economy.\745\ They were motivated by attempts to explain why the
economy actually expanded immediately after the last shocks, and why
there was no evidence of higher energy prices being passed on through
higher wage inflation. Using different methodologies, they conclude
that the economy has largely gotten over its concern with dramatic
swings in oil prices.
---------------------------------------------------------------------------

    \744\ National Research Council, 2009. Hidden Costs of Energy:
Unpriced Consequences of Energy Production and Use. National Academy
of Science, Washington, DC.
    \745\ See, William Nordhaus, ``Who's Afraid of a Big Bad Oil
Shock?,'' available at http://aida.econ.yale.edu/~nordhaus/homepage/
Big_Bad_Oil_Shock_Meeting.pdf, and Olivier Blanchard and Jordi Gali,
``The macroeconomic Effects of Oil price Shocks: Why are the 2000s
so different from the 1970s?,'' pp. 373-421, in The International
Dimensions of Monetary Policy, Jordi Gali and Mark Gertler, editors,
University of Chicago Press, February 2010, available at http://www.nber.org/chapters/c0517.pdf.
---------------------------------------------------------------------------

    One reason, according to Nordhaus, is that monetary policy has
become more accommodating to the price impacts of oil shocks. Another
is that consumers have simply decided that such movements are
temporary, and have noted that price impacts are not passed on as
inflation in other parts of the economy. He also notes that real
changes to productivity due to oil price increases are incredibly
modest,\746\ and that the general direction of the economy matters a
great deal regarding how the economy responds to a shock. Estimates of
the impact of a price shock on aggregate demand are insignificantly
different from zero.
---------------------------------------------------------------------------

    \746\ In fact, ``. . . energy-price changes have no effect on
multifactor productivity and very little effect on labor
productivity.'' Page 19. He calculates the productivity effect of a
doubling of oil prices as a decrease of 0.11 percent for one year
and 0.04 percent a year for ten years. Page 5. (The doubling
reflects the historical experience of the post-war shocks, as
described in Table 7.1 in Blanchard and Gali, p. 380.)
---------------------------------------------------------------------------

    Blanchard and Gali (2010) contend that improvements in monetary
policy (as noted above), more flexible labor markets, and lessening of
energy intensity in the economy, combined with an absence of concurrent
shocks, all contributed to lessen the impact of oil shocks after 1980.
They find ``. . . the effects of oil price shocks have changed over
time, with steadily smaller effects on prices and wages, as well as on
output and employment.'' \747\ In a comment at the chapter's end, this
work is summarized as follows: ``The message of this chapter is thus
optimistic in that it suggests a transformation in U.S. institutions
has inoculated the economy against the responses that we saw in the
past.''
---------------------------------------------------------------------------

    \747\ Blanchard and Gali, p. 414.
---------------------------------------------------------------------------

    At the same time, the implications of the ``Shale Oil Revolution''
are now being felt in the international markets, with current prices at
four year lows. Analysts generally attribute this result in part to the
significant increase in supply resulting from U.S. production, which
has put liquid petroleum production on par with Saudi Arabia. The price
decline is also attributed to the sustained reductions in U.S.
consumption and global demand growth from fuel efficiency policies and
high oil prices. The resulting decrease in foreign imports, down to
about one-third of domestic consumption (from 60 percent in 2005, for
example \748\), effectively permits U.S. supply to act as a buffer
against artificial or other supply restrictions (the latter due to
conflict or natural disaster, for example).
---------------------------------------------------------------------------

    \748\ See, Oil Price Drops on Oversupply, http://www.oil-price.net/en/articles/oil-price-drops-on-oversupply.php, 10/6/2014.
---------------------------------------------------------------------------

    However, other papers suggest that oil shocks, particularly sudden
supply shocks, remain a concern. Both Blanchard and Gali's and Nordhaus
work were based on data and analysis through 2006, ending with a period
of strong global economic growth and growing global oil demand. The
Nordhaus work particularly stressed the effects of the price increase
from 2002-2006 that were comparatively gradual (about half the growth
rate of the 1973 event and one-third that of the 1990 event). The
Nordhaus study emphasizes the robustness of the U.S. economy during a
time period through 2006. This time period was just before rapid
further increases in the price of oil and other commodities with oil
prices more-than-doubling to over $130/barrel by mid-2008, only to drop
after the onset of the largest recession since the Great Depression.
    Hamilton (2012) reviewed the empirical literature on oil shocks and
suggested that the results are mixed, noting that some work (e.g.
Rasmussen and Roitman (2011) finds less evidence for economic effects
of oil shocks, or declining effects of shocks (Blanchard and Gali
2010), while other work continues to find evidence regarding the
economic importance of oil shocks. For example, Baumeister and Peersman
(2011) found that an oil price increase of a given size seems to have a
decreasing effect over time, but noted that the declining price-
elasticity of demand meant that a given physical disruption had a
bigger effect on price and turned out to have a similar effect on
output as in the earlier data.'' \749\ Hamilton observes that ``a
negative effect of oil prices on real output has also been reported for
a number of other countries, particularly when nonlinear functional
forms have been employed'' (citing as recent examples Kim 2012,
Engemann, Kliesen, and Owyang 2011 and Daniel, et. al. 2011).
Alternatively, rather than a declining effect, Ramey and Vine (2010)
found ``remarkable stability in the response of aggregate real
variables to oil shocks once we account for the extra costs imposed on
the economy in the 1970s by price controls and a complex system of
entitlements that led to some rationing and shortages.'' \750\
---------------------------------------------------------------------------

