturers estimated to be willing to pay civil
penalties, the manufacturer reaches the point at which doing so would
be more cost-effective (from the manufacturer's perspective) than
adding further technology.\646\
---------------------------------------------------------------------------

    \646\ This possibility was added to the model to account for the
fact that under EPCA/EISA, manufacturers must pay fines if they do
not achieve compliance with applicable CAFE standards. 49 U.S.C.
32912(b). NHTSA recognizes that some manufacturers will find it more
cost-effective to pay fines than to achieve compliance, and believes
that to assume these manufacturers would exhaust available
technologies before paying fines would cause unrealistically high
estimates of market penetration of expensive technologies such as
diesel engines and strong hybrid electric vehicles, as well as
correspondingly inflated estimates of both the costs and benefits of
any potential CAFE standards. NHTSA thus includes the possibility of
manufacturers choosing to pay fines in its modeling analysis in
order to achieve what the agency believes is a more realistic
simulation of manufacturer decision-making. Unlike flex-fuel and
other credits, NHTSA is not barred by statute from considering fine-
payment in determining maximum feasible standards under EPCA/EISA.
49 U.S.C. 32902(h).
---------------------------------------------------------------------------

    As discussed below, the model has also been modified in order to
apply additional technology in early model years if doing so will
facilitate compliance in later model years. This is designed to
simulate a manufacturer's decision to plan for CAFE obligations several
years in advance, which NHTSA believes better replicates manufacturers'
actual behavior as compared to the year-by-year evaluation which EPCA
would otherwise require.
    The model accounts explicitly for each model year, applying most
technologies when vehicles are scheduled to be redesigned or freshened,
and carrying forward technologies between model years. The CAFE model
accounts explicitly for each model year because EPCA requires that
NHTSA make a year-by-year determination of the appropriate level of
stringency and then set the standard at

that level, while ensuring ratable increases in average fuel
economy.\647\ The multi-year planning capability mentioned above
increases the model's ability to simulate manufacturers' real-world
behavior, accounting for the fact that manufacturers will seek out
compliance paths for several model years at a time, while accommodating
the year-by-year requirement.
---------------------------------------------------------------------------

    \647\ 49 U.S.C. 32902(a) states that at least 18 months before
the beginning of each model year, the Secretary of Transportation
shall prescribe by regulation average fuel economy standards for
automobiles manufactured by a manufacturer in that model year, and
that each standard shall be the maximum feasible average fuel
economy level that the Secretary decides the manufacturers can
achieve in that year. NHTSA has long interpreted this statutory
language to require year-by-year assessment of manufacturer
capabilities. 49 U.S.C. 32902(b)(2)(C) also requires that standards
increase ratably between MY 2011 and MY 2020.
---------------------------------------------------------------------------

    The model also calculates the costs, effects, and benefits of
technologies that it estimates could be added in response to a given
CAFE standard.\648\ It calculates costs by applying the cost estimation
techniques discussed above in Section IV.C.2, and by accounting for the
number of affected vehicles. It accounts for effects such as changes in
vehicle travel, changes in fuel consumption, and changes in greenhouse
gas and criteria pollutant emissions. It does so by applying the fuel
consumption estimation techniques also discussed in Section IV.C.2, and
the vehicle survival and mileage accumulation forecasts, the rebound
effect estimate and the fuel properties and emission factors discussed
in Section IV.C.3. Considering changes in travel demand and fuel
consumption, the model estimates the monetized value of accompanying
benefits to society, as discussed in Section IV.C.3. The model
calculates both the undiscounted and discounted value of benefits that
accrue over time in the future.
---------------------------------------------------------------------------

    \648\ As for all of its other rulemakings, NHTSA is required by
Executive Order 12866 and DOT regulations to analyze the costs and
benefits of CAFE standards. Executive Order 12866, 58 FR 51735 (Oct.
4, 1993); DOT Order 2100.5, ``Regulatory Policies and Procedures,''
1979, available at http://regs.dot.gov/rulemakingrequirements.htm
(last accessed February 21, 2010).
---------------------------------------------------------------------------

    The Volpe model has other capabilities that facilitate the
development of a CAFE standard. It can be used to fit a mathematical
function forming the basis for an attribute-based CAFE standard,
following the steps described below. It can also be used to evaluate
many (e.g., 200 per model year) potential levels of stringency
sequentially, and identify the stringency at which specific criteria
are met. For example, it can identify the stringency at which net
benefits to society are maximized, the stringency at which a specified
total cost is reached, or the stringency at which a given average
required fuel economy level is attained. This allows the agency to
compare more easily the impacts in terms of fuel savings, emissions
reductions, and costs and benefits of achieving different levels of
stringency according to different criteria. The model can also be used
to perform uncertainty analysis (i.e., Monte Carlo simulation), in
which input estimates are varied randomly according to specified
probability distributions, such that the uncertainty of key measures
(e.g., fuel consumption, costs, benefits) can be evaluated.
b. Has NHTSA considered other models?
    Nothing in EPCA requires NHTSA to use the Volpe model. In
principle, NHTSA could perform all of these tasks through other means.
For example, in developing today's final standards, the agency did not
use the Volpe model's curve fitting routines; rather, as discussed
above in Section II, the agency fitted curves outside the model (as for
the NPRM) but elected to retain the curve shapes defining the proposed
standards. In general, though, these model capabilities have greatly
increased the agency's ability to rapidly, systematically, and
reproducibly conduct key analyses relevant to the formulation and
evaluation of new CAFE standards.
    During its previous rulemaking, which led to the final MY 2011
standards promulgated earlier this year, NHTSA received comments from
the Alliance and CARB encouraging NHTSA to examine the usefulness of
other models. As discussed in that final rule, NHTSA, having undertaken
such consideration, concluded that the Volpe model is a sound and
reliable tool for the development and evaluation of potential CAFE
standards.\649\ Also, although some observers have criticized analyses
the agency has conducted using the Volpe model, those criticisms have
largely concerned inputs to the model (such as fuel prices and the
estimated economic cost of CO2 emissions), not the model
itself. In comments on the NPRM preceding today's final rule, one of
these observers, the Center for Biological Diversity (CBD), suggested
that the revisions to such inputs have produced an unbiased cost-
benefit analysis.
---------------------------------------------------------------------------

    \649\ 74 FR 14372 (Mar. 30, 2009).
---------------------------------------------------------------------------

    One commenter, the International Council on Clean Transportation
(ICCT) suggested that the Volpe model is excessively complex and
insufficiently transparent. However, in NHTSA's view, the complexity of
the Volpe model has evolved in response to the complex analytical
demands surrounding very significant regulations impacting a large and
important sector of the economy, and ICCT's own comments illustrate
some of the potential pitfalls of model simplification. Furthermore,
ICCT's assertions regarding model transparency relate to the use of
confidential business information, not to the Volpe model itself; as
discussed elsewhere in this final rule, NHTSA and the Volpe Center have
taken pains to make the Volpe model transparent by releasing the model
and supporting documentation, along with the underlying source code and
accompanying model inputs and outputs. Therefore, the agency disagrees
with these ICCT comments.
    In reconsidering and reaffirming this conclusion for purposes of
this NPRM, NHTSA notes that the Volpe model not only has been formally
peer-reviewed and tested through three rulemakings, but also has some
features especially important for the analysis of CAFE standards under
EPCA/EISA. Among these are the ability to perform year-by-year
analysis, and the ability to account for engineering differences
between specific vehicle models.
    EPCA requires that NHTSA set CAFE standards for each model year at
the level that would be ``maximum feasible'' for that year.\650\ Doing
so requires the ability to analyze each model year and, when developing
regulations covering multiple model years, to account for the
interdependency of model years in terms of the appropriate levels of
stringency for each one. Also, as part of the evaluation of the
economic practicability of the standards, as required by EPCA, NHTSA
has traditionally assessed the annual costs and benefits of the
standards. The first (2002) version of DOT's model treated each model
year separately, and did not perform this type of explicit accounting.
Manufacturers took strong exception to these shortcomings. For example,
GM commented in 2002 that ``although the table suggests that the
proposed standard for MY 2007, considered in isolation, promises
benefits exceeding costs, that anomalous outcome is merely an artifact
of the peculiar Volpe methodology, which treats each year independently
of any other * * *'' In 2002, GM also criticized DOT's analysis for, in
some cases, adding a technology in MY 2006 and then replacing it with
another technology in MY 2007. GM

(and other manufacturers) argued that this completely failed to
represent true manufacturer product-development cycles, and therefore
could not be technologically feasible or economically practicable.
---------------------------------------------------------------------------

    \650\ 49 U.S.C. 32902(a).
---------------------------------------------------------------------------

    In response to these concerns, and to related concerns expressed by
other manufacturers, DOT modified the CAFE model in order to account
for dependencies between model years and to better represent
manufacturers' planning cycles, in a way that still allowed NHTSA to
comply with the statutory requirement to determine the appropriate
level of the standards for each model year. This was accomplished by
limiting the application of many technologies to model years in which
vehicle models are scheduled to be redesigned (or, for some
technologies, ``freshened''), and by causing the model to ``carry
forward'' applied technologies from one model year to the next.
    During the recent rulemaking for MY 2011 passenger cars and light
trucks, DOT further modified the CAFE model to account for cost
reductions attributable to ``learning effects'' related to volume
(i.e., economies of scale) and the passage of time (i.e., time-based
learning), both of which evolve on year-by-year basis. These changes
were implemented in response to comments by environmental groups and
other stakeholders.
    The Volpe model is also able to account for important engineering
differences between specific vehicle models, and to thereby reduce the
risk of applying technologies that may be incompatible with or already
present on a given vehicle model. Some commenters have previously
suggested that manufacturers are most likely to broadly apply generic
technology ``packages,'' and the Volpe model does tend to form
``packages'' dynamically, based on vehicle characteristics, redesign
schedules, and schedules for increases in CAFE standards. For example,
under the final CAFE standards for passenger cars, the CAFE model
estimated that manufacturers could apply turbocharged SGDI engines
mated with dual-clutch AMTs to 2.4 million passenger cars in MY 2016,
about 22 percent of the MY 2016 passenger car fleet. Recent
modifications to the model, discussed below, to represent multi-year
planning, increase the model's tendency to add relatively cost-
effective technologies when vehicles are estimated to be redesigned,
and thereby increase the model's tendency to form such packages.
    On the other hand, some manufacturers have indicated that
especially when faced with significant progressive increases in the
stringency of new CAFE standards, they are likely to also look for
narrower opportunities to apply specific technologies. By progressively
applying specific technologies to specific vehicle models, the CAFE
model also produces such outcomes. For example, under the final CAFE
standards for passenger cars, the CAFE model estimated that in MY 2012,
some manufacturers could find it advantageous to apply SIDI to some
vehicle models without also adding turbochargers.
    By following this approach of combining technologies incrementally
and on a model-by-model basis, the CAFE model is able to account for
important engineering differences between vehicle models and avoid
unlikely technology combinations. For example, the model does not apply
dual-clutch AMTs (or strong hybrid systems) to vehicle models with 6-
speed manual transmissions. Some vehicle buyers prefer a manual
transmission; this preference cannot be assumed away. The model's
accounting for manual transmissions is also important for vehicles with
larger engines: For example, cylinder deactivation cannot be applied to
vehicles with manual transmissions because there is no reliable means
of predicting when the driver will change gears. By retaining cylinder
deactivation as a specific technology rather than part of a pre-
determined package and by retaining differentiation between vehicles
with different transmissions, DOT's model is able to target cylinder
deactivation only to vehicle models for which it is technologically
feasible.
    The Volpe model also produces a single vehicle-level output file
that, for each vehicle model, shows which technologies were present at
the outset of modeling, which technologies were superseded by other
technologies, and which technologies were ultimately present at the
conclusion of modeling. For each vehicle, the same file shows resultant
changes in vehicle weight, fuel economy, and cost. This provides for
efficient identification, analysis, and correction of errors, a task
with which the public can now assist the agency, since all inputs and
outputs are public.
    Such considerations, as well as those related to the efficiency
with which the Volpe model is able to analyze attribute-based CAFE
standards and changes in vehicle classification, and to perform higher-
level analysis such as stringency estimation (to meet predetermined
criteria), sensitivity analysis, and uncertainty analysis, lead the
agency to conclude that the model remains the best available to the
agency for the purposes of analyzing potential new CAFE standards.
c. What changes has DOT made to the model?
    As discussed in the NPRM preceding today's final rule, the Volpe
model has been revised to make some minor improvements, and to add one
significant new capability: The ability to simulate manufacturers'
ability to engage in ``multi-year planning.'' Multi-year planning
refers to the fact that when redesigning or freshening vehicles,
manufacturers can anticipate future fuel economy or CO2
standards, and add technologies accounting for these standards. For
example, a manufacturer might choose to over-comply in a given model
year when many vehicle models are scheduled for redesign, in order to
facilitate compliance in a later model year when standards will be more
stringent yet few vehicle models are scheduled for redesign.\651\ Prior
comments have indicated that the Volpe model, by not representing such
manufacturer choices, tended to overestimate compliance costs. However,
because of the technical complexity involved in representing these
choices when, as in the Volpe model, each model year is accounted for
separately and explicitly, the model could not be modified to add this
capability prior to the statutory deadline for the MY 2011 final
standards.
---------------------------------------------------------------------------

