Kia.............................             406             467             582             780           1,137
Mazda...........................             144             241             250             354             480
Mitsubishi......................              39              77             553             686           1,371
Nissan..........................             398             489             970           1,026           1,362
Porsche.........................              44              76             109             568             640
Subaru..........................           1,036             995           1,016           1,060           1,049
Suzuki..........................              66           1,797           1,744           1,689           1,732
Tata............................              66             110             137             198             690
Toyota..........................             130             150             384             499             713
Volkswagen......................              44              77             552             557             606
                                 -------------------------------------------------------------------------------
    Total/Average...............             322             416             621             752             961
----------------------------------------------------------------------------------------------------------------

          Table IV.G.4-6--Average Incremental Cost Increases ($) by Manufacturer Under Final Standards
----------------------------------------------------------------------------------------------------------------
          Manufacturer                MY 2012         MY 2013         MY 2014         MY 2015         MY 2016
----------------------------------------------------------------------------------------------------------------
BMW.............................             196             225             283             430             847
Chrysler........................             553             743             989           1,084           1,257
Daimler.........................             139             171             417             695             937
Ford............................           1,209           1,187           1,205           1,472           1,622
General Motors..................             446             705             946           1,064           1,165
Honda...........................             116             144             266             343             585
Hyundai.........................             577             599             847             805             879
Kia.............................             177             221             263             334             426
Mazda...........................             545             587             716             778             858
Mitsubishi......................             459             453           1,200           1,389           1,647
Nissan..........................             211             376             792             813             984
Porsche.........................             250             207             243             452             544
Subaru..........................             630             650             998           1,267           1,248
Suzuki..........................             231             823             954             946           1,123
Tata............................             164             199             265             396             832
Toyota..........................              67              70             159             248             317
Volkswagen......................             245             410             579             648             901
                                 -------------------------------------------------------------------------------
    Total/Average...............             434             513             665             782             926
----------------------------------------------------------------------------------------------------------------

    Based on the agencies' estimates of manufacturers' future sales
volumes, these cost increases will lead to a total of $51.7 billion in
incremental outlays during MYs 2012-2016 for additional technology
attributable to the final standards:

                                        Table IV.G.4-7--Incremental Technology Outlays ($b) Under Final Standards
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               2012            2013            2014            2015            2016            Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Passenger Cars..........................................             4.1             5.4             6.9             8.2             9.5            34.2
Light Trucks............................................             1.8             2.5             3.7             4.3             5.4            17.6
                                                         -----------------------------------------------------------------------------------------------
    Combined............................................             5.9             7.9            10.5            12.5            14.9            51.7
--------------------------------------------------------------------------------------------------------------------------------------------------------

    NHTSA notes that these estimates of the economic costs for meeting
higher CAFE standards omit certain potentially important categories of
costs, and may also reflect underestimation (or possibly
overestimation) of some costs that are included. For example, although
the agency's analysis is intended to hold vehicle performance,
capacity, and utility constant in estimating the costs of applying
fuel-saving technologies to vehicles, the analysis imputes no cost to
any actual reductions in vehicle performance, capacity, and utility
that may result from manufacturers' efforts to comply with the final
CAFE standards. Although these costs are difficult to estimate
accurately, they nonetheless represent a notable category of omitted
costs if they have not been adequately accounted for in the cost
estimates. Similarly, the agency's estimates of net benefits for
meeting higher CAFE standards does not estimate the economic value of
potential changes in motor vehicle fatalities and injuries that could
result from

reductions in the size or weight of vehicles. While NHTSA reports a
range of estimates of these potential safety effects below and in the
FRIA (ranging from a net negative monetary impact to a net positive
benefits for society), no estimate of their economic value is included
in the agency's estimates of the net benefits resulting from the final
standards.
    Finally, while NHTSA is confident that the cost estimates are the
best available and appropriate for purposes of this final rule, it is
possible that the agency may have underestimated or overestimated
manufacturers' direct costs for applying some fuel economy
technologies, or the increases in manufacturer's indirect costs
associated with higher vehicle manufacturing costs. In either case, the
technology outlays reported here will not correctly represent the costs
of meeting higher CAFE standards. Similarly, NHTSA's estimates of
increased costs of congestion, accidents, and noise associated with
added vehicle use are drawn from a 1997 study, and the correct
magnitude of these values may have changed since they were developed.
If this is the case, the costs of increased vehicle use associated with
the fuel economy rebound effect will differ from the agency's estimates
in this analysis. Thus, like the agency's estimates of economic
benefits, estimates of total compliance costs reported here may
underestimate or overestimate the true economic costs of the final
standards.
    However, offsetting these costs, the achieved increases in fuel
economy will also produce significant benefits to society. NHTSA
attributes most of these benefits to reductions in fuel consumption,
valuing fuel savings at future pretax prices in EIA's reference case
forecast from AEO 2010. The total benefits also include other benefits
and dis-benefits, examples of which include the social values of
reductions in CO2 and criteria pollutant emissions, the
value of additional travel (induced by the rebound effect), and the
social cost of additional congestion, accidents, and noise attributable
to that additional travel. The FRIA accompanying today's final rule
presents a detailed analysis of the rule's specific benefits.
    As Table IV.G.4-8 shows, NHTSA estimates that at the discount rate
of 3 percent prescribed in OMB guidance for regulatory analysis, the
present value of total benefits from the final CAFE standards over the
lifetimes of MY 2012-2016 passenger cars and light trucks will be
$182.5 billion.

                     Table IV.G.4-8--Present Value of Benefits ($Billion) Under Final Standards Using 3 Percent Discount Rate \717\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               2012            2013            2014            2015            2016            Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Passenger Cars..........................................             6.8            15.2            21.6            28.7            35.2           107.5
Light Trucks............................................             5.1            10.7            15.5            19.4            24.3            75.0
                                                         -----------------------------------------------------------------------------------------------
    Combined............................................            11.9            25.8            37.1            48.0            59.5           182.5
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Table IV.G.4-9 reports that the present value of total benefits
from requiring cars and light trucks to achieve the fuel economy levels
specified in the final CAFE standards for MYs 2012-16 will be $146.2
billion when discounted at the 7 percent rate also required by OMB
guidance. Thus the present value of fuel savings and other benefits
over the lifetimes of the vehicles covered by the final standards is
$36.3 billion--or about 20 percent--lower when discounted at a 7
percent annual rate than when discounted using the 3 percent annual
rate.\718\
---------------------------------------------------------------------------

    \717\ Unless otherwise indicated, all tables in Section IV
report benefits calculated using the Reference Case input
assumptions, with future benefits resulting from reductions in
carbon dioxide emissions discounted at the 3 percent rate prescribed
in the interagency guidance on the social cost of carbon.
    \718\ For tables that report total or net benefits using a 7
percent discount rate, future benefits from reducing carbon dioxide
emissions are discounted at 3 percent, in order to maintain
consistency with the discount rate used to develop the reference
case estimate of the social cost of carbon. All other future
benefits reported in these tables are discounted using the 7 percent
rate.

                        Table IV.G.4-9--Present Value of Benefits ($Billion) Under Final Standards Using 7 Percent Discount Rate
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               2012            2013            2014            2015            2016            Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Passenger Cars..........................................             5.5            12.3            17.5            23.2            28.6            87.0
Light Trucks............................................             4.0             8.4            12.2            15.3            19.2            59.2
                                                         -----------------------------------------------------------------------------------------------
    Combined............................................             9.5            20.7            29.7            38.5            47.8           146.2
--------------------------------------------------------------------------------------------------------------------------------------------------------

    For both the passenger car and light truck fleets, NHTSA estimates
that the benefits of today's final standards will exceed the
corresponding costs in every model year, so that the net social
benefits from requiring higher fuel economy--the difference between the
total benefits that result from higher fuel economy and the technology
outlays required to achieve it--will be substantial. Because the
technology outlays required to achieve the fuel economy levels required
by the final standards are incurred during the model years when
vehicles are produced and sold, however, they are not subject to
discounting, so that their present value does not depend on the
discount rate used.\719\ Thus the net benefits of the final standards
differ depending on whether the 3 percent or 7 percent discount rate is
used, but only because the choice of discount rates affects the present
value of total benefits, and not that of technology costs.
---------------------------------------------------------------------------

    \719\ Although technology costs are incurred at the beginning of
each model year's lifetime and thus are not subject to discounting,
the discount rate does influence the effective cost of some
technologies. Because NHTSA assumes some manufacturers will be
willing to pay civil penalties when compliance costs become
sufficiently high, It is still possible for the discount rate to
affect the agency's estimate of total technology outlays. However,
this does not occur under the alternative NHTSA has adopted for its
final MY 2012-16 CAFE standards.
---------------------------------------------------------------------------

    As Table IV.G.4-10 shows, over the lifetimes of the affected (MY
2012-2016)

vehicles, the agency estimates that when the benefits of the final
standards are discounted at a 3 percent rate, they will exceed the
costs of the final standards by $130.7 billion:

                      Table IV.G.4-10--Present Value of Net Benefits ($Billion) Under Final Standards Using 3 Percent Discount Rate
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               2012            2013            2014            2015            2016            Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Passenger Cars..........................................             2.7             9.7            14.8            20.5            25.7            73.3
Light Trucks............................................             3.4             8.2            11.8            15.0            18.9            57.4
                                                         -----------------------------------------------------------------------------------------------
    Combined............................................             6.0            18.0            26.6            35.5            44.6           130.7
--------------------------------------------------------------------------------------------------------------------------------------------------------

    As indicated previously, when fuel savings and other future
benefits resulting from the final standards are discounted at the 7
percent rate prescribed in OMB guidance, they are $36.3 billion lower
than when the 3 percent discount rate is applied. Because technology
costs are not subject to discounting, using the higher 7 percent
discount rate reduces net benefits by exactly this same amount.
Nevertheless, Table IV.G.4-11 shows that the net benefits from
requiring passenger cars and light trucks to achieve higher fuel
economy are still substantial even when future benefits are discounted
at the higher rate, totaling $94.5 billion over MYs 2012-16. Net
benefits are thus about 28 percent lower when future benefits are
discounted at a 7 percent annual rate than at a 3 percent rate.

