delaying the issuance of this rule for some undefined, indefinite time
period.
    Some parties have argued that EPA's issuance of this light-duty
vehicle rule amounts to a denial of various administrative requests
pending before EPA, in which parties have requested that EPA reconsider
and stay the GHG endangerment finding published on December 15, 2009.
That is not an accurate characterization of the impact of this final
rule. EPA has not taken final action on these administrative requests,
and issuance of this vehicle rule is not final agency action,
explicitly or implicitly, on those requests. Currently, while we
carefully consider the pending requests for reconsideration on
endangerment, these final findings on endangerment and contribution
remain in place. Thus under section 202(a) EPA is obligated to
promulgate GHG motor vehicle standards, although there is no statutory
deadline for issuance of the light-duty vehicle rule or other motor
vehicle rules. In that context, issuance of this final light-duty
vehicle rule does no more than recognize the current status of the
findings--they are final and impose a rulemaking obligation on EPA,
unless and until we change them. In issuing the vehicle rule we are not
making a decision on requests to reconsider or stay the endangerment
finding, and are not in any way prejudicing or limiting EPA's
discretion in making a final decision on these administrative requests.
    For discussion of comments on impacts on small entities and EPA's
compliance with the Regulatory Flexibility Act, see the discussion in
Section III.I.3.
b. Environmental and Economic Benefits and Costs of EPA's Standards
    In Table III.A.3-3 EPA presents estimated annual net benefits for
the indicated calendar years. The table also shows the net present
values of those benefits for the calendar years 2012-2050 using both a
3 percent and a 7 percent discount rate. As discussed previously, EPA
recognizes that much of these same costs and benefits are also
attributable to the CAFE standard contained in this joint final rule.

                                       Table III.A.3-3--Projected Quantifiable Benefits and Costs for CO2 Standard
                                                                   [In million 2007$]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               2020            2030            2040            2050         NPV, 3% \a\     NPV, 7% \a\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Quantified Annual Costs\b\..............................        -$20,100        -$64,000       -$101,900       -$152,200     -$1,199,700       -$480,700
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                           Benefits From Reduced CO2 Emissions at Each Assumed SCC Value c d e
--------------------------------------------------------------------------------------------------------------------------------------------------------
Avg SCC at 5%...........................................             900           2,700           4,600           7,200          34,500          34,500
Avg SCC at 3%...........................................           3,700           8,900          14,000          21,000         176,700         176,700
Avg SCC at 2.5%.........................................           5,800          14,000          21,000          30,000         299,600         299,600
95th percentile SCC at 3%...............................          11,000          27,000          43,000          62,000         538,500         538,500
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                      Other Impacts
--------------------------------------------------------------------------------------------------------------------------------------------------------
Criteria Pollutant Benefits f g h i.....................               B     1,200-1,300     1,200-1,300     1,200-1,300          21,000          14,000
Energy Security Impacts (price shock)...................           2,200           4,500           6,000           7,600          81,900          36,900
Reduced Refueling.......................................           2,400           4,800           6,300           8,000          87,900          40,100
Value of Increased Driving \j\..........................           4,200           8,800          13,000          18,400         171,500          75,500
Accidents, Noise, Congestion............................          -2,300          -4,600          -6,100          -7,800         -84,800         -38,600
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                 Quantified Net Benefits at Each Assumed SCC Value c d e
--------------------------------------------------------------------------------------------------------------------------------------------------------
Avg SCC at 5%...........................................          27,500          81,500         127,000         186,900       1,511,700         643,100
Avg SCC at 3%...........................................          30,300          87,700         136,400         200,700       1,653,900         785,300
Avg SCC at 2.5%.........................................          32,400          92,800         143,400         209,700       1,776,800         908,200
95th percentile SCC at 3%...............................          37,600         105,800         165,400         241,700       2,015,700       1,147,100
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ Note that net present value of reduced GHG emissions is calculated differently than other benefits. The same discount rate used to discount the
  value of damages from future emissions (SCC at 5, 3, 2.5 percent) is used to calculate net present value of SCC for internal consistency. Refer to
  Section III.F for more detail.
\b\ Quantified annual costs are negative because of fuel savings (see Table III.H.10-1 for a breakdown of the vehicle technology costs and fuel
  savings). The fuel savings outweigh the vehicle technology costs and, therefore, the costs are presented here are negative values.
\c\ Monetized GHG benefits exclude the value of reductions in non-CO2 GHG emissions (HFC, CH4 and N2O) expected under this final rule. Although EPA has
  not monetized the benefits of reductions in these non-CO2 emissions, the value of these reductions should not be interpreted as zero. Rather, the
  reductions in non-CO2 GHGs will contribute to this rule's climate benefits, as explained in Section III.F.2. The SCC Technical Support Document (TSD)
  notes the difference between the social cost of non-CO2 emissions and CO2 emissions, and specifies a goal to develop methods to value non-CO2
  emissions in future analyses.
\d\ Section III.H.6 notes that SCC increases over time. Corresponding to the years in this table, the SCC estimates range as follows: for Average SCC at
  5%: $5-$16; for Average SCC at 3%: $21-$45; for Average SCC at 2.5%: $35-$65; and for 95th percentile SCC at 3%: $65-$136. Section III.H.6 also
  presents these SCC estimates.
\e\ Note that net present value of reduced GHG emissions is calculated differently than other benefits. The same discount rate used to discount the
  value of damages from future emissions (SCC at 5, 3, 2.5 percent) is used to calculate net present value of SCC for internal consistency. Refer to SCC
  TSD for more detail.
\f\ Note that ``B'' indicates unquantified criteria pollutant benefits in the year 2020. For the final rule, we only modeled the rule's PM2.5- and ozone-
  related impacts in the calendar year 2030. For the purposes of estimating a stream of future-year criteria pollutant benefits, we assume that the
  benefits out to 2050 are equal to, and no less than, those modeled in 2030 as reflected by the stream of estimated future emission reductions. The NPV
  of criteria pollutant-related benefits should therefore be considered a conservative estimate of the potential benefits associated with the final
  rule.
\g\ The benefits presented in this table include an estimate of PM-related premature mortality derived from Laden et al., 2006, and the ozone-related
  premature mortality estimate derived from Bell et al., 2004. If the benefit estimates were based on the ACS study of PM-related premature mortality
  (Pope et al., 2002) and the Levy et al., 2005 study of ozone-related premature mortality, the values would be as much as 70% smaller.
\h\ The calendar year benefits presented in this table assume either a 3% discount rate in the valuation of PM-related premature mortality ($1,300
  million) or a 7% discount rate ($1,200 million) to account for a twenty-year segmented cessation lag. Note that the benefits estimated using a 3%
  discount rate were used to calculate the NPV using a 3% discount rate and the benefits estimated using a 7% discount rate were used to calculate the
  NPV using a 7% discount rate. For benefits totals presented at each calendar year, we used the mid-point of the criteria pollutant benefits range
  ($1,250).
\i\ Note that the co-pollutant impacts presented here do not include the full complement of endpoints that, if quantified and monetized, would change
  the total monetized estimate of impacts. The full complement of human health and welfare effects associated with PM and ozone remain unquantified
  because of current limitations in methods or available data. We have not quantified a number of known or suspected health effects linked with ozone
  and PM for which appropriate health impact functions are not available or which do not provide easily interpretable outcomes (e.g., changes in heart
  rate variability). Additionally, we are unable to quantify a number of known welfare effects, including reduced acid and particulate deposition damage
  to cultural monuments and other materials, and environmental benefits due to reductions of impacts of eutrophication in coastal areas.
\j\ Calculated using pre-tax fuel prices.

4. Basis for the GHG Standards Under Section 202(a)
    EPA statutory authority under section 202(a)(1) of the Clean Air
Act (CAA) is discussed in more detail in Section I.C.2 of the proposed
rule (74 FR at 49464-65). The following is a summary of the basis for
the final GHG standards under section 202(a), which is discussed in
more detail in the following portions of Section III.
    With respect to CO2 and HFCs, EPA is adopting attribute-
based light-duty car and truck standards that achieve large and
important emissions reductions of GHGs. EPA has evaluated the
technological feasibility of the standards, and the information and
analysis performed by EPA indicates that these standards are feasible
in the lead time provided. EPA and NHTSA have carefully evaluated the
effectiveness of individual technologies as well as the interactions
when technologies are combined. EPA's projection of the technology that
would be used to comply with the standards indicates that manufacturers
will be able to meet the standards by employing

a wide variety of technologies that are already commercially available
and can be incorporated into their vehicles at the time of redesign. In
addition to the consideration of the manufacturers' redesign cycle,
EPA's analysis also takes into account certain flexibilities that will
facilitate compliance especially in the early years of the program when
potential lead time constraints are most challenging. These
flexibilities include averaging, banking, and trading of various types
of credits. For the industry as a whole, EPA's projections indicate
that the standards can be met using technology that will be available
in the lead-time provided. At the same time, it must be noted that
because technology is commercially available today does not mean it can
automatically be incorporated fleet-wide during the model years in
question. As discussed below, and in detail in Section III.D.7, EPA and
NHTSA carefully analyzed issues of adequacy of lead time in determining
the level of the standards, and the agencies are convinced both that
lead time is sufficient to meet the standards but that major further
additions of technology across the fleet is not possible during these
model years.
    To account for additional lead-time concerns for various
manufacturers of typically higher performance vehicles, EPA is adopting
a Temporary Lead-time Allowance similar to that proposed that will
further facilitate compliance for limited volumes of such vehicles in
the program's initial years. For a few very small volume manufacturers,
EPA is deferring standards pending later rulemaking.
    EPA has also carefully considered the cost to manufacturers of
meeting the standards, estimating piece costs for all candidate
technologies, direct manufacturing costs, cost markups to account for
manufacturers' indirect costs, and manufacturer cost reductions
attributable to learning. In estimating manufacturer costs, EPA took
into account manufacturers' own practices such as making major changes
to model technology packages during a planned redesign cycle. EPA then
projected the average cost across the industry to employ this
technology, as well as manufacturer-by-manufacturer costs. EPA
considers the per vehicle costs estimated from this analysis to be
within a reasonable range in light of the emissions reductions and
benefits received. EPA projects, for example, that the fuel savings
over the life of the vehicles will more than offset the increase in
cost associated with the technology used to meet the standards.
    EPA has also evaluated the impacts of these standards with respect
to reductions in GHGs and reductions in oil usage. For the lifetime of
the model year 2012-2016 vehicles we estimate GHG reductions of
approximately 960 million metric tons CO2 eq. and fuel
reductions of 1.8 billion barrels of oil. These are important and
significant reductions. EPA has also analyzed a variety of other
impacts of the standards, ranging from the standards' effects on
emissions of non-GHG pollutants, impacts on noise, energy, safety and
congestion. EPA has also quantified the cost and benefits of the
standards, to the extent practicable. Our analysis to date indicates
that the overall quantified benefits of the standards far outweigh the
projected costs. Utilizing a 3% discount rate, we estimate the total
net social benefits over the life of the model year 2012-2016 vehicles
is $192 billion, and the net present value of the net social benefits
of the standards through the year 2050 is $1.9 trillion dollars.\166\
These values are estimated at $136 billion and $787 billion,
respectively, using a 7% discount rate and the SCC discounted at 3
percent.\167\
---------------------------------------------------------------------------

    \166\ Based on the mean SCC at 3 percent discount rate, which is
$21 per metric ton CO2 in 2010 rising to $45 per metric
ton CO2 in 2050.
    \167\ SCC was discounted at 3 percent to maintain internal
consistency in the SCC calculations while all other benefits were
discounted at 7 percent. Specifically, the same discount rate used
to discount the value of damages from future CO2
emissions is used to calculate net present value of SCC.
---------------------------------------------------------------------------