    \651\ Although a manufacturer may, in addition, generate CAFE
credits in early model years for use in later model years (or, less
likely, in later years for use in early years), EPCA does not allow
NHTSA, when setting CAFE standards, to account for manufacturers'
use of CAFE credits.
---------------------------------------------------------------------------

    The model now includes this capability, and NHTSA has applied it in
conducting analysis to support the NPRM and in analyzing the standards
finalized today. Consequently, this new capability often produces
results indicating that manufacturers could over-comply in some model
years (with corresponding increases in costs and benefits in those
model years) and thereby ``carry forward'' technology into later model
years in order to reduce compliance costs in those later model years.
NHTSA believes this better represents how manufacturers would actually
respond to new CAFE standards, and thereby produces more realistic
estimates of the costs and benefits of such standards.
    The Volpe model has also been modified to accommodate inputs
specifying the amount of CAFE credit to be applied to each
manufacturer's fleet.

Although the model is not currently capable of estimating
manufacturers' decisions regarding the generation and use of CAFE
credits, and EPCA does not allow NHTSA, in setting CAFE standards, to
take into account manufacturers' potential use of credits, this
additional capability in the Volpe model provides a basis for more
accurately estimating costs, effects, and benefits that may actually
result from new CAFE standards. Insofar as some manufacturers actually
do earn and use CAFE credits, this provides NHTSA with some ability to
examine outcomes more realistically than EPCA allows for purposes of
setting new CAFE standards.
    In comments on recent NHTSA rulemakings, some reviewers have
suggested that the Volpe model should be modified to estimate the
extent to which new CAFE standards would induce changes in the mix of
vehicles in the new vehicle fleet. NHTSA, like EPA, agrees that a
``market shift'' model, also called a consumer vehicle choice model,
could provide useful information regarding the possible effects of
potential new CAFE standards. An earlier experimental version of the
Volpe model included a multinomial logit model that estimated changes
in sales resulting from CAFE-induced increases in new vehicle fuel
economy and prices. A fuller description of this attempt can be found
in Section V of the FRIA. However, NHTSA has thus far been unable to
develop credible coefficients specifying such a model. In addition, as
discussed in Section II.H.4, such a model is sensitive to the
coefficients used in it, and there is great variation over some key
values of these coefficients in published studies.
    In the NPRM preceding today's final rule, NHTSA sought comment on
ways to improve on this earlier work and develop this capability
effectively. Some comments implied that the agency should continue work
to do so, without providing specific recommendations. The Alliance of
Automobile Manufacturers identified consumer choice as one of several
factors outside the industry's control yet influential with respect to
the agencies' analysis. Also, the University of Pennsylvania
Environmental Law Project suggested that the rule would change
consumers' vehicle purchasing decisions, and the California Air
Resources Board expressed support for continued consideration of
consumer choice modeling. On the other hand, citing concerns regarding
model calibration, handling of advanced technologies, and applicability
to the future light vehicle market, ACEEE, ICCT, UCS, and NRDC all
expressed opposition to the possibility of using consumer choice models
in estimating the costs and benefits of new standards. Notwithstanding
comments on this issue, NHTSA has been unable to further develop this
capability in time to include it in the analysis supporting decisions
regarding final CAFE standards. The agency will, however, continue
efforts to develop and make use of this capability in future
rulemakings, taking into account comments received in connection with
today's final rule.
d. Does the model set the standards?
    Since NHTSA began using the Volpe model in CAFE analysis, some
commenters have interpreted the agency's use of the model as the way by
which the agency chooses the maximum feasible fuel economy standards.
This is incorrect. Although NHTSA currently uses the Volpe model as a
tool to inform its consideration of potential CAFE standards, the Volpe
model does not determine the CAFE standards that NHTSA proposes or
promulgates as final regulations. The results it produces are
completely dependent on inputs selected by NHTSA, based on the best
available information and data available in the agency's estimation at
the time standards are set. Although the model has been programmed in
previous rulemakings to estimate at what stringency net benefits are
maximized, it was not the model's decision to seek that level of
stringency, it was the agency's, as it is always the agency's decision
what level of CAFE stringency is appropriate. Ultimately, NHTSA's
selection of appropriate CAFE standards is governed and guided by the
statutory requirements of EPCA, as amended by EISA: NHTSA sets the
standard at the maximum feasible average fuel economy level that it
determines is achievable during a particular model year, considering
technological feasibility, economic practicability, the effect of other
standards of the Government on fuel economy, and the need of the nation
to conserve energy.
    NHTSA considers the results of analyses conducted by the Volpe
model and analyses conducted outside of the Volpe model, including
analysis of the impacts of carbon dioxide and criteria pollutant
emissions, analysis of technologies that may be available in the long
term and whether NHTSA could expedite their entry into the market
through these standards, and analysis of the extent to which changes in
vehicle prices and fuel economy might affect vehicle production and
sales. Using all of this information--not solely that from the Volpe
model--the agency considers the governing statutory factors, along with
environmental issues and other relevant societal issues such as safety,
and promulgates the standards based on its best judgment on how to
balance these factors.
    This is why the agency considered eight regulatory alternatives,
only one of which reflects the agency's final standards, based on the
agency's determinations and assumptions. Others assess alternative
standards, some of which exceed the final standards and/or the point at
which net benefits are maximized.\652\ These comprehensive analyses,
which also included scenarios with different economic input assumptions
as presented in the FEIS and FRIA, are intended to inform and
contribute to the agency's consideration of the ``need of the United
States to conserve energy,'' as well as the other statutory factors. 49
U.S.C. 32902(f). Additionally, the agency's analysis considers the need
of the nation to conserve energy by accounting for economic
externalities of petroleum consumption and monetizing the economic
costs of incremental CO2 emissions in the social cost of
carbon. NHTSA uses information from the model when considering what
standards to propose and finalize, but the model does not determine the
standards.
---------------------------------------------------------------------------

    \652\ See Section IV.F below for a discussion of the regulatory
alternatives considered in this rulemaking.
---------------------------------------------------------------------------

e. How does NHTSA make the model available and transparent?
    Model documentation, which is publicly available in the rulemaking
docket and on NHTSA's Web site, explains how the model is installed,
how the model inputs (all of which are available to the public) \653\
and outputs are structured, and how the model is used. The model can be
used on any Windows-based personal computer with Microsoft Office 2003
or 2007 and the Microsoft .NET framework installed (the latter
available without charge from Microsoft). The executable version of the
model and the underlying source code are also available at NHTSA's Web
site. The input files used to conduct the core analysis documented in
this final rule are available in the public docket. With the model and
these input files, anyone is capable of independently

running the model to repeat, evaluate, and/or modify the agency's
analysis.
---------------------------------------------------------------------------

    \653\ We note, however, that files from any supplemental
analysis conducted that relied in part on confidential manufacturer
product plans cannot be made public, as prohibited under 49 CFR part
512.
---------------------------------------------------------------------------

    NHTSA is aware of two attempts by commenters to install and use the
Volpe model in connection with the NPRM. James Adcock, an individual
reviewer, reported difficulties installing the model on a computer with
Microsoft[supreg] Office 2003 installed. Also, students from the
University of California at Santa Barbara, though successful in
installing and running the model, reported being unable to reproduce
NHTSA's results underlying the development of the shapes of the
passenger car and light truck curves.
    Regarding the difficulties Mr. Adcock reported encountering, NHTSA
staff is aware of no attempts to contact the agency for assistance
locating supporting material related to the MYs 2012-2016 CAFE
rulemaking. Further, the model documentation provides specific minimum
hardware requirements and also indicates operating environment
requirements, both of which have remained materially unchanged for more
than a year. Volpe Center staff members routinely install and run the
model successfully on new laptops, desktops, and servers as part of
normal equipment refreshes and interagency support activities. We
believe, therefore, that if the minimum hardware and operating
environment requirements are met, installing and running the model
should be straightforward and successful. The model documentation notes
that some of the development and operating environment used by the
Volpe model (e.g., the software environment rather than the hardware on
which that software environment operates), particularly the version of
Microsoft[supreg] Excel used by the model, is Microsoft[supreg] Office
2003. We recognize that some users may have more recent versions of
Microsoft[supreg] Office. However, as in the case of other large
organizations, software licensing decisions, including the version of
Microsoft[supreg] Office, is centralized in the Office of the Chief
Information Officer. Nonetheless, the Volpe Model is proven on both
Microsoft[supreg] Office version 2003 and the newer 2007 version.
    As discussed in Section II.C, considering comments by the UC Santa
Barbara students regarding difficulties reproducing NHTSA's analysis,
NHTSA reexamined its analysis, and discovered some erroneous entries in
model inputs underlying the analysis used to develop the curves
proposed in the NPRM. These errors are discussed in the FRIA and have
since been corrected. Updated inputs and outputs have been posted to
NHTSA's Web site, and should enable outside replication of the analysis
documented in today's notice.
5. How did NHTSA develop the shape of the target curves for the final
standards?
    In developing the shape of the target curves for today's final
standards, NHTSA took a new approach, primarily in response to comments
received in the MY 2011 rulemaking. NHTSA's authority under EISA allows
consideration of any ``attribute related to fuel economy'' and any
``mathematical function.'' While the attribute, footprint, is the same
for these final standards as the attribute used for the MY 2011
standards, the mathematical function is new.
    Both vehicle manufacturers and public interest groups expressed
concern in the MY 2011 rulemaking process that the constrained logistic
function, particularly the function for the passenger car standards,
was overly steep and could lead, on the one hand, to fuel economy
targets that were overly stringent for small footprint vehicles, and on
the other hand, to a greater incentive for manufacturers to upsize
vehicles in order to reduce their compliance obligation (because
larger-footprint vehicles have less stringent targets) in ways that
could compromise energy and environmental benefits. Given comments
received in response to the NPRM preceding this final rule, it appears
that the constrained linear function developed here significantly
mitigates prior steepness concerns, and appropriately balances, for
purposes of this rulemaking, the objectives of (1) discouraging vehicle
downsizing that could compromise highway safety and (2) avoiding an
overly strong incentive to increase vehicle sizes in ways that could
compromise energy and environmental benefits.
a. Standards Are Attribute-Based and Defined by a Mathematical Function
    EPCA, as amended by EISA, expressly requires that CAFE standards
for passenger cars and light trucks be based on one or more vehicle
attributes related to fuel economy, and be expressed in the form of a
mathematical function.\654\ Like the MY 2011 standards, the MY 2012-
2016 passenger car and light truck standards are attribute-based and
defined by a mathematical function.\655\ Also like the MY 2011
standards, the MY 2012-2016 standards are based on the footprint
attribute. However, unlike the MY 2011 standards, the MY 2012-2016
standards are defined by a constrained linear rather than a constrained
logistic function. The reasons for these similarities and differences
are explained below.
---------------------------------------------------------------------------