                      Table IV.G.4-11--Present Value of Net Benefits ($Billion) Under Final Standards Using 7 Percent Discount Rate
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               2012            2013            2014            2015            2016            Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Passenger Cars..........................................             1.3             6.8            10.6            15.0            19.0            52.9
Light Trucks............................................             2.3             5.9             8.6            11.0            13.9            41.6
                                                         -----------------------------------------------------------------------------------------------
    Combined............................................             3.6            12.8            19.2            26.0            32.9            94.5
--------------------------------------------------------------------------------------------------------------------------------------------------------

    NHTSA's estimates of economic benefits from establishing higher
CAFE standards are subject to considerable uncertainty. Most important,
the agency's estimates of the fuel savings likely to result from
adopting higher CAFE standards depend critically on the accuracy of the
estimated fuel economy levels that will be achieved under both the
baseline scenario, which assumes that manufacturers will continue to
comply with the MY 2011 CAFE standards, and under alternative increases
in the standards that apply to MYs 2012-16 passenger cars and light
trucks. Specifically, if the agency has underestimated the fuel economy
levels that manufacturers would have achieved under the baseline
scenario--or is too optimistic about the fuel economy levels that
manufacturers will actually achieve under the final standards--its
estimates of fuel savings and the resulting economic benefits
attributable to this rule will be too large.
    Another major source of potential overestimation in the agency's
estimates of benefits from requiring higher fuel economy stems from its
reliance on the Reference Case fuel price forecasts reported in AEO
2010. Although NHTSA believes that these forecasts are the most
reliable that are available, they are nevertheless significantly higher
than the fuel price projections reported in most previous editions of
EIA's Annual Energy Outlook, and reflect projections of world oil
prices that are well above forecasts issued by other firms and
government agencies. If the future fuel prices projected in AEO 2010
prove to be too high, the agency's estimates of the value of future
fuel savings--the major component of benefits from this rule--will also
be too high.
    In addition, it is possible that NHTSA's estimates of economic
benefits from the effects of saving fuel on U.S. petroleum consumption
and imports are too high. The estimated ``energy security premium'' the
agency uses to value reductions in U.S. petroleum imports includes both
increased payments for petroleum imports that occur when world oil
prices increase rapidly, and losses in U.S. GDP losses and adjustment
costs that result from oil price shocks. One commenter suggested
increased import costs associated with rapid increases in petroleum
prices represent transfers from U.S. oil consumers to petroleum
suppliers rather than real economic costs, so any reduction in their
potential magnitude should be excluded when calculating benefits from
lower U.S. petroleum imports. If this view is correct, then the
agency's estimates of benefits from the effect of reduced fuel
consumption on U.S. petroleum imports would indeed be too high.\720\
---------------------------------------------------------------------------

    \720\ Doing so, however, would represent a significant departure
from how disruption costs associated with oil price shocks have been
quantified in research on the value of energy security, and NHTSA
believes this issue should be analyzed in more detail before these
costs are excluded. Moreover, the agency believes that increases in
import costs during oil supply disruptions differ from transfers due
to the existence of U.S. monopsony power in the world oil market,
since they reflect real resource shortages and costly short-run
shifts in demand by energy users, rather than losses to consumers of
petroleum products that that are matched by offsetting gains to
suppliers. Thus the agency believes that reducing their expected
value provides real economic benefits, and they do not represent
pure transfers.
---------------------------------------------------------------------------

    However, it is also possible that NHTSA's estimates of economic
benefits from establishing higher CAFE standards underestimate the true
economic benefits of the fuel savings those standards would produce. If
the AEO 2010 forecast of fuel prices proves to be too low, for example,
NHTSA will have underestimated the value of fuel savings that will
result from adopting higher CAFE standards for MY 2012-16. As another
example, the agency's estimate of benefits from reducing the threat of
economic damages from disruptions in the supply of imported petroleum
to the U.S. applies to

calendar year 2015. If the magnitude of this estimate would be expected
to grow after 2015 in response to increases in U.S. petroleum imports,
growth in the level of U.S. economic activity, or increases in the
likelihood of disruptions in the supply of imported petroleum, the
agency may have underestimated the benefits from the reduction in
petroleum imports expected to result from adopting higher CAFE
standards.
    NHTSA's benefit estimates could also be too low because they
exclude or understate the economic value of certain potentially
significant categories of benefits from reducing fuel consumption. As
one example, EPA's estimates of the economic value of reduced damages
to human health resulting from lower exposure to criteria air
pollutants includes only the effects of reducing population exposure to
PM2.5 emissions. Although this is likely to be the most
significant component of health benefits from reduced emissions of
criteria air pollutants, it excludes the value of reduced damages to
human health and other impacts resulting from lower emissions and
reduced population exposure to other criteria air pollutants, including
ozone and nitrous oxide (N2O), as well as airborne toxics.
EPA's estimates exclude these benefits because no reliable dollar-per-
ton estimates of the health impacts of criteria pollutants other than
PM2.5 or of the health impacts of airborne toxics were
available to use in developing estimates of these benefits.
    Similarly, the agency's estimate of the value of reduced climate-
related economic damages from lower emissions of GHGs excludes many
sources of potential benefits from reducing the pace and extent of
global climate change.\721\ For example, none of the three models used
to value climate-related economic damages includes ocean acidification
or loss of species and wildlife. The models also may not adequately
capture certain other impacts, such as potentially abrupt changes in
climate associated with thresholds that govern climate system
responses, inter-sectoral and inter-regional interactions, including
global security impacts of high-end extreme warming, or limited near-
term substitutability between damage to natural systems and increased
consumption. Including monetized estimates of benefits from reducing
the extent of climate change and these associated impacts would
increase the agency's estimates of benefits from adopting higher CAFE
standards.
---------------------------------------------------------------------------

    \721\ Social Cost of Carbon for Regulatory Impact Analysis Under
Executive Order 12866, Interagency Working Group on Social Cost of
Carbon, United States Government, February 2010. Available in Docket
No. NHTSA-2009-0059.
---------------------------------------------------------------------------

    The following tables present itemized costs and benefits for the
combined passenger car and light truck fleets for each model year
affected by the final standards as well as for all model years
combined, using both discount rates prescribed by OMB regulatory
guidance. Table IV.G.4-12 reports technology outlays, each separate
component of benefits (including costs associated with additional
driving due to the rebound effect, labeled ``dis-benefits''), the total
value of benefits, and net benefits, using the 3 percent discount rate.
(Numbers in parentheses represent negative values.)
---------------------------------------------------------------------------

    \722\ Using the central value of $21 per metric ton for the SCC,
and discounting future benefits from reduced CO2
emissions at a 3 percent annual rate. Additionally, we note that the
$21 per metric ton value for the SCC applies to calendar year 2010,
and increases over time. See the interagency guidance on SCC for
more information.

                 Table IV.G.4-12--Itemized Cost and Benefit Estimates for the Combined Vehicle Fleet Using 3 Percent Discount Rate ($M)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                        MY 2012          MY 2013          MY 2014          MY 2015          MY 2016           Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                          Costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
Technology Costs..................................           5,903            7,890           10,512           12,539           14,904           51,748
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                        Benefits
--------------------------------------------------------------------------------------------------------------------------------------------------------
Savings in Lifetime Fuel Expenditures.............           9,265           20,178           29,083           37,700           46,823          143,048
Consumer Surplus from Additional Driving..........             696            1,504            2,150            2,754            3,387           10,491
Value of Savings in Refueling Time................             706            1,383            1,939            2,464            2,950            9,443
Reduction in Petroleum Market Externalities.......             545            1,154            1,630            2,080            2,543            7,952
Reduction in Climate-Related Damages from Lower                921            2,025            2,940            3,840            4,804           14,528
 CO2 Emissions \722\..............................
Reduction in Health Damage Costs from Lower
 Emissions of Criteria Air Pollutants:
    CO............................................               0                0                0                0                0                0
    VOC...........................................              42               76              102              125              149              494
    NOX...........................................              70              104              126              146              166              612
    PM............................................             205              434              612              776              946            2,974
    SOX...........................................             158              332              469              598              731            2,288
Dis-Benefits from Increased Driving:
    Congestion Costs..............................            (447)            (902)          (1,282)          (1,633)          (2,000)          (6,264)
    Noise Costs...................................              (9)             (18)             (25)             (32)             (39)            (122)
    Crash Costs...................................            (217)            (430)            (614)            (778)            (950)          (2,989)
                                                   -----------------------------------------------------------------------------------------------------
        Total Benefits............................          11,936           25,840           37,132           48,040           59,509          182,457
                                                   -----------------------------------------------------------------------------------------------------

        Net Benefits..............................           6,033           17,950           26,619           35,501           44,606          130,709
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Similarly, Table IV.G.4-13 below reports technology outlays, the
individual components of benefits (including ``dis-benefits'' resulting
from additional driving) and their total, and net benefits, using the 7
percent discount rate. (Again, numbers in parentheses represent
negative values.)

                 Table IV.G.4-13--Itemized Cost and Benefit Estimates for the Combined Vehicle Fleet Using 7 Percent Discount Rate ($M)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                        MY 2012          MY 2013          MY 2014          MY 2015          MY 2016           Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                          Costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
Technology Costs..................................           5,903            7,890           10,512           12,539           14,904           51,748
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                        Benefits
--------------------------------------------------------------------------------------------------------------------------------------------------------
Savings in Lifetime Fuel Expenditures.............           7,197           15,781           22,757           29,542           36,727          112,004
Consumer Surplus from Additional Driving..........             542            1,179            1,686            2,163            2,663            8,233
Value of Savings in Refueling Time................             567            1,114            1,562            1,986            2,379            7,608
Reduction in Petroleum Market Externalities.......             432              917            1,296            1,654            2,023            6,322
Reduction in Climate-Related Damages from Lower                921            2,025            2,940            3,840            4,804           14,530
 CO2 Emissions \723\..............................
Reduction in Health Damage Costs from Lower
 Emissions of Criteria Air Pollutants:
    CO............................................               0                0                0                0                0                0
    VOC...........................................              32               60               80               99              119              390
    NOX...........................................              53               80               98              114              131              476
    PM............................................             154              336              480              611              748            2,329
    SOX...........................................             125              265              373              475              581            1,819
Dis-Benefits from Increased Driving:
    Congestion Costs..............................            (355)            (719)          (1,021)          (1,302)          (1,595)          (4,992)
    Noise Costs...................................              (7)             (14)             (20)             (26)             (31)             (98)
    Crash Costs...................................            (173)            (342)            (488)            (619)            (756)          (2,378)
                                                   -----------------------------------------------------------------------------------------------------
        Total Benefits............................           9,488           20,682           29,743           38,537           47,793          146,243
                                                   -----------------------------------------------------------------------------------------------------
        Net Benefits..............................           3,586           12,792           19,231           25,998           32,890           94,497
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The above benefit and cost estimates did not reflect the
availability and use of flexibility mechanisms, such as compliance
credits and credit trading, because EPCA prohibits NHTSA from
considering the effects of those mechanisms in setting CAFE standards.
However, the agency noted that, in reality, manufacturers were likely
to rely to some extent on flexibility mechanisms provided by EPCA and
would thereby reduce the cost of complying with the final standards to
a meaningful extent.
---------------------------------------------------------------------------

    \723\ Using the central value of $21 per metric ton for the SCC,
and discounting future benefits from reduced CO2
emissions at a 3 percent annual rate. Additionally, we note that the
$21 per metric ton value for the SCC applies to calendar year 2010,
and increases over time. See the interagency guidance on SCC for
more information.
---------------------------------------------------------------------------