    \749\ Hamilton, J.D. (2012). Oil Prices, Exhaustible Resources,
and Economic Growth. In Handbook of Energy and Climate Change.
Retrieved from http://econweb.ucsd.edu/~jhamilto/
handbook_climate.pdf.
    \750\ Ramey, V.A., & Vine, D.J. (2010). ``Oil, Automobiles, and
the U.S. Economy: How Much have Things Really Changed?'', National
Bureau of Economic Research Working Papers, WP 16067 (June).
Retrieved from http://www.nber.org/papers/w16067.pdf.
---------------------------------------------------------------------------

    Some of the recent literature on oil price shocks has emphasized
that economic impacts depend on the nature of the oil shock, with
differences between price increases caused by sudden supply loss and
those caused by rapidly growing demand. Most recent analyses of oil
price shocks have confirmed that ``demand-driven'' oil price shocks
have greater effects on oil prices and tend to have positive effects on
the economy while ``supply-driven'' oil shocks still have negative
economic impacts (Baumeister, Peersman and Robays, 2010). A recent
paper by Kilian and Vigfusson (2014), for example, assigned a more
prominent role to the effects of price increases that are unusual, in
the sense of being beyond range of recent experience. Kilian and
Vigfussen also conclude that the difference in response to oil shocks
may well stem from the different effects of demand- and supply-based
price increases: ``One explanation is that oil price shocks are
associated with a range of oil demand and oil supply shocks, some of
which stimulate the U.S.

economy in the short run and some of which slow down U.S. growth (see
Kilian 2009a). How recessionary the response to an oil price shock is
thus depends on the average composition of oil demand and oil supply
shocks over the sample period.''
    The general conclusion that oil supply-driven shocks reduce
economic output is also reached in a recently published paper by Cashin
et al. (2014) for 38 countries from 1979-2011. ``The results indicate
that the economic consequences of a supply-driven oil-price shock are
very different from those of an oil-demand shock driven by global
economic activity, and vary for oil-importing countries compared to
energy exporters,'' and ``oil importers [including the U.S.] typically
face a long-lived fall in economic activity in response to a supply-
driven surge in oil prices'' but almost all countries see an increase
in real output for an oil-demand disturbance. Note that the energy
security premium calculation in this analysis is based on price shocks
from potential future supply events only.
    Finally, despite continuing uncertainty about oil market behavior
and outcomes and the sensitivity of the U.S. economy to oil shocks, it
is generally agreed that it is beneficial to reduce petroleum fuel
consumption from an energy security standpoint. Reducing fuel
consumption reduces the amount of domestic economic activity associated
with a commodity whose price depends on volatile international markets.
Also, reducing U.S. oil import levels reduces the likelihood and
significance of supply disruptions.
---------------------------------------------------------------------------

    \751\ Historical data are from EIA Annual Energy Review, various
editions. For data since 2011 and projected data: Source is EIA
Annual Energy Outlook (AEO) 2014 (Reference Case). See Table 11,
file ``aeotab_11.xlsx'' and Table 20 (Macroeconomic Indicators,''
(file ``aeotab_20.xlsx'').
[GRAPHIC] [TIFF OMITTED] TP13JY15.018

(c) Cost of Existing U.S. Energy Security Policies
    The last often-identified component of the full economic costs of
U.S. oil imports are the costs to the U.S. taxpayers of existing U.S.
energy security policies. The two primary examples are maintaining the
Strategic Petroleum Reserve (SPR) and maintaining a military presence
to help secure a stable oil supply from potentially vulnerable regions
of the world. The SPR is the largest stockpile of government-owned
emergency crude oil in the world. Established in the aftermath of the
1973/1974 oil embargo, the SPR provides the U.S. with a response option
should a disruption in commercial oil supplies threaten the U.S.
economy. It also allows the U.S. to meet part of its International
Energy Agency obligation to maintain emergency oil stocks, and it
provides a national defense fuel reserve. While the costs for building
and maintaining the SPR are more clearly related to U.S. oil use and
imports, historically these costs have not varied in response to
changes in U.S. oil import levels. Thus, while the effect of the SPR in
moderating price shocks is factored into the ORNL analysis, the cost of
maintaining the SPR is excluded.
    U.S. military costs are excluded from the analysis performed by
ORNL because their attribution to particular missions or activities is
difficult, and because it is not clear that these outlays would decline
in response to incremental reductions in U.S. oil imports. Most
military forces serve a broad range of security and foreign policy
objectives. The agencies also recognize that attempts to attribute some
share of U.S. military costs to oil imports are further challenged by
the need to estimate how those costs might

vary with incremental variations in U.S. oil imports.
(3) Energy Security Benefits of This Program
    Using the ORNL ``oil premium'' methodology, updating world oil
price values and energy trends using AEO 2014 (Early Release) and using
the estimated fuel savings from the proposed rules estimated from the
MOVES/CAFE models, the agencies has calculated the annual energy
security benefits of this proposed rule through 2050.\752\ Since the
agencies are taking a global perspective with respect to valuing
greenhouse gas benefits from the rules, only the avoided macroeconomic
adjustment/disruption portion of the energy security premium is used in
the energy security benefits estimates present below. These results are
shown below in Table IX-25. The agencies have also calculated the net
present value at 3 percent and 7 percent discount rates of model year
lifetime benefits associated with energy security; these values are
presented in Table IX-26.
---------------------------------------------------------------------------

    \752\ In order to determine the energy security benefits beyond
2040, we use the 2040 energy security premium multiplied by the
estimate fuel savings from the proposed rule. Since the AEO 2014
(Early Release) only goes to 2040, we only calculate energy security
premiums to 2040.