    \654\ 49 U.S.C. 32902(a)(3)(A).
    \655\ As discussed in Chapter 2 of the TSD, EPA is also setting
attribute-based CO2 standards that are defined by a
mathematical function, given the advantages of using attribute-based
standards and given the goal of coordinating and harmonizing the
CAFE and CO2 standards as expressed by President Obama in
his announcement of the new National Program and in the joint NOI.
---------------------------------------------------------------------------

    As discussed above in Section II, under attribute-based standards,
the fleet-wide average fuel economy that a particular manufacturer must
achieve in a given model year depends on the mix of vehicles that it
produces for sale. Until NHTSA began to set ``Reformed'' attribute-
based standards for light trucks in MYs 2008-2011, and until EISA gave
NHTSA authority to set attribute-based standards for passenger cars
beginning in MY 2011, NHTSA set ``universal'' or ``flat'' industry-wide
average CAFE standards. Attribute-based standards are preferable to
universal industry-wide average standards for several reasons. First,
attribute-based standards increase fuel savings and reduce emissions
when compared to an equivalent universal industry-wide standard under
which each manufacturer is subject to the same numerical requirement.
Absent a policy to require all full-line manufacturers to produce and
sell essentially the same mix of vehicles, the stringency of the
universal industry-wide standards is constrained by the capability of
those full-line manufacturers whose product mix includes a relatively
high proportion of larger and heavier vehicles. In effect, the
standards are based on the mix of those manufacturers. As a result, the
standards are generally set below the capabilities of full-line and
limited-line manufacturers that sell predominantly lighter and smaller
vehicles.
    Under an attribute-based system, in contrast, every manufacturer is
more likely to be required to continue adding more fuel-saving
technology each year because the level of the compliance obligation of
each manufacturer is based on its own particular product mix. Thus, the
compliance obligation of a manufacturer with a higher percentage of
lighter and smaller vehicles will have a higher compliance obligation
than a manufacturer with a lower percentage of such vehicles. As a
result, all manufacturers must use technologies to enhance the fuel
economy levels of the vehicles they sell. Therefore, fuel savings and
CO2 emissions reductions should be higher under an
attribute-based system than under a comparable industry-wide standard.
    Second, attribute-based standards minimize the incentive for
manufacturers to respond to CAFE in

ways harmful to safety.\656\ Because each vehicle model has its own
target (based on the attribute chosen), attribute-based standards
provide no incentive to build smaller vehicles simply to meet a fleet-
wide average. Since smaller vehicles are subject to more stringent fuel
economy targets, a manufacturer's increasing its proportion of smaller
vehicles would simply cause its compliance obligation to increase.
---------------------------------------------------------------------------

    \656\ The 2002 NAS Report described at length and quantified the
potential safety problem with average fuel economy standards that
specify a single numerical requirement for the entire industry. See
NAS Report at 5, finding 12.
---------------------------------------------------------------------------

    Third, attribute-based standards provide a more equitable
regulatory framework for different vehicle manufacturers.\657\ A
universal industry-wide average standard imposes disproportionate cost
burdens and compliance difficulties on the manufacturers that need to
change their product plans and no obligation on those manufacturers
that have no need to change their plans. Attribute-based standards
spread the regulatory cost burden for fuel economy more broadly across
all of the vehicle manufacturers within the industry.
---------------------------------------------------------------------------

    \657\ Id. at 4-5, finding 10.
---------------------------------------------------------------------------

    And fourth, attribute-based standards respect economic conditions
and consumer choice, instead of having the government mandate a certain
fleet mix. Manufacturers are required to invest in technologies that
improve the fuel economy of their fleets, regardless of vehicle mix.
Additionally, attribute-based standards help to avoid the need to
conduct rulemakings to amend standards if economic conditions change,
causing a shift in the mix of vehicles demanded by the public. NHTSA
conducted three rulemakings during the 1980s to amend passenger car
standards for MYs 1986-1989 in response to unexpected drops in fuel
prices and resulting shifts in consumer demand that made the universal
passenger car standard of 27.5 mpg infeasible for several years
following the change in fuel prices.
    As discussed above in Section II, for purposes of the CAFE
standards finalized in this NPRM, NHTSA recognizes that the risk, even
if small, does exist that low fuel prices in MYs 2012-2016 might lead
indirectly to less than currently anticipated fuel savings and
emissions reductions. Section II discusses the reasons that the agency
does not believe that fuel savings and emissions reductions will be
significantly lower than anticipated such as to warrant additional
backstop measures beyond the one mandated by EISA, but the agency will
monitor the situation and consider further rulemaking solutions if
necessary and as lead time permits. See also Section IV.E.3 below for
further discussion of NHTSA's backstop authority.
b. What attribute does NHTSA use, and why?
    Consistent with the MY 2011 CAFE standards, NHTSA is using
footprint as the attribute for the MY 2012-2016 CAFE standards. There
are several policy reasons why NHTSA and EPA both believe that
footprint is the most appropriate attribute on which to base the
standards, as discussed below.
    As discussed in Section IV.D.1.a.ii below, in NHTSA's judgment,
from the standpoint of vehicle safety, it is important that the CAFE
standards be set in a way that does not encourage manufacturers to
respond by selling vehicles that are in any way less safe. NHTSA's
research indicates that reductions in vehicle mass tend to compromise
vehicle safety if applied on an equal basis across the entire light
duty vehicle fleet, however if greater mass reduction is applied to the
higher mass vehicles (the larger light trucks), an improvement in
aggregate fleet safety is possible. Footprint-based standards provide
an incentive to use advanced lightweight materials and structures that,
if carefully designed and validated, should minimize impacts on safety,
although that will be better proven as these vehicles become more
prevalent in the future.
    Further, although we recognize that weight is better correlated
with fuel economy than is footprint, we continue to believe that there
is less risk of ``gaming'' (artificial manipulation of the attribute(s)
to achieve a more favorable target) by increasing footprint under
footprint-based standards than by increasing vehicle mass under weight-
based standards--it is relatively easy for a manufacturer to add enough
weight to a vehicle to decrease its applicable fuel economy target a
significant amount, as compared to increasing vehicle footprint. We
also agree with concerns raised in 2008 by some commenters in the MY
2011 CAFE rulemaking that there would be greater potential for gaming
under multi-attribute standards, such as standards under which targets
would also depend on attributes such as weight, torque, power, towing
capability, and/or off-road capability. Standards that incorporate such
attributes in conjunction with footprint would not only be
significantly more complex, but by providing degrees of freedom with
respect to more easily-adjusted attributes, they would make it less
certain that the future fleet would actually achieve the projected
average fuel economy and CO2 reduction levels.
    As discussed above in Section II.C, NHTSA and EPA sought comment on
whether the agencies should consider setting standards for the final
rule based on another attribute or another combination of attributes.
Although NHTSA specifically requested that the commenters address the
concerns raised in the paragraphs above regarding the use of other
attributes, and explain how standards should be developed using the
other attribute(s) in a way that contributes more to fuel savings and
CO2 reductions than the footprint-based standards, without
compromising safety, commenters raising the issue largely reiterated
comments submitted in prior CAFE rulemakings, which the agency answered
in the MY 2011 final rule.\658\ As a result, and as discussed further
in Section II, the agencies finalized target curve standards based on
footprint for MYs 2012-2016.
---------------------------------------------------------------------------

    \658\ See 74 FR at 14358-59 (Mar. 30, 2009).
---------------------------------------------------------------------------

c. What mathematical function did NHTSA use for the recently-
promulgated MY 2011 CAFE standards?
    The MY 2011 CAFE standards are defined by a continuous, constrained
logistic function, which takes the form of an S-curve, and is defined
according to the following formula:
[GRAPHIC] [TIFF OMITTED] TR07MY10.028

    Here, TARGET is the fuel economy target (in mpg) applicable to
vehicles of a given footprint (FOOTPRINT, in square feet), b and a
are the function's lower and upper asymptotes (also in mpg), e is
approximately equal to 2.718,\659\ c is the footprint (in square
feet) at which the inverse of the fuel economy target falls halfway
between the inverses of the lower and upper asymptotes, and d is a
parameter (in square feet) that determines how gradually the fuel
economy target transitions from the upper toward the lower asymptote
as the footprint increases.