    As discussed in the FRIA, NHTSA has performed an analysis to
estimate the costs and benefits if EPCA's provisions regarding FFVs are
accounted for. The agency considered also attempting to account for
other EPCA flexibility mechanisms, in particular credit transfers
between the passenger and nonpassenger fleets, but has concluded that,
at least within a context in which each model year is represented
explicitly, technologies carry forward between model years, and multi-
year planning effects are represented, there is no basis to estimate
reliably how manufacturers might use these mechanisms. Accounting for
the FFV provisions indicates that achieved fuel economies would be 0.5-
1.3 mpg lower than when these provisions are not considered (for
comparison see Table IV.G.1-2 above):

          Table IV.G.4-14--Average Achieved Fuel Economy (mpg) Under Final Standards (With FFV Credits)
----------------------------------------------------------------------------------------------------------------
                                       2012            2013            2014            2015            2016
----------------------------------------------------------------------------------------------------------------
Passenger Cars..................            32.3            33.5            34.2            35.0            36.2
Light Trucks....................            24.5            25.1            25.9            26.7            27.5
                                 -------------------------------------------------------------------------------
    Combined....................            28.7            29.7            30.6            31.5            32.7
----------------------------------------------------------------------------------------------------------------

    As a result, NHTSA estimates that, when FFV credits are taken into
account, fuel savings will total 58.6 billion gallons--about 3.9
percent less than the 61.0 billion gallons estimated when these credits
are not considered:

                                 Table IV.G.4-15--Fuel Saved (Billion Gallons) Under Final Standards (With FFV Credits)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               2012            2013            2014            2015            2016            Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Passenger Cars..........................................             2.7             4.7             6.4             8.4            11.0            33.1
Light Trucks............................................             2.3             3.6             5.0             6.6             8.1            25.5
                                                         -----------------------------------------------------------------------------------------------
    Combined............................................             4.9             8.2            11.3            15.0            19.1            58.6
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The agency similarly estimates CO2 emissions reductions
will total 636 million metric tons (mmt), about 2.9 percent less than
the 655 mmt estimated when these credits are not considered: \724\
---------------------------------------------------------------------------

    \724\ Differences in the application of diesel engines lead to
differences in the incremental percentage changes in fuel
consumption and carbon dioxide emissions.

                            Table IV.G.4-16--Avoided Carbon Dioxide Emissions (mmt) Under Final Standards (With FFV Credits)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               2012            2013            2014            2015            2016            Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Passenger Cars..........................................              28              50              69              91             119             357
Light Trucks............................................              25              39              54              72              88             279
                                                         -----------------------------------------------------------------------------------------------
    Combined............................................              53              89             123             163             208             636
--------------------------------------------------------------------------------------------------------------------------------------------------------

    This analysis further indicates that significant reductions in
outlays for additional technology will result when FFV provisions are
taken into account. Table IV.G.4-17 below shows that as a result, total
technology costs are estimated to decline to $37.5 billion, or about 27
percent less than the $51.7 billion estimated when excluding these
provisions:

                               Table IV.G.4-17--Incremental Technology Outlays ($B) Under Final Standards With FFV Credits
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               2012            2013            2014            2015            2016            Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Passenger Cars..........................................             2.6             3.6             4.8             6.1             7.5            24.6
Light Trucks............................................             1.1             1.5             2.5             3.4             4.4            12.9
                                                         -----------------------------------------------------------------------------------------------
    Combined............................................             3.7             5.1             7.3             9.5            11.9            37.5
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Because NHTSA's analysis indicated that FFV provisions will not
significantly reduce fuel savings, the agency's estimate of the present
value of total benefits will be $175.6 billion when discounted at a 3
percent annual rate, as Table IV.G.4-18 following reports. This
estimate of total benefits is $6.9 billion, or about 3.8 percent, lower
than the $182.5 billion reported previously for the analysis that
excluded these provisions:

               Table IV.G.4-18--Present Value of Benefits ($Billion) Under Final Standards With FFV Credits Using 3 Percent Discount Rate
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               2012            2013            2014            2015            2016            Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Passenger Cars..........................................             7.6            13.7            19.1            25.6            34.0           100.0
Light Trucks............................................             6.4            10.4            14.6            19.8            24.4            75.6
                                                         -----------------------------------------------------------------------------------------------
    Combined............................................            14.0            24.1            33.7            45.4            58.4           175.6
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Similarly, because the FFV are not expected to reduce fuel savings
significantly, NHTSA estimates that the present value of total benefits
will decline only slightly from its previous estimate when future fuel
savings and other benefits are discounted at the higher 7 percent rate.
Table IV.G.4-19 reports that the present value of benefits from
requiring higher fuel economy for MY 2012-16 cars and light trucks will
total $140.7 billion when discounted using a 7 percent rate, about $5.5
billion (or again, 3.8 percent) below the previous $146.2 billion
estimate of total benefits when FFV credits were not permitted:

               Table IV.G.4-19--Present Value of Benefits ($Billion) Under Final Standards With FFV Credits Using 7 Percent Discount Rate
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               2012            2013            2014            2015            2016            Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Passenger Cars..........................................             6.1            11.1            15.5            20.7            27.6            80.9
Light Trucks............................................             5.0             8.2            11.5            15.6            19.3            59.7
                                                         -----------------------------------------------------------------------------------------------
    Combined............................................            11.2            19.3            27.0            36.4            46.9           140.7
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Although the discounted present value of total benefits will be
slightly lower when FFV provisions are taken into account, the agency
estimates that these provisions will slightly increase net benefits.
This occurs because the flexibility these provisions provide to
manufacturers will allow them to reduce technology costs for meeting
the new standards by considerably more than the reduction in the value
of fuel savings and other benefits. As Table IV.G.4-20 shows, the
agency estimates that the availability of FFV credits will increase net
benefits from the final CAFE standards to $138.2 billion from the
previously-reported estimate of $130.7 billion without those credits,
or by about 5.7 percent.

                 Table IV.G.4-20--Present Value of Net Benefits ($Billion) Under Final Standards With FFV Credits Using 3% Discount Rate
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               2012            2013            2014            2015            2016            Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Passenger Cars..........................................             5.1            10.1            14.3            19.5            26.5            75.4
Light Trucks............................................             5.3             8.8            12.1            16.4            20.0            62.7
                                                         -----------------------------------------------------------------------------------------------
    Combined............................................            10.4            19.0            26.5            35.9            46.5           138.2
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Similarly, Table IV.G.4-21 immediately below shows that NHTSA
estimates manufacturers' use of FFV credits will raise net benefits
from requiring higher fuel economy for MY 2012-16 cars and light trucks
to $103.2 billion if a 7 percent discount rate is applied to future
benefits. This estimate is $8.7 billion--or about 9.2%--higher than the
previously-reported $94.5 billion estimate of net benefits without the
availability of FFV credits using that same discount rate.

                 Table IV.G.4-21--Present Value of Net Benefits ($Billion) Under Final Standards With FFV Credits Using 7% Discount Rate
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               2012            2013            2014            2015            2016            Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Passenger Cars..........................................             3.6             7.5            10.7            14.6            20.0            56.4
Light Trucks............................................             3.9             6.6             9.1            12.3            14.9            46.8
                                                         -----------------------------------------------------------------------------------------------
    Combined............................................             7.5            14.1            19.7            26.9            35.0           103.2
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The agency has also performed several sensitivity analyses to
examine the effects of varying important assumptions that affect its
estimates of benefits and costs from higher CAFE standards for MY 2012-
16 cars and light trucks. We examine the sensitivity of fuel savings,
total economic benefits, and technology costs with respect to the
following five economic parameters:
    (1) The price of gasoline: The Reference Case uses the AEO 2010
reference case estimate for the price of gasoline. In this sensitivity
analysis we examine the effect of instead using the AEO 2009 high and
low price forecasts.
    (2) The rebound effect: The Reference Case uses a rebound effect of
10 percent to project increased miles traveled as the cost per mile
driven decreases. In the sensitivity analysis, we examine the effect of
instead using a 5 percent or 15 percent rebound effect.
    (3) The values of CO2 benefits: The Reference Case uses
$21 per ton (in 2010 in 2007$, rising over time to $45 in 2030) to
quantify the benefits of reducing CO2 emissions and $0.17
per gallon to quantify the energy security benefits from reducing fuel
consumption. In the sensitivity analysis, we examine the effect of
using values of $5, and $65 per ton instead of the reference value of
$21 per ton to value CO2 benefits. These values can be
translated into cents per gallon by multiplying by 0.0089,\725\ giving
the following values:

    \725\ The molecular weight of Carbon (C) is 12, the molecular
weight of Oxygen (O) is 16, thus the molecular weight of
CO2 is 44. One ton of C = 44/12 tons CO2 =
3.67 tons CO2. 1 gallon of gas weighs 2,819 grams, of
that 2,433 grams are carbon. $1.00 CO2 = $3.67 C and
$3.67/ton * ton/1,000kg * kg/1,000g * 2,433g/gallon = (3.67 *
2,433)/1,000 * 1,000 = $0.0089/gallon.
---------------------------------------------------------------------------

($5 per ton CO2) x 0.0089 = $0.045 per gallon

($21 per ton CO2) x 0.0089 = $0.187 per gallon
($35 per ton CO2) x 0.0089 = $0.312 per gallon
($67 per ton CO2) x 0.0089 = $0.596 per gallon

    (4) Military security: The Reference Case uses $0 per gallon to
quantify the military security benefits of reducing fuel consumption.
In the sensitivity analysis, we examine the impact of instead using a
value of 5 cents per gallon.
    Varying each of these four parameters in isolation results in 9
additional economic scenarios, in addition to the Reference case. These
are listed in Table IV.G.4-22 below, together with two additional
scenarios that use combinations of these parameters that together
produce the lowest and highest benefits.