   Table IX-25--Annual U.S. Energy Security Benefits of the Preferred
  Alternative and Net Present Values at 3% and 7% Discount Rates Using
           Method B and Relative to the Less Dynamic Baseline
                       [In millions of 2012$] \a\
------------------------------------------------------------------------
                                                               Benefits
                            Year                               (2012$)
------------------------------------------------------------------------
2018.......................................................           10
2019.......................................................           20
2020.......................................................           31
2021.......................................................           77
2022.......................................................          140
2023.......................................................          211
2024.......................................................          328
2025.......................................................          456
2026.......................................................          596
2027.......................................................          770
2028.......................................................          947
2029.......................................................        1,126
2030.......................................................        1,306
2035.......................................................        2,156
2040.......................................................        2,920
2050.......................................................        3,498
NPV, 3%....................................................       28,947
NPV, 7%....................................................       11,857
------------------------------------------------------------------------
Note:
\a\ For an explanation of analytical Methods A and B, please see Section
  I.D; for an explanation of the less dynamic baseline, 1a, and more
  dynamic baseline, 1b, please see Section X.A.1.

Table IX-26--Discounted Model Year Lifetime Energy Security Benefits Due
 to the Preferred Alternative at 3% and 7% Discount Rates Using Method B
                and Relative to the Less Dynamic Baseline
                         [Millions of 2012$] \a\
------------------------------------------------------------------------
                                                3% discount  7% discount
                 Calendar year                      rate         rate
------------------------------------------------------------------------
2018..........................................           86           60
2019..........................................           85           56
2020..........................................           84           53
2021..........................................          534          326
2022..........................................          579          341
2023..........................................          621          353
2024..........................................          996          546
2025..........................................        1,060          560
2026..........................................        1,121          571
2027..........................................        1,375          676
2028..........................................        1,388          657
2029..........................................        1,397          637
                                               -------------------------
Sum...........................................        9,325        4,837
------------------------------------------------------------------------
Note:
\a\ For an explanation of analytical Methods A and B, please see Section
  I.D; for an explanation of the less dynamic baseline, 1a, and more
  dynamic baseline, 1b, please see Section X.A.1.

J. Other Impacts

(1) Costs of Noise, Congestion and Accidents Associated With Additional
(Rebound) Driving
    Although it provides benefits to drivers as described above,
increased vehicle use associated with the rebound effect also
contributes to increased traffic congestion, motor vehicle accidents,
and highway noise. Depending on how the additional travel is
distributed over the day and where it takes place, additional vehicle
use can contribute to traffic congestion and delays by increasing the
number of vehicles using facilities that are already heavily traveled.
These added delays impose higher costs on drivers and other vehicle
occupants in the form of increased travel time and operating expenses.
At the same time, this additional travel also increases costs
associated with traffic accidents and vehicle noise.
    The agencies estimate these costs using the same methodology as
used in the two light-duty and the HD Phase 1 rule analyses, which
relies on estimates of congestion, accident, and noise costs imposed by
automobiles and light trucks developed by the Federal Highway
Administration to estimate these increased external costs caused by
added driving.\753\ We provide the details behind the estimates in
Chapter 8.7 of the draft RIA. The agencies request comment on all input
metrics used in the analysis of accidents, congestion and noise and on
the calculation methodology. Table IX-27 presents the estimated annual
impacts associated with accidents, congestion and noise along with net
present values at both 3 percent and 7 percent discount rates. Table
IX-28 presents the estimated discounted model year lifetime impacts
associated with accidents, congestion and noise.
---------------------------------------------------------------------------

    \753\ These estimates were developed by FHWA for use in its 1997
Federal Highway Cost Allocation Study; http://www.fhwa.dot.gov/policy/hcas/final/index.htm (last accessed July 8, 2012).

   Table IX-27--Annual Costs Associated With Accidents, Congestion and
 Noise and Net Present Values at 3% and 7% Discount Rates Using Method B
                and Relative to the Less Dynamic Baseline
                         [Millions of 2012$] \a\
------------------------------------------------------------------------
                                                             Costs of
                                                            accidents,
                      Calendar year                         congestion,
                                                             and noise
------------------------------------------------------------------------
2018....................................................              $0
2019....................................................               0
2020....................................................               0
2021....................................................             117
2022....................................................             172
2023....................................................             226
2024....................................................             279
2025....................................................             330
2026....................................................             379
2027....................................................             425
2028....................................................             467
2029....................................................             506
2030....................................................             542
2035....................................................             676
2040....................................................             758
2050....................................................             871
NPV, 3%.................................................           9,334
NPV, 7%.................................................           4,202
------------------------------------------------------------------------
Note:
\a\ For an explanation of analytical Methods A and B, please see Section
  I.D; for an explanation of the less dynamic baseline, 1a, and more
  dynamic baseline, 1b, please see Section X.A.1.