    \659\ e is the irrational number for which the slope of the
function y = number\x\ is equal to 1 when x is equal to zero. The
first 8 digits of e are 2.7182818.
---------------------------------------------------------------------------

    After fitting this mathematical form (separately) to the passenger
car and light truck fleets and determining the stringency of the
standards (i.e., the vertical positions of the curves), NHTSA arrived
at the following curves to define the MY 2011 standards:
[GRAPHIC] [TIFF OMITTED] TR07MY10.029

d. What mathematical function is NHTSA using for the MYs 2012-2016 CAFE
standards, and why?
    In finalizing the MY 2011 standards, NHTSA noted that the agency is
not required to use a constrained logistic function and indicated that
the agency may consider defining future CAFE standards in terms of a
different mathematical function. NHTSA has done so for the final CAFE
standards.
    In revisiting this question, NHTSA found that the final MY 2011
CAFE standard for passenger cars, though less steep than the MY 2011
standard NHTSA final in 2008, continues to concentrate the sloped
portion of the curve (from a compliance perspective, the area in which
upsizing results in a slightly lower applicable target) within a
relatively narrow footprint range (approximately 47-55 square feet).
Further, most passenger car models have footprints smaller than the
curve's 51.4 square foot inflection point, and many passenger car
models have footprints at which the curve is relatively flat.
    For both passenger cars and light trucks, a mathematical function
that has some slope at most footprints where vehicles are produced is
advantageous in terms of fairly balancing regulatory burdens among
manufacturers, and in terms of providing a disincentive to respond to
new standards by downsizing vehicles in ways that compromise vehicle
safety. For example, a flat standard may be very difficult for a full-
line manufacturer to meet, while requiring very little of a
manufacturer concentrating on small vehicles, and a flat standard may
provide an incentive to manufacturers to downsize certain vehicles, in
order to ``balance out'' other vehicles subject to the same standard.
As discussed above in Section II.C, NHTSA and EPA have considered
comments by students from UC Santa Barbara indicating that the
passenger car and light truck curves should be flatter. The agencies
conclude that flatter curves would reduce the incentives intended in
shifting from

``flat'' CAFE standards to attribute-based CAFE and GHG standards--
those being the incentive to respond to attribute-based standards in
ways that minimize compromises in vehicle safety, and the incentive for
more manufacturers (than primarily those selling a wider range of
vehicles) across the range of the attribute to have to increase the
application of fuel-saving technologies.
    As a potential alternative to the constrained logistic function,
NHTSA had, in proposing MY 2011 standards, presented information
regarding a constrained linear function. As shown in the 2008 NPRM, a
constrained linear function has the potential to avoid creating a
localized region (in terms of vehicle footprint) over which the slope
of the function is relatively steep. Although NHTSA did not receive
public comments on this option at that time, the agency indicated that
it still believed a linear function constrained by upper (on a gpm
basis) and possibly lower limits could merit reconsideration in future
CAFE rulemakings.
    Having re-examined a constrained linear function for purposes of
the final standards, and considered comments discussed above in Section
II, NHTSA, with EPA, concludes that for both passenger cars and light
trucks, the constrained linear functions finalized today remain
meaningfully sloped over a wide footprint range, thereby providing a
well-distributed disincentive to downsize vehicles in ways that could
compromise highway safety. Further, the constrained linear functions
finalized today are not so steeply sloped that they would provide a
strong incentive to increase vehicle size in order to obtain a lower
CAFE requirement and higher CO2 limit, thereby compromising
energy and environmental benefits. Therefore, today's final CAFE
standards are defined by constrained linear functions.
    The constrained linear function is defined according to the
following formula:
[GRAPHIC] [TIFF OMITTED] TR07MY10.030

    Here, TARGET is the fuel economy target (in mpg) applicable to
vehicles of a given footprint (FOOTPRINT, in square feet), b and a
are the function's lower and upper asymptotes (also in mpg),
respectively, c is the slope (in gpm per square foot) of the sloped
portion of the function, and d is the intercept (in gpm) of the
sloped portion of the function (that is, the value the sloped
portion would take if extended to a footprint of 0 square feet. The
MIN and MAX functions take the minimum and maximum, respectively of
the included values; for example, MIN(1,2) = 1, MAX(1,2) = 2, and
MIN[MAX(1,2),3)]=2.
e. How did NHTSA fit the coefficients that determine the shape of the
final curves?
    For purposes of this final rule and the preceding NPRM, and for
EPA's use in developing new CO2 emissions standards,
potential curve shapes were fitted using methods similar to those
applied by NHTSA in fitting the curves defining the MY 2011 standards.
We began with the market inputs discussed above, but because the
baseline fleet is technologically heterogeneous, NHTSA used the CAFE
model to develop a fleet to which nearly all the technologies discussed
in Section V of the FRIA and Chapter 3 of the Joint TSD \660\ were
applied, by taking the following steps: (1) Treating all manufacturers
as unwilling to pay civil penalties rather than applying technology,
(2) applying any technology at any time, irrespective of scheduled
vehicle redesigns or freshening, and (3) ignoring ``phase-in caps''
that constrain the overall amount of technology that can be applied by
the model to a given manufacturer's fleet. These steps helped to
increase technological parity among vehicle models, thereby providing a
better basis (than the baseline fleet) for estimating the statistical
relationship between vehicle size and fuel economy.
---------------------------------------------------------------------------

    \660\ The agencies excluded diesel engines and strong hybrid
vehicle technologies from this exercise (and only this exercise)
because the agencies expect that manufacturers would not need to
rely heavily on these technologies in order to comply with the final
standards. NHTSA and EPA did include diesel engines and strong
hybrid vehicle technologies in all other portions of their analyses.
---------------------------------------------------------------------------

    However, while this approach produced curves that the agencies'
judged appropriate for the NPRM, it did not do so for the final rule.
Corrections to some engineering inputs in NHTSA's market forecast,
while leading to a light truck curve nearly identical to that derived
for the NPRM, yielded a considerably steeper passenger car curve. As
discussed above in Section II, NHTSA and EPA are concerned about the
incentives that would result from a significantly steeper curve.
Considering this, and considering that the updated analysis--in terms
of the error measure applied by the agency--supports the curve from the
NPRM nearly as well as it supports the steeper curve, NHTSA and EPA are
promulgating final standards based on the curves proposed in the NPRM.
    More information on the process for fitting the passenger car and
light truck curves for MYs 2012-2016 is available above in Section
II.C, and NHTSA refers the reader to that section and to Chapter 2 of
the Joint TSD. Section II.C also discusses comments NHTSA and EPA
received on this process, and on the outcomes thereof.

D. Statutory Requirements

1. EPCA, as Amended by EISA
a. Standard Setting
    NHTSA must establish separate standards for MY 2011-2020 passenger
cars and light trucks, subject to two principal requirements.\661\
First, the standards are subject to a minimum requirement regarding
stringency: they must be set at levels high enough to ensure that the
combined U.S. passenger car and light truck fleet achieves an average
fuel economy level of not less than 35 mpg not later than MY 2020.\662\
Second, as discussed above and at length in the March 2009 final rule
establishing the MY 2011 CAFE standards, EPCA requires that the agency
establish standards for all new passenger cars and light trucks at the
maximum feasible average fuel economy level that the Secretary decides
the manufacturers can achieve in that model year, based on a balancing
of

express statutory and other factors.\663\ The implication of this
second requirement is that it calls for setting a standard that exceeds
the minimum requirement if the agency determines that the manufacturers
can achieve a higher level. When determining the level achievable by
the manufacturers, EPCA requires that the agency consider the four
statutory factors of technological feasibility, economic
practicability, the effect of other motor vehicle standards of the
Government on fuel economy, and the need of the United States to
conserve energy. In addition, the agency has the authority to and
traditionally does consider other relevant factors, such as the effect
of the CAFE standards on motor vehicle safety. The ultimate
determination of what standards can be considered maximum feasible
involves a weighing and balancing of these factors. NHTSA received a
number of comments on how the agency interprets its statutory
requirements, and will respond to them in this section.
---------------------------------------------------------------------------

    \661\ EISA added the following additional requirements: (1)
Standards must be attribute-based and expressed in the form of a
mathematical function. 49 U.S.C. 32902(b)(3)(A). (2) Standards for
MYs 2011-2020 must ``increase ratably'' in each model year. 49
U.S.C. 32902(b)(2)(C). This requirement does not have a precise
mathematical meaning, particularly because it must be interpreted in
conjunction with the requirement to set the standards for each model
year at the level determined to be the maximum feasible level for
that model year. Generally speaking, the requirement for ratable
increases means that the annual increases should not be
disproportionately large or small in relation to each other.
    \662\ 49 U.S.C. 32902(b)(2)(A).
    \663\ 49 U.S.C. 32902(a).
---------------------------------------------------------------------------

i. Statutory Factors Considered in Determining the Achievable Level of
Average Fuel Economy
    As none of the four factors is defined in EPCA and each remains
interpreted only to a limited degree by case law, NHTSA has
considerable latitude in interpreting them. NHTSA interprets the four
statutory factors as set forth below.
(1) Technological Feasibility
    ``Technological feasibility'' refers to whether a particular
technology for improving fuel economy is available or can become
available for commercial application in the model year for which a
standard is being established. Thus, the agency is not limited in
determining the level of new standards to technology that is already
being commercially applied at the time of the rulemaking. It can,
instead, set technology-forcing standards, i.e., ones that make it
necessary for manufacturers to engage in research and development in
order to bring a new technology to market.
    Commenters appear to have generally agreed with the agency's
interpretation of technological feasibility. NESCAUM commented that the
proposed standards were technologically feasible and cost-effective in
the rulemaking timeframe. CBD and the UCSB students focused their
comments more on the technology-forcing aspects of the definition of
technological feasibility. CBD commented that the standards must be
below the level of all that is technologically feasible if all the
technology necessary to meet them is available today. The UCSB students
similarly commented that the agencies should not base regulations for
MY 2016 solely on technologies available today, that they should also
consider technologies still in the research phase for the later years
of the rulemaking timeframe.
    While NHTSA agrees that the technological feasibility factor can
include a degree of technology forcing, and that this could certainly
be appropriate given EPCA's overarching purpose of energy conservation,
we note that determining what levels of technology to require in the
rulemaking timeframe requires a balancing of all relevant factors.
Technologies that are still in the research phase now may be
sufficiently advanced to become available for commercial application
in, for example, MY 2016. However, given the rate at which the
standards already require average mpg to rise, and given the current
state of the industry, NHTSA does not believe that it would be
reasonable to set standards mandating that manufacturers devote
substantial resources to bringing these technologies to market
immediately rather than to simply improving the fuel economy of their
fleets by applying more of the technologies on the market today. As
will be discussed further in Section IV.F below, technological
feasibility is one of four factors that the agency balances in
determining what standards would be maximum feasible for each model
year. As the balancing may vary depending on the circumstances at hand
for the model years in which the standards are set, the extent to which
technological feasibility is simply met or plays a more dynamic role
may also shift.
(2) Economic Practicability
    ``Economic practicability'' refers to whether a standard is one
``within the financial capability of the industry, but not so stringent
as to'' lead to ``adverse economic consequences, such as a significant
loss of jobs or the unreasonable elimination of consumer choice.''
\664\ In an attempt to ensure the standards' economic practicability,
the agency considers a variety of factors, including the annual rate at
which manufacturers can increase the percentage of the fleet that has a
particular type of fuel saving technology, and cost to consumers.
Consumer acceptability is also an element of economic practicability.
---------------------------------------------------------------------------

    \664\ 67 FR 77015, 77021 (Dec. 16, 2002).
---------------------------------------------------------------------------

    At the same time, the law does not preclude a CAFE standard that
poses considerable challenges to any individual manufacturer. The
Conference Report for EPCA, as enacted in 1975, makes clear, and the
case law affirms, ``(A) determination of maximum feasible average fuel
economy should not be keyed to the single manufacturer which might have
the most difficulty achieving a given level of average fuel economy.''
\665\ Instead, the agency is compelled ``to weigh the benefits to the
nation of a higher fuel economy standard against the difficulties of
individual automobile manufacturers.'' Id. The law permits CAFE
standards exceeding the projected capability of any particular
manufacturer as long as the standard is economically practicable for
the industry as a whole. Thus, while a particular CAFE standard may
pose difficulties for one manufacturer, it may also present
opportunities for another. The CAFE program is not necessarily intended
to maintain the competitive positioning of each particular company.
Rather, it is intended to enhance fuel economy of the vehicle fleet on
American roads, while protecting motor vehicle safety and being mindful
of the risk of harm to the overall United States economy.
---------------------------------------------------------------------------