                         Table IV.G.4-22--Sensitivity Analyses Evaluated in NHTSA's FRIA
----------------------------------------------------------------------------------------------------------------
                                                            Discount     Rebound
               Name                      Fuel price           rate        effect        SCC          Military
                                                           (percent)    (percent)                    security
----------------------------------------------------------------------------------------------------------------
Reference.........................  AEO 20210 Reference             3           10          $21  0[cent]/gal.
                                     Case.
High Fuel Price...................  AEO 2009 High Price             3           10           21  0[cent]/gal.
                                     Case.
Low Fuel Price....................  AEO 2009 Low Price              3           10           21  0[cent]/gal.
                                     Case.
5% Rebound Effect.................  AEO 20210 Reference             3            5           21  0[cent]/gal.
                                     Case.
15% Rebound Effect................  AEO 20210 Reference             3           15           21  0[cent]/gal.
                                     Case.
$67/ton CO2 Value.................  AEO 20210 Reference             3           10           67  0[cent]/gal.
                                     Case.
$35/ton CO2 Value.................  AEO 20210 Reference             3           10           35  0[cent]/gal.
                                     Case.
$5/ton CO2 Value..................  AEO 20210 Reference             3           10            5  0[cent]/gal.
                                     Case.
$5/ton CO2........................  AEO 20210 Reference             3           10            5  0[cent]/gal.
                                     Case.
5[cent]/gal Military Security       AEO 20210 Reference             3           10           21  5[cent]/gal.
 Value.                              Case.
Lowest Discounted Benefits........  AEO 2009 Low Price              7           15            5  0[cent]/gal.
                                     Case.
Highest Discounted Benefits.......  AEO 2009 High Price             3            5           67  5[cent]/gal.
                                     Case.
----------------------------------------------------------------------------------------------------------------

    The basic results of the sensitivity analyses were as follows:
    (1) The various economic assumptions have no effect on the final
passenger car and light truck standards established by this rule,
because these are determined without reference to economic benefits.
    (2) Varying the economic assumptions individually has comparatively
modest impacts on fuel savings resulting from the adopted standards.
The range of variation in fuel savings in response to changes in
individual assumptions extends from a reduction of nearly 5 percent to
an increase of that same percentage.
    (3) The economic parameter with the greatest impacts on fuel
savings is the magnitude of the rebound effect. Varying the rebound
effect from 5 percent to 15 percent is responsible for a 4.6 percent
increase and 4.6 percent reduction in fuel savings compared to the
Reference results.
    (4) The only other parameter that has a significant effect on fuel
savings is forecast fuel prices, although its effect is complex because
changes in fuel prices affect vehicle use and fuel consumption in both
the baseline and under the final standards.
    (5) Variation in forecast fuel prices and in the value of reducing
CO2 emissions have significant effects on the total economic
benefits resulting from the final standards. Changing the fuel price
forecast to AEO's High Price forecast raises estimated economic
benefits by almost 40 percent, while using AEO's Low Price forecast
reduces total economic benefits by only about 5 percent. Raising the
value of eliminating each ton of CO2 emissions to $67
increases total benefits by 15 percent.
    (6) Varying all economic parameters simultaneously has a
significant effect on total economic benefits. The combination of
parameter values producing the highest benefits increases their total
by slightly more than 50 percent, while that producing the lowest
benefits reduces their value by almost 55 percent. However, varying
these parameters in combination has less significant effects on other
measures; for example, the high- and low-benefit combinations of
parameter values raise or lower fuel savings and technology costs by
only about 5 percent.

For more detailed information regarding NHTSA's sensitivity analyses
for this final rule, please see Chapter X of NHTSA's FRIA.
5. How would these final standards impact vehicle sales?
    The effect of this rule on sales of new vehicles depends partly on
how potential buyers evaluate and respond to its effects on vehicle
prices and fuel economy. The rule will make new cars and light trucks
more expensive, as manufacturers attempt to recover their costs for
complying with the rule by raising vehicle prices, which by itself
would discourage sales. At the same time, the rule will require
manufacturers to improve the fuel economy of at least some of their
models, which will lower their operating costs.
    However, this rule will not change the way that potential buyers
evaluate improved fuel economy. If some consumers find it difficult to
estimate the value of future fuel savings and correctly compare it with
the increased cost of purchasing higher fuel economy (possibilities
discussed below in Section IV.G.6)--or if they simply have low values
of saving fuel--this rule will not change that situation, and they are
unlikely to purchase the more fuel-efficient models that manufacturers
offer. To the extent that other consumers more completely or correctly
account for the value of fuel savings and the costs of acquiring higher
fuel economy in their purchasing decisions, they will also continue to
do so, and they are likely to view models with improved fuel economy as
more attractive purchases than currently available models. The effect
of the rule on sales of new vehicles will depend on which form of
behavior is more widespread.
    In general we would expect that the net effect of this rule would
be to reduce sales of new vehicles or leave them unchanged. If
consumers are satisfied with the combinations of fuel economy levels
and prices that current models offer, we would expect some to decide
that the higher prices of those models no longer justify purchasing
them, even though they offer higher fuel economy. Other potential
buyers may decide to purchase the same vehicle they would have before
the rule took effect, or to adjust their purchases in favor of models
offering other attributes. Thus sales of new models would decline,

regardless of whether ``consumer-side'' failures in the market for fuel
economy currently lead buyers to under-invest in fuel economy. However,
if there is some market failure on the producer or supply side that
currently inhibits manufacturers from offering increases in fuel
economy that would increase their profits--for example, if producers
have underestimated the demand for fuel economy, or do not compete
vigorously to provide as much as buyers would prefer--then the new
standards would make vehicles more attractive to many buyers, and their
sales should increase (potential explanations for such producer market
failures are discussed in Section IV.G.6 below).
    NHTSA examined the potential impact of higher vehicle prices on
sales on an industry-wide basis for passenger cars and light trucks
separately. We note that the analysis conducted for this rule does not
have the precision to examine effects on individual manufacturers or
different vehicle classes. The methodology NHTSA used for estimating
the impact on vehicle sales in effect assumes that the latter situation
will prevail; although it is relatively straightforward, it relies on a
number of simplifying assumptions.
    There is a broad consensus in the economic literature that the
price elasticity for demand for automobiles is approximately -1.0.\726\
Thus, every one percent increase in the price of the vehicle would
reduce sales by one percent. Elasticity estimates assume no perceived
change in the quality of the product. However, in this case, vehicle
price increases result from adding technologies that improve fuel
economy. If consumers did not value improved fuel economy at all, and
considered nothing but the increase in price in their purchase
decisions, then the estimated impact on sales from price elasticity
could be applied directly. However, NHTSA believes that consumers do
value improved fuel economy, because it reduces the operating cost of
the vehicles. NHTSA also believes that consumers consider other factors
that affect their costs and have included these in the analysis.
---------------------------------------------------------------------------

    \726\ Kleit, A.N. (1990). ``The Effect of Annual Changes in
Automobile Fuel Economy Standards,'' Journal of Regulatory
Economics, vol. 2, pp 151-172 (Docket EPA-HQ-OAR-2009-0472-0015);
Bordley, R. (1994). ``An Overlapping Choice Set Model of Automotive
Price Elasticities,'' Transportation Research B, vol 28B, no 6, pp
401-408 (Docket NHTSA-2009-0059-0153); McCarthy, P.S. (1996).
``Market Price and Income Elasticities of New Vehicle Demands,'' The
Review of Economics and Statistics, vol. LXXVII, no. 3, pp. 543-547
(Docket NHTSA-2009-0059-0039).
---------------------------------------------------------------------------

    The main question, however, is how much of the retail price needed
to cover the technology investments to meet higher fuel economy
standards will manufacturers be able to pass on to consumers. The
ability of manufacturers to pass the compliance costs on to consumers
depends upon how consumers value the fuel economy improvements.\727\
The estimates reported below as part of NHTSA's analysis on sales
impacts assume that manufacturers will be able to pass all of their
costs to improve fuel economy on to consumers. To the extent that NHTSA
has accurately predicted the price of gasoline and consumers reactions,
and manufacturers can pass on all of the costs to consumers, then the
sales and employment impact analyses are reasonable. On the other hand,
if manufacturers only increase retail prices to the extent that
consumers value these fuel economy improvements (i.e., to the extent
that they value fuel savings), then there would be no impact on sales,
although manufacturers' profit levels would fall. Sales losses are
predicted to occur only if consumers fail to value fuel economy
improvements at least as much as they pay in higher vehicle prices.
Likewise, if fuel prices rise beyond levels used in this analysis,
consumer valuation of improved fuel economy could potentially increase
beyond that estimated here, which could result in an increase in sales
levels.
---------------------------------------------------------------------------

    \727\ Gron, Ann and Swenson, Deborah, 2000, ``Cost Pass-Through
in the U.S. Automobile Market,'' The Review of Economics and
Statistics, 82: 316-324. (Docket EPA-HQ-OAR-2009-0472-0007).
---------------------------------------------------------------------------

    To estimate the average value consumers place on fuel savings at
the time of purchase, NHTSA assumes that the average purchaser
considers the fuel savings they would receive over a 5 year time frame.
NHTSA chose 5 years because this is the average length of time of a
financing agreement.\728\ The present values of these savings were
calculated using a 3 percent discount rate. NHTSA used a fuel price
forecast that included taxes, because this is what consumers must pay.
Fuel savings were calculated over the first 5 years and discounted back
to a present value.
---------------------------------------------------------------------------

    \728\ National average financing terms for automobile loans are
available from the Board of Governors of the Federal Reserve System
G.19 ``Consumer Finance'' release. See http://
www.federalreserve.gov/releases/g19/ (last accessed February 26,
2010).
---------------------------------------------------------------------------

    NHTSA believes that consumers may consider several other factors
over the 5 year horizon when contemplating the purchase of a new
vehicle. NHTSA added these factors into the calculation to represent
how an increase in technology costs might affect consumers' buying
considerations.
    First, consumers might consider the sales taxes they have to pay at
the time of purchasing the vehicle. NHTSA took sales taxes in 2007 by
state and weighted them by population by state to determine a national
weighted-average sales tax of 5.5 percent.
    Second, NHTSA considered insurance costs over the 5 year period.
More expensive vehicles will require more expensive collision and
comprehensive (e.g., theft) car insurance. The increase in insurance
costs is estimated from the average value of collision plus
comprehensive insurance as a proportion of average new vehicle price.
Collision plus comprehensive insurance is the portion of insurance
costs that depend on vehicle value. The Insurance Information Institute
provides the average value of collision plus comprehensive insurance in
2006 as $448.\729\ This is compared to an average price for light
vehicles of $24,033 for 2006.\730\ Average prices and estimated sales
volumes are needed because price elasticity is an estimate of how a
percent increase in price affects the percent decrease in sales.
---------------------------------------------------------------------------

    \729\ Insurance Information Institute, 2008, ``Average
Expenditures for Auto Insurance By State, 2005-2006.'' Available at
http://www.iii.org/media/facts/statsbyissue/auto/ (last accessed
March 15, 2010).
    \730\ $29,678/$26,201 = 1.1327 * $22,651 = $25,657 average price
for light trucks. In 2006, passenger cars were 54 percent of the on-
road fleet and light trucks were 46 percent of the on-road fleet,
resulting in an average light vehicle price for 2006 of $24,033.
---------------------------------------------------------------------------

    Dividing the insurance cost by the average price of a new vehicle
gives the proportion of comprehensive plus collision insurance as 1.86
percent of the price of a vehicle. If we assume that this premium is
proportional to the new vehicle price, it represents about 1.86 percent
of the new vehicle price and insurance is paid each year for the five
year period we are considering for payback. Discounting that stream of
insurance costs back to present value indicates that the present value
of the component of insurance costs that vary with vehicle price is
equal to 8.5 percent of the vehicle's price at a 3 percent discount
rate.
    Third, NHTSA considered that 70 percent of new vehicle purchasers
take out loans to finance their purchase. The average new vehicle loan
is for 5 years at a 6 percent rate.\731\ At these terms, the average
person taking a loan will pay 16 percent more for their vehicle over
the 5 years than a consumer paying cash for

the vehicle at the time of purchase.\732\ Discounting the additional
3.2 percent (16 percent/5 years) per year over the 5 years using a 3
percent mid-year discount rate \733\ results in a discounted present
value of 14.87 percent higher for those taking a loan. Multiplying that
by the 70 percent of consumers who take out a loan means that the
average consumer would pay 10.2 percent more than the retail price for
loans the consumer discounted at a 3 percent discount rate.
---------------------------------------------------------------------------