     Table IX-28--Discounted Model Year Lifetime Costs of Accidents,
   Congestion and Noise at 3% and 7% Discount Rates Using Method B and
                  Relative to the Less Dynamic Baseline
                         [Millions of 2012$] \a\
------------------------------------------------------------------------
                                                3% discount  7% discount
                 Calendar year                      rate         rate
------------------------------------------------------------------------
2018..........................................          132           85
2019..........................................          146           94
2020..........................................          162          103
2021..........................................          450          284
2022..........................................          438          266
2023..........................................          427          250
2024..........................................          424          239
2025..........................................          422          229
2026..........................................          420          219
2027..........................................          415          209
2028..........................................          409          198
2029..........................................          402          187
                                               -------------------------
  Sum.........................................        4,247        2,362
------------------------------------------------------------------------
Note:
\a\ For an explanation of analytical Methods A and B, please see Section
  I.D; for an explanation of the less dynamic baseline, 1a, and more
  dynamic baseline, 1b, please see Section X.A.1.

(2) Benefits Associated With Reduced Refueling Time
    By reducing the frequency with which drivers typically refuel their
vehicles and by extending the upper limit of the range that can be
traveled before requiring refueling (i.e., future fuel tank sizes
remain constant), savings would be realized associated with less time
spent refueling vehicles. Alternatively, refill intervals may remain
the same (i.e., future fuel tank sizes get smaller), resulting in the
same number of refills as today but less time spent per refill because
there would be less fuel to refill. The agencies have estimated this
impact using the former approach--by assuming that future tank sizes
remain constant.
    The savings in refueling time are calculated as the total amount of
time the driver of a typical truck in each class would save each year
as a consequence of pumping less fuel into the vehicle's tank. The
calculation does not include any reduction in time spent searching for
a fueling station or other time spent at the station; it is assumed
that time savings occur only when truck operators are actually
refueling their vehicles.
    The calculation uses the reduced number of gallons consumed by
truck type and divides that value by the tank volume and refill amount
to get the number of refills, then multiplies that by the time per
refill to determine the number of hours saved in a given year. The
calculation then applies DOT-recommended values of travel time savings
to convert the resulting time savings to their economic value,
including a 1.2 percent growth rate in those time savings going
forward.\754\ The input metrics used in the analysis are presented in
greater detail in draft RIA Chapter 9.7. The annual benefits associated
with reduced refueling time are shown in Table IX-29 along with net
present values at both 3 percent and 7 percent discount rates. The
discounted model year lifetime benefits are shown in Table IX-30.
---------------------------------------------------------------------------

    \754\ U.S. Department of Transportation, Valuation of Travel
Guidance, July 9, 2014, at page 14.

 Table IX-29--Annual Refueling Benefits and Net Present Values at 3% and
    7% Discount Rates Using Method B and Relative to the Less Dynamic
                                Baseline
                         [Millions of 2012$] \a\
------------------------------------------------------------------------
                                                              Refueling
                       Calendar year                           benefits
------------------------------------------------------------------------
2018.......................................................            3
2019.......................................................            6
2020.......................................................            9
2021.......................................................           25
2022.......................................................           47
2023.......................................................           72
2024.......................................................          113
2025.......................................................          157
2026.......................................................          205
2027.......................................................          266
2028.......................................................          327
2029.......................................................          386
2030.......................................................          444
2035.......................................................          698
2040.......................................................          890
2050.......................................................        1,195
NPV, 3%....................................................        9,410
NPV, 7%....................................................        3,868
------------------------------------------------------------------------
Note:
\a\ For an explanation of analytical Methods A and B, please see Section
  I.D; for an explanation of the less dynamic baseline, 1a, and more
  dynamic baseline, 1b, please see Section X.A.1.

  Table IX-30--Discounted Model Year Lifetime Refueling Benefits Using
           Method B and Relative to the Less Dynamic Baseline
                         [Millions of 2012$] \a\
------------------------------------------------------------------------
                                                3% discount  7% discount
                  Model year                        rate         rate
------------------------------------------------------------------------
2018..........................................           23           16
2019..........................................           22           15
2020..........................................           21           14
2021..........................................          163          101
2022..........................................          184          110
2023..........................................          203          117
2024..........................................          325          181
2025..........................................          349          187
2026..........................................          372          191
2027..........................................          466          231
2028..........................................          465          222
2029..........................................          463          213
                                               -------------------------
  Sum.........................................        3,055        1,597
------------------------------------------------------------------------
Note:
\a\ For an explanation of analytical Methods A and B, please see Section
  I.D; for an explanation of the less dynamic baseline, 1a, and more
  dynamic baseline, 1b, please see Section X.A.1.