    \665\ CEI-I, 793 F.2d 1322, 1352 (DC Cir. 1986).
---------------------------------------------------------------------------

    Thus, NHTSA believes that this factor must be considered in the
context of the competing concerns associated with different levels of
standards. Prior to the MY 2005-2007 rulemaking, the agency generally
sought to ensure the economy practicability of standards in part by
setting them at or near the capability of the ``least capable
manufacturer'' with a significant share of the market, i.e., typically
the manufacturer whose vehicles are, on average, the heaviest and
largest. In the first several rulemakings to establish attribute based
standards, the agency applied marginal cost benefit analysis. This
ensured that the agency's application of technologies was limited to
those that would pay for themselves and thus should have significant
appeal to consumers. However, the agency can and has limited its
application of technologies to those technologies, with or without the
use of such analysis.
    Besides the many commenters raising economic practicability as an
issue in the context of the stringency of the proposed standards, some
commenters also directly addressed the agency's interpretation of
economic practicability. AIAM commented that NHTSA has wide discretion
to consider economic practicability concerns as long as EPCA's
overarching purpose of energy conservation is met, and that it would be
within NHTSA's statutory discretion to set standards at levels

below those at which net benefits are maximized due to economic
practicability. GM and Mitsubishi both commented that consideration of
economic practicability should include more focus on individual
manufacturers: GM stated that NHTSA must consider sales and employment
impacts on individual manufacturers and not just industry in the
aggregate, while Mitsubishi emphasized the difficulties of limited-line
manufacturers in meeting standards that might be economically
practicable for full-line manufacturers. CBD commented that a
determination of economic practicability should not be tied to
``differences between incremental improvements'' that ``fail to
consider all relevant costs and benefits and fail to analyze the
overall impact of the proposed standards.'' CBD pointed to the three-
to-one benefit-cost ratio of the proposed standards to argue that much
more stringent standards would still be economically practicable. ACEEE
also commented that standards set at the level at which net benefits
are maximized should be considered a ``lower bound'' for determining
economic practicability.
    While NHTSA agrees with AIAM in general that the agency has wide
discretion to consider economic practicability concerns, we do not
believe that economic practicability will always counsel setting
standards lower than the point at which net benefits are maximized,
given that it must be considered in the context of the overall
balancing and EPCA's overarching purpose of energy conservation.
Depending on the conditions of the industry and the assumptions used in
the agency's analysis of alternative stringencies, NHTSA could well
find that standards that maximize net benefits, or even higher
standards, could be economically practicable. To that end, however,
given the current conditions faced by the industry, which is perhaps
just now passing the nadir of the economy-wide downturn and looking at
a challenging road to recovery, and the relatively limited amount of
lead time for MYs 2012-2016, we disagree with CBD's comment that the
benefit-cost ratio of the final standards indicates that more stringent
standards would be economically practicable during the rulemaking
timeframe and with ACEEE's comment that standards higher than those
that would maximize net benefits would be economically practicable at
this time. These comments overlook the fact that nearly all
manufacturers are capital-constrained at this time and may be for the
next couple of model years; access to capital in a down market is
crucial to making the investments in technology that the final
standards will require, and requiring more technology will require
significantly more capital, to which manufacturers would not likely
have access. Moreover, economic practicability depends as well on
manufacturers' ability to sell the vehicles that the standards require
them to produce. If per-vehicle costs increase too much too soon,
consumers may defer new vehicle purchases, which defeats the object of
raising CAFE standards to get vehicles with better mileage on the road
sooner and meet the need of the Nation to conserve energy. See Section
IV.F below for further discussion of these issues.
    As for GM's and Mitsubishi's comments, while the agency does
consider carefully the impacts on individual manufacturers in the
agency's analysis, as shown in the FRIA, we reiterate that economic
practicability is not keyed to any single manufacturer. One of the main
benefits of attribute-based standards is greater regulatory fairness--
for all the manufacturers who build vehicles of a particular footprint,
the target for that footprint is the same, yet each manufacturer has
their own individual compliance obligation depending on the mix of
vehicles they produce for sale. More manufacturers are required to
improve their fuel economy, yet in a fairer way. And while some
manufacturers may face difficulties under a given CAFE standard, others
will find opportunities. The agency's consideration of economic
practicability recognizes these difficulties and opportunities in the
context of the industry as a whole, and in the context of balancing
against the other statutory factors, as discussed further below.
(3) The Effect of Other Motor Vehicle Standards of the Government on
Fuel Economy
    ``The effect of other motor vehicle standards of the Government on
fuel economy,'' involves an analysis of the effects of compliance with
emission,\666\ safety, noise, or damageability standards on fuel
economy capability and thus on average fuel economy. In previous CAFE
rulemakings, the agency has said that pursuant to this provision, it
considers the adverse effects of other motor vehicle standards on fuel
economy. It said so because, from the CAFE program's earliest years
\667\ until present, the effects of such compliance on fuel economy
capability over the history of the CAFE program have been negative
ones. In those instances in which the effects are negative, NHTSA has
said that it is called upon to ``mak[e] a straightforward adjustment to
the fuel economy improvement projections to account for the impacts of
other Federal standards, principally those in the areas of emission
control, occupant safety, vehicle damageability, and vehicle noise.
However, only the unavoidable consequences should be accounted for. The
automobile manufacturers must be expected to adopt those feasible
methods of achieving compliance with other Federal standards which
minimize any adverse fuel economy effects of those standards.'' \668\
For example, safety standards that have the effect of increasing
vehicle weight lower vehicle fuel economy capability and thus decrease
the level of average fuel economy that the agency can determine to be
feasible.
---------------------------------------------------------------------------

    \666\ In the case of emission standards, this includes standards
adopted by the Federal government and can include standards adopted
by the States as well, since in certain circumstances the Clean Air
Act allows States to adopt and enforce State standards different
from the Federal ones.
    \667\ 42 FR 63184, 63188 (Dec. 15, 1977). See also 42 FR 33534,
33537 (Jun. 30, 1977).
    \668\ 42 FR 33534, 33537 (Jun. 30, 1977).
---------------------------------------------------------------------------

    The ``other motor vehicle standards'' consideration has thus in
practice functioned in a fashion similar to the provision in EPCA, as
originally enacted, for adjusting the statutorily-specified CAFE
standards for MY 1978-1980 passengers cars.\669\ EPCA did not permit
NHTSA to amend those standards based on a finding that the maximum
feasible level of average fuel economy for any of those three years was
greater or less than the standard specified for that year. Instead, it
provided that the agency could only reduce the standards and only on
one basis: If the agency found that there had been a Federal standards
fuel economy reduction, i.e., a reduction in fuel economy due to
changes in the Federal vehicle standards, e.g., emissions and safety,
relative to the year of enactment, 1975.
---------------------------------------------------------------------------

    \669\ That provision was deleted as obsolete when EPCA was
codified in 1994.
---------------------------------------------------------------------------

    The ``other motor vehicle standards'' provision is broader than the
Federal standards fuel economy reduction provision. Although the
effects analyzed to date under the ``other motor vehicle standards''
provision have been negative, there could be circumstances in which the
effects are positive. In the event that the agency encountered such
circumstances, it would be required to consider those positive effects.
For example, if changes in vehicle safety technology led to NHTSA's
amending a

safety standard in a way that permits manufacturers to reduce the
weight added in complying with that standard, that weight reduction
would increase vehicle fuel economy capability and thus increase the
level of average fuel economy that could be determined to be feasible.
    In the wake of Massachusetts v. EPA and of EPA's endangerment
finding, its granting of a waiver to California for its motor vehicle
GHG standards, and its own GHG standards for light-duty vehicles, NHTSA
is confronted with the issue of how to treat those standards under the
``other motor vehicle standards'' provision. To the extent the GHG
standards result in increases in fuel economy, they would do so almost
exclusively as a result of inducing manufacturers to install the same
types of technologies used by manufacturers in complying with the CAFE
standards. The primary exception would involve increases in the
efficiency of air conditioners.
    In the NPRM, NHTSA tentatively concluded that the effects of the
EPA and California standards are neither positive nor negative because
the proposed rule resulted in consistent standards among all components
of the National Program, but sought comment on whether and in what way
the effects of the California and EPA standards should be considered
under the ``other motor vehicle standards'' provision or other
provisions of EPCA in 49 U.S.C. 32902, consistent with NHTSA's
independent obligation under EPCA/EISA to issue CAFE standards. NHTSA
stated that it had already considered EPA's proposal and the
harmonization benefits of the National Program in developing its own
proposed maximum feasible standards.
    The Alliance commented that the extent to which the consideration
of other motor vehicle standards of the government should affect
NHTSA's standard-setting process was entirely within the agency's
discretion. The Alliance agreed with NHTSA that the original intent of
the factor was to ensure that NHTSA accounted for other government
standards that might reduce fuel economy or inhibit fuel economy
improvements, but stated that since GHG standards set by EPA and
California overlap CAFE standards so extensively, and are thus
functionally equivalent to CAFE standards (plus air conditioning),
those standards should be ``basically irrelevant to NHTSA's mission to
set fuel economy standards, unless some specific aspect of the GHG
standards actually makes it harder for mfrs to improve fuel economy.''
The Alliance stated further that NHTSA must still determine what levels
of CAFE standards would be maximum feasible regardless of the findings
or standards set by EPA and California. Thus, the Alliance stated, for
purposes of the MYs 2012-2016 CAFE standards, EPA's GHG standards could
be sufficiently considered by NHTSA given the agency's decision to
harmonize as part of the National Program,\670\ while California's GHG
standards need not be considered because of the state's agreement under
the National Program that compliance with EPA's standards would
constitute compliance with its own. Ford concurred individually with
the Alliance comments. NADA, in contrast, commented that EPA's GHG
standards should not be considered as an ``other vehicle standard'' for
purposes of this statutory factor, and argued that NHTSA need not and
should not consider California's GHG standards due to preemption under
EPCA.
---------------------------------------------------------------------------

    \670\ The University of Pennsylvania Environmental Law Project
offered a similar comment.
---------------------------------------------------------------------------

    Commenters from the state of California (the Attorney General and
the Air Resources Board), in contrast, stated that NHTSA must consider
the effects of the California GHG standards on fuel economy as a
baseline for NHTSA's analysis, to give credit to the state's leadership
role in achieving the levels required by the National Program. CBD
seconded this comment.\671\ The California Attorney General further
stated that Congress discussed both positive and negative impacts of
other standards on fuel economy in the 1975 Conference Reports
preceding EPCA's enactment.\672\ CARB and the University of
Pennsylvania Environmental Law Project both cited the Green Mountain
Chrysler \673\ and Central Valley Chrysler \674\ cases as supporting
NHTSA's consideration of CARB's GHG standards pursuant to this factor.
---------------------------------------------------------------------------

    \671\ NHTSA answered similar comments in the FEIS. See FEIS
Section <IP_ADDRESS> for the agency's response.
    \672\ Citing HR Rep 94-340 at 86-87, 89-91 (1975 USCCAN 1762,
1848-49, 1851-53).
    \673\ Green Mountain Chrysler Plymouth Dodge Jeep v. Crombie,
508 F.Supp.2d 295 (D.Vt. 2007).
    \674\ Central Valley Chrysler Jeep, Inc. v. Goldstene, 529
F.Supp.2d 1151 (E.D. Cal. 2007).
---------------------------------------------------------------------------