    \731\ New car loan rates in 2007 averaged about 7.8 percent at
commercial banks and 4.5 percent at auto finance companies, so their
average is close to 7 percent.
    \732\ Based on http://www.bankrate.com auto loan calculator for
a 5 year loan at 6 percent.
    \733\ For a 3 percent discount rate, the summation of 3.2
percent x 0.9853 in year one, 3.2 x 0.9566 in year two, 3.2 x 0.9288
in year three, 3.2 x 0.9017 in year 4, and 3.2 x 0.8755 in year
five.
---------------------------------------------------------------------------

    Fourth, NHTSA considered the residual value (or resale value) of
the vehicle after 5 years and expressed this as a percentage of the new
vehicle price. In other words, if the price of the vehicle increases
due to fuel economy technologies, the resale value of the vehicle will
go up proportionately. The average resale price of a vehicle after 5
years is about 35 percent of the original purchase price.\734\
Discounting the residual value back 5 years using a 3 percent discount
rate (35 percent * .8755) gives an effective residual value at new of
30.6 percent.
---------------------------------------------------------------------------

    \734\ Consumer Reports, August 2008, ``What That Car Really
Costs to Own.'' Available at http://www.consumerreports.org/cro/
cars/pricing/what-that-car-really-costs-to-own-4-08/overview/what-
that-car-really-costs-to-own-ov.htm (last accessed February 26,
2010).
---------------------------------------------------------------------------

    NHTSA then adds these four factors together. At a 3 percent
discount rate, the consumer considers she could get 30.6 percent back
upon resale in 5 years, but will pay 5.5 percent more for taxes, 8.5
percent more in insurance, and 10.2 percent more for loans, results in
a 6.48 percent return on the increase in price for fuel economy
technology. Thus, the increase in price per vehicle is multiplied by
0.9352 (1-0.0648) before subtracting the fuel savings to determine the
overall net consumer valuation of the increase of costs on her purchase
decision.
    The following table shows the estimated impact on sales for
passenger cars, light trucks, and both combined for the final
standards. For all model years except MY 2012, NHTSA anticipates an
increase in sales, based on consumers valuing the improvement in fuel
economy more than the increase in price.

            Table IV.G.5-1--Potential Impact on Sales, Passenger Cars and Light Trucks, and Combined
----------------------------------------------------------------------------------------------------------------
                                      MY 2012         MY 2013         MY 2014         MY 2015         MY 2016
----------------------------------------------------------------------------------------------------------------
Passenger Cars..................         -65,202          46,801         103,422         168,334         227,039
Light Trucks....................          48,561         106,658         139,893         171,920         213,868
                                 -------------------------------------------------------------------------------
    Combined....................         -16,641         153,459         243,315         340,255         440,907
----------------------------------------------------------------------------------------------------------------

    The estimates provided in the tables above are meant to be
illustrative rather than a definitive prediction. When viewed at the
industry-wide level, they give a general indication of the potential
impact on vehicle sales. As shown below, the overall impact is positive
and growing over time for both cars and trucks. Because the fuel
savings associated with this rule are expected to exceed the technology
costs, the effective prices of vehicles (the adjusted increase in
technology cost less the fuel savings over five years) to consumers
will fall, and consumers will buy more new vehicles. As a result, the
lower net cost of the vehicles is projected to lead to an increase in
sales for both cars and trucks.
    As discussed above, this result depends on the assumption that more
fuel efficient vehicles yielding net consumer benefits over their first
five years would not otherwise be offered, due to market failures on
the part of vehicle manufacturers. However, vehicle models that achieve
the fuel economy targets prescribed by today's rulemaking are already
available, and consumers do not currently purchase a combination of
them that meets the fuel economy levels this rule requires. This
suggests that the rule may not result in an increase in vehicle sales,
because it does not alter how consumers currently make decisions about
which models to purchase. In addition, this analysis has not accounted
for a number of factors that might affect consumer vehicle purchases,
such as changing market conditions, changes in vehicle characteristics
that might accompany improvements in fuel economy, or consumers
considering a different ``payback period'' for their fuel economy
purchases. If consumers use a shorter payback period, sales will
increase by less than estimated here, and might even decline, while if
consumers use longer payback periods, the increase in sales is likely
to be larger than reported. In addition, because this is an aggregate
analysis some individual consumers (including those who drive less than
estimated here) will receive lower net benefits from the increase n
fuel economy this rule requires, while others (who drive more than
estimated here) will realize even greater savings. These
complications--which have not been taken into account in our analysis--
add considerable uncertainty to our estimates of changes in vehicle
sales resulting from this rule.
6. Potential Unquantified Consumer Welfare Impacts of the Final
Standards
    The underlying goal of the CAFE and GHG standards is to increase
social welfare, in the broadest sense, and as shown in earlier
sections, NHTSA projects that the MY 2012-2016 CAFE standards will
yield large net social benefits. In its net benefits analysis, NHTSA
made every attempt to include all of the costs and benefits that could
be identified and quantified.
    It is important to highlight several features of the rulemaking
analysis that NHTSA believes gives high confidence to its conclusion
that there are large net social benefits from these standards. First,
the agencies adopted footprint-based standards in large part so that
the full range of vehicle choices in the marketplace could be
maintained. Second, the agencies performed a rigorous technological
feasibility, cost, and leadtime analysis that showed that the standards
could be met while maintaining current levels of other vehicle
attributes such as safety, utility, and performance. Third, widespread
automaker support for the standards, in conjunction with the future
product plans that have been provided by automakers to the agencies and
recent industry announcements on new product offerings, provides
further indication that the standards can be met while retaining the
full spectrum of vehicle choices.
    Notwithstanding these points, and its high degree of confidence
that the benefits amply justify the costs, NHTSA recognizes the
possibility of consumer welfare impacts that are not accounted for in
its analysis of benefits and costs

from higher CAFE standards. The agencies received public comments
expressing diverging views on this issue. The majority of commenters
suggested that potential losses in welfare from requiring higher fuel
economy were unlikely to be a significant concern, because of the many
imperfections in the market for fuel economy. In contrast, other
comments suggested that potential unidentified and unquantified
consumer welfare losses could be large. Acknowledging the comments, the
FRIA provides a sensitivity analysis showing how various levels of
unidentified consumer welfare losses would affect the projected net
social benefits from the CAFE standards established by this final rule.
    There are two viewpoints for evaluating the costs and benefits of
the increase in CAFE standards: The private perspective of vehicle
buyers themselves on the higher fuel economy levels that the rule would
require, and the economy-wide or ``social'' perspective on the costs
and benefits of requiring higher fuel economy. It is important, in
short, to distinguish between costs and benefits that are ``private''
and costs and benefits that are ``social.'' The agency's analysis of
benefits and costs from requiring higher fuel efficiency, presented
above, includes several categories of benefits (``social benefits'')
that are not limited to automobile purchasers and that extend
throughout the U.S. economy, such as reductions in the energy security
costs associated with U.S. petroleum imports and in the economic
damages expected to result from climate change. In contrast, other
categories of benefits--principally the economic value of future fuel
savings projected to result from higher fuel economy--will be
experienced exclusively by the initial purchasers and subsequent owners
of vehicle models whose fuel economy manufacturers elect to improve as
part of their strategies for complying with higher CAFE standards
(``private benefits'').
    Although the economy-wide or ``social'' benefits from requiring
higher fuel economy represent an important share of the total economic
benefits from raising CAFE standards, NHTSA estimates that benefits to
vehicle buyers themselves will significantly exceed the costs of
complying with the stricter fuel economy standards this rule
establishes, as shown above. Since the agency also assumes that the
costs of new technologies manufacturers will employ to improve fuel
economy will ultimately be shifted to vehicle buyers in the form of
higher purchase prices, NHTSA concludes that the benefits to vehicle
buyers from requiring higher fuel efficiency will far outweigh the
costs they will be required to pay to obtain it. However, this raises
the question of why current purchasing patterns do not already result
in higher average fuel economy, and why stricter fuel efficiency
standards should be necessary to achieve that goal.
    As an illustration, Table IV.G.6-1 reports the agency's estimates
of the average lifetime values of fuel savings for MY 2012-2016
passenger cars and light trucks calculated using future retail fuel
prices, which are those likely to be used by vehicle buyers to project
the value of fuel savings they expect from higher fuel economy. The
table compares NHTSA's estimates of the average lifetime value of fuel
savings for cars and light trucks to the price increases it projects to
result as manufacturers attempt to recover their costs for complying
with increased CAFE standards for those model years by increasing
vehicle sales prices. As the table shows, the agency's estimates of the
present value of lifetime fuel savings (discounted using the OMB-
recommended 3% rate) substantially outweigh projected vehicle price
increases for both cars and light trucks in every model year, even
under the assumption that all of manufacturers' technology outlays are
passed on to buyers in the form of higher selling prices for new cars
and light trucks. By model year 2016, NHTSA projects that average
lifetime fuel savings will exceed the average price increase by more
than $2,000 for cars, and by more than $2,700 for light trucks.

                                       Table IV.G.6-1--Value of Lifetime Fuel Savings vs. Vehicle Price Increases
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Model year
                 Fleet                               Measure             -------------------------------------------------------------------------------
                                                                               2012            2013            2014            2015            2016
--------------------------------------------------------------------------------------------------------------------------------------------------------
Passenger Cars........................  Value of Fuel Savings...........            $759          $1,349          $1,914          $2,480          $2,932
                                        Average Price Increase..........             505             573             690             799             907
                                                                         -------------------------------------------------------------------------------
                                           Difference...................             255             897           1,264           1,680           2,025
Light Trucks..........................  Value of Fuel Savings...........             828           1,634           2,277           2,887           3,700
                                        Average Price Increase..........             322             416             621             752             961
                                                                         -------------------------------------------------------------------------------
                                           Difference...................             506           1,218           1,656           2,135           2,739
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The comparisons above immediately raise the question of why current
vehicle purchasing patterns do not already result in average fuel
economy levels approaching those that this rule would require, and why
stricter CAFE standards should be necessary to increase the fuel
economy of new cars and light trucks. They also raise the question of
why manufacturers do not elect to provide higher fuel economy even in
the absence of increases in CAFE standards, since the comparisons in
Table IV.G.6-1 suggest that doing so would increase the value of many
new vehicle models by far more than it would raise the cost of
producing them (and thus raise their purchase prices), thus presumably
increasing sales of new vehicles. More specifically, why would
potential buyers of new vehicles hesitate to make investments in higher
fuel economy that would produce the substantial economic returns
illustrated by the comparisons presented in Table IV.G.6-1? And why
would manufacturers voluntarily forego opportunities to increase the
attractiveness, value, and competitive positioning of their car and
light truck models by improving their fuel economy?
    The majority of comments received on this topic answered these
questions by pointing out many reasons why the market for vehicle fuel
economy does not appear to work perfectly, and accordingly, that
properly designed CAFE standards would be expected to increase consumer
welfare. Some of these imperfections might stem from standard market
failures (such as an absence of adequate information on the part of
consumers); some of them might involve findings in behavioral

economics (including, for example, a lack of sufficient consumer
attention to long-term savings, or a lack of salience, to consumers at
the time of purchase, of relevant benefits, including fuel and time
savings). Both theoretical and empirical research suggests that many
consumers do not make energy-efficient investments even when those
investments would pay off in the relatively short-term.\735\ This
research is in line with related findings that consumers may underweigh
benefits and costs that are less salient or that will be realized only
in the future.\736\
---------------------------------------------------------------------------

