CO2.\327\ Adjusted to reflect increases since the mid-1990s
in the marginal damage costs of emissions at now-higher atmospheric
concentrations of GHGs, and expressed in 2007 dollars, Tol's mean value
corresponds to a global damage cost of $33 per ton of CO2
emitted during the year 2007, with a standard deviation of nearly $47
per ton. Thus, the value that is one standard deviation above the $33
figure is $80 per ton of CO2.
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    NHTSA acknowledges that including an appropriate premium to reflect
the value of reducing the risks of catastrophic climate events could
significantly increase its estimate of the value of reducing
CO2 emissions, but it has not attempted to do so at this
time.\338\ (For discussion of NHTSA's consideration of abrupt climate
change, see Sec.  <IP_ADDRESS>.4 of the FEIS.) However, the agency is aware
of recent research suggesting that including an appropriate risk
premium can significantly increase estimates of the SCC, and by
implication increase the estimated value of reducing CO2
emissions.\339\ In working with EPA, DOE and other federal agencies in
the development of revised estimates of the benefits from reducing
CO2 emissions that could be used in the next CAFE
rulemaking, NHTSA will carefully consider any new research that
explicitly estimates risk premiums, and evaluate their applicability to
the issue of estimating economic benefits from reductions in
CO2 emissions resulting from future CAFE standards. The
agency will also work with those agencies and departments in exploring
the possibility

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

VI. How NHTSA Sets the CAFE Standards

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

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

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

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

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

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

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

    \368\ 49 U.S.C. 32902(a)(3)(A).
    [GRAPHIC] [TIFF OMITTED] TR30MR09.050

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

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

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

[GRAPHIC] [TIFF OMITTED] TR30MR09.051

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

    NHTSA received only three comments regarding its use of the
continuous function. Ferrari commented that it supports ``the choice to
use a continuous function instead of a step function, because for each
vehicle model is associated the corresponding fuel economy target,
regardless of whether the attribute is the footprint alone or another
one or a combination of two or more.''
    Fuji/Subaru commented that ``In general, Subaru conceptually
supports the NHTSA proposal to carryover the attribute and continuous
logistic function structure from the prior 2008-2011 light truck fuel
economy rulemaking.''
    IIHS commented that it ``strongly supports the extension of an
attribute-based system to cars and the agency's proposal to index fuel
economy to a continuous function.'' IIHS stated that a step function
gives manufacturers an incentive ``to redesign vehicles with minimally
larger footprints to achieve lower fuel economy targets or to downsize
vehicles to achieve weight reductions within footprint categories.''
This incentive exists, IIHS argued, because of the fact that ``By
minimally boosting the footprint of a vehicle near an upper boundary,
an automaker can gain a large benefit in meeting fuel economy
targets,'' and that ``By the same token, an automaker can significantly
decrease a vehicle's size and weight as long as the changes do not
place the vehicle below the lower boundary of its current step,'' which
IIHS argued presented significant safety concerns. IIHS further stated
that the continuous function presented an added benefit over a step
function insofar as ``car buyers would be more likely to notice design
changes incorporated to achieve a substantial CAFE benefit in a
continuous function system.''
    Agency response: Notwithstanding concerns regarding the steepness
of an attribute-based function--concerns that are addressed below in
Section VI.E--these comments support the agency's decision to
promulgate a final rule that uses a continuous function to specify fuel
economy targets that depend on a vehicle attribute.
Constrained Logistic Function
    NHTSA explained in the NPRM that there are a variety of
mathematical forms available to estimate the relationship between an
attribute and fuel economy that could be used as a continuous function,
including simple linear (straight-line) functions, quadratic (U-shaped)
functions, exponential (curves that continuously become steeper or
shallower) functions, and unconstrained logistic (S-shaped) functions.
NHTSA examined these alternative mathematical forms in the MY 2008-2011
light truck CAFE rulemaking,\370\ but concluded that none of those
functional forms as presented would be appropriate for the CAFE program
because they tended toward excessively high stringency levels at the
smaller end of the footprint range, excessively low stringency levels
at the larger end of the footprint range, or both. Too-high stringency
levels for smaller vehicles could potentially result in target values
beyond the technological capabilities of manufacturers, while too-low
levels for larger vehicles would reduce fuel savings below that of the
optimized fleet. NHTSA determined that a constrained logistic function,
shaped like an S-curve with plateaus at the top and bottom rather than
increasing/decreasing to infinity, provided a relatively good fit to
the data points without creating problems associated with some or all
of the other forms. The constrained logistic function also limited the
potential for the curve to be disproportionately influenced by outlier
vehicles.
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    \370\ See 71 FR 17600-17607 (Apr. 6, 2007) for a fuller
discussion of the agency's analysis in that rule.
---------------------------------------------------------------------------