(3) Benefits of Increased Travel Associated With Rebound Driving
    The increase in travel associated with the rebound effect produces
additional benefits to vehicle owners and operators, which reflect the
value of the added (or more desirable) social and economic
opportunities that become accessible with additional travel. The
analysis estimates the economic benefits from increased rebound-effect
driving as the sum of fuel expenditures incurred plus the consumer
surplus from the additional accessibility it provides. As evidenced by
the fact that vehicles make more frequent or longer trips when the cost
of driving declines, the benefits from this added travel exceed added
expenditures for the fuel consumed. The amount by which the benefits
from this increased driving exceed its increased fuel costs measures
the net benefits from the additional travel, usually referred to as
increased consumer surplus.
    The agencies' analysis estimates the economic value of the
increased consumer surplus provided by added driving using the
conventional approximation, which is one half of the product of the
decline in vehicle operating costs per vehicle-mile and the resulting
increase in the annual number of miles driven. Because it depends on
the extent of improvement in fuel economy, the value of benefits from
increased vehicle use changes by model year and varies among
alternative standards. Under even those alternatives that would impose
the highest standards, however, the magnitude of the consumer surplus
from additional vehicle use represents a small fraction of this
benefit.
    The annual benefits associated with increased travel are shown in
Table IX-31 along with net present values at both

3 percent and 7 percent discount rates. The discounted model year
lifetime benefits are shown in Table IX-32.

 Table IX-31--Annual Value of Increased Travel and Net Present Values at
3% and 7% Discount Rates Using Method B and Relative to the Less Dynamic
                                Baseline
                         [Millions of 2012$] \a\
------------------------------------------------------------------------
                                                             Benefits of
                       Calendar year                          increased
                                                                travel
------------------------------------------------------------------------
2018.......................................................            0
2019.......................................................            0
2020.......................................................            0
2021.......................................................          445
2022.......................................................          636
2023.......................................................          821
2024.......................................................        1,001
2025.......................................................        1,179
2026.......................................................        1,346
2027.......................................................        1,506
2028.......................................................        1,647
2029.......................................................        1,783
2030.......................................................        1,909
2035.......................................................        2,445
2040.......................................................        2,873
2050.......................................................        3,286
NPV, 3%....................................................       34,240
NPV, 7%....................................................       15,316
------------------------------------------------------------------------
Note:
\a\ For an explanation of analytical Methods A and B, please see Section
  I.D; for an explanation of the less dynamic baseline, 1a, and more
  dynamic baseline, 1b, please see Section X.A.1.

Table IX-32--Discounted Model Year Lifetime Value of Increased Travel at
3% and 7% Discount Rates Using Method B and Relative to the Less Dynamic
                                Baseline
                         [Millions of 2012$] \a\
------------------------------------------------------------------------
           Calendar year             3% discount rate   7% discount rate
------------------------------------------------------------------------
2018..............................               $554               $353
2019..............................                618                390
2020..............................                686                429
2021..............................              1,510                942
2022..............................              1,488                894
2023..............................              1,463                847
2024..............................              1,434                799
2025..............................              1,442                774
2026..............................              1,447                748
2027..............................              1,421                708
2028..............................              1,415                678
2029..............................              1,406                649
                                   -------------------------------------
  Sum.............................             14,884              8,211
------------------------------------------------------------------------
Note:
\a\ For an explanation of analytical Methods A and B, please see Section
  I.D; for an explanation of the less dynamic baseline, 1a, and more
  dynamic baseline, 1b, please see Section X.A.1.

K. Summary of Benefits and Costs

    This section presents the costs, benefits, and other economic
impacts of the proposed Phase 2 standards. It is important to note that
NHTSA's proposed fuel consumption standards and EPA's proposed GHG
standards would both be in effect, and would jointly lead to increased
fuel efficiency and reductions in GHG and non-GHG emissions. The
individual categories of benefits and costs presented in the tables
below are defined more fully and presented in more detail in Chapter 8
of the draft RIA. These include:
     The vehicle program costs (costs of complying with the
vehicle CO2 and fuel consumption standards),
     changes in fuel expenditures associated with reduced fuel
use by more efficient vehicles and increased fuel use associated with
the ``rebound'' effect, both of which result from the program,
     the global economic value of reductions in GHGs,
     the economic value of reductions in non-GHG pollutants,
     costs associated with increases in noise, congestion, and
accidents resulting from increased vehicle use,
     savings in drivers' time from less frequent refueling,
     benefits of increased vehicle use associated with the
``rebound'' effect, and
     the economic value of improvements in U.S. energy security
impacts.

For a discussion of the cost of ownership and the agencies' payback
analysis of vehicles covered by this proposal, please see Section IX.M.
    The agencies conducted coordinated and complementary analyses using
two analytical methods referred to as Method A and Method B. For an
explanation of these methods, please see Section I.D. And as discussed
in Section X.A.1, the agencies present estimates of benefits and costs
that are measured against two different assumptions about improvements
in fuel efficiency that might occur in the absence of the Phase 2
standards. The first case (Alternative 1a) uses a baseline that
projects very little improvement in new vehicles in the absence of new
Phase 2 standards, and the second (Alternative 1b) uses a more dynamic
baseline that projects more significant improvements in vehicle fuel
efficiency.