    \735\ Jaffe, A. B., and Stavins, R. N. (1994). The Energy
Paradox and the Diffusion of Conservation Technology. Resource and
Energy Economics, 16(2); see Hunt Alcott and Nathan Wozny, Gasoline
Prices, Fuel Economy, and the Energy Paradox (2010, available at
http://web.mit.edu/allcott/www/Allcott%20and%20Wozny%202010%20-
%20Gasoline%20Prices,%20Fuel%20Economy,%20and%20the%20Energy%20Parado
x.pdf.
    \736\ Hossain, Janjim, and John Morgan (2009). `` * * * Plus
Shipping and Handling: Revenue (Non)Equivalence in Field Experiments
on eBay,'' Advances in Economic Analysis and Policy vol. 6; Barber,
Brad, Terrence Odean, and Lu Zheng (2005). ``Out of Sight, Out of
Mind: The Effects of Expenses on Mutual Fund Flows,'' Journal of
Business vol. 78, no. 6, pp. 2095-2020.
---------------------------------------------------------------------------

    Existing work provides support for the agency's conclusion that the
benefits buyers will receive from requiring manufacturers to increase
fuel economy far outweigh the costs they will pay to acquire those
benefits, by identifying aspects of normal behavior that may explain
buyers' current reluctance to purchase vehicles whose higher fuel
economy appears to offer an attractive economic return. For example,
consumers' understandable aversion to the prospect of losses (``loss
aversion'') may produce an exaggerated sense of uncertainty about the
value of future fuel savings, making consumers reluctant to purchase a
more fuel-efficient vehicle seem unattractive, even when doing so is
likely to be a sound economic decision. Compare the finding in Greene
et al. (2009) to the effect that the expected net present value of
increasing the fuel economy of a passenger car from 28 to 35 miles per
gallon falls from $405 when calculated using standard net present value
calculations, to nearly zero when uncertainty regarding future cost
savings is taken into account.\737\
---------------------------------------------------------------------------

    \737\ Greene, D., J. German, and M. Delucchi (2009). ``Fuel
Economy: The Case for Market Failure'' in Reducing Climate Impacts
in the Transportation Sector, Sperling, D., and J. Cannon, eds.
Springer Science. Surprisingly, the authors find that uncertainty
regarding the future price of gasoline appears to be less important
than uncertainty surrounding the expected lifetimes of new vehicles.
(Docket NHTSA-2009-0059-0154).
---------------------------------------------------------------------------

    The well-known finding that as gas prices rise, consumers show more
willingness to pay for fuel-efficient vehicles is not inconsistent with
the possibility that many consumers undervalue gasoline costs and fuel
economy at the time of purchase. In ordinary circumstances, such costs
may be a relatively ``shrouded'' attribute in consumers' decisions, in
part because the savings are cumulative and extend over a significant
period of time. This claim fits well with recent findings to the effect
that many consumers are willing to pay less than $1 upfront to obtain a
$1 benefit reduction in discounted gasoline costs.\738\
---------------------------------------------------------------------------

    \738\ See Alcott and Wozny.
---------------------------------------------------------------------------

    Some research suggests that the consumers' apparent unwillingness
to purchase more fuel efficient vehicles stems from their inability to
value future fuel savings correctly. For example, Larrick and Soll
(2008) find evidence that consumers do not understand how to translate
changes in fuel economy, which is denominated in miles per gallon, into
resulting changes in fuel consumption, measured in gallons per time
period.\739\ Sanstad and Howarth (1994) argue that consumers resort to
imprecise but convenient rules of thumb to compare vehicles that offer
different fuel economy ratings, and that this behavior can cause many
buyers to underestimate the value of fuel savings, particularly from
significant increases in fuel economy.\740\ If the behavior identified
in these studies is widespread, then the agency's estimates suggesting
that the benefits to vehicle owners from requiring higher fuel economy
significantly exceed the costs of providing it are indeed likely to be
correct.
---------------------------------------------------------------------------

    \739\ Larrick, R. P., and J.B. Soll (2008). ``The MPG
illusion.'' Science 320: 1593-1594.
    \740\ Sanstad, A., and R. Howarth (1994). `` `Normal' Markets,
Market Imperfections, and Energy Efficiency.'' Energy Policy 22(10):
811-818.
---------------------------------------------------------------------------

    Another possible reconciliation of the agency's claim that the
average vehicle buyer will experience large fuel savings from the
higher CAFE standards this rule establishes with the fact that the
average fuel economy of vehicles currently purchased falls well short
of the new standards is that the values of future savings from higher
fuel economy vary widely across consumers. As an illustration, one
recent review of consumers' willingness to pay for improved fuel
economy found estimates that varied from less than 1% to almost ten
times the present value of the resulting fuel savings when those are
discounted at 7% over the vehicle's expected lifetime.\741\ The wide
variation in these estimates undoubtedly reflects methodological and
measurement differences among the studies surveyed. However, it may
also reveal that the expected savings from purchasing a vehicle with
higher fuel economy vary widely among individuals, because they travel
different amounts, have different driving styles, or simply have
varying expectations about future fuel prices.
---------------------------------------------------------------------------

    \741\ Greene, David L., ``How Consumers Value Fuel Economy: A
Literature Review,'' Draft report to U.S. Environmental Protection
Agency, Oak Ridge National Laboratory, December 29, 2009; see Table
10, p. 37.
    See also David Greene and Jin-Tan Liu (1988). ``Automotive Fuel
Economy Improvements and Consumers' Surplus.'' Transportation
Research Part A 22A(3): 203-218 (Docket EPA-HQ-OAR-2009-0472-0045).
The study actually calculated the willingness to pay for reduced
vehicle operating costs, of which vehicle fuel economy is a major
component.
---------------------------------------------------------------------------

    These differences reflect the possibility that many buyers with
high valuations of increased fuel economy already purchase vehicle
models that offer it, while those with lower values of fuel economy
emphasize other vehicle attributes in their purchasing decisions. A
related possibility is that because the effects of differing fuel
economy levels are relatively modest when compared to those provided by
other, more prominent features of new vehicles--passenger and cargo-
carrying capacity, performance, safety, etc.--it is simply not in many
shoppers' interest to spend the time and effort necessary to determine
the economic value of higher fuel economy, attempt to isolate the
component of a new vehicle's selling price that is related to its fuel
economy, and compare these two. (This possibility is consistent with
the view that fuel economy is a relatively ``shrouded'' attribute.) In
either case, the agency's estimates of the average value of fuel
savings that will result from requiring cars and light trucks to
achieve higher fuel economy may be correct, but those savings may not
be large enough to lead a sufficient number of buyers to push for
vehicles with higher fuel economy to increase average fuel economy from
its current levels.
    Defects in the market for cars and light trucks could also lead
manufacturers to undersupply fuel economy, even in cases where many
buyers were willing to pay the increased prices necessary to provide
it.
    To be sure, the relevant market, taken as a whole, has a great deal
of competition. But even in those circumstances, there may not such
competition with respect to all vehicle attributes. Incomplete or
``asymmetric'' access to information on vehicle attributes such as fuel
economy--whereby manufacturers of new vehicles or sellers of used cars
and light trucks

have more complete knowledge of the value of purchasing higher fuel
economy, than do potential buyers--may also prevents sellers of new or
used vehicles from capturing its full value. In this situation, the
level of fuel efficiency provided in the markets for new or used
vehicles might remain persistently lower than that demanded by
potential buyers (at least if they are well-informed).
    It is also possible that deliberate decisions by manufacturers of
cars and light trucks, rather than constraints on the combinations of
fuel economy, carrying capacity, and performance that manufacturers can
offer using current technologies, limit the range of fuel economy
available to buyers within individual vehicle market segments, such as
full-size automobiles, small SUVs, or minivans. As an illustration,
once a potential buyer has decided to purchase a minivan, the range of
fuel economy among current models extends only from 18 to 24 mpg.\742\
Manufacturers might make such decisions if they underestimate the
premiums that shoppers in certain market segments are willing to pay
for more fuel-efficient versions of the vehicle models they currently
offer to prospective buyers within those segments. If this occurs,
manufacturers may fail to supply levels of fuel efficiency as high as
those buyers are willing to pay for, and the average fuel efficiency of
their entire new vehicle fleets could remain below the levels that
potential buyers demand and are willing to pay for. (Of course this
possibility is most realistic if it is also assumed that buyers are
imperfectly informed or if fuel economy savings are not sufficiently
salient.) However, other commenters suggested that, if one assumes a
perfectly functioning market, there must be unidentified consumer
welfare losses that could offset the private fuel savings that
consumers are currently foregoing.
---------------------------------------------------------------------------

    \742\ This is the range of combined city and highway fuel
economy levels from lowest (Toyota Siena 4WD) to highest (Mazda 5)
available for model year 2010; http://www.fueleconomy.gov/feg/
bestworstEPAtrucks.htm (last accessed February 15, 2010).
---------------------------------------------------------------------------

    One explanation for this apparent paradox is that NHTSA's estimates
of benefits and costs from requiring manufacturers to improve the fuel
efficiency of their vehicle models do not match potential vehicle
buyers' assessment of the likely benefits and costs from requiring
higher fuel efficiency. This could occur because the agency's
underlying assumptions about some of the factors that affect the value
of fuel savings differ from those made by potential buyers, because
NHTSA has used different estimates for some components of the benefits
from saving fuel than do buyers, or because the agency has failed to
account for some potential costs of achieving higher fuel economy.
    For example, buyers may not value increased fuel economy as highly
as the agencies' calculations suggest, because they have shorter time
horizons than the full vehicle lifetimes assumed by NHTSA and EPA, or
because, when buying vehicles, they discount future fuel future savings
using higher rates than those prescribed by OMB for evaluating Federal
regulations. Potential buyers may also anticipate lower fuel prices in
the future than those forecast by the Energy Information
Administration, or may expect larger differences between vehicles rated
and actual on-road MPG levels than the agencies' estimate.
    To illustrate the first of these possibilities, Table IV.G.6-2
shows the effect of differing assumptions about vehicle buyers' time
horizons for assessing the value of future fuel savings. Specifically,
the table compares the average value of fuel savings from purchasing a
MY 2016 car or light truck when fuel savings are evaluated over
different time horizons to the estimated increase in its price. This
table shows that as reported previously in Table IV.G.6-2, when fuel
savings are evaluated over the entire expected lifetime of a MY 2016
car (approximately 14 years) or light truck (about 16 years), their
discounted present value (using the OMB-recommended 3% discount rate)
lifetime fuel savings exceeds the estimated average price increase by
more than $2,000 for cars and by more than $2,700 for light trucks.
    If buyers are instead assumed to consider fuel savings over a 10-
year time horizon, however, the present value of fuel savings exceeds
the projected price increase for a MY 2016 car by about $1,300, and by
somewhat more than $1,500 for a MY 2016 light truck. Finally, Table
VI.G.6-2 shows that under the assumption that buyers consider fuel
savings only over the length of time for which they typically finance
new car purchases (slightly more than 5 years during 2009), the value
of fuel savings exceeds the estimated increase in the price of a MY
2016 car by only about $350, and the corresponding difference is
reduced to slightly more than $500 for a MY 2016 light truck.
---------------------------------------------------------------------------

    \743\ Expected lifetimes are approximately 14 years for cars and
16 years for light trucks.
    \744\ Average term on new vehicle loans made by auto finance
companies during 2009 was 62 months; See Board of Governors of the
Federal Reserve System, Federal Reserve Statistical Release G.19,
Consumer Credit. Available at http://www.federalreserve.gov/
releases/g19/Current (last accessed March 1, 2010).