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

C. What other types of standards did commenters propose?

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

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

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

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

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

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

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

    And fourth, attribute-based standards respect economic conditions
and consumer choice, instead of having the government mandate a certain
fleet mix. Manufacturers are required to invest in technologies that
improve the fuel economy of the vehicles they sell, regardless of size.
    All commenters recognized that NHTSA must set attribute-based
standards per Congress' mandate in EISA, but several commenters, mostly
small and limited-line manufacturers, requested that NHTSA develop some
kind of alternative standard besides the attribute-based passenger car
and light truck standards proposed in the NPRM.\374\ These
manufacturers generally argued that the proposed passenger car
standards were set without regard to 15 percent of the passenger car
market and were disproportionately burdensome to them (NHTSA notes,
however, that full-line manufacturers argued to the contrary that the
proposed standards were disproportionately burdensome to them). Most
requested that the agency set an alternative standard that required
them to raise their CAFE levels by a certain set percentage each year,
rather than at the rate required by the proposed standards. Commenters
generally reasoned that these alternative standards would improve fuel
savings, because otherwise small and limited-line manufacturers will be
unable to meet the proposed standards and will just pay fines.
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    \374\ The Alliance comment on this issue simply stated that
``For some manufacturers, whose model proliferation may not
correlate well with footprint-based CAFE standards, the burden of
required fuel economy increases is particularly high,'' and
suggested that ``NHTSA should consider the appropriateness of
implementing an alternative fuel economy standard option'' for those
manufacturers, but left it to the individual manufacturers to
comment further.
---------------------------------------------------------------------------

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

enforcement penalties under those standards.
    Mercedes Benz also argued that ``manufacturers not included in the
analysis'' for passenger car standards, i.e., limited-line
manufacturers, should be allowed either to meet the average fuel
economy specified for the vehicle fleet, or ``to improve their fleet
fuel economy by a percentage equal to the percentage improvement NHTSA
estimates for the fleet as a whole.'' Mercedes Benz suggested that
NHTSA could require manufacturers to comply with the higher of the two
options. The commenter further argued that such an approach would be
legal under EPCA/EISA because it ``would be based on the attribute
based continuous function curve,'' and would be fairer because the
proposed attribute-based standards did not take into account what the
fleet as a whole could achieve in terms of fuel economy.
    Agency response: NHTSA disagrees that it has the authority to set
such suggested standards for any manufacturers under EPCA and EISA for
purposes of this rulemaking. An average standard that is ``based on''
an attribute-based standard is not itself attribute-based, as required
by EISA. Many of the manufacturers arguing for an alternative standard
were concerned that the agency had excluded them from consideration in
developing the proposed standards. In response, the agency included all
manufacturers subject to the standards (excluding low-volume
manufacturers), to ensure that the curves reflected the capabilities of
the entire fleet, and not just the seven largest manufacturers. NHTSA
believes that this addresses many of the commenters' concerns.

D. How does NHTSA fit the curve and estimate the stringency that
maximizes net benefits to society?

    In the NPRM, NHTSA proposed attribute-based passenger car and light
truck CAFE standards under which each vehicle model has a fuel economy
target that is based on the vehicle model's footprint, and the CAFE
levels required of each manufacturer's passenger car and light truck
fleets are determined by calculating the sales-weighted harmonic
averages of those targets. NHTSA proposed the following mathematical
function relating fuel economy targets to footprint:
[GRAPHIC] [TIFF OMITTED] TR30MR09.052

    where
    [GRAPHIC] [TIFF OMITTED] TR30MR09.053

    and

T(x) = fuel economy target (mpg)