    Under section 202(a) EPA is called upon to set standards that
provide adequate lead-time for the development and application of
technology to meet the standards. EPA's standards satisfy this
requirement, as discussed above. In setting the standards, EPA is
called upon to weigh and balance various factors, and to exercise
judgment in setting standards that are a reasonable balance of the
relevant factors. In this case, EPA has considered many factors, such
as cost, impacts on emissions (both GHG and non-GHG), impacts on oil
conservation, impacts on noise, energy, safety, and other factors, and
has, where practicable, quantified the costs and benefits of the rule.
In summary, given the technical feasibility of the standard, the
moderate cost per vehicle in light of the savings in fuel costs over
the life time of the vehicle, the very significant reductions in
emissions and in oil usage, and the significantly greater quantified
benefits compared to quantified costs, EPA is confident that the
standards are an appropriate and reasonable balance of the factors to
consider under section 202(a). See Husqvarna AB v. EPA, 254 F. 3d 195,
200 (DC Cir. 2001) (great discretion to balance statutory factors in
considering level of technology-based standard, and statutory
requirement ``to [give appropriate] consideration to the cost of
applying * * * technology'' does not mandate a specific method of cost
analysis); see also Hercules Inc. v. EPA, 598 F. 2d 91, 106 (DC Cir.
1978) (``In reviewing a numerical standard we must ask whether the
agency's numbers are within a zone of reasonableness, not whether its
numbers are precisely right''); Permian Basin Area Rate Cases, 390 U.S.
747, 797 (1968) (same); Federal Power Commission v. Conway Corp., 426
U.S. 271, 278 (1976) (same); Exxon Mobil Gas Marketing Co. v. FERC, 297
F. 3d 1071, 1084 (DC Cir. 2002) (same).
    EPA recognizes that the vast majority of technologies which we are
considering for purposes of setting standards under section 202(a) are
commercially available and already being utilized to a limited extent
across the fleet. The vast majority of the emission reductions, which
would result from this rule, would result from the increased use of
these technologies. EPA also recognizes that this rule would enhance
the development and limited use of more advanced technologies, such as
PHEVs and EVs. In this technological context, there is no clear cut
line that indicates that only one projection of technology penetration
could potentially be considered feasible for purposes of section
202(a), or only one standard that could potentially be considered a
reasonable balancing of the factors relevant under section 202(a). EPA
therefore evaluated two sets of alternative standards, one more
stringent than the promulgated standards and one less stringent.
    The alternatives are 4% per year increase in standards which would
be less stringent and a 6% per year increase in the standards which
would be more stringent. EPA is not adopting either of these. As
discussed in Section III.D.7, the 4% per year forgoes CO2
reductions which can be achieved at reasonable cost and are achievable
by the industry within the rule's timeframe. The 6% per year
alternative requires a significant increase in the projected required
technology penetration which appears inappropriate in this timeframe
due to the limited available lead time and the current difficult
financial condition of the automotive industry. (See Section III.D.7
for a detailed discussion of why EPA is not adopting either of the
alternatives.) EPA also believes that the no backsliding standards it
is adopting

for N2O and CH4 are appropriate under section
202(a).

B. GHG Standards for Light-Duty Vehicles, Light-Duty Trucks, and
Medium-Duty Passenger Vehicles

    EPA is finalizing new emission standards to control greenhouse
gases (GHGs) from light-duty vehicles. First, EPA is finalizing an
emission standard for carbon dioxide (CO2) on a gram per
mile (g/mile) basis that will apply to a manufacturer's fleet of cars,
and a separate standard that will apply to a manufacturer's fleet of
trucks. CO2 is the primary greenhouse gas resulting from the
combustion of vehicular fuels, and the amount of CO2 emitted
is directly correlated to the amount of fuel consumed. Second, EPA is
providing auto manufacturers with the opportunity to earn credits
toward the fleet-wide average CO2 standards for improvements
to air conditioning systems, including both hydrofluorocarbon (HFC)
refrigerant losses (i.e., system leakage) and indirect CO2
emissions related to the increased load on the engine. Third, EPA is
finalizing separate emissions standards for two other GHGs: Methane
(CH4) and nitrous oxide (N20). CH4 and
N2O emissions relate closely to the design and efficient use
of emission control hardware (i.e., catalytic converters). The
standards for CH4 and N2O will be set as a cap
that will limit emissions increases and prevent backsliding from
current emission levels. The final standards described below will apply
to passenger cars, light-duty trucks, and medium-duty passenger
vehicles (MDPVs). As an overall group, they are referred to in this
preamble as light vehicles or simply as vehicles. In this preamble
section passenger cars may be referred to simply as ``cars'', and
light-duty trucks and MDPVs as ``light trucks'' or ``trucks.'' \168\
---------------------------------------------------------------------------

    \168\ As described in Section III.B.2., GHG emissions standards
will use the same vehicle category definitions as are used in the
CAFE program.
---------------------------------------------------------------------------

    EPA's program includes a number of credit opportunities and other
flexibilities to help manufacturers comply, especially in the early
years of the program. EPA is establishing a system of averaging,
banking, and trading of credits integral to the fleet averaging
approach, based on manufacturer fleet average CO2
performance, as discussed in Section III.B.4. This approach is similar
to averaging, banking, and trading (ABT) programs EPA has established
in other programs and is also similar to provisions in the CAFE
program. In addition to traditional ABT credits based on the fleet
emissions average, EPA is also including A/C credits as an aspect of
the standards, as mentioned above. EPA is also including several
additional credit provisions that apply only in the initial model years
of the program. These include flex fuel vehicle credits, incentives for
the early commercialization of certain advanced technology vehicles,
credits for new and innovative ``off-cycle'' technologies that are not
captured by the current test procedures, and generation of credits
prior to model year 2012. The A/C credits and additional credit
opportunities are described in Section III.C. These credit programs
will provide flexibility to manufacturers, which may be especially
important during the early transition years of the program. EPA will
also allow a manufacturer to carry a credit deficit into the future for
a limited number of model years. A parallel provision, referred to as
credit carry-back, will be part of the CAFE program. Finally, EPA is
finalizing an optional compliance flexibility, the Temporary Leadtime
Allowance Alternative Standard program, for intermediate volume
manufacturers, and is deferring standards for the smallest
manufacturers, as discussed in Sections III.B.5 and 6 below.
1. What fleet-wide emissions levels correspond to the CO2
standards?
    The attribute-based CO2 standards are projected to
achieve a national fleet-wide average, covering both light cars and
trucks, of 250 grams/mile of CO2 in model year (MY) 2016.
This includes CO2-equivalent emission reductions from A/C
improvements, reflected as credits in the standard. The standards will
begin with MY 2012, with a generally linear increase in stringency from
MY 2012 through MY 2016. EPA will have separate standards for cars and
light trucks. The tables in this section below provide overall fleet
average levels that are projected for both cars and light trucks over
the phase-in period which is estimated to correspond with the
standards. The actual fleet-wide average g/mi level that will be
achieved in any year for cars and trucks will depend on the actual
production for that year, as well as the use of the various credit and
averaging, banking, and trading provisions. For example, in any year,
manufacturers may generate credits from cars and use them for
compliance with the truck standard. Such transfer of credits between
cars and trucks is not reflected in the table below. In Section III.F,
EPA discusses the year-by-year estimate of emissions reductions that
are projected to be achieved by the standards.
    In general, the schedule of standards acts as a phase-in to the MY
2016 standards, and reflects consideration of the appropriate lead-time
for each manufacturer to implement the requisite emission reductions
technology across its product line.\169\ Note that 2016 is the final
model year in which standards become more stringent. The 2016
CO2 standards will remain in place for 2017 and later model
years, until revised by EPA in a future rulemaking.
---------------------------------------------------------------------------

    \169\ See CAA section 202(a)(2).
---------------------------------------------------------------------------

    EPA estimates that, on a combined fleet-wide national basis, the
2016 MY standards will achieve a level of 250 g/mile CO2,
including CO2-equivalent credits from A/C related
reductions. The derivation of the 250 g/mile estimate is described in
Section III.B.2.
    EPA has estimated the overall fleet-wide CO2-equivalent
emission levels that correspond with the attribute-based standards,
based on the projections of the composition of each manufacturer's
fleet in each year of the program. Tables III.B.1-1 and III.B.1-2
provides these estimates for each manufacturer.\170\
---------------------------------------------------------------------------

    \170\ These levels do not include the effect of flexible fuel
credits, transfer of credits between cars and trucks, temporary lead
time allowance, or any other credits.
---------------------------------------------------------------------------

    As a result of public comments and updated economic and future
fleet projections, the attribute based curves have been updated for
this final rule, as discussed in detail in Section II.B of this
preamble and Chapter 2 of the Joint TSD. This update in turn affects
costs, benefits, and other impacts of the final standards--thus EPA's
overall projection of the impacts of the final rule standards have been
updated and the results are different than for the NPRM, though in
general not by a large degree.

         Table III.B.1-1--Estimated Fleet CO2-Equivalent Levels Corresponding to the Standards for Cars
                                                    [g/mile]
----------------------------------------------------------------------------------------------------------------
                                                                    Model year
          Manufacturer           -------------------------------------------------------------------------------
                                       2012            2013            2014            2015            2016
----------------------------------------------------------------------------------------------------------------
BMW.............................             266             259             250             239             228
Chrysler........................             269             262             254             243             232
Daimler.........................             274             267             259             249             238
Ford............................             267             259             251             240             229
General Motors..................             268             261             252             241             230
Honda...........................             260             252             244             233             222
Hyundai.........................             260             254             246             233             222
Kia.............................             263             255             247             235             224
Mazda...........................             260             252             243             232             221
Mitsubishi......................             257             249             241             230             219
Nissan..........................             263             256             248             237             226
Porsche.........................             244             237             228             217             206
Subaru..........................             253             246             237             226             215
Suzuki..........................             245             238             230             218             208
Tata............................             288             280             272             261             250
Toyota..........................             259             251             243             232             221
Volkswagen......................             256             249             240             229             219
----------------------------------------------------------------------------------------------------------------

     Table III.B.1-2--Estimated Fleet CO2-Equivalent Levels Corresponding to the Standards for Light Trucks
                                                    [g/mile]
----------------------------------------------------------------------------------------------------------------
                                                                    Model year
          Manufacturer           -------------------------------------------------------------------------------
                                       2012            2013            2014            2015            2016
----------------------------------------------------------------------------------------------------------------
BMW.............................             330             320             310             297             283
Chrysler........................             342             333             323             309             295
Daimler.........................             343             332             323             308             294
Ford............................             354             344             334             319             305
General Motors..................             364             354             344             330             316
Honda...........................             327             318             309             295             281
Hyundai.........................             325             316             307             292             278
Kia.............................             335             327             318             303             289
Mazda...........................             319             308             299             285             271
Mitsubishi......................             316             306             297             283             269
Nissan..........................             343             334             323             308             294
Porsche.........................             334             325             315             301             287
Subaru..........................             315             305             296             281             267
Suzuki..........................             320             310             300             286             272
Tata............................             321             310             301             287             272
Toyota..........................             342             333             323             308             294
Volkswagen......................             341             331             322             307             293
----------------------------------------------------------------------------------------------------------------

    These estimates were aggregated based on projected production
volumes into the fleet-wide averages for cars and trucks (Table
III.B.1-3).\171\
---------------------------------------------------------------------------

    \171\ Due to rounding during calculations, the estimated fleet-
wide CO2-equivalent levels may vary by plus or minus 1
gram.

       Table III.B.1-3--Estimated Fleet-Wide CO2-Equivalent Levels
                     Corresponding to the Standards
------------------------------------------------------------------------
                                            Cars             Trucks
             Model year              -----------------------------------
                                         CO2 (g/mi)        CO2 (g/mi)
------------------------------------------------------------------------
2012................................               263               346
2013................................               256               337
2014................................               247               326
2015................................               236               312
2016 and later......................               225               298
------------------------------------------------------------------------

    As shown in Table III.B.1-3, fleet-wide CO2-equivalent
emission levels for cars under the approach are projected to decrease
from 263 to 225 grams per mile between MY 2012 and MY 2016. Similarly,
fleet-wide CO2-equivalent

emission levels for trucks are projected to decrease from 346 to 398
grams per mile. These numbers do not include the effects of other
flexibilities and credits in the program. The estimated achieved values
can be found in Chapter 5 of the Regulatory Impact Analysis (RIA).
    EPA has also estimated the average fleet-wide levels for the
combined car and truck fleets. These levels are provided in Table
III.B.1-4. As shown, the overall fleet average CO2 level is
expected to be 250 g/mile in 2016.