    Table IX-33 shows benefits and costs for the proposed standards
from the perspective of a program designed to improve the nation's
energy security and conserve energy by improving fuel efficiency. From
this viewpoint, technology costs occur when the vehicle is purchased.
Fuel savings are counted as benefits that occur over the lifetimes of
the vehicles produced during the model years subject to the Phase 2
standards as they consume less fuel. The table shows that benefits far
outweigh the costs, and the preferred alternative is anticipated to
result in large net benefits to the U.S economy.

  Table IX-33--Lifetime Benefits & Costs of the Preferred Alternative for Model Years 2018-2029 Vehicles Using
                                                Analysis Method A
                                   [Billions of 2012$ discounted at 3% and 7%]
----------------------------------------------------------------------------------------------------------------
                                                            Baseline 1a                     Baseline 1b
                    Category                     ---------------------------------------------------------------
                                                        3%              7%              3%              7%
----------------------------------------------------------------------------------------------------------------
Vehicle Program: Technology and Indirect Costs,             25.4            17.1            25.0            16.8
 Normal Profit on Additional Investments........
Additional Routine Maintenance..................             1.1             0.6             1.0             0.6
Congestion, Accidents, and Noise from Increased              4.7             2.8             4.5             2.6
 Vehicle Use....................................
                                                 ---------------------------------------------------------------
    Total Costs.................................            31.1            20.5            30.5            20.0
Fuel Savings (valued at pre-tax prices).........           175.1            94.2           165.1            89.2
Savings from Less Frequent Refueling............             3.1             1.6             2.9             1.5
Economic Benefits from Additional Vehicle Use...            15.1             8.4            14.7             8.2
Reduced Climate Damages from GHG Emissions \a\..            34.9            34.9            32.9            32.9
Reduced Health Damages from Non-GHG Emissions...            38.8            20.7            37.2            20.0
Increased U.S. Energy Security..................             8.9             4.7             8.1             4.3
                                                 ---------------------------------------------------------------
    Total Benefits..............................             276             165             261             156
                                                 ---------------------------------------------------------------
        Net Benefits............................             245             144             231             136
----------------------------------------------------------------------------------------------------------------
Note:
\a\ Benefits and net benefits use the 3 percent average global SCC value applied only to CO2 emissions; GHG
  reductions include CO2, CH4, N2O and HFC reductions, and include benefits to other nations as well as the U.S.
  See Draft RIA Chapter 8.5 and Preamble Section IX.G for further discussion.

    Table IX-34, Table IX-35, and Table IX-36 report benefits and cost
from the perspective of reducing GHG. Table IX-34 shows the annual
impacts and net benefits of the preferred alternative for selected
future years, together with the net present values of cumulative annual
impacts from 2018 through 2050, discounted at 3 percent and 7 percent
rates. Table IX-35 and Table IX-36 show the discounted lifetime costs
and benefits for each model year affected by the Phase 2 standards at 3
percent and 7 percent discount rates, respectively.

 Table IX-34--Annual Benefits & Costs of the Preferred Alternative and Net Present Values at 3% and 7% Discount
                         Rates Using Method B and Relative to the Less Dynamic Baseline
                                             [Billions of 2012$] \a\
----------------------------------------------------------------------------------------------------------------
                                       2018    2021    2024    2030    2035    2040    2050    NPV, 3%   NPV, 7%
----------------------------------------------------------------------------------------------------------------
Vehicle program.....................    -0.1    -2.4    -3.7    -5.4    -5.9    -6.3    -7.0     -86.8     -41.1
Maintenance.........................     0.0     0.0    -0.1    -0.1    -0.1    -0.1    -0.1      -1.8      -0.9
Pre-tax fuel........................     0.2     1.7     6.9    24.0    37.2    47.8    57.5     495.6     206.7
Energy security.....................     0.0     0.1     0.3     1.3     2.2     2.9     3.5      28.9      11.9
Accidents/Congestion/Noise..........     0.0    -0.1    -0.3    -0.5    -0.7    -0.8    -0.9      -9.3      -4.2
Refueling impacts...................     0.0     0.0     0.1     0.4     0.7     0.9     1.2       9.4       3.9
Travel value........................     0.0     0.4     1.0     1.9     2.4     2.9     3.3      34.2      15.3
Non-GHG impacts.....................     0.0     0.4     1.0     3.3     4.8     5.7     7.0       69.      26.6
                                          to      to      to      to      to      to      to        to        to
                                         0.1     0.9     2.4     8.3    12.1    14.3    17.5     157.0      60.4
SCCb c
SCC_CO2; 5% Avg.....................     0.0     0.1     0.4     1.5     2.5     3.3     5.0      22.1      22.1
SCC_CO2; 3% Avg.....................     0.0     0.3     1.3     4.8     7.4     9.7    13.6     103.1     103.1
SCC_CO2; 2.5% Avg...................     0.1     0.5     1.9     6.9    10.6    13.7    18.5     164.1     164.1
SCC_CO2; 3% 95th....................     0.1     1.0     4.0    14.6    23.2    30.3    42.0     320.5     320.5
Net benefits \ d\
SCC_CO2; 5% Avg.....................     0.2     0.4     6.4    28.8    46.8    60.6    74.6     605.8     257.1
SCC_CO2; 3% Avg.....................     0.2     0.7     7.3    32.1    51.7    66.9    83.2     686.8     338.1
SCC_CO2; 2.5% Avg...................     0.2     0.8     7.9    34.2    54.9    70.9    88.2     747.8     399.1
SCC_CO2; 3% 95th....................     0.3     1.3    10.0    41.9    67.5    87.6   111.7     904.1     555.5
----------------------------------------------------------------------------------------------------------------
Notes:
\a\ Positive values denote decreased social costs (benefits); negative values denote increased social costs. For
  an explanation of analytical Methods A and B, please see Section I.D; for an explanation of the less dynamic
  baseline, 1a, and more dynamic baseline, 1b, please see Section X.A.1.
\b\ Net present value of reduced CO2 emissions is calculated differently than other benefits. The same discount
  rate used to discount the value of damages from future emissions (SC-CO2 at 5, 3, 2.5 percent) is used to
  calculate net present value of SC-CO2 for internal consistency. Refer to the SCC TSD for more detail.
\c\ Section IX.G notes that SCCO2 increases over time. For the years 2012-2050, the SC-CO2 estimates range as
  follows: for Average SC-CO2 at 5%: $12-$28; for Average SC-CO2 at 3%: $37-$77; for Average SC-CO2 at 2.5%: $58-
  $105; and for 95th percentile SC-CO2 at 3%: $105-$237. Section IX.G also presents these SC-CO2 estimates.