    NHTSA believes that these comments generally support the agency's
interpretation of this factor as stated in the NPRM. While the agency
may consider both positive and negative effects of other motor vehicle
standards of the Government on fuel economy in determining what level
of CAFE standards would be maximum feasible, given the fact that the
final rule results in consistent standards among all components of the
National Program, and given that NHTSA considered the harmonization
benefits of the National Program in developing its own standards, the
agency's obligation to balance this factor with the others may be
considered accounted for.
(4) The Need of the United States To Conserve Energy
    ``The need of the United States to conserve energy'' means ``the
consumer cost, national balance of payments, environmental, and foreign
policy implications of our need for large quantities of petroleum,
especially imported petroleum.'' \675\ Environmental implications
principally include those associated with reductions in emissions of
criteria pollutants and CO2. A prime example of foreign
policy implications are energy independence and security concerns.
---------------------------------------------------------------------------

    \675\ 42 FR 63184, 63188 (1977).
---------------------------------------------------------------------------

    While a number of commenters cited the need of the nation to
conserve energy in calling for the agency to set more stringent CAFE
standards, none disagreed with the agency's interpretation of this
factor and its influence on the statutory balancing required by EPCA.
CBD, for example, commented that ``Increasing mileage standards for
this vehicle fleet is the single most effective and quickest available
step the U.S. can take to conserve energy and to reduce the U.S.
dependence on foreign oil, and also has an immediate and highly
significant effect on total U.S. GHG emissions,'' and that accordingly,
NHTSA should consider the need of the nation to conserve energy as
counseling the agency to raise standards at a faster rate. NHTSA agrees
that this factor tends to influence stringency upwards, but reiterates
that the need of the nation to conserve energy is still but one of four
factors that must be balanced, as discussed below.

ii. Other Factors Considered by NHTSA

    The agency historically has considered the potential for adverse
safety consequences in setting CAFE standards. This practice is
recognized approvingly in case law. As the courts have recognized,
``NHTSA has always examined the safety consequences of the CAFE
standards in its overall consideration of relevant factors since its
earliest rulemaking under the CAFE program.'' Competitive Enterprise
Institute v. NHTSA, 901 F.2d 107, 120 n. 11 (DC Cir. 1990) (``CEI I'')
(citing 42 FR 33534, 33551 (June 30, 1977)). The courts have
consistently upheld NHTSA's implementation of EPCA in this manner. See,
e.g., Competitive

Enterprise Institute v. NHTSA, 956 F.2d 321, 322 (DC Cir. 1992) (``CEI
II'') (in determining the maximum feasible fuel economy standard,
``NHTSA has always taken passenger safety into account.'') (citing CEI
I, 901 F.2d at 120 n. 11); Competitive Enterprise Institute v. NHTSA,
45 F.3d 481, 482-83 (DC Cir. 1995) (``CEI III'') (same); Center for
Biological Diversity v. NHTSA, 538 F.3d 1172, 1203-04 (9th Cir. 2008)
(upholding NHTSA's analysis of vehicle safety issues associated with
weight in connection with the MY 2008-11 light truck CAFE rule). Thus,
in evaluating what levels of stringency would result in maximum
feasible standards, NHTSA assesses the potential safety impacts and
considers them in balancing the statutory considerations and to
determine the appropriate level of the standards.
    Under the universal or ``flat'' CAFE standards that NHTSA was
previously authorized to establish, manufacturers were encouraged to
respond to higher standards by building smaller, less safe vehicles in
order to ``balance out'' the larger, safer vehicles that the public
generally preferred to buy, which resulted in a higher mass
differential between the smallest and the largest vehicles, with a
correspondingly greater risk to safety. Under the attribute-based
standards being finalized today, that risk is reduced because building
smaller vehicles would tend to raise a manufacturer's overall CAFE
obligation, rather than only raising its fleet average CAFE, and
because all vehicles are required to continue improving their fuel
economy. In prior rulemakings, NHTSA limited the application of mass
reduction/material substitution in our modeling analysis to vehicles
over 5,000 lbs GVWR,\676\ but for purposes of today's final standards,
NHTSA has revised its modeling analysis to allow some application of
mass reduction/material substitution for all vehicles, although it is
concentrated in the largest and heaviest vehicles, because we believe
that this is more consistent with how manufacturers will actually
respond to the standards. However, as discussed above, NHTSA does not
mandate the use of any particular technology by manufacturers in
meeting the standards. More information on the new approach to modeling
manufacturer use of downweighting/material substitution is available in
Chapter 3 of the Joint TSD and in Section V of the FRIA; and the
estimated safety impacts that may be due to the final standards are
described below.
---------------------------------------------------------------------------

    \676\ See 74 FR 14396-14407 (Mar. 30, 2009).
---------------------------------------------------------------------------

iii. Factors that NHTSA is Prohibited from Considering
    EPCA also provides that in determining the level at which it should
set CAFE standards for a particular model year, NHTSA may not consider
the ability of manufacturers to take advantage of several EPCA
provisions that facilitate compliance with the CAFE standards and
thereby reduce the costs of compliance.\677\ As discussed further
below, manufacturers can earn compliance credits by exceeding the CAFE
standards and then use those credits to achieve compliance in years in
which their measured average fuel economy falls below the standards.
Manufacturers can also increase their CAFE levels through MY 2019 by
producing alternative fuel vehicles. EPCA provides an incentive for
producing these vehicles by specifying that their fuel economy is to be
determined using a special calculation procedure that results in those
vehicles being assigned a high fuel economy level.
---------------------------------------------------------------------------

    \677\ 49 U.S.C. 32902(h).
---------------------------------------------------------------------------

    The effect of the prohibitions against considering these
flexibilities in setting the CAFE standards is that the flexibilities
remain voluntarily-employed measures. If the agency were instead to
assume manufacturer use of those flexibilities in setting new
standards, that assumption would result in higher standards and thus
tend to require manufacturers to use those flexibilities.
iv. Determining the Level of the Standards by Balancing the Factors
    NHTSA has broad discretion in balancing the above factors in
determining the appropriate levels of average fuel economy at which to
set the CAFE standards for each model year. Congress ``specifically
delegated the process of setting * * * fuel economy standards with
broad guidelines concerning the factors that the agency must
consider.'' \678\ The breadth of those guidelines, the absence of any
statutorily prescribed formula for balancing the factors, the fact that
the relative weight to be given to the various factors may change from
rulemaking to rulemaking as the underlying facts change, and the fact
that the factors may often be conflicting with respect to whether they
militate toward higher or lower standards give NHTSA broad discretion
to decide what weight to give each of the competing policies and
concerns and then determine how to balance them. The exercise of that
discretion is subject to the necessity of ensuring that NHTSA's
balancing does not undermine the fundamental purpose of the EPCA:
Energy conservation,\679\ and as long as that balancing reasonably
accommodates ``conflicting policies that were committed to the agency's
care by the statute.'' \680\ The balancing of the factors in any given
rulemaking is highly dependent on the factual and policy context of
that rulemaking. Given the changes over time in facts bearing on
assessment of the various factors, such as those relating to the
economic conditions, fuel prices and the state of climate change
science, the agency recognizes that what was a reasonable balancing of
competing statutory priorities in one rulemaking may not be a
reasonable balancing of those priorities in another rulemaking.\681\
Nevertheless, the agency retains substantial discretion under EPCA to
choose among reasonable alternatives.
---------------------------------------------------------------------------

    \678\ Center for Auto Safety v. NHTSA, 793 F.2d 1322, 1341
(C.A.D.C. 1986).
    \679\ Center for Biological Diversity v. NHTSA, 538 F.3d 1172,
1195 (9th Cir. 2008).
    \680\ CAS, 1338 (quoting Chevron U.S.A., Inc. v. Natural
Resources Defense Council, Inc., 467 U.S. 837, 845).
    \681\ CBD v. NHTSA, 538 F.3d 1172, 1198 (9th Cir. 2008).
---------------------------------------------------------------------------

    EPCA neither requires nor precludes the use of any type of cost-
benefit analysis as a tool to help inform the balancing process. While
NHTSA used marginal cost-benefit analysis in the first two rulemakings
to establish attribute-based CAFE standards, as noted above, it was not
required to do so and is not required to continue to do so. Regardless
of what type of analysis is or is not used, considerations relating to
costs and benefits remain an important part of CAFE standard setting.
    Because the relevant considerations and factors can reasonably be
balanced in a variety of ways under EPCA, and because of uncertainties
associated with the many technological and cost inputs, NHTSA considers
a wide variety of alternative sets of standards, each reflecting
different balancing of those policies and concerns, to aid it in
discerning reasonable outcomes. Among the alternatives providing for an
increase in the standards in this rulemaking, the alternatives range in
stringency from a set of standards that increase, on average, 3 percent
annually to a set of standards that increase, on average, 7 percent
annually.
v. Other Standards--Minimum Domestic Passenger Car Standard
    The minimum domestic passenger car standard was added to the CAFE

program through EISA, when Congress gave NHTSA explicit authority to
set universal standards for domestically-manufactured passenger cars at
the level of 27.5 mpg or 92 percent of the average fuel economy of the
combined domestic and import passenger car fleets in that model year,
whichever was greater.\682\ This minimum standard was intended to act
as a ``backstop,'' ensuring that domestically-manufactured passenger
cars reached a given mpg level even if the market shifted in ways
likely to reduce overall fleet mpg. Congress was silent as to whether
the agency could or should develop similar backstop standards for
imported passenger cars and light trucks. NHTSA has struggled with this
question since EISA was enacted.
---------------------------------------------------------------------------

    \682\ 49 U.S.C. 32902(b)(4).
---------------------------------------------------------------------------

    In the MY 2011 final rule, facing comments split fairly evenly
between support and opposition to additional backstop standards, NHTSA
noted Congress' silence and ``accept[ed] at least the possibility that
* * * [it] could be reasonably interpreted as permissive rather than
restrictive,'' but concluded based on the record for that rulemaking as
a whole that additional backstop standards were not necessary for MY
2011, given the lack of leadtime for manufacturers to change their MY
2011 vehicles, the apparently-growing public preference for smaller
vehicles, and the anti-backsliding characteristics of the footprint-
based curves.\683\ NHTSA stated, however, that it would continue to
monitor manufacturers' product plans and compliance, and would revisit
the backstop issue if it became necessary in future rulemakings.\684\
---------------------------------------------------------------------------

    \683\ 74 FR at 14412 (Mar. 30, 2009).
    \684\ Id.
---------------------------------------------------------------------------

    Thus, in the MYs 2012-2016 NPRM, NHTSA again sought comment on the
issue of additional backstop standards, recognizing the possibility
that low fuel prices during the years that the MYs 2012-2016 vehicles
are in service might lead to less than anticipated fuel savings.\685\
NHTSA asked commenters, in addressing this issue, to consider reviewing
the agency's discussion in the MY 2011 final rule, which the agency
described as concluding that its authority was likely limited by
Congress' silence to setting only the backstop that Congress expressly
provided for.\686\ EPA also sought comment on whether it should set
backstop standards under the CAA for MYs 2012-2016.
---------------------------------------------------------------------------

    \685\ 74 FR at 49685 (Sept. 28, 2009).
    \686\ Id. at 49637, 49685 (Sept. 28, 2009).
---------------------------------------------------------------------------