  Table III.B.1-4--Estimated Fleet-Wide Combined CO2-Equivalent Levels
                     Corresponding to the Standards
------------------------------------------------------------------------
                                                           Combined car
                                                             and truck
                       Model year                        ---------------
                                                            CO2 (g/mi)
------------------------------------------------------------------------
2012....................................................             295
2013....................................................             286
2014....................................................             276
2015....................................................             263
2016....................................................             250
------------------------------------------------------------------------

    As noted above, EPA is finalizing standards that will result in
increasingly stringent levels of CO2 control from MY 2012
though MY 2016--applying the CO2 footprint curves applicable
in each model year to the vehicles expected to be sold in each model
year produces fleet-wide annual reductions in CO2 emissions.
Comments from the Center for Biological Diversity (CBD) challenged EPA
to increase the stringency of the standards for all of the years of the
program, and even argued that 2016 standards should be feasible in
2012. Other commenters noted the non-linear increase in the standards
from 2011 (CAFE) to the 2012 GHG standards. As explained in greater
detail in Section III.D below and the relevant support documents, EPA
believes that the level of improvement achieves important
CO2 emissions reductions through the application of feasible
control technology at reasonable cost, considering the needed lead time
for this program. EPA further believes that the averaging, banking and
trading provisions, as well as other credit-generating mechanisms,
allow manufacturers further flexibilities which reduce the cost of the
CO2 standards and help to provide adequate lead time. EPA
believes this approach is justified under section 202(a) of the Clean
Air Act.
    EPA has analyzed the feasibility under the CAA of achieving the
CO2 standards, based on projections of what actions
manufacturers are expected to take to reduce emissions. The results of
the analysis are discussed in detail in Section III.D below and in the
RIA. EPA also presents the estimated costs and benefits of the car and
truck CO2 standards in Section III.H. In developing the
final rule, EPA has evaluated the kinds of technologies that could be
utilized by the automobile industry, as well as the associated costs
for the industry and fuel savings for the consumer, the magnitude of
the GHG reductions that may be achieved, and other factors relevant
under the CAA.
    With respect to the lead time and cost of incorporating technology
improvements that reduce GHG emissions, EPA and NHTSA place important
weight on the fact that during MYs 2012-2016 manufacturers are expected
to redesign and upgrade their light-duty vehicle products (and in some
cases introduce entirely new vehicles not on the market today). Over
these five model years there will be an opportunity for manufacturers
to evaluate almost every one of their vehicle model platforms and add
technology in a cost-effective way to control GHG emissions and improve
fuel economy. This includes redesign of the air conditioner systems in
ways that will further reduce GHG emissions. The time-frame and levels
for the standards, as well as the ability to average, bank and trade
credits and carry a deficit forward for a limited time, are expected to
provide manufacturers the time needed to incorporate technology that
will achieve GHG reductions, and to do this as part of the normal
vehicle redesign process. This is an important aspect of the final
rule, as it will avoid the much higher costs that will occur if
manufacturers needed to add or change technology at times other than
these scheduled redesigns. This time period will also provide
manufacturers the opportunity to plan for compliance using a multi-year
time frame, again in accord with their normal business practice.
Further details on lead time, redesigns and feasibility can be found in
Section III-D.
    Consistent with the requirement of CAA section 202(a)(1) that
standards be applicable to vehicles ``for their useful life,'' EPA is
finalizing CO2 vehicle standards that will apply for the
useful life of the vehicle. Under section 202(i) of the Act, which
authorized the Tier 2 standards, EPA established a useful life period
of 10 years or 120,000 miles, whichever first occurs, for all Tier 2
light-duty vehicles and light-duty trucks.\172\ Tier 2 refers to EPA's
standards for criteria pollutants such as NOX, HC, and CO.
EPA is finalizing new CO2 standards for the same group of
vehicles, and therefore the Tier 2 useful life will apply for
CO2 standards as well. The in-use emission standard will be
10% higher than the model-level certification emission test results, to
address issues of production variability and test-to-test variability.
The in-use standard is discussed in Section III.E.
---------------------------------------------------------------------------

    \172\ See 65 FR 6698 (February 10, 2000).
---------------------------------------------------------------------------

    EPA is requiring manufacturers to measure CO2 for
certification and compliance purposes using the same test procedures
currently used by EPA for measuring fuel economy. These procedures are
the Federal Test Procedure (FTP or ``city'' test) and the Highway Fuel
Economy Test (HFET or ``highway'' test).\173\ This corresponds with the
data used to develop the footprint-based CO2 standards,
since the data on control technology efficiency was also developed in
reference to these test procedures. Although EPA recently updated the
test procedures used for fuel economy labeling, to better reflect the
actual in-use fuel economy achieved by vehicles, EPA is not using these
test procedures for the CO2 standards in this final rule,
given the lack of data on control technology effectiveness under these
procedures.\174\ There were a number of commenters that advocated for a
change in either the test procedures or the fuel economy calculation
weighting factors. The U.S. Coalition for Advanced Diesel Cars urged a
changing of the city/highway weighting factors from their current
values of 45/55 to 43/57 to be more consistent with the EPA (5-cycle)
fuel economy labeling rule. EPA has decided that such a change would
not be appropriate, nor consistent with the technical analyses
supporting the 5-cycle fuel economy label rulemaking. The city/highway
weighting of 43/57 was found to be appropriate when the city fuel
economy is based on a combination of Bags 2 and 3 of the FTP and the
city portion of the US06 test cycle, and when the highway fuel economy
is based on a combination of the HFET and the highway portion of the
US06 cycle. When city and highway fuel economy are based on the FTP and
HFET cycles, respectively, the appropriate city/highway weighting is
not 43/57, but very close to 55/45. Therefore, the weighting of the
city and

highway fuel economy values contained in this rule is appropriate for
and consistent with the use of the FTP and HFET cycles to measure city
and highway fuel economy.
---------------------------------------------------------------------------

    \173\ EPA established the FTP for emissions measurement in the
early 1970s. In 1976, in response to the Energy Policy and
Conservation Act (EPCA) statute, EPA extended the use of the FTP to
fuel economy measurement and added the HFET. The provisions in the
1976 regulation, effective with the 1977 model year, established
procedures to calculate fuel economy values both for labeling and
for CAFE purposes.
    \174\ See 71 FR 77872, December 27, 2006.
---------------------------------------------------------------------------

    The American Council for an Energy-Efficient Economy (ACEEE),
Cummins, and Sierra Club all suggested using more real-world test
procedures. It is not feasible at this time to base the final
CO2 standards on EPA's five-cycle fuel economy formulae.
Consistent with its name, these formulae require vehicle testing over
five test cycles, the two cycles associated with the proposed
CO2 standards, plus the cold temperature FTP, the US06 high
speed, high acceleration cycle and the SC03 air conditioning test. EPA
considered employing the five-cycle calculation of fuel economy and GHG
emissions for this rule, but there were a number of reasons why this
was not practical. As discussed extensively in the Joint TSD, setting
the appropriate levels of CO2 standards requires extensive
knowledge of the CO2 emission control effectiveness over the
certification test cycles. Such knowledge has been gathered over the
FTP and HFET cycles for decades, but is severely lacking for the other
three test cycles. EPA simply lacks the technical basis to project the
effectiveness of the available technologies over these three test
cycles and therefore, could not adequately support a rule which set
CO2 standards based on the five-cycle formulae. The benefits
of today's rule do presume a strong connection between CO2
emissions measured over the FTP and HFET cycles and onroad operation.
Since CO2 emissions determined by the five-cycle formulae
are believed to correlate reasonably with onroad emissions, this
implies a strong connection between emissions over the FTP and HFET
cycles and the five cycle formulae. However, while we believe that this
correlation is reasonable on average for the vehicle fleet, it may not
be reasonable on a per vehicle basis, nor for any single manufacturer's
vehicles. Thus, we believe that it is reasonable to project a direct
relationship between the percentage change in CO2 emissions
over the two certification cycles and onroad emissions (a surrogate of
which is the five-cycle formulae), but not reasonable to base the
certification of specific vehicles on that untested relationship.
Furthermore, EPA is allowing for off-cycle credits to encourage
technologies that may not be not properly captured on the 2-cycle city/
highway test procedure (although these credits could apply toward
compliance with EPA's standards, not toward compliance with the CAFE
standards). For future analysis, EPA will consider examining new drive
cycles and test procedures for fuel economy.\175\
---------------------------------------------------------------------------

    \175\ There were also a number of comments on air conditioner
test procedures; these will be discussed in Section III.C and the
RIA.
---------------------------------------------------------------------------

    EPA is finalizing standards that include hydrocarbons (HC) and
carbon monoxide (CO) in its CO2 emissions calculations on a
CO2-equivalent basis. It is well accepted that HC and CO are
typically oxidized to CO2 in the atmosphere in a relatively
short period of time and so are effectively part of the CO2
emitted by a vehicle. In terms of standard stringency, accounting for
the carbon content of tailpipe HC and CO emissions and expressing it as
CO2-equivalent emissions will add less than one percent to
the overall CO2-equivalent emissions level. This will also
ensure consistency with CAFE calculations since HC and CO are included
in the ``carbon balance'' methodology that EPA uses to determine fuel
usage as part of calculating vehicle fuel economy levels.
2. What are the CO2 attribute-based standards?
    EPA is finalizing the same vehicle category definitions that are
used in the CAFE program for the 2011 model year standards.\176\ This
approach allows EPA's CO2 standards and the CAFE standards
to be harmonized across all vehicles. In other words, vehicles will be
subject to either car standards or truck standards under both programs,
and not car standards under one program and trucks standards under the
other. The CAFE vehicle category definitions differ slightly from the
EPA definitions for cars and light trucks used for the Tier 2 program
and other EPA vehicle programs. However, EPA is not changing the
vehicle category definitions for any other light-duty mobile source
programs, except the GHG standards.
---------------------------------------------------------------------------

    \176\ See 49 CFR 523.
---------------------------------------------------------------------------

    EPA is finalizing separate car and truck standards, that is,
vehicles defined as cars have one set of footprint-based curves for MY
2012-2016 and vehicles defined as trucks have a different set for MY
2012-2016. In general, for a given footprint the CO2 g/mi
target for trucks is less stringent then for a car with the same
footprint.
    Some commenters requested a single or converging curve for both
cars and trucks.\177\ EPA is not finalizing a single fleet standard
where all cars and trucks are measured against the same footprint curve
for several reasons. First, some vehicles classified as trucks (such as
pick-up trucks) have certain attributes not common on cars which
attributes contribute to higher CO2 emissions--notably high
load carrying capability and/or high towing capability.\178\ Due to
these differences, it is reasonable to separate the light-duty vehicle
fleet into two groups. Second, EPA wishes to harmonize key program
design elements of the GHG standards with NHTSA's CAFE program where it
is reasonable to do so. NHTSA is required by statute to set separate
standards for passenger cars and for non-passenger cars. As discussed
in Section IV, EPCA does not preclude NHTSA from issuing converging
standards if its analysis indicates that these are the appropriate
standards under the statute applicable separately to each fleet.
---------------------------------------------------------------------------

    \177\ CBD, ICCT and NESCAUM supported a single curve and the
students at UC Santa Barbara commented on converging curves.
    \178\ There is a distinction between body-on-frame trucks and
unibody cars and trucks that make them technically different in a
number of ways. Also, 2WD vehicles tend to have lower CO2
emissions than their 4WD counterparts (all other things being
equal). More discussion of this can be found in the TSD and RIA.
---------------------------------------------------------------------------

    Finally, most of the advantages of a single standard for all light
duty vehicles are also present in the two-fleet standards finalized
here. Because EPA is allowing unlimited credit transfer between a
manufacturer's car and truck fleets, the two fleets can essentially be
viewed as a single fleet when manufacturers consider compliance
strategies. Manufacturers can thus choose on which vehicles within
their fleet to focus GHG reducing technology and then use credit
transfers as needed to demonstrate compliance, just as they will if
there was a single fleet standard. The one benefit of a single light-
duty fleet not captured by a two-fleet approach is that a single fleet
prevents potential ``gaming'' of the car and truck definitions to try
and design vehicles which are more similar to passenger cars but which
may meet the regulatory definition of trucks. Although this is of
concern to EPA, we do not believe at this time that concern is
sufficient to outweigh the other reasons for finalizing separate car
and truck fleet standards. However, it is possible that in the future,
recent trends may continue such that cars may become more truck-like
and trucks may become more car-like. Therefore, EPA will reconsider
whether it is appropriate to use converging curves if justified by
future analysis.
    For model years 2012 and later, EPA is finalizing a series of
CO2 standards that are described mathematically by a family
of piecewise linear functions

(with respect to vehicle footprint).\179\ The form of the function is
as follows:
---------------------------------------------------------------------------

    \179\ See final regulations at 40 CFR 86.1818-12.