\d\ Net impacts are the summation of results within columns of the table with the exception that the net impacts
  at each SC-CO2 value include only the SC-CO2 impacts at that value.

   Table IX-35--Discounted Model Year Lifetime Benefits & Costs of the Preferred Alternative Using Method B and Relative to the Less Dynamic Baseline
                                                        [Billions of 2012$ discounted at 3%] \a\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                               2018    2019    2020    2021    2022    2023    2024    2025    2026    2027    2028     2029       Sum
--------------------------------------------------------------------------------------------------------------------------------------------------------
Vehicle program.............................    -0.1    -0.1    -0.1    -2.0    -1.9    -1.9    -2.8    -2.7    -2.7    -3.7    -3.6      -3.5     -25.1
Maintenance.................................    -0.1     0.0     0.0    -0.1    -0.1    -0.1    -0.1    -0.1    -0.1    -0.1    -0.1      -0.1      -1.1
Pre-tax fuel................................     1.9     1.9     1.8    11.1    11.5    11.9    18.9    19.6    20.2    24.1    24.1      24.1     171.1
Energy security.............................     0.1     0.1     0.1     0.5     0.6     0.6     1.0     1.1     1.1     1.4     1.4       1.4       9.3
Accidents/Congestion/Noise..................    -0.1    -0.1    -0.2    -0.4    -0.4    -0.4    -0.4    -0.4    -0.4    -0.4    -0.4      -0.4      -4.2
Refueling...................................     0.0     0.0     0.0     0.2     0.2     0.2     0.3     0.3     0.4     0.5     0.5       0.5       3.1
Travel value................................     0.6     0.6     0.7     1.5     1.5     1.5     1.4     1.4     1.4     1.4     1.4       1.4      14.9
Non-GHG.....................................     0.2     0.2     0.2     2.0     2.0     2.0     2.9     3.0     2.6     3.1     3.1       3.1      24.4
                                                  to      to      to      to      to      to      to      to      to      to      to        to        to
                                                 0.5     0.4     0.4     4.5     4.5     4.5     6.6     6.8     5.9     6.9     6.9       7.0      55.0
    SCC; b c................................
SCC_CO2; 5% Avg.............................     0.1     0.1     0.1     0.5     0.5     0.5     0.9     0.9     0.9     1.1     1.1       1.1       7.8
SCC_CO2; 3% Avg.............................     0.4     0.4     0.4     2.2     2.3     2.3     3.7     3.9     4.0     4.8     4.8       4.9      34.0
SCC_CO2; 2.5% Avg...........................     0.6     0.6     0.6     3.4     3.5     3.6     5.8     6.1     6.3     7.6     7.6       7.7      53.4
SCC_CO2; 3% 95th............................     1.1     1.1     1.1     6.6     6.9     7.2    11.5    12.0    12.4    14.9    15.0      15.1     105.0
Net benefits \ d\
SCC_CO2; 5% Avg.............................     2.8     2.7     2.7    14.6    15.1    15.5    23.9    25.0    25.1    29.2    29.4      29.4     215.5
SCC_CO2; 3% Avg.............................     3.0     3.0     3.0    16.2    16.8    17.3    26.8    28.0    28.2    33.0    33.1      33.2     241.7
SCC_CO2; 2.5% Avg...........................     3.2     3.2     3.2    17.4    18.1    18.6    28.9    30.2    30.5    35.7    35.9      36.0     261.1
SCC_CO2; 3% 95th............................     3.8     3.8     3.7    20.7    21.5    22.1    34.5    36.0    36.6    43.1    43.3      43.5     312.7
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes:
\a\ Positive values denote decreased social costs (benefits); negative values denote increased social costs. For an explanation of analytical Methods A
  and B, please see Section I.D; for an explanation of the less dynamic baseline, 1a, and more dynamic baseline, 1b, please see Section X.A.1.c
\b\ Net present value of reduced CO2 emissions is calculated differently than other benefits. The same discount rate used to discount the value of
  damages from future emissions (SC-CO2 at 5, 3, 2.5 percent) is used to calculate net present value of SC-CO2 for internal consistency. Refer to the
  SCC TSD for more detail.
\c\ Section IX.G notes that SCC increases over time. For the years 2012-2050, the SCC estimates range as follows: for Average SC-CO2 at 5%: $12-$28; for
  Average SC-CO2 at 3%: $37-$77; for Average SC-CO2 at 2.5%: $58-$105; and for 95th percentile SC-CO2 at 3%: $105-$237. Section IX.G also presents these
  SCC estimates.
\d\ Net impacts are the summation of results within columns of the table with the exception that the net impacts at each SC-CO2 value include only the
  SCCO2 impacts at that value.