    As discussed above in Section II, many commenters addressed the
backstop issue, and again comments were fairly evenly split between
support and opposition to additional backstop standards. While
commenters opposed to additional backstops, such as the Alliance,
largely reiterated NHTSA's previous statements with regard to its
backstop authority, some commenters in favor of additional backstops
provided more detailed legal arguments than have been previously
presented for the agency's consideration. Section II provides NHTSA's
and EPA's general response to comments on the backstop issue; this
section provides NHTSA's specific response to the legal arguments by
Sierra Club et al.\687\ on the agency's authority to set additional
backstop standards.
---------------------------------------------------------------------------

    \687\ NHTSA refers to these commenters by the shorthand ``Sierra
Club et al.,'' but the group consists of the Sierra Club, the Safe
Climate Campaign, the Coalition for Clean Air, the Alliance for
Climate Protection, and Environment America. Their comments may be
found at Docket No. EPA-HQ-OAR-2009-0472-7278.1.
---------------------------------------------------------------------------

    The Sierra Club et al. commented that a more permissive reading of
Congress' silence in EISA was appropriate given the context of the
statute, the 9th Circuit's revised opinion in CBD v. NHTSA, and the
assumptions employed in the NPRM analysis. The commenters stated that
given that EISA includes the 35-in-2020 and ratable increase
requirements, and given that CAFE standards were only just starting to
rise for light trucks at the time of EISA's enactment and had remained
at the statutory level of 27.5 mpg for passenger cars for many years,
it appears that Congress' intent in EISA was to raise CAFE standards as
rapidly as possible. Thus, the commenters stated, if the purpose of
EISA was to promote the maximum feasible increase in fuel economy with
ratable increases, then there was no reason to think that backstop
standards would be inconsistent with that purpose--if they were
inconsistent, Congress would not have included one for domestic
passenger cars. Similarly, Congress could not have thought that
additional backstops were inconsistent with attribute-based standards,
or it would not have included one for domestic passenger cars.\688\ The
commenters also cited D.C. Circuit case law stating that congressional
silence leaves room for agency discretion; specifically, that ``[w]hen
interpreting statutes that govern agency action, [the courts] have
consistently recognized that a congressional mandate in one section and
silence in another often `suggests not a prohibition but simply a
decision not to mandate any solution in the second context, i.e., to
leave the question to agency discretion.' '' \689\
---------------------------------------------------------------------------

    \688\ The commenters also suggested that NHTSA could set
attribute-based backstop standards if it was concerned that
Congress' mandate to set attribute-based standards generally
precluded additional flat backstops.
    \689\ Citing Catawba County, N.C. v. EPA, 571 F.3d 20, 36 (DC
Cir. 2009) (quoting Cheney R. Co. v. ICC, 902 F.2d 66, 69 (DC Cir.
1990)).
---------------------------------------------------------------------------

    The Sierra Club et al. also commented that it appeared that the 9th
Circuit's revised opinion in CBD v. NHTSA supported the agency's
discretion to set additional backstops, since it was revised after the
passage of EISA and did not change its earlier holding (pertaining to
the original EPCA language) that backstop standards were within the
agency's discretion.\690\
---------------------------------------------------------------------------

    \690\ Citing CBD v. NHTSA, 538 F.3d at 1204-06 (9th Cir. 2008).
---------------------------------------------------------------------------

    And finally, the commenters stated that NHTSA's rationale for not
adopting additional backstops in the MY 2011 final rule should not be
relied on for MYs 2012-2016, namely, that the agency's belief that
backstop standards were unnecessary to ensure the expected levels of
fuel savings given the short lead time between the promulgation of the
final standards and the beginning of MY 2011, the apparent growing
consumer preference for smaller vehicles, and the existing anti-
backsliding measures in the attribute-based curves. As described above
in Section II, these commenters (and many others) expressed concern
about the agencies' fleet mix assumptions and their potential effect on
estimated fuel savings.
    In response, and given DC Circuit precedent as cited above, NHTSA
agrees that whether to adopt additional minimum standards for imported
passenger cars and light trucks is squarely within the agency's
discretion, and that such discretion should be exercised as necessary
to avoid undue losses in fuel savings due to market shifts or other
forces while still respecting the statutorily-mandated manufacturer
need for lead time in establishing CAFE standards. However, as
discussed above in Section II.C, NHTSA remains confident that the
projections of the future fleet mix are reliable, and that future
changes in the fleet mix of footprints and sales are not likely to lead
to more than modest changes in projected emissions reductions or fuel
savings. There are only a relatively few model years at issue, and
market trends today are consistent with the agencies' estimates,
showing shifts from light trucks to passenger cars and increased
emphasis on fuel economy from all vehicles. The shapes of the curves
also tend to avoid

or minimize regulatory incentives for manufacturers to upsize their
fleet to change their compliance burden, and the risk of vehicle
upsizing or changing vehicle offerings to ``game'' the passenger car
and light truck definitions to which commenters refer is not so great
for the model years in question, because the changes that commenters
suggest manufacturers might make are neither so simple nor so likely to
be accepted by consumers, as discussed above.
    Thus, NHTSA is confident that the anticipated increases in average
fuel economy and reductions in average CO2 emission rates
can be achieved without backstops under EISA, as noted above.
Nevertheless, we acknowledge that the MY 2016 fuel economy goal of 34.1
mpg is an estimate and not a standard,\691\ and that changes in fuel
prices, consumer preferences, and/or vehicle survival and mileage
accumulation rates could result in either smaller or larger oil
savings. However, as explained above and elsewhere in the rule, NHTSA
believes that the possibility of not meeting (or, alternatively,
exceeding) fuel economy goals exists, but is not likely to lead to more
than modest changes in the currently-projected levels of fuel and GHG
savings. NHTSA plans to conduct retrospective analysis to monitor
progress, and has the authority to revise standards if warranted, as
long as sufficient lead time is provided. Given this, and given the
potential complexities in designing an appropriate backstop, NHTSA
believes that the balance here points to not adopting additional
backstops at this time for the MYs 2012-2016 standards other than
NHTSA's issuing the ones required by EPCA/EISA for domestic passenger
cars. If, during the timeframe of this rule, NHTSA observes a
significant shift in the manufacturer's product mix resulting in a
relaxation of their estimated targets, NHTSA and EPA will reconsider
options, both for MYs 2012-2016 and future rulemakings.
---------------------------------------------------------------------------

    \691\ The MYs 2012-2016 passenger car and light truck curves are
the actual standards.
---------------------------------------------------------------------------

2. Administrative Procedure Act
    To be upheld under the ``arbitrary and capricious'' standard of
judicial review in the APA, an agency rule must be rational, based on
consideration of the relevant factors, and within the scope of the
authority delegated to the agency by the statute. The agency must
examine the relevant data and articulate a satisfactory explanation for
its action including a ``rational connection between the facts found
and the choice made.'' Burlington Truck Lines, Inc. v. United States,
371 U.S. 156, 168 (1962).
    Statutory interpretations included in an agency's rule are
subjected to the two-step analysis of Chevron, U.S.A., Inc. v. Natural
Resources Defense Council, 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694
(1984). Under step one, where a statute ``has directly spoken to the
precise question at issue,'' id. at 842, 104 S.Ct. 2778, the court and
the agency ``must give effect to the unambiguously expressed intent of
Congress,'' id. at 843, 104 S.Ct. 2778. If the statute is silent or
ambiguous regarding the specific question, the court proceeds to step
two and asks ``whether the agency's answer is based on a permissible
construction of the statute.'' Id.
    If an agency's interpretation differs from the one that it has
previously adopted, the agency need not demonstrate that the prior
position was wrong or even less desirable. Rather, the agency would
need only to demonstrate that its new position is consistent with the
statute and supported by the record, and acknowledge that this is a
departure from past positions. The Supreme Court emphasized this
recently in FCC v. Fox Television, 129 S.Ct. 1800 (2009). When an
agency changes course from earlier regulations, ``the requirement that
an agency provide reasoned explanation for its action would ordinarily
demand that it display awareness that it is changing position,'' but
``need not demonstrate to a court's satisfaction that the reasons for
the new policy are better than the reasons for the old one; it suffices
that the new policy is permissible under the statute, that there are
good reasons for it, and that the agency believes it to be better,
which the conscious change of course adequately indicates.'' \692\
---------------------------------------------------------------------------

    \692\ Ibid., 1181.
---------------------------------------------------------------------------

    The APA also requires that agencies provide notice and comment to
the public when proposing regulations.\693\ Two commenters, the
American Chemistry Council and the American Petroleum Institute, argued
that the agreements by auto manufacturers and California to support the
National Program indicated that a ``deal'' had been struck between the
agencies and these parties, which was not available as part of the
administrative record and which the public had not been given the
opportunity to comment on. The commenters argued that this violated the
APA.
---------------------------------------------------------------------------

    \693\ 5 U.S.C. 553.
---------------------------------------------------------------------------

    In response, under the APA, agencies ``must justify their
rulemakings solely on the basis of the record [they] compile[] and
make[] public.'' \694\ Any informal contacts that occurred prior to the
release of the NPRM may have been informative for the agencies and
other parties involved in developing the NPRM, but they did not release
the agencies of their obligation consider and respond to public
comments on the NPRM and to justify the final standards based on the
public record. The agencies believe that the record fully justifies the
final standards, demonstrating analytically that they are the maximum
feasible and reasonable for the model years covered. Thus, we disagree
that there has been any violation of the APA.
---------------------------------------------------------------------------

    \694\ Sierra Club v. Costle, 657 F.2d 298, 401 (DC Cir. 1981).
---------------------------------------------------------------------------

3. National Environmental Policy Act
    As discussed above, EPCA requires the agency to determine what
level at which to set the CAFE standards for each model year by
considering the four factors of technological feasibility, economic
practicability, the effect of other motor vehicle standards of the
Government on fuel economy, and the need of the United States to
conserve energy. NEPA directs that environmental considerations be
integrated into that process. To accomplish that purpose, NEPA requires
an agency to compare the potential environmental impacts of its
proposed action to those of a reasonable range of alternatives.
    To explore the environmental consequences in depth, NHTSA has
prepared both a draft and a final environmental impact statement. The
purpose of an EIS is to ``provide full and fair discussion of
significant environmental impacts and [to] inform decisionmakers and
the public of the reasonable alternatives which would avoid or minimize
adverse impacts or enhance the quality of the human environment.'' 40
CFR 1502.1.
    NEPA is ``a procedural statute that mandates a process rather than
a particular result.'' Stewart Park & Reserve Coal., Inc. v. Slater,
352 F.3d at 557. The agency's overall EIS-related obligation is to
``take a `hard look' at the environmental consequences before taking a
major action.'' Baltimore Gas & Elec. Co. v. Natural Res. Def. Council,
Inc., 462 U.S. 87, 97, 103 S.Ct. 2246, 76 L.Ed.2d 437 (1983).
Significantly, ``[i]f the adverse environmental effects of the proposed
action are adequately identified and evaluated, the agency is not
constrained by NEPA from deciding that other values outweigh the
environmental costs.'' Robertson v. Methow Valley Citizens Council, 490

U.S. 332, 350, 109 S.Ct. 1835, 104 L.Ed.2d 351 (1989).
    The agency must identify the ``environmentally preferable''
alternative, but need not adopt it. ``Congress in enacting NEPA * * *
did not require agencies to elevate environmental concerns over other
appropriate considerations.'' Baltimore Gas and Elec. Co. v. Natural
Resources Defense Council, Inc., 462 U.S. 87, 97 (1983). Instead, NEPA
requires an agency to develop alternatives to the proposed action in
preparing an EIS. 42 U.S.C. 4332(2)(C)(iii). The statute does not
command the agency to favor an environmentally preferable course of
action, only that it make its decision to proceed with the action after
taking a hard look at environmental consequences.
    This final rule also constitutes a Record of Decision for NHTSA
under NEPA. Section IV.K below provides much more information on the
agency's NEPA analysis for this rulemaking, and on how this final rule
constitutes a Record of Decision.