CO2 = a, if x <= l
CO2 = cx + d, if l < x <= h
CO2 = b, if x > h

Where:

CO2 = the CO2 target value for a given
footprint (in g/mi)
a = the minimum CO2 target value (in g/mi)
b = the maximum CO2 target value (in g/mi)
c = the slope of the linear function (in g/mi per sq ft)
d = is the zero-offset for the line (in g/mi CO2)
x = footprint of the vehicle model (in square feet, rounded to the
nearest tenth)
l & h are the lower and higher footprint limits, constraints, or the
boundary (``kinks'') between the flat regions and the intermediate
sloped line

    EPA's parameter values that define the family of functions for the
CO2 fleetwide average car and truck standards are as
follows:

                                                       Table III.B.2-1--Parameter Values for Cars
                                                             [For CO2 gram per mile targets]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Lower           Upper
                       Model year                                a               b               c               d          constraint      constraint
--------------------------------------------------------------------------------------------------------------------------------------------------------
2012....................................................             244             315            4.72            50.5              41              56
2013....................................................             237             307            4.72            43.3              41              56
2014....................................................             228             299            4.72            34.8              41              56
2015....................................................             217             288            4.72            23.4              41              56
2016 and later..........................................             206             277            4.72            12.7              41              56
--------------------------------------------------------------------------------------------------------------------------------------------------------

                                                      Table III.B.2-2--Parameter Values for Trucks
                                                             [For CO2 gram per mile targets]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Lower           Upper
                       Model year                                a               b               c               d          constraint      constraint
--------------------------------------------------------------------------------------------------------------------------------------------------------
2012....................................................             294             395            4.04           128.6              41              66
2013....................................................             284             385            4.04           118.7              41              66
2014....................................................             275             376            4.04           109.4              41              66
2015....................................................             261             362            4.04            95.1              41              66
2016 and later..........................................             247             348            4.04            81.1              41              66
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The equations can be shown graphically for each vehicle category,
as shown in Figures III.B.2-1 and III.B.2-2. These standards (or
functions) decrease from 2012-2016 with a vertical shift.
    The EPA received a number of comments on both the attribute and the
shape of the curve. For reasons described in Section IIC and Chapter 2
of the TSD, the EPA feels that footprint is the most appropriate choice
of attribute for this rule. More background discussion on other
alternative attributes and curves EPA explored can be found in the EPA
RIA. EPA recognizes that the CAA does not mandate that EPA use an
attribute based standard, as compared to NHTSA's obligations under
EPCA. The EPA believes that a footprint-based program will harmonize
EPA's program and the CAFE program as a single national program,
resulting in reduced compliance complexity for manufacturers. EPA's
reasons for using an attribute based standard are discussed in more
detail in the Joint TSD. Also described in these other sections are the
reasons why EPA is finalizing the slopes and the constraints as shown
above. For future analysis, EPA will consider other options and
suggestions made by commenters.
    EPA also received public comments from three manufacturers, General
Motors, Ford Motor Company, and Chrysler, suggesting that the GHG
program should harmonize with an EPCA provision that allows a
manufacturer to exclude emergency vehicles from its CAFE fleet by
providing written notice to NHTSA.\180\ These manufacturers believe
this provision is necessary because law enforcement vehicles (e.g.,
police cars) must be designed with special performance and features
necessary for police work--but which tend to raise GHG emissions and
reduce fuel economy relative to the base vehicle. These commenters
provided several examples of features unique to these special purpose
vehicles that negatively impact GHG emissions, such as heavy-duty
suspensions, unique engine and transmission calibrations, and heavy-
duty components (e.g., batteries, stabilizer bars, engine cooling).
These manufacturers believe consistency in addressing these vehicles
between the EPA and NHTSA programs is critical, as a manufacturer may
be challenged to continue providing the performance needs of the
Federal, State, and local government purchasers of emergency vehicles.
---------------------------------------------------------------------------

    \180\ 49 U.S.C. 32902(e).
---------------------------------------------------------------------------

    EPA is not finalizing such an emergency vehicle provision in this
rule, since we believe that it is feasible for manufacturers to apply
the same types of technologies to the base emergency vehicle as they
would to other vehicles in their fleet. However, EPA also recognizes
that, because of the unique ``performance upgrading'' needed to convert
a base vehicle into one that meets the performance demands of the law
enforcement community--which tend to reduce GHGs relative to the base
vehicles--there could be situations where a manufacturer is more
challenged in meeting the GHG standards than the CAFE standards, simply
due to inclusion of these higher-emitting vehicles in the GHG program
fleet. While EPA is not finalizing such an exclusion for emergency
vehicles today, we do believe it is important to assess this issue in
the future. EPA plans to assess the unique characteristics of these
emergency vehicles and whether special provisions for addressing them
are warranted. EPA plans to undertake this evaluation as part of a
follow-up rulemaking in the next 18 months (this rulemaking is
discussed in the context of small

volume manufacturers in Section III.B.6. below).
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BILLING CODE 6560-50-C

3. Overview of How EPA's CO2 Standards Will Be Implemented
for Individual Manufacturers
    This section provides a brief overview of how EPA will implement
the CO2 standards. Section III.E explains EPA's approach to
certification and compliance in detail. As proposed, EPA is finalizing
two kinds of standards--fleet average standards determined by a
manufacturer's fleet makeup, and in-use standards that will apply to
the individual vehicles that make up the manufacturer's fleet. Although
this is similar in concept to the current light-duty vehicle Tier 2
program, there are important differences. In explaining EPA's
CO2 standards, it is useful to summarize how the Tier 2
program works.
    Under Tier 2, manufacturers select a test vehicle prior to
certification and test the vehicle and/or its emissions hardware to
determine both its emissions performance when new and the emissions
performance expected at the end of its useful life. Based on this
testing, the vehicle is assigned to one of several specified bins of
emissions levels, identified in the Tier 2 rule, and this bin level
becomes the emissions standard for the test group the test vehicle
represents. All of the vehicles in the group must meet the emissions
level for that bin throughout their useful life. The emissions level
assigned to the bin is also used in calculating the manufacturer's
fleet average emissions performance.
    Since compliance with the Tier 2 fleet average depends on actual
test group sales volumes and bin levels, it is not possible to
determine compliance at the time the manufacturer applies for and
receives a certificate of conformity for a test group. Instead, at
certification, the manufacturer demonstrates that the vehicles in the
test group are expected to comply throughout their useful life with the
emissions bin assigned to that test group, and makes a good faith
demonstration that its fleet is expected to comply with the Tier 2
average when the model year is over. EPA issues a certificate for the
vehicles covered by the test group based on this demonstration, and
includes a condition in the certificate that if the manufacturer does
not comply with the fleet average then production vehicles from that
test group will be treated as not covered by the certificate to the
extent needed to bring the manufacturer's fleet average into compliance
with Tier 2.
    EPA is retaining the Tier 2 approach of requiring manufacturers to
demonstrate in good faith at the time of certification that vehicles in
a test group will meet applicable standards throughout useful life. EPA
is also retaining the practice of conditioning certificates upon
attainment of the fleet average standard. However, there are several
important differences between a Tier 2 type of program and the
CO2 standards program. These differences and resulting
modifications to EPA's certification protocols are summarized below and
are described in detail in Section III.E.
    EPA will continue to certify test groups as it does for Tier 2, and
the CO2 emission results for the test vehicle will serve as
the initial or default standard for all of the vehicles in the test
group. However, manufacturers will later collect and submit data for
individual vehicle model types \181\ within each test group, based on
the extensive fuel economy testing that occurs through the course of
the model year. This model type data will be used to assign a distinct
certification level for each model type, thus replacing the initial
test group data as the compliance value for each model. It is these
model type values that will be used to calculate the fleet average
after the end of the model year.\182\ The option to substitute model
type data for the test group data is at the manufacturer's discretion,
except they are required, as they are under the CAFE test protocols, to
submit sufficient vehicle test data to represent no less than 90
percent of their actual model year production. The test group emissions
data will continue to apply for any model type that is not covered by
vehicle test data specific to that model type.
---------------------------------------------------------------------------

    \181\ ``Model type'' is defined in 40 CFR 600.002-08 as ``* * *
a unique combination of car line, basic engine, and transmission
class.'' A ``car line'' is essentially a model name, such as
``Camry,'' ``Malibu,'' or ``F150.'' The fleet average is calculated
on the basis of model type emissions.
    \182\ The final in-use vehicle standards for each vehicle will
also be based on the testing used to determine the model type
values. As discussed in Section III.E.4, an in-use adjustment factor
will be applied to the vehicle test results to determine the in-use
standard that will apply during the useful life of the vehicle.
---------------------------------------------------------------------------

    EPA's CO2 standards also differ from Tier 2 in that the
fleet average calculation for Tier 2 is based on test group bin levels
and test group sales whereas under the CO2 program the
CO2 fleet average could be based on a combination of test
group and model type emissions and model type production. For the new
CO2 standards, the final regulations use production rather
than sales in calculating the fleet average in order to closely conform
with the CAFE program, which is a production-based program.\183\
Production as defined in the regulations is relatively easy for
manufacturers to track, but once the vehicle is delivered to
dealerships the manufacturer becomes once step removed from the sale to
the ultimate customer, and it becomes more difficult to track that
final transaction. There is no environmental impact of using production
instead of actual sales, and many commenters supported maintaining
alignment between EPA's program and the CAFE program where possible.
---------------------------------------------------------------------------

    \183\ ``Production'' is defined as ``vehicles produced and
delivered for sale'' and is not a measure of the number of vehicles
actually sold.
---------------------------------------------------------------------------

4. Averaging, Banking, and Trading Provisions for CO2
Standards
    As explained above, EPA is finalizing a fleet average
CO2 program for passenger cars and light trucks. EPA has
previously implemented similar averaging programs for a range of motor
vehicle types and pollutants, from the Tier 2 fleet average for
NOX to motorcycle hydrocarbon (HC) plus oxides of nitrogen
(NOX) emissions to NOX and particulate matter
(PM) emissions from heavy-duty engines.\184\ The program will operate
much like EPA's existing averaging programs in that manufacturers will
calculate production-weighted fleet average emissions at the end of the
model year and compare their fleet average with a fleet average
emission standard to determine compliance. As in other EPA averaging
programs, the Agency is also finalizing a comprehensive program for
averaging, banking, and trading of credits which together will help
manufacturers in planning and implementing the orderly phase-in of
emissions control technology in their production, consistent with their
typical redesign schedules.\185\
---------------------------------------------------------------------------