  Table IV.G.6-2--Value of Fuel Savings vs. Vehicle Price Increases With Alternative Assumptions About Vehicle
                                               Buyer Time Horizons
----------------------------------------------------------------------------------------------------------------
                                                                       Value over alternative time horizons
                                                                 -----------------------------------------------
                Vehicle                          Measure             Expected                      Average loan
                                                                  lifetime \743\     10 years       term \744\
----------------------------------------------------------------------------------------------------------------
MY 2016 Passenger Car.................  Fuel Savings............          $2,932          $2,180          $1,254
                                        Price Increase..........             907             907             907
                                                                 -----------------------------------------------
                                           Difference...........           2,025           1,273             347
MY 2016 Light Truck...................  Fuel Savings............           3,700           2,508           1,484
                                        Price Increase..........             961             961             961
                                                                 -----------------------------------------------
                                           Difference...........           2,739           1,547             523
----------------------------------------------------------------------------------------------------------------

    Potential vehicle buyers may also discount future fuel future
savings using higher rates than those typically used to evaluate
Federal regulations. OMB guidance prescribes that future benefits and
costs of regulations that mainly

affect private consumption decisions, as will be the case if
manufacturers' costs for complying with higher fuel economy standards
are passed on to vehicle buyers, should be discounted using a
consumption rate of time preference.\745\ OMB estimates that savers
currently discount future consumption at an average real or inflation-
adjusted rate of about 3 percent when they face little risk about its
likely level, which makes it a reasonable estimate of the consumption
rate of time preference. However, vehicle buyers may view the value of
future fuel savings that results from purchasing a vehicle with higher
fuel economy as risky or uncertain, or they may instead discount future
consumption at rates reflecting their costs for financing the higher
capital outlays required to purchase more fuel-efficient models. In
either case, they may discount future fuel savings at rates well above
the 3% assumed in NHTSA's evaluation in their purchase decisions.
---------------------------------------------------------------------------

    \745\ Office of Management and Budget, Circular A-4,
``Regulatory Analysis,'' September 17, 2003, 33. Available at http:/
/www.whitehouse.gov/omb/assets/regulatory_matters_pdf/a-4.pdf
(last accessed March 1, 2010).
---------------------------------------------------------------------------

    Table IV.G.6-3 shows the effects of higher discount rates on
vehicle buyers' evaluation of the fuel savings projected to result from
the CAFE standards established by this rule, again using MY 2016
passenger cars and light trucks as an example. As Table IV.G.6-1 showed
previously, average future fuel savings discounted at the OMB 3%
consumer rate exceed the agency's estimated price increases by more
than $2,000 for MY 2016 passenger cars and by more than $2,700 for MY
2016 light trucks. If vehicle buyers instead discount future fuel
savings at the average new-car loan rate during 2009 (6.7%), however,
these differences decline to slightly more than $1,400 for cars and
$1,900 for light trucks, as Table IV.G.6-3 illustrates.
    This is a potentially plausible alternative assumption, because
buyers are likely to finance the increases in purchase prices resulting
from compliance with higher CAFE standards as part of the process of
financing the vehicle purchase itself. Finally, as the table also
shows, discounting future fuel savings using a consumer credit card
rate (which averaged 13.4% during 2009) reduces these differences to
less than $800 for a MY 2016 passenger car and less than $1,100 for the
typical MY 2016 light truck. Note, however, that even at these higher
discount rates, the table shows that the private net benefits from
purchasing a vehicle with the average level of fuel economy this rule
requires remains large.

  Table IV.G.6-3--Value of Fuel Savings vs. Vehicle Price Increases With Alternative Assumptions About Consumer
                                                 Discount Rates
----------------------------------------------------------------------------------------------------------------
                                                               Value over alternative time horizons
                                                 ---------------------------------------------------------------
                                                                                Consumer
            Vehicle                  Measure       OMB consumer    New car loan   OMB investment    credit card
                                                    rate  (3%)     rate  (6.7%)     rate  (7%)     rate  (13.4%)
                                                                       \746\                           \747\
----------------------------------------------------------------------------------------------------------------
MY 2016 Passenger Car.........  Fuel Savings....          $2,932          $2,336          $2,300          $1,669
                                Price Increase..             907             907             907             907
                                                 ---------------------------------------------------------------
                                   Difference...           2,025           1,429           1,393             762
MY 2016 Light Truck...........  Fuel Savings....           3,700           2,884           2,836           2,030
                                Price Increase..             961             961             961             961
                                                 ---------------------------------------------------------------
                                   Difference...           2,739           1,923           1,875           1,069
----------------------------------------------------------------------------------------------------------------

    Combinations of a shorter time horizon and a higher discount rate
could further reduce or even eliminate the difference between the value
of fuel savings and the agency's estimates of increases in vehicle
prices. One plausible combination would be for buyers to discount fuel
savings over the term of a new car loan, using the interest rate on
that loan as a discount rate. Doing so would reduce the amount by which
future fuel savings exceed the estimated increase in the prices of MY
2016 vehicles to about $340 for passenger cars and $570 for light
trucks. Some evidence also suggests directly that vehicle buyers may
employ combinations of higher discount rates and shorter time horizons
for their purchase decisions; for example, consumers surveyed by Kubik
(2006) reported that fuel savings would have to be adequate to pay back
the additional purchase price of a more fuel-efficient vehicle in less
than 3 years to persuade a typical buyer to purchase it.\748\ As these
comparisons and evidence illustrate, reasonable alternative assumptions
about how consumers might evaluate the major benefit from requiring
higher fuel economy can significantly affect the benefits they expect
to receive when they decide to purchase a new vehicle.
---------------------------------------------------------------------------

    \746\ Average rate on 48-month new vehicle loans made by
commercial banks during 2009 was 6.72%; See Board of Governors of
the Federal Reserve System, Federal Reserve Statistical Release
G.19, Consumer Credit. Available at http://www.federalreserve.gov/
releases/g19/Current (last accessed March 1, 2010).
    \747\ Average rate on consumer credit card accounts at
commercial banks during 2009 was 13.4%; See Board of Governors of
the Federal Reserve System, Federal Reserve Statistical Release
G.19, Consumer Credit. Available at http://www.federalreserve.gov/
releases/g19/Current (last accessed March 1, 2010).
    \748\ Kubik, M. (2006). Consumer Views on Transportation and
Energy. Second Edition. Technical Report: National Renewable Energy
Laboratory. Available at Docket No. NHTSA-2009-0059-0038.
---------------------------------------------------------------------------

    Imaginable combinations of shorter time horizons, higher discount
rates, and lower expectations about future fuel prices or annual
vehicle use and fuel savings could make potential buyers hesitant or
even unwilling to purchase vehicles offering the increased fuel economy
levels this rule will require manufacturers to produce. At the same
time, they might cause vehicle buyers' collective assessment of the
aggregate benefits and costs of this rule to differ from NHTSA's
estimates. If consumers' views about critical variables such as future
fuel prices or the appropriate discount rate differ sufficiently from
the assumptions used by the agency, some or perhaps many potential
vehicle buyers might conclude that the value of fuel savings and other
benefits they will experience from higher fuel economy are not
sufficient to justify the increase in purchase prices they expect to
pay. This would explain why their current choices among available
models do not result in average fuel economy levels