E. What are the final CAFE standards?

1. Form of the Standards
    Each of the CAFE standards that NHTSA is finalizing today for
passenger cars and light trucks is expressed as a mathematical function
that defines a fuel economy target applicable to each vehicle model
and, for each fleet, establishes a required CAFE level determined by
computing the sales-weighted harmonic average of those targets.\695\
---------------------------------------------------------------------------

    \695\ Required CAFE levels shown here are estimated required
levels based on NHTSA's current projection of manufacturers' vehicle
fleets in MYs 2012-2016. Actual required levels are not determined
until the end of each model year, when all of the vehicles produced
by a manufacturer in that model year are known and their compliance
obligation can be determined with certainty. The target curves, as
defined by the constrained linear function, and as embedded in the
function for the sales-weighted harmonic average, are the real
``standards'' being established today.
---------------------------------------------------------------------------

    As discussed above in Section II.C, NHTSA has determined fuel
economy targets using a constrained linear function defined according
to the following formula:

[GRAPHIC] [TIFF OMITTED] TR07MY10.031

    Here, TARGET is the fuel economy target (in mpg) applicable to
vehicles of a given footprint (FOOTPRINT, in square feet), b and a
are the function's lower and upper asymptotes (also in mpg),
respectively, c is the slope (in gpm per square foot) of the sloped
portion of the function, and d is the intercept (in gpm) of the
sloped portion of the function (that is, the value the sloped
portion would take if extended to a footprint of 0 square feet. The
MIN and MAX functions take the minimum and maximum, respectively of
the included values.

    In the NPRM preceding today's final rule (as under the recently-
promulgated MY 2011 standards), NHTSA proposed that the CAFE level
required of any given manufacturer be determined by calculating the
production-weighted harmonic average of the fuel economy targets
applicable to each vehicle model:

[GRAPHIC] [TIFF OMITTED] TR07MY10.032

    Here, CAFErequired is the required level for a given fleet,
SALESi is the number of units of model i produced for sale in the
United States, TARGETi is the fuel economy target applicable to
model i (according to the equation shown in Chapter II and based on
the footprint of model i), and the summations in the numerator and
denominator are both performed over all models in the fleet in
question.

    However, comments by Honda and Toyota indicate that the defined
variables used in the equations could be interpreted differently by
vehicle manufacturers. The term ``footprint of a vehicle model'' could
be interpreted to mean that a manufacturer only has to use one
representative footprint within a model type or that it is necessary to
use all the unique footprints and corresponding fuel economy target
standards within a model type when determining a fleet target standard.
    In the same NPRM, EPA proposed new regulations which also include
the calculation of standards based on the attribute of footprint. The
EPA regulation text is specific and states that standards will be
derived using the target values ``for each unique combination of model
type and footprint value'' (proposed regulation text 40 CFR 86.1818-
12(c)(2)(ii)(B) for passenger automobiles and (c)(3)(ii)(B) for light
trucks). Also, in an EPA final rule issued November 25, 2009, the
manufacturers are required to provide in their final model year reports
to EPA data for ``each unique footprint within each model type'' used
to calculate the new CAFE program fuel economy levels (40 CFR 600.512-
08(c)(8) and (9)). Using this term would be more definitive than using
terms such as ``footprint of a vehicle model'' and would more fully
harmonize the NHTSA and EPA regulations. Therefore, under the final
CAFE standards promulgated today, a manufacturer's ``fleet target
standard'' will be derived from the summation of the targets for all
and every unique footprint within each model type for all model types
that make up a fleet of vehicles. Also, to provide greater clarity, the
equation will use the variable name PRODUCTION rather than SALES to
refer to production of vehicles for sale in the United States.
Otherwise, for purposes of the final rule the same equation will apply:

[GRAPHIC] [TIFF OMITTED] TR07MY10.033

    However, PRODUCTIONi is the number of units produced for sale in
the United States of each ith unique footprint within each model type,
produced for sale in the United States, and TARGETi is the
corresponding fuel economy target (according to the equation shown in
Chapter II and based on the corresponding footprint), and the
summations in the numerator and denominator are both performed over all
unique footprint and model type combinations in the fleet in question.
The equations and terms specified for calculating the required CAFE
fleet values in Part 531.5(b) and (c) for MYs 2012-2016, and Part
533.5(g), (h) and (i) for MYs 2008-2016 will be updated accordingly.
Although the agency is not changing the equations for the MY 2011
standards, we would expect manufacturers to follow the same procedures
for calculating their required levels for that model year. Also, the
Appendices in each of these parts will also be updated to provide
corresponding examples of calculating the fleet standards.
    Corresponding changes to regulatory text defining CAFE standards
are discussed below in Section IV.I.
    The final standards are, therefore, specified by the four
coefficients defining fuel economy targets:

a = upper limit (mpg)
b = lower limit (mpg)
c = slope (gpm per square foot)
d = intercept (gpm)

The values of the coefficients are different for the passenger car
standards and the light truck standards.
2. Passenger Car Standards for MYs 2012-2016
    For passenger cars, NHTSA proposed CAFE standards defined by the
following coefficients during MYs 2012-2016:

       Table IV.E.2-1--Coefficients Defining Proposed MY 2012-2016 Fuel Economy Targets for Passenger Cars
----------------------------------------------------------------------------------------------------------------
           Coefficient                 2012            2013            2014            2015            2016
----------------------------------------------------------------------------------------------------------------
a (mpg).........................      36.23           37.15           38.08           39.55           41.38
b (mpg).........................      28.12           28.67           29.22           30.08           31.12
c (gpm/sf)......................       0.0005308       0.0005308       0.0005308       0.0005308       0.0005308
d (gpm).........................       0.005842        0.005153        0.004498        0.003520        0.002406
----------------------------------------------------------------------------------------------------------------

    After updating inputs to its analysis, and revisiting the form and
stringency of both passenger cars and light truck standards, as
discussed in Section II, NHTSA is finalizing passenger car CAFE
standards defined by the following coefficients during MYs 2012-2016:

        Table IV.E.2-2--Coefficients Defining Final MY 2012-2016 Fuel Economy Targets for Passenger Cars
----------------------------------------------------------------------------------------------------------------
           Coefficient                 2012            2013            2014            2015            2016
----------------------------------------------------------------------------------------------------------------
a (mpg).........................      35.95           36.80           37.75           39.24           41.09
b (mpg).........................      27.95           28.46           29.03           29.90           30.96
c (gpm/sf)......................       0.0005308       0.0005308       0.0005308       0.0005308       0.0005308
d (gpm).........................       0.006057        0.005410        0.004725        0.003719        0.002573
----------------------------------------------------------------------------------------------------------------

    These coefficients reflect the agency's decision, discussed above
in Section II, to leave the shapes of both the passenger car and light
truck curves unchanged. They also reflect the agency's reevaluation of
the ``gap'' in stringency between the passenger car and light truck
standard, also discussed in Section II.
    These coefficients result in the footprint-dependent target curves
shown graphically below. The MY 2011 final standard, which is specified
by a constrained logistic function rather than a constrained linear
function, is shown for comparison.

[GRAPHIC] [TIFF OMITTED] TR07MY10.034

    As discussed, the CAFE levels required of individual manufacturers
will depend on the mix of vehicles they produce for sale in the United
States. Based on the market forecast of future sales that NHTSA has
used to examine today's final CAFE standards, the agency estimates that
the targets shown above will result in the following average required
fuel economy levels for individual manufacturers during MYs 2012-2016
(an updated estimate of the average required fuel economy level under
the final MY 2011 standard is shown for comparison): \696\
---------------------------------------------------------------------------

    \696\ In the March 2009 final rule establishing MY 2011
standards for passenger cars and light trucks, NHTSA estimated that
the required fuel economy levels for passenger cars would average
30.2 mpg under the MY 2011 passenger car standard. Based on the
agency's current forecast of the MY 2011 passenger car market, which
anticipates greater numbers of passenger cars than the forecast used
in the MY 2011 final rule, NHTSA now estimates that the average
required fuel economy level for passenger cars will be 30.4 mpg in
MY 2011. This does not mean that the agency is making the standards
more stringent for that model year, or that any manufacturer will
necessarily face a more difficult CAFE standard, it simply reflects
the change in assumptions about what vehicles will be produced for
sale in that model year. The target curve remains the same, and each
manufacturer's compliance obligation will still be determined at the
end of the model year.

     Table IV.E.2-3--Estimated Average Fuel Economy Required Under Final MY 2011 and Final MY 2012-2016 CAFE
                                          Standards for Passenger Cars
----------------------------------------------------------------------------------------------------------------
           Manufacturer               MY 2011      MY 2012      MY 2013      MY 2014      MY 2015      MY 2016
----------------------------------------------------------------------------------------------------------------
BMW...............................         30.2         33.0         33.7         34.5         35.7         37.3
Chrysler..........................         29.4         32.6         33.3         34.1         35.2         36.7
Daimler...........................         29.2         32.0         32.7         33.3         34.4         35.8
Ford..............................         29.7         32.9         33.7         34.4         35.6         37.1
General Motors....................         30.3         32.7         33.5         34.2         35.4         36.9
Honda.............................         30.8         33.8         34.6         35.4         36.7         38.3
Hyundai...........................         30.9         33.8         34.3         35.1         36.6         38.2
Kia...............................         30.6         33.4         34.2         35.0         36.3         37.9
Mazda.............................         30.6         33.8         34.6         35.5         36.8         38.4
Mitsubishi........................         31.0         34.2         35.0         35.8         37.1         38.7
Nissan............................         30.7         33.3         34.1         34.9         36.1         37.7

Porsche...........................         31.2         35.9         36.8         37.8         39.2         41.1
Subaru............................         31.0         34.6         35.5         36.3         37.7         39.4
Suzuki............................         31.2         35.8         36.6         37.5         39.0         40.8
Tata..............................         28.0         30.7         31.4         32.1         33.3         34.7
Toyota............................         30.8         33.9         34.7         35.5         36.8         38.4
Volkswagen........................         30.8         34.3         35.0         35.9         37.2         38.8
Average...........................         30.4         33.3         34.2         34.9         36.2         37.8
----------------------------------------------------------------------------------------------------------------

    Because a manufacturer's required average fuel economy level for a
model year under the final standards will be based on its actual
production numbers in that model year, its official required fuel
economy level will not be known until the end of that model year.
However, because the targets for each vehicle footprint will be
established in advance of the model year, a manufacturer should be able
to estimate its required level accurately.