    \184\ For example, see the Tier 2 light-duty vehicle emission
standards program (65 FR 6698, February 10, 2000), the 2010 and
later model year motorcycle emissions program (69 FR 2398, January
15, 2004), and the 2007 and later model year heavy-duty engine and
vehicle standards program (66 FR 5001, January 18, 2001).
    \185\ See final regulations at 40 CFR 86.1865-12.
---------------------------------------------------------------------------

    Averaging, Banking, and Trading (ABT) of emissions credits has been
an important part of many mobile source programs under CAA Title II,
both for fuels programs as well as for engine and vehicle programs. ABT
is important because it can help to address many issues of
technological feasibility and lead-time, as well as considerations of
cost. ABT is an integral part of the standard setting itself, and is
not just an add-on to help reduce costs. In many cases, ABT resolves
issues of lead-time

or technical feasibility, allowing EPA to set a standard that is either
numerically more stringent or goes into effect earlier than could have
been justified otherwise. This provides important environmental
benefits and at the same time it increases flexibility and reduces
costs for the regulated industry. A wide range of commenters expressed
general support for the ABT provisions. Some commenters noted issues
regarding specific provisions of the ABT program, which will be
discussed in the appropriate context below. Several commenters
requested that EPA publicly release manufacturer-specific ABT data to
improve the transparency of credit transactions. These comments are
addressed in Section III.E.
    This section discusses generation of credits by achieving a fleet
average CO2 level that is lower than the manufacturer's
CO2 fleet average standard. The final rule includes a
variety of additional ways credits may be generated by manufacturers.
Section III.C describes these additional opportunities to generate
credits in detail. Manufacturers may earn credits through A/C system
improvements beyond a specified baseline. Credits can also be generated
by producing alternative fuel vehicles, by producing advanced
technology vehicles including electric vehicles, plug-in hybrids, and
fuel cell vehicles, and by using technologies that improve off-cycle
emissions. In addition, early credits can be generated prior to the
program's MY 2012 start date. The credits will be used to determine a
manufacturer's compliance at the end of the model year. These credit
generating opportunities are described below in Section III.C.
    As explained earlier, manufacturers will determine the fleet
average standard that applies to their car fleet and the standard for
their truck fleet from the applicable attribute-based curve. A
manufacturer's credit or debit balance will be determined by comparing
their fleet average with the manufacturer's CO2 standard for
that model year. The standard will be calculated from footprint values
on the attribute curve and actual production levels of vehicles at each
footprint. A manufacturer will generate credits if its car or truck
fleet achieves a fleet average CO2 level lower than its
standard and will generate debits if its fleet average CO2
level is above that standard. At the end of the model year, each
manufacturer will calculate a production-weighted fleet average for
each averaging set (cars and trucks). A manufacturer's car or truck
fleet that achieves a fleet average CO2 level lower than its
standard will generate credits, and if its fleet average CO2
level is above that standard its fleet will generate debits.
    The regulations will account for the difference in expected
lifetime vehicle miles traveled (VMT) between cars and trucks in order
to preserve CO2 reductions when credits are transferred
between cars and trucks. As directed by EISA, NHTSA accomplishes this
in the CAFE program by using an adjustment factor that is applied to
credits when they are transferred between car and truck compliance
categories. The CAFE adjustment factor accounts for two different
influences that can cause the transfer of car and truck credits
(expressed in tenths of a mpg), if left unadjusted, to potentially
negate fuel reductions. First, mpg is not linear with fuel consumption,
i.e., a 1 mpg improvement above a standard will imply a different
amount of actual fuel consumed depending on the level of the standard.
Second, NHTSA's conversion corrects for the fact that the typical
lifetime miles for cars is less than that for trucks, meaning that
credits earned for cars and trucks are not necessarily equal. NHTSA's
adjustment factor essentially converts credits into vehicle lifetime
gallons to ensure preservation of fuel savings and the transfer credits
on an equal basis, and then converts back to the statutorily-required
credit units of tenths of a mile per gallon. To convert to gallons
NHTSA's conversion must take into account the expected lifetime mileage
for cars and trucks. Because EPA's standards are expressed on a
CO2 gram per mile basis, which is linear with fuel
consumption, EPA's credit calculations do not need to account for the
first issue noted above. However, EPA is accounting for the second
issue by expressing credits when they are generated in total lifetime
Megagrams (metric tons), rather than through the use of conversion
factors that would apply at certain times. In this way credits may be
freely exchanged between car and truck compliance categories without
the need for adjustment. Additional detail regarding this approach,
including a discussion of the vehicle lifetime mileage estimates for
cars and trucks can be found in Section III.E.5. A discussion of the
derivation of the estimated vehicle lifetime miles traveled can be
found in Chapter 4 of the Joint Technical Support Document.
    A manufacturer that generates credits in a given year and vehicle
category may use those credits in essentially four ways, although with
some limitations. These provisions are very similar to those of other
EPA averaging, banking, and trading programs. These provisions have the
potential to reduce costs and compliance burden, and support the
feasibility of the standards in terms of lead time and orderly redesign
by a manufacturer, thus promoting and not reducing the environmental
benefits of the program.
    First, EPA proposed that the manufacturer must use any credits
earned to offset any deficit that had accrued in the current year or in
a prior model year that had been carried over to the current model
year. NRDC commented that such a provision is necessary to prevent
credit ``shell games'' from delaying the adoption of new technologies.
EPA's Tier 2 program includes such a restriction, and EPA is applying
an identical restriction to the GHG program. Simply stated, a
manufacturer may not bank (or carry forward) credits if that
manufacturer is also carrying a deficit. In such a case, the
manufacturer is obligated to use any current model year credits to
offset that deficit. Using current model year credits to offset a prior
model year deficit is referred to in the CAFE program as credit carry-
back. EPA's deficit carry-forward, or credit carry-back provisions are
described further, below.
    Second, after satisfying any needs to offset pre-existing deficits,
remaining credits may be banked, or saved for use in future years.
Credits generated in this program will be available to the manufacturer
for use in any of the five model years after the model year in which
they were generated, consistent with the CAFE program under EISA. This
is also referred to as a credit carry-forward provision.
    EPA received a number of comments regarding the credit carry-back
and carry-forward provisions. Many supported the proposed consistency
of these provisions with EISA and the flexibility provided by these
provisions, and several offered qualified or tentative support. For
example, NRDC encouraged EPA to consider further restrictions in the
2017 and later model years. Public Citizen expressed concern regarding
the complexity of the program and how these provisions might obscure a
straightforward determination of compliance in any given model year. At
least two automobile manufacturers suggested modeling the program after
California, which allows credits to be carried forward for three
additional years following a discounting schedule.
    For other new emission control programs, EPA has sometimes
initially restricted credit life to allow time for the Agency to assess
whether the credit program is functioning as intended. When EPA first
offered averaging and

banking provisions in its light-duty emissions control program (the
National Low Emission Vehicle Program), credit life was restricted to
three years. The same is true of EPA's early averaging and banking
program for heavy-duty engines. As these programs matured and were
subsequently revised, EPA became confident that the programs were
functioning as intended and that the standards were sufficiently
stringent to remove the restrictions on credit life. EPA is therefore
acting consistently with our past practice in finalizing reasonable
restrictions on credit life in this new program. The Agency believes
that a credit life of five years represents an appropriate balance
between promoting orderly redesign and upgrade of the emissions control
technology in the manufacturer's fleet and the policy goal of
preventing large numbers of credits accumulated early in the program
from interfering with the incentive to develop and transition to other
more advanced emissions control technologies. As discussed below in
Section III.C, early credits generated by a manufacturer are also be
subject to the five year credit carry-forward restriction based on the
year in which they are generated. This limits the effect of the early
credits on the long-term emissions reductions anticipated to result
from the new standards.
    Third, the new program enables manufacturers to transfer credits
between the two averaging sets, passenger cars and trucks, within a
manufacturer. For example, credits accrued by over-compliance with a
manufacturer's car fleet average standard may be used to offset debits
accrued due to that manufacturer's not meeting the truck fleet average
standard in a given year. EPA believes that such cross-category use of
credits by a manufacturer provides important additional flexibility in
the transition to emissions control technology without affecting
overall emission reductions. Comments regarding the credit transfer
provisions expressed general support, noting that it does not matter to
the environment whether a gram of greenhouse gas is generated from a
car or a truck. Additional comments regarding EPA's streamlined
megagram approach and method of accounting for expected vehicle
lifetime miles traveled are summarized in Section III.E.
    Finally, accumulated credits may be traded to another vehicle
manufacturer. As with intra-company credit use, such inter-company
credit trading provides flexibility in the transition to emissions
control technology without affecting overall emission reductions.
Trading credits to another vehicle manufacturer could be a
straightforward process between the two manufacturers, but could also
involve third parties that could serve as credit brokers. Brokers may
not own the credits at any time. These sorts of exchanges are typically
allowed under EPA's current emission credit programs, e.g., the Tier 2
light-duty vehicle NOX fleet average standard and the heavy-
duty engine NOX fleet average standards, although
manufacturers have seldom made such exchanges. Comments generally
reflected support for the credit trading flexibility, although some
questioned the extent to which trading might actually occur. As noted
above, comments regarding program transparency are addressed in Section
III.E.
    If a manufacturer has accrued a deficit at the end of a model
year--that is, its fleet average level failed to meet the required
fleet average standard--the manufacturer may carry that deficit forward
(also referred to credit carry-back) for a total of three model years
after the model year in which that deficit was generated. EPA continues
to believe that three years is an appropriate amount of time that gives
the manufacturers adequate time to respond to a deficit situation but
does not create a lengthy period of prolonged non-compliance with the
fleet average standards.\186\ As noted above, such a deficit carry-
forward may only occur after the manufacturer has applied any banked
credits or credits from another averaging set. If a deficit still
remains after the manufacturer has applied all available credits, and
the manufacturer did not obtain credits elsewhere, the deficit may be
carried forward for up to three model years. No deficit may be carried
into the fourth model year after the model year in which the deficit
occurred. Any deficit from the first model year that remains after the
third model year will constitute a violation of the condition on the
certificate, which will constitute a violation of the Clean Air Act and
will be subject to enforcement action.
---------------------------------------------------------------------------

    \186\ EPA emission control programs that incorporate ABT
provisions (e.g., the Tier 2 program and the Mobile Source Air
Toxics program) have provided this three-year deficit carry-forward
provision for this reason. See 65 FR 6745 (February 10, 2000), and
71 FR 8427 (February 26, 2007).
---------------------------------------------------------------------------