approaching those this rule would require.
    Another possibility is that achieving the fuel economy improvements
required by stricter fuel economy standards might mean that
manufacturers will forego planned future improvements in performance,
carrying capacity, safety, or other features of their vehicle models
that represent important sources of utility to vehicle owners. Although
the specific economic values that vehicle buyers attach to individual
vehicle attributes such as fuel economy, performance, passenger- and
cargo-carrying capacity, and other sources of vehicles' utility are
difficult to infer from their purchasing decisions and vehicle prices,
changes in vehicle attributes can significantly affect the overall
utility that vehicles offer to potential buyers. Foregoing future
improvements in these or other highly-valued attributes could be viewed
by potential buyers as an additional cost of improving fuel economy.
    As indicated in its previous discussion of technology costs, NHTSA
has approached this potential problem by developing cost estimates for
fuel economy-improving technologies that include allowances for any
additional manufacturing costs that would be necessary to maintain the
reference fleet (or baseline) levels of performance, comfort, capacity,
or safety of light-duty vehicle models to which those technologies are
applied. In doing so, the agency followed the precedent established by
the 2002 NAS Report on improving fuel economy, which estimated
``constant performance and utility'' costs for technologies that
manufacturers could employ to increase the fuel efficiency of cars or
light trucks. Although NHTSA has revised its estimates of
manufacturers' costs for some technologies significantly for use in
this rulemaking, these revised estimates are still intended to
represent costs that would allow manufacturers to maintain the
performance, safety, carrying capacity, and utility of vehicle models
while improving their fuel economy. The adoption of the footprint-based
standards also addresses this concern.
    Finally, vehicle buyers may simply prefer the choices of vehicle
models they now have available to the combinations of price, fuel
economy, and other attributes that manufacturers are likely to offer
when required to achieve higher overall fuel economy. If this is the
case, their choices among models--and even some buyers' decisions about
whether to purchase a new vehicle--will respond accordingly, and their
responses to these new choices will reduce their overall welfare. Some
may buy models with combinations of price, fuel efficiency, and other
attributes that they consider less desirable than those they would
otherwise have purchased, while others may simply postpone buying a new
vehicle. The use of the footprint-based standards, the level of
stringency, and the lead time this rule allows manufacturers are all
intended to ensure that this does not occur. Although the potential
losses in buyers' welfare associated with these responses cannot be
large enough to offset the estimated value of fuel savings reported in
the agencies' analyses, they might reduce the benefits from requiring
manufacturers to achieve higher fuel efficiency, particularly in
combination with the other possibilities outlined previously.
    As the foregoing discussion suggests, the agency does not have a
complete answer to the question of why the apparently large differences
between its estimates of benefits from requiring higher fuel economy
and the costs of supplying it do not result in higher average fuel
economy for new cars and light trucks in the absence of this rule. One
explanation is that NHTSA's estimates are reasonable, and that for the
reasons outlined above, the market for fuel economy is not operating
efficiently. NHTSA believes that the existing literature gives support
for the view that because of various market failures (including
behavioral factors, such as emphasis on the short-term and a lack of
salience), there are likely to be substantial private gains, on net,
from the rule, but it will continue to investigate new empirical
literature as it becomes available.
    NHTSA acknowledges the possibility that it has incorrectly
characterized the impact of the CAFE standards this rule establishes on
consumers. To recognize this possibility, this section presents an
alternative accounting of the benefits and costs of CAFE standards for
MYs 2012-2016 passenger cars and light trucks and discusses its
implications. Table IV.G.6-4 displays the economic impacts of the rule
as viewed from the perspective of potential buyers, and also reconciles
the estimated net benefits of the rule as they are likely to be viewed
by vehicle buyers with its net benefits to the economy as a whole.
    As the table shows, the total benefits to vehicle buyers (line 4)
consist of the value of fuel savings at retail fuel prices (line 1),
the economic value of vehicle occupants' savings in refueling time
(line 2), and the economic benefits from added rebound-effect driving
(line 3). As the zero entries in line 5 of the table suggest, the
agency's estimate of the retail value of fuel savings reported in line
1 is assumed to be correct, and no losses in consumer welfare from
changes in vehicle attributes (other than those from increases in
vehicle prices) are assumed to occur. Thus there is no reduction in the
total private benefits to vehicle owners, so that net private benefits
to vehicle buyers (line 6) are equal to total private benefits
(reported previously in line 4).
    As Table IV.G.6-4 also shows, the decline in fuel tax revenues
(line 7) that results from reduced fuel purchases is in effect a social
cost that offsets part of the benefits of fuel savings to vehicle
buyers (line 1).\749\ Thus the sum of lines 1 and 7 is the savings in
fuel production costs that was reported previously as the value of fuel
savings at pre-tax prices in the agency's usual accounting of benefits
and costs. Lines 8 and 9 of Table IV.G.6-4 report the value of
reductions in air pollution and climate-related externalities resulting
from lower emissions during fuel production and consumption, while line
10 reports the savings in energy security externalities to the U.S.
economy from reduced consumption and imports of crude petroleum and
refined fuel. Line 12 reports the costs of increased congestion delays,
accidents, and noise that result from additional driving due to the
fuel economy rebound effect; net social benefits (line 13) is thus the
sum of the change in fuel tax revenues, the reduction in environmental
and energy security externalities, and increased costs from added
driving.
---------------------------------------------------------------------------

    \749\ Strictly speaking, fuel taxes represent a transfer of
resources from consumers of fuel to government agencies and not a
use of economic resources. Reducing the volume of fuel purchases
simply reduces the value of this transfer, and thus cannot produce a
real economic cost or benefit. Representing the change in fuel tax
revenues in effect as an economy-wide cost is necessary to offset
the portion of fuel savings included in line 1 that represents
savings in fuel tax payments by consumers. This prevents the savings
in tax revenues from being counted as a benefit from the economy-
wide perspective.
---------------------------------------------------------------------------

    Line 14 of Table IV.G.6-4 shows manufacturers' technology outlays
for meeting higher CAFE standards for passenger cars and light trucks,
which represent the principal cost of requiring higher fuel economy.
The net total benefits (line 15 of the table) resulting from the rule
consist of the sum of private (line 6) and external (line 13) benefits,
minus technology costs (line 14); as expected, the figures reported in
line 15 of the table are identical to those reported previously in the
agency's customary format.
    Table IV.G.6-4 highlights several important features of this rule's

economic impacts. First, comparing the rule's net private (line 6) and
external (line 13) benefits makes it clear that a substantial majority
of the benefits from requiring higher fuel economy are experienced by
vehicle buyers, with only a small share distributed throughout the
remainder of the U.S. economy. In turn, the vast majority of private
benefits stem from fuel savings. External benefits are small because
the value of reductions in environmental and energy security
externalities is almost exactly offset by the decline in fuel tax
revenues and the increased costs associated with added vehicle use via
the rebound effect of higher fuel economy. As a consequence, the net
economic benefits of the rule mirror closely its benefits to private
vehicle buyers and the technology costs for achieving higher fuel
economy, again highlighting the importance of accounting for any other
effects of the rule on the economic welfare of vehicle buyers.

 Table IV.G.6-4--Private, Social, and Total Benefits and Costs of MY 2012-16 CAFE Standards: Passenger Cars Plus
                                                  Light Trucks
----------------------------------------------------------------------------------------------------------------
                                                                     Model year
                                   -----------------------------------------------------------------------------
               Entry                                                                                Total,
                                        2012         2013         2014         2015         2016      2012-2016
----------------------------------------------------------------------------------------------------------------
 1. Value of Fuel Savings (at             $10.5        $22.9        $32.9        $42.5        $52.7       $161.6
 Retail Fuel Prices)..............
 2. Savings in Refueling Time.....          0.7          1.4          1.9          2.5          3.0          9.4
 3. Consumer Surplus from Added             0.7          1.5          2.2          2.8          3.4         10.5
 Driving..........................
 4. Total Private Benefits (= 1+ 2         11.9         25.8         37.0         47.8         59.0        181.5
 + 3).............................
 5. Reduction in Private Benefits.          0.0          0.0          0.0          0.0          0.0          0.0
 6. Net Private Benefits (= 1 + 2)         11.9         25.8         37.0         47.8         59.0        181.5
 7. Change in Fuel Tax Revenues...         -1.3         -2.7         -3.8         -4.8         -5.9        -18.5
 8. Reduced Health Damages from             0.5          0.9          1.3          1.6          2.0          6.4
 Criteria Emissions...............
 9. Reduced Climate Damages from            0.9          2.0          2.9          3.8          4.8         14.5
 CO2 Emissions....................
10. Reduced Energy Security                 0.5          1.2          1.6          2.1          2.5          8.0
 Externalities....................
11. Reduction in Externalities (=           1.9          4.1          5.9          7.6          9.3         28.8
 8 + 9 + 10)......................
12. Increased Costs of Congestion,         -0.7         -1.3         -1.9         -2.4         -3.0         -9.4
 etc..............................
13. Net Social Benefits (= 7 + 11           0.0          0.1          0.1          0.3          0.5          1.0
 + 12)............................
14. Technology Costs..............          5.9          7.9         10.5         12.5         14.9         51.7
15. Net Social Benefits (= 6 + 12 -         6.0         17.9         26.6         35.5         44.6        130.7
  14).............................
----------------------------------------------------------------------------------------------------------------

    As discussed in detail previously, NHTSA believes that the
aggregate benefits from this rule amply justify its aggregate costs,
but it remains possible that the agency has overestimated the value of
fuel savings to buyers and subsequent owners of the cars and light
trucks to which higher CAFE standards will apply. It is also possible
that the agency has failed to identify and value reductions in consumer
welfare that could result from buyers' responses to changes in vehicle
attributes that manufacturers make as part of their efforts to achieve
higher fuel economy. To acknowledge these possibilities, NHTSA examines
their potential impact on the rule's benefits and costs, showing the
rule's economic impacts for MY 2012-16 passenger cars and light trucks
under varying theoretical assumptions about the agency's potential
overestimation of private benefits from higher fuel economy and the
value of potential changes in other vehicle attributes. See Chapter
VIII of the FRIA.
7. What other impacts (quantitative and unquantifiable) will these
final standards have?
    In addition to the quantified benefits and costs of fuel economy
standards, the final standards will have other impacts that we have not
quantified in monetary terms. The decision on whether or not to
quantify a particular impact depends on several considerations:
     Does the impact exist, and can the magnitude of the impact
reasonably be attributed to the outcome of this rulemaking?
     Would quantification help NHTSA and the public evaluate
standards that may be set in rulemaking?
     Is the impact readily quantifiable in monetary terms? Do
we know how to quantify a particular impact?
     If quantified, would the monetary impact likely be
material?
     Can a quantification be derived with a sufficiently narrow
range of uncertainty so that the estimate is useful?
    NHTSA expects that this rulemaking will have a number of genuine,
material impacts that have not been quantified due to one or more of
the considerations listed above. In some cases, further research may
yield estimates for future rulemakings.
Technology Forcing
    The final rule will improve the fuel economy of the U.S. new
vehicle fleet, but it will also increase the cost (and presumably, the
price) of new passenger cars and light trucks built during MYs 2012-
2016. We anticipate that the cost, scope, and duration of this rule, as
well as the steadily rising standards it requires, will cause
automakers and suppliers to devote increased attention to methods of
improving vehicle fuel economy.
    This increased attention will stimulate additional research and
engineering, and we anticipate that, over time, innovative approaches
to reducing the fuel consumption of light duty vehicles will emerge.
Several commenters agreed. These innovative approaches may reduce the
cost of the final rule in its later years, and also increase the set of
feasible technologies in future years.
    We have attempted to estimate the effect of learning on known
technologies within the period of the rulemaking. We have not attempted
to estimate the extent to which not-yet-invented technologies will
appear, either within the time period of the current rulemaking or that
might be available after MY 2016.
Effects on Vehicle Maintenance, Operation, and Insurance Costs
    Any action that increases the cost of new vehicles will
subsequently make such vehicles more costly to maintain, repair, and
insure. In general, this effect can be expected to be a positive linear
function of vehicle costs. The final rule raises vehicle costs by over
$900 by 2016, and for some manufacturers costs will increase by $1,000-
$1,800. Depending on the retail price of the

vehicle, this could represent a significant increase in the overall
vehicle cost and subsequently increase insurance rates, operation
costs, and maintenance costs. Comprehensive insurance costs are likely
to be directly related to price increases, but liability premiums will
go up by a smaller proportion because the bulk of liability coverage
reflects the cost of personal injury. The impact on operation and
maintenance costs is less clear, because the maintenance burden and
useful life of each technology are not known. However, one of the
common consequences of using more complex or innovative technologies is
a decline in vehicle reliability and an increase in maintenance costs,
borne, in part, by the manufacturer (through warranty costs, which are
included in the indirect costs of production) and, in part by the
vehicle owner. NHTSA believes that this effect is difficult to quantify
for purposes of this final rule. The agency will analyze this issue
further for future rulemakings to attempt to gauge its impact more
completely.
Effects on Vehicle Miles Traveled (VMT)
    While NHTSA has estimated the impact of the rebound effect on VMT,
we have not estimated how a change in vehicle sales could impact VMT.
Since the value of the fuel savings to consumers outweighs the
technology costs, new vehicle sales are predicted to increase. A change
in vehicle sales will have complicated and a hard-to-quantify effect on