   Table IX-36--Discounted Model Year Lifetime Benefits & Costs of the Preferred Alternative Using Method B and Relative to the Less Dynamic Baseline
                                                       [Billions of 2012$ discounted at 7%] \a b\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                               2018    2019    2020    2021    2022    2023    2024    2025    2026    2027    2028     2029       Sum
--------------------------------------------------------------------------------------------------------------------------------------------------------
Vehicle program.............................    -0.1    -0.1    -0.1    -1.6    -1.4    -1.4    -1.9    -1.8    -1.7    -2.3    -2.1      -2.0     -16.6
Maintenance.................................     0.0     0.0     0.0    -0.1    -0.1    -0.1    -0.1    -0.1    -0.1    -0.1    -0.1       0.0      -0.6
Pre-tax fuel................................     1.4     1.3     1.2     6.9     6.9     6.8    10.5    10.4    10.4    11.9    11.5      11.0      90.1
Energy security.............................     0.1     0.1     0.1     0.3     0.3     0.4     0.5     0.6     0.6     0.7     0.7       0.6       4.8
Accidents/Congestion/Noise..................    -0.1    -0.1    -0.1    -0.3    -0.3    -0.2    -0.2    -0.2    -0.2    -0.2    -0.2      -0.2      -2.4
Refueling...................................     0.0     0.0     0.0     0.1     0.1     0.1     0.2     0.2     0.2     0.2     0.2       0.2       1.6
Travel value................................     0.4     0.4     0.4     0.9     0.9     0.8     0.8     0.8     0.7     0.7     0.7       0.6       8.2
Non-GHG.....................................     0.1     0.1     0.1     1.1     1.1     1.0     1.4     1.4     1.2     1.3     1.3       1.3      11.5
                                                  to      to      to      to      to      to      to      to      to      to      to        to        to
                                                 0.3     0.3     0.3     2.5     2.4     2.3     3.3     3.2     2.7     3.0     2.9       2.8      26.0
SCC b c
SCC_CO2; 5% Avg.............................     0.1     0.1     0.1     0.5     0.5     0.5     0.9     0.9     0.9     1.1     1.1       1.1       7.8
SCC_CO2; 3% Avg.............................     0.4     0.4     0.4     2.2     2.3     2.3     3.7     3.9     4.0     4.8     4.8       4.9      34.0
SCC_CO2; 2.5% Avg...........................     0.6     0.6     0.6     3.4     3.5     3.6     5.8     6.1     6.3     7.6     7.6       7.7      53.4
SCC_CO2; 3% 95th............................     1.1     1.1     1.1     6.6     6.9     7.2    11.5    12.0    12.4    14.9    15.0      15.1     105.0
Net benefits \d\
SCC_CO2; 5% Avg.............................     1.9     1.8     1.7     8.7     8.7     8.7    13.0    13.1    12.7    14.3    13.8      13.4     111.8
SCC_CO2; 3% Avg.............................     2.2     2.1     2.0    10.3    10.4    10.5    15.8    16.1    15.8    18.0    17.6      17.2     138.0
SCC_CO2; 2.5% Avg...........................     2.4     2.3     2.2    11.5    11.7    11.8    17.9    18.3    18.1    20.7    20.4      20.0     157.4
SCC_CO2; 3% 95th............................     2.9     2.8     2.8    14.8    15.1    15.3    23.6    24.2    24.2    28.1    27.8      27.4     209.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes:
\a\ Positive values denote decreased social costs (benefits); negative values denote increased social costs. For an explanation of analytical Methods A
  and B, please see Section I.D; for an explanation of the less dynamic baseline, 1a, and more dynamic baseline, 1b, please see Section X.A.1.
\b\ Net present value of reduced CO2 emissions is calculated differently than other benefits. The same discount rate used to discount the value of
  damages from future emissions (SC-CO2 at 5, 3, 2.5 percent) is used to calculate net present value of SCC for internal consistency. Refer to the SCC
  TSD for more detail.
\c\ Section IX.G notes that SC-CO2 increases over time. For the years 2012-2050, the SC-CO2 estimates range as follows: for Average SC-CO2 at 5%: $12-
  $28; for Average SC-CO2 at 3%: $37-$77; for Average SC-CO2 at 2.5%: $58-$105; and for 95th percentile SCCO2 at 3%: $105-$237. Section IX.G also
  presents these SC-CO2 estimates.
\d\ Net impacts are the summation of results within columns of the table with the exception that the net impacts at each SC-CO2 value