    The averaging, banking, and trading provisions are generally
consistent with those included in the CAFE program, with a few notable
exceptions. As with EPA's approach, CAFE allows five year carry-forward
of credits and three year carry-back. Under CAFE, transfers of credits
across a manufacturer's car and truck averaging sets are also allowed,
but with limits established by EISA on the use of transferred credits.
The amount of transferred credits that can be used in a year is
limited, and transferred credits may not be used to meet the CAFE
minimum domestic passenger car standard. CAFE allows credit trading,
but again, traded credits cannot be used to meet the minimum domestic
passenger car standard. EPA did not propose, and is not finalizing,
these constraints on the use of transferred credits.
    Additional details regarding the averaging, banking, and trading
provisions and how EPA will implement these provisions can be found in
Section III.E.
5. CO2 Temporary Lead-Time Allowance Alternative Standards
    EPA proposed adopting a limited and narrowly prescribed option,
called the Temporary Lead-time Allowance Alternative Standards (TLAAS),
to provide additional lead time for a certain subset of manufacturers.
As noted in the proposal, this option was designed to address two
different situations where we project that more lead time is needed,
based on the level of emissions control technology and emissions
control performance currently exhibited by certain vehicles. One
situation involves manufacturers who have traditionally paid CAFE fines
instead of complying with the CAFE fleet average, and as a result at
least part of their vehicle production currently has significantly
higher CO2 and lower fuel economy levels than the industry
average. More lead time is needed in the program's initial years to
upgrade these vehicles to meet the aggressive CO2 emissions
performance levels required by the final rule. The other situation
involves manufacturers who have a limited line of vehicles and are
therefore unable to average emissions performance across a full line of
production. For example, some smaller volume manufacturers produce only
vehicles with emissions above the corresponding CO2
footprint target, and do not have other types of vehicles (that exceed
their compliance targets) in their production mix with which to
average. Often, these manufacturers also pay fines under the CAFE
program rather than meeting the applicable CAFE standard. Because
voluntary non-compliance through payment of civil penalties is
impermissible for the GHG standards under the CAA, both of these types
of manufacturers need additional lead time to upgrade vehicles and meet
the standards. EPA proposed that this subset of manufacturers be
allowed to

produce up to 100,000 vehicles over model years 2012-2015 that would be
subject to a somewhat less stringent CO2 standard of 1.25
times the standard that would otherwise apply to those vehicles. Only
manufacturers with total U.S. sales of less than 400,000 vehicles per
year in MY 2009 would be eligible for this allowance. Those
manufacturers would have to exhaust designated program flexibilities in
order to be eligible, and credit generating and trading opportunities
for the eligible vehicles would be restricted. See 74 FR 49522-224.
    EPA is finalizing the optional TLAAS provisions, with certain
limited modifications, so that these manufacturers can have sufficient
lead time to meet the tougher MY 2016 GHG standards, while preserving
consumer choice of vehicles during this time.\187\ EPA is finalizing
modified provisions to address the unique lead-time issues of smaller
volume manufacturers. One provision involves additional flexibility
under the TLAAS program for manufacturers below 50,000 U.S. vehicle
sales, as discussed further in Section III.B.5.b below. Another
provision defers the CO2 standards for the smallest volume
manufacturers, those below 5,000 U.S. vehicle sales, as discussed in
Section III.B.6.
---------------------------------------------------------------------------

    \187\ See final regulations at 40 CFR 86.1818-12(e).
---------------------------------------------------------------------------

    Comments from several manufacturers strongly supported the TLAAS
program as critical to provide the lead time needed for manufacturers
to meet the standards. Volkswagen commented that TLAAS is an important
aspect of EPA's proposal and that it responds to the needs of some
smaller manufacturers for additional lead time and flexibility under
the CAA. Daimler Automotive Group commented that TLAAS is a critical
element of the program and falls squarely within EPA's discretion to
provide appropriate lead time to limited-line low-volume manufacturers.
BMW also commented that TLAAS is needed because most of the companies
with limited lines will have to meet a more stringent fleet standard by
2016 than full-line manufacturers because they sell ``feature-dense''
vehicles (as opposed to light-weight large wheel-base vehicles) and no
pick-up trucks. BMW commented that their MY 2016 footprint-based
standard is projected to be 4 percent more stringent than the fleet
average standard of 250 g/mile. The Alliance of Automobile
Manufacturers supported the flexibilities proposed by EPA, including
TLAAS. As discussed in detail below, EPA received extensive comments
from many smaller volume manufacturers that the proposed TLAAS program
was insufficient to address lead time and feasibility issues they will
face under the program.
    In contrast, EPA also received comments from the Center for
Biological Diversity opposing the TLAAS program, commenting that an
exception for high performance vehicles is not allowed under EPCA or
the CAA and that it rewards manufacturers that pay penalties under CAFE
and penalizes those that have complied with CAFE. This commenter
suggests that manufacturers could decrease vehicle mass or power output
of engines, purchase credits from another manufacturer, or earn off-
cycle credits. EPA responds to these comments below.
    After carefully considering the public comments, EPA continues to
believe that the TLAAS program is essential in providing necessary lead
time and flexibility to eligible manufacturers in the early years of
the standards. First, EPA believes that it is acting well within its
legal authority in adopting the various TLAAS provisions. EPA is
required to provide sufficient lead time for industry as a whole for
standards under section 202(a)(1), which mandates that standards are to
take effect only ``after providing such period as the Administrator
finds necessary to permit the development and application of the
requisite technology, giving appropriate consideration to the cost of
compliance within such period.'' Thus, although section 202(a)(1) does
not explicitly authorize this or any other specific lead time
provision, it affords ample leeway for EPA to craft provisions designed
to provide adequate lead time, and to tailor those provisions as
appropriate. We show below that the types of technology penetrations
required for TLAAS-eligible vehicles in the program's earlier years
raise critical issues as to adequacy of lead time. As discussed in the
EPA feasibility analysis provided in Section III.D.6 and III.D.7
several manufacturers eligible for TLAAS are projected to face a
compliance shortfall in MY 2016 without the TLAAS program, even with
the full application of technologies assumed by the OMEGA Model,
including hybrid use of up to 15 percent. These include BMW, Jaguar
Land Rover, Daimler, Porsche, and Volkswagen In addition, the smaller
volume manufacturers of this group (i.e., Jaguar Land Rover and
Porsche) face the greatest shortfall (see Table III.D.6-4). Even with
TLAAS, these manufacturers will need to take technology steps to comply
with standards above and beyond those of other manufacturers. These
manufacturers have relatively few models with high baseline emissions
and this flexibility allows them additional lead time to adapt to a
longer term strategy of meeting the final standards within their
vehicle redesign cycles.
    Second, EPA has carefully evaluated other means of eligible
manufacturers to meet the standards, such as utilizing available credit
opportunities. Indeed, eligibility for the TLAAS, and for temporary
deferral of regulation for very small volume manufacturers, is
conditioned on first exhausting the various programmatic flexibilities
including credit utilization. At the same time, a basic reason certain
manufacturers are faced with special lead time difficulties is their
inability to generate credits which can be then be averaged across
their fleet because of limited product lines. And although purchasing
credits is an option under the program, there are no guarantees that
credits will be available. Historic practice in fact suggests that
manufacturers do not sell credits to competitors. While some of the
smaller manufacturers covered by the TLAAS program may be in a position
to obtain credits, they are not likely to be available for the TLAAS
manufacturers across the board in the volume needed to comply without
the TLAAS provisions. At the same time the TLAAS provisions have been
structured such that any credits that do become available would likely
be used before a manufacturer would turn to the more restricted and
limiting TLAAS provisions.
    As discussed in Section III.C., off-cycle credits are available if
manufacturers are able to employ new and innovative technologies not
already in widespread use, which provide real-world emissions
reductions not captured on the current test cycles. Further, these
credits are eligible only for technologies that are newly introduced on
just a few vehicle models, and are not yet in widespread use across the
fleet. The magnitude of these credits are highly uncertain because they
are based on new technologies, and EPA is not aware of any such
technologies that would provide enough credits to bring these
manufacturers into compliance without TLAAS lead time flexibility.
Manufacturers first must develop these technologies and then
demonstrate their emissions reductions capabilities, which will require
lead time. Moreover, the technologies mentioned in the proposal which
are the most likely to be eligible based on present knowledge,
including solar panels and active

aerodynamics, are likely to provide only small incremental emissions
reductions.
    We agree with the comment that reducing vehicle mass or power are
potential methods for reducing emissions that should be employed by
TLAAS-eligible manufacturers to help them meet standards. However,
based on our assessment of the lead time needed for these manufacturers
to comply with the standards, especially given their more limited
product offerings and higher baseline emissions, we believe that
additional time is needed for them to come into compliance. EPA can
permissibly consider the TLAAS and other manufacturers' lead time,
cost, and feasibility issues in developing the primary standards and
has discretion in setting the overall stringency of the standards to
account for these factors. Natural Resources Defense Council v. Thomas,
805 F. 2d 410, 421 (DC Cir. 1986) (even when implementing technology-
forcing provisions of Title II, EPA may base standards on an industry-
wide capability ``taking into account the broad spectrum of
technological capabilities as well as cost and other factors'' across
the industry). EPA is not legally required to set standards that drive
these manufacturers or their products out of the market, nor is EPA
legally required to preserve a certain product line or vehicle
characteristic. Instead EPA has broad discretion under section
202(a)(1) to set standards that reasonably balance lead time needs
across the industry as a whole and vehicle availability. In this
rulemaking, EPA has consistently emphasized the importance of obtaining
very significant reductions in emissions of GHGs from the industry as a
whole, and obtaining those reductions through regulatory approaches
that avoid limiting the ability of manufacturers to provide model
availability and choice for consumers. The primary mechanism to achieve
this is the use of a footprint attribute curve in setting the
increasingly stringent model year standards. The TLAAS provisions are a
temporary and strictly limited modification to these attribute
standards allowing the TLAAS manufacturers lead time to upgrade their
product lines to meet the 2016 GHG standards. EPA has made a reasonable
choice here to preserve the overall stringency of the program, and to
afford increased flexibility in the program's early years to a limited
class of vehicles to assure adequate lead time for all manufacturers to
meet the strictest of the standards by MY 2016.
    As described below, EPA also carefully considered the comments of
smaller volume manufacturers and believes additional lead time is
needed. Therefore, EPA is finalizing the TLAAS program, similar to that
proposed, and is also finalizing an additional TLAAS option for
manufacturers with annual U.S. sales under 50,000 vehicles. EPA is also
deferring standards for manufacturers with annual sales of less than
5,000 vehicles. These new TLAAS provisions and the small volume
manufacturer deferment are discussed in detail below and in Section
III.B.6.
a. Base TLAAS Program
    As proposed, EPA is establishing the TLAAS program for a specified
subset of manufacturers. This alternative standard is an option only
for manufacturers with total U.S. sales of less than 400,000 vehicles
per year, using 2009 model year final sales numbers to determine
eligibility for these alternative standards. For manufacturers with
annual U.S. sales of 50,000 or more but less than 400,000 vehicles, EPA
is finalizing the TLAAS program largely as proposed. EPA proposed that
under the TLAAS, qualifying manufacturers would be allowed to produce
up to 100,000 vehicles that would be subject to a somewhat less
stringent CO2 standard of 1.25 times the standard that would
otherwise apply to those vehicles. This 100,000 volume is not an annual
limit, but is an absolute limit for the total number of vehicles which
can use the TLAAS program over the model years 2012-2015. Any
additional production would be subject to the same standards as any
other manufacturer. EPA is retaining this limit for manufacturers with
baseline MY 2009 sales of 50,000 but less than 400,000. In addition, as
discussed further below, EPA is finalizing a variety of restrictions on
the use of the TLAAS program, to ensure that only manufacturers who
need more lead time for the kinds of reasons noted above are likely to
use the program.
    Volvo and Saab commented that basing eligibility strictly on MY
2009 sales would be problematic for these companies, which are being
spun-off from larger manufacturer in the MY 2009 time frame due to the
upheaval in the auto industry over the past few years. These commenters
offered a variety of suggestions including using MY 2010 as the
eligibility cut-off instead of MY 2009, reassessing eligibility on a
year-by-year basis as corporate relationships change, or allowing
companies separated from a larger parent company by the end of 2010 to
use their MY 2009 branded U.S. sales to qualify for TLAAS. In response
to these concerns, EPA recognizes that these companies currently being
sold by larger manufacturers will share the same characteristics of the
manufacturers for which the TLAAS program was designed. As newly
independent companies, these firms will face the challenges of a
narrower fleet of vehicles across which to average, and may potentially
be in a situation, at least in the first few years, of paying fines
under CAFE. Lead time concerns in the program's initial years are in
fact particularly acute for these manufacturers since they will be
newly independent, and thus would have even less of an opportunity to
modify their vehicles to meet the standards. Therefore, EPA is
finalizing an approach that allows manufacturers with U.S. ``branded
sales'' in MY 2009 under the umbrella of a larger manufacturer that
become independent by the end of calendar year 2010 to use their MY
2009 branded sales to qualify for TLAAS eligibility. In other words, a
manufacturer will be eligible for TLAAS if it produced vehicles for the
U.S. market in MY 2009, its branded sales of U.S. vehicles were less
than 400,000 in MY 2009 but whose vehicles were sold as part of a
larger manufacturer, and it becomes independent by the end of calendar
year 2010, if the new entity has sales below 400,000 vehicles.
    Manufacturers with no U.S. sales in MY 2009 are not eligible to
utilize the TLAAS program. EPA does not support the commenter's
suggestion of a year-by-year eligibility determination because it opens
up the TLAAS program to an unknown universe of potential eligible
manufacturers, with the potential for gaming. EPA does not believe the
TLAAS program should be available to new entrants to the U.S. market
since these manufacturers are not transitioning from the CAFE regime
which allows fine paying as a means of compliance to a CAA regime which
does not, and hence do not present the same types of lead time issues.
Manufacturers entering the U.S. market for the first time thus will be
fully subject to the GHG fleet-average standards.
    As proposed, manufacturers qualifying for TLAAS will be allowed to
meet slightly less stringent standards for a limited number of
vehicles. An eligible manufacturer could have a total of up to 100,000
units of cars or trucks combined over model years 2012-2015 which would
be subject to a standard 1.25 times the standard that would otherwise
apply to those vehicles under the primary program. In other words, the
footprint curves upon which the individual manufacturer standards for
the TLAAS fleets are based would be

less stringent by a factor of 1.25 for up to 100,000 of an eligible
manufacturer's vehicles for model years 2012-2015. EPA believes that
100,000 units over four model years achieves an appropriate balance, as
the emissions impact is quite small, but does provide companies with
necessary lead time during MY 2012-2015. For example, for a
manufacturer producing 400,000 vehicles per year, this would be a total
of up to 100,000 vehicles out of a total production of up to 1.6
million vehicles over the four year period, or about 6 percent of total
production.
    Finally, for manufacturers of 50,000 but less than 400,000 U.S.
vehicles sales during 2009, the program expires at the end of MY 2015
as proposed. EPA continues to believe the program reasonably addresses
a real world lead time constraint for these manufacturers, and does so
in a way that balances the need for more lead time with the need to
minimize any resulting loss in potential emissions reductions. In MY
2016, the TLAAS option thus ends for all but the smallest manufacturers
opting for TLAAS, and manufacturers must comply with the same
CO2 standards as non-TLAAS manufacturers; under the CAFE
program companies would continue to be allowed to pay civil penalties
in lieu of complying with the CAFE standards. However, because
companies must meet both the CAFE standards and the EPA CO2
standards, the National Program will have the practical impact of
providing a level playing field for almost all except the smallest
companies beginning in MY 2016. This option, even with the
modifications being adopted, thereby results in more fuel savings and
CO2 reductions than would be the case under the CAFE program
by itself.
    EPA proposed that manufacturers meeting the cut-point of below
400,000 sales for MY 2009 but whose U.S. sales grew above 400,000 in
any subsequent model years would remain eligible for the TLAAS program.
The total sales number applies at the corporate level, so if a
corporation owns several vehicle brands the aggregate sales for the
corporation must be used. These provisions would help prevent gaming of
the provisions through corporate restructuring. Corporate ownership or
control relationships would be based on determinations made under CAFE
for model year 2009 (except in the case of a manufacturer being sold by
a larger manufacturer by the end of calendar year 2010, as discussed
above). In other words, corporations grouped together for purposes of
meeting CAFE standards in MY 2009, must be grouped together for
determining whether or not they are eligible under the 400,000 vehicle
cut point. EPA is finalizing these provisions with the following
modifications. EPA recognizes the dynamic corporate restructuring
occurring in the auto industry and believes it is important to
structure additional provisions to ensure there is no ability to game
the TLAAS provisions and to ensure no unintended loss of feasible
environmental benefits. Therefore, EPA is finalizing a provision that
if two or more TLAAS eligible companies are later merged, with one
company having at least 50% or more ownership of the other, or if the
companies are combined for the purposes of EPA certification and
compliance, the TLAAS allotment is not additive. The merged company
will only be allowed the allotment for what is considered the parent
company under the new corporate structure. Further, if the newly formed
company would have exceeded the 400,000 vehicle cut point based on
combined MY 2009 sales, the new entity is not eligible for TLAAS in the
model year following the merger. EPA believes that such mergers and
acquisitions would give the parent company additional opportunities to
average across its fleet, eliminating one of the primary needs for the
TLAAS program. This provision will not be retroactive and will not
affect the TLAAS program in the year of the merger or for previous
model years. EPA believes these additional provisions are essential to
ensure the integrity of the TLAAS program by ensuring that it does not
become available to large manufacturers through mergers and
acquisitions.
    As proposed, the TLAAS vehicles will be separate car and truck
fleets for that model year and subject to the less stringent footprint-
based standards of 1.25 times the primary fleet average that would
otherwise apply. The manufacturer will determine what vehicles are
assigned to these separate averaging sets for each model year. As
proposed, credits from the primary fleet average program can be
transferred and used in the TLAAS program. Credits generated within the
TLAAS program may also be transferred between the TLAAS car and truck
averaging sets (but not to the primary fleet as explained below) for
use through MY 2015 when the TLAAS ends.
    EPA is finalizing a number of restrictions on credit trading within
the TLAAS program, as proposed. EPA is concerned that if credit use in
the TLAAS program were unrestricted, some manufacturers would be able
to place relatively clean vehicles in the TLAAS fleet, and generate
credits for the primary program fleet. First, credits generated under
TLAAS may not be transferred or traded to the primary program.
Therefore, any unused credits under TLAAS expire after model year 2015
(or 2016 for manufacturers with annual sales less than 50,000
vehicles). EPA believes that this is necessary to limit the program to
situations where it is needed and to prevent the allowance from being
inappropriately transferred to the long-term primary program where it
is not needed. EPA continues to believe this provision is necessary to
prevent credits from being earned simply by removing some high-emitting
vehicles from the primary fleet. Absent this restriction, manufacturers
would be able to choose to use the TLAAS for these vehicles and also be
able to earn credits under the primary program that could be banked or
traded under the primary program without restriction. Second, EPA is
finalizing two additional restrictions on the use of TLAAS by requiring
that for any of the 2012-2015 model years for which an eligible
manufacturer would like to use the TLAAS, the manufacturer must use two
of the available flexibilities in the GHG program first in order to try
and comply with the primary standard before accessing the TLAAS--i.e.,
TLAAS eligibility is not available to those manufacturers with other
readily-available means of compliance. Specifically, before using the
TLAAS a manufacturer must: (1) Use any banked emission credits from
previous model years; and, (2) use any available credits from the
companies' car or truck fleet for the specific model year (i.e., use
credit transfer from cars to trucks or from trucks to cars). That is,
before using the TLAAS for either the car fleet or the truck fleet, the
company must make use of any available intra-manufacturer credit
transfers first. Finally, EPA is restricting the use of banking and
trading between companies of credits in the primary program in years in
which the TLAAS is being used. No such restriction is in place for
years when the TLAAS is not being used.
    EPA received several comments in support of these credit
restrictions for the TLAAS program. On the negative side, one
manufacturer commented that the restrictions were not necessary, saying
that the restrictions are counter to providing manufacturers with
flexibility and that the emissions impacts estimated by EPA due to the
full use of the program are small. However, EPA continues to believe
that the restrictions are appropriate to prevent the potential gaming
described above, and to ensure that the TLAAS

program is used only by those manufacturers that have exhausted all
other readily available compliance mechanisms and consequently have
legitimate lead time issues.
    One manufacturer commented that the program is restrictive due to
the requirement that manufacturers must decide prior to the start of
the model year whether or not and how to use the TLAAS program. EPA did
not intend for manufactures to have to make this determination prior to
the start of the model year. EPA expects that manufacturers will
provide a best estimate of their plans to use the TLAAS program during
certification based on projected model year sales, as part of their pre
model year report projecting their overall plan for compliance (as
required by Sec.  600.514-12 of the regulations). Manufacturers must
determine the program's actual use at the end of the model year during
the process of demonstrating year-end compliance. EPA recognizes that
depending on actual sales for a given model year, a manufacturer's use
of TLAAS may change from the projections used in the pre-model year
report.
b. Additional TLAAS Flexibility for Manufacturers With MY 2009 Sales of
Less Than 50,000 Vehicles
    EPA received extensive comments that the TLAAS program would not
provide sufficient lead time and flexibility for companies with sales
of significantly less than 400,000 vehicles. Jaguar Land Rover, which
separated from Ford in 2008, commented that it sells products only in
the middle and large vehicle segments and that its total product range
remains significantly more limited in terms of segments in comparison
with its main competitors which typically have approximately 75% of
their passenger car fleet in the small and middle segments. Jaguar Land
Rover also commented that it has already committed $1.3 billion of
investment to reducing CO2 from its vehicle fleet and that
this investment is already delivering a range of technologies to
improve the fuel economy and CO2 performance of its existing
vehicles. Jaguar Land Rover submitted confidential business information
regarding their future product plans and emissions performance
capabilities of their vehicles which documents their assertions.
    Porsche commented that their passenger car footprint-based standard
is the most stringent of any manufacturer and this, combined with their
high baseline emissions level, means that it would need to reduce
emissions by about 10 percent per year over the 2012-2016 time-frame.
Porsche commented that such reductions were not feasible. They
commented that their competitors will be able to continue to offer
their full line of products because the competitors have a wider range
of products with which to average. Porsche further commented that their
product development cycles are longer than larger competitors. Porsche
recommended for small limited line niche manufacturers that EPA require
an annual 5 percent reduction in emissions from baseline up to a total
reduction of 25 percent, or to modify the TLAAS program to require such
reductions. Porsche noted that this percent reduction would be in line
with the average emissions reductions required for larger
manufacturers.
    EPA also received comments from several very small volume
manufacturers that, even with the TLAAS program, the proposed standards
are not feasible for them, certainly not in the MY 2012-2016 MY time
frame. These manufacturers included Aston Martin, McLaren, Lotus, and
Ferrari. Their comments consistently focused on the need for separate,
less stringent standards for small volume manufacturers. The
manufacturers commented that they are willing to make progress in
reducing emissions, but that separate, less-stringent small volume
manufacturer standards are needed for them to remain in the U.S.
market. The commenters note that their product line consists entirely
of high end sports cars. Most of these manufacturers have only a few
vehicle models, have annual sales on the order of a few hundred to a
few thousand vehicles, and several have average baseline CO2
emissions in excess of 500 g/mile--nearly twice the industry average.
McLaren commented that its vehicle model to be introduced in MY 2011
will have class leading CO2 performance but that it would
not be able to offer the vehicle in the U.S. market because it does not
have other vehicle models with which to average. Similarly, Aston
Martin commented that it is of utmost importance that it is not
required to reduce emissions significantly more than equivalent
vehicles from larger manufacturers, which would render them
uncompetitive due purely to the size of its business. Manufacturers
also noted that they launch new products less frequently than larger
manufacturers (e.g., Ferrari noted that their production period for
models is 7-8 years), and that suppliers serve large manufacturers
first because they can buy in larger volumes. Some manufacturers also
noted that they would be willing to purchase credits at a reasonable
price, but they believed that credit availability from other
manufacturers was highly unlikely due to the competitive nature of the
auto industry. Several of these manufacturers provided confidential
business information indicating their preliminary plans for reducing
GHG emissions across their product lines through MY 2016 and beyond.
    The Association of International Automobile Manufacturers (AIAM)
also commented that, because of their essential features, vehicles
produced by small volume manufacturers would not be able to meet the
proposed greenhouse gas standards. AIAM commented that ``while it is
possible that these small volume manufacturers (SVMs) might be able to
comply with greenhouse gas standards by purchasing credits from other
manufacturers, this is far too speculative a solution. The market for
credits is unpredictable at this point. Other than exiting the U.S.
market, therefore, the only other possible solution for an independent
SVM would be to sell an equity interest in the company to a larger,
full-line manufacturer, so that the emissions of the luxury vehicles
could be averaged in with the much larger volume of other vehicles
produced by the major manufacturer. This cannot possibly be the outcome
EPA intends, especially when measured against the minimal, if any,
environmental benefit that would result.'' AIAM commented further that
``there is ample legal authority for EPA to provide SVMs a more
generous lead-time allowance or an alternative standard. Indeed, EPA
recognizes such authority in the proposal for a small entity exemption
(for those companies defined under the Small Business Administration's
regulations), see 74 FR at 49574, and in the TLAAS. These provisions
are consistent with previous EPA rulemaking under the Clean Air Act
which offer relief to SVMs.'' AIAM recommended deferring standards for
SVMs to a future rulemaking, providing EPA with adequate time to assess
relevant product plans and technology feasibility information from
SVMs, conduct the necessary reviews and modeling that may be needed,
and consult with the stakeholders.
    These commenters noted that standards for the smallest
manufacturers were deferred in the California program until MY 2016 and
that California's program would have established standards for small
volume manufacturers in MY 2016 at a level that would be
technologically feasible.

The commenters also suggested that California's approach is similar to
the approach being taken by EPA for small business entities. Further,
these commenters noted that in Tier 2 and other light-duty vehicle
programs, EPA has allowed small volume manufacturers (SVMs) until the
end of the phase-in period to comply with standards. The commenters
recommended that EPA should defer standards for SVMs, and conduct a
future rulemaking to establish appropriate standards for SVMs starting
in model year 2016. Alternatively, some manufacturers recommended
establishing much less stringent standards for SVMs as part of the
current rulemaking.
    In summary, the manufacturers commented that their range of
products was insufficient to allow them to meet the standards in the
time provided, even with the proposed TLAAS program. Many of these
manufacturers have baseline emissions significantly higher than their
larger-volume competitors, and thus the CO2 reductions
required from baseline under the program are larger for many of these
companies than for other companies. Although they are investing
substantial resources to reduce CO2 emissions, they believe
that they will not be able to achieve the standards under the proposed
approach.
    EPA also received comments urging us not to expand the TLAAS
program. The commenters are concerned about the loss of benefits that
would occur with any expansion.
    EPA has considered the comments carefully and concludes that
additional flexibility is needed for these companies. After assessing
the issues raised by commenters, EPA believes there are two groups of
manufacturers that need additional lead time. The first group includes
manufacturers with annual U.S. sales of less than 5,000 vehicles per
year. Standards for these small volume manufacturers are being deferred
until a future rulemaking in the 2012 timeframe, as discussed in
Section III.B.6, below. This will allow EPA to determine the
appropriate level of standards for these manufacturers, as well as the
small business entities, at a later time. The second group includes
manufacturers with MY 2009 U.S. sales of less than 50,000 vehicles but
above the 5,000 vehicle threshold being established for small volume
manufacturers. EPA has selected a cut point of 50,000 vehicles in order
to limit the additional flexibility to only the smaller manufacturers
with much more limited product lines over which to average. EPA has
tailored these provisions as narrowly as possible to provide additional
lead time only as needed by these smaller manufacturers. We estimate
that the TLAAS program, including the changes below will result in a
total decrease in overall emissions reductions of about one percent of
the total projected GHG program emission benefits. These estimates are
provided in RIA Chapter 5 Appendix A.
    For some of the companies, the reduction from baseline
CO2 emissions required to meet the standards is clearly
greater than for other TLAAS-eligible manufacturers. Compared with
other TLAAS-eligible manufacturers, these companies also have more
limited fleets across which to average the standards. Some companies
have only a few vehicle models all of a similar utility, and thus their
averaging abilities are extremely limited posing lead time issues of
greater severity than other TLAAS-eligible manufacturers. EPA's
feasibility analysis provided in Section III.D., shows that these
companies face a compliance shortfall significantly greater than other
TLAAS companies (see Table III.D.6-4). This shortfall is primarily due
to their narrow product lines and more limited ability to average
across their vehicle fleets. In addition, with fewer models with which
to average, there is a higher likelihood that phase-in requirements may
conflict with normal product redesign cycles.
    Therefore, for manufacturers with MY 2009 U.S. sales of less than
50,000 vehicles, EPA is finalizing additional TLAAS compliance
flexibility through model year 2016. These manufacturers will be
allowed to place up to 200,000 vehicles in the TLAAS program in MY
2012-2015 and an additional 50,000 vehicles in MY 2016. To be eligible
for the additional allotment above the base TLAAS level of 100,000
vehicles, manufacturers must annually demonstrate that they have
diligently made a good faith effort to purchase credits from other
manufacturers in order to comply with the base TLAAS program, but that
sufficient credits were not available. Manufacturers must secure
credits to the extent they are reasonably available from other
manufacturers to offset the difference between their emissions
reductions obligations under the base TLAAS program and the expanded
TLAAS program. Manufacturers must document their efforts to purchase
credits as part of their end of year compliance report. All other
aspects of the TLAAS program including the 1.25x adjustment to the
standards and the credits provision restrictions remain the same as
described above for the same reasons. This will still require the
manufacturers to reduce emissions significantly in the 2012-2016 time-
frame and to meet the final emissions standards in MY 2017. The
standards remain very challenging for these manufacturers but these
additional provisions will allow them the necessary lead time for
implementing their strategy for compliance with the final, most
stringent standards.
    The eligibility limit of 50,000 vehicles will be treated in a
similar way as the 400,000 vehicle eligibility limit is treated, as
described above. Manufacturers with model year 2009 U.S. sales of less
than 50,000 vehicles are eligible for the expanded TLAAS flexibility.
Manufacturers whose sales grow in later years above 50,000 vehicles
without merger or acquisition will continue to be eligible for the
expanded TLAAS program. However, manufacturers that exceed the 50,000
vehicle limit through mergers or acquisitions will not be eligible for
the expanded TLAAS program in the model year following the merger or
acquisition, but may continue to be eligible for the base TLAAS program
if the MY 2009 sales of the new company would have been below the
400,000 vehicle eligibility cut point. The use of TLAAS by all the
entities within the company in years prior to the merger must be
counted against the 100,000 vehicle limit of the base program. If the
100,000 vehicle limit has been exceeded, the company is no longer
eligible for TLAAS.
6. Deferment of CO2 Standards for Small Volume Manufacturers
With Annual Sales Less Than 5,000 Vehicles
    In the proposal, in the context of the TLAAS program, EPA
recognized that there would be a wide range of companies within the
eligible manufacturers with sales less than 400,000 vehicles in model
year 2009. As noted in the proposal, some of these companies, while
having relatively small U.S. sales volumes, are large global automotive
firms, including companies such as Mercedes and Volkswagen. Other
companies are significantly smaller niche firms, with sales volumes
closer to 10,000 vehicles per year worldwide, such as Aston Martin. EPA
anticipated that there is a small number of such smaller volume
manufacturers, which may face greater challenges in meeting the
standards due to their limited product lines across which to average.
EPA requested comment on whether the proposed TLAAS program would
provide sufficient lead-time for these smaller firms to incorporate the
technology needed to comply with the proposed GHG standards. See 74 FR
at 49524.

    EPA received comments from several very small volume manufacturers
that the TLAAS program would not provide sufficient lead time, as
described above. EPA agrees with comments that the standards would be
extremely challenging and potentially infeasible for these small volume
manufacturers, absent credits from other manufacturers, and that credit
availability at this point is highly uncertain--although these
companies are planning to introduce significant GHG-reducing
technologies to their product lines, they are still highly unlikely to
meet the standards by MY 2016. Because the products produced by these
manufacturers are so unique, these manufacturers were not included in
EPA's OMEGA modeling assessment of the technology feasibility and costs
to meet the proposed standards. As noted above, these manufacturers
have only a few models and have very high baseline emissions. TLAAS
manufacturers are projected to be required to reduce emissions by up to
39%, whereas SVMs in many cases would need to cut their emissions by
more than half to comply with MY 2016 standards.
    Given the unique feasibility issues raised for these manufacturers,
EPA is deferring establishing CO2 standards for
manufacturers with U.S. sales of less than 5,000 vehicles.\188\ This
will provide EPA more time to consider the unique challenges faced by
these manufacturers. EPA expects to conduct this rulemaking in the 2012
timeframe. The deferment only applies to CO2 standards and
SVMs must meet N2O and CH4 standards. EPA plans
to set standards for these manufacturers as part of a future rulemaking
in the next 18 months. This future rulemaking will allow EPA to fully
examine the technologies and emissions levels of vehicles offered by
small manufacturers and to determine the potential emissions control
capabilities, costs, and necessary lead time. This timing may also
allow a credits market to develop, so that EPA may consider the
availability of credits during the rulemaking process. See State of
Mass. v. EPA, 549 U.S. at 533 (EPA retains discretion as to timing of
any regulations addressing vehicular GHG emissions under section
202(a)(1)). We expect that standards would begin to be implemented in
the MY 2016 timeframe. This approach is consistent with that envisioned
by California for these manufacturers. EPA estimates that eligible
small volume manufacturers currently comprise less than 0.1 percent of
the total light-duty vehicle sales in the U.S., and therefore the
deferment will have a very small impact on the GHG emissions reductions
from the standards.
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    \188\ See final regulations at 40 CFR 86.1801-12(k).
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    In addition to the 5,000 vehicle per year cut point, to be eligible
for deferment each year, manufacturers must also demonstrate due
diligence in attempting to secure credits from other manufacturers.
Manufacturers must make a good faith effort to secure credits to the
extent they are reasonably available from other manufacturers to offset
the difference between their baseline emissions and what their
obligations would be under the TLAAS program starting in MY 2012.
    Eligibility will be determined somewhat differently compared to the
TLAAS program. Manufacturers with either MY 2008 or MY 2009 U.S. sales
of less than 5,000 vehicles will be initially eligible. This includes
``branded sales'' for companies that sold vehicles under a larger
manufacturer but has become independent by the end of calendar year
2010. EPA is including MY 2008 as well as MY 2009 because some
manufacturers in this market segment have such limited sales that they
often drop in and out of the market from year to year.
    In determining eligibility, manufacturers must be aggregated
according to the provisions of 40 CFR 86.1838-01(b)(3), which requires
the sales of different firms to be aggregated in various situations,
including where one firm has a 10% or more equity ownership of another
firm, or where a third party has a 10% or more equity ownership of two
or more firms. EPA received public comment from a manufacturer
requesting that EPA should allow a manufacturer to apply to EPA to
establish small volume manufacturer status based on the independence of
its research, development, testing, design, and manufacturing from
another firm that may have an ownership interest in that manufacturer.
EPA has reviewed this comment, but is not finalizing such a provision
at this time. EPA believes that this issue likely presents some
competitive issues, which we would like to be fully considered through
the public comment process. Therefore, EPA plans to consider this issue
and seek public comments in our proposal for small volume manufacturer
CO2 standards, which we expect to complete within 18 months.
    To remain eligible for the deferral from standards, the rolling
average of three consecutive model years of sales must remain below
5,000 vehicles. EPA is establishing the 5,000 vehicle threshold to
allow for some sales growth by SVMs, as SVMs typically have annual
sales of below 2,000 vehicles. However, EPA wants to ensure that
standards for as few vehicles as possible are deferred and therefore
believes it is appropriate that manufacturers with U.S. sales growing
to above 5,000 vehicles per year be required to comply with standards
(including TLAAS, as applicable). Manufacturers with unusually strong
sales in a given year would still likely remain eligible, based on the
three year rolling average. However, if a manufacturer takes steps to
expand in the U.S. market on a permanent basis such that they
consistently sell more than 5,000 vehicles per year, they must meet the
TLAAS standards. EPA believes a manufacturer will be able to consider
these provisions, along with other factors, in its planning to
significantly expand in the U.S. market.
    For manufacturers exceeding the 5,000 vehicle rolling average
through mergers or acquisitions of other manufacturers, those
manufacturers will lose eligibility in the MY immediately following the
last year of the rolling average. For manufacturers exceeding this
level through sales growth, but remaining below a 50,000 vehicle
threshold, the manufacturer will lose eligibility for the deferred
standards in the second model year following the last year of the
rolling average. For example, if the rolling average of MYs 2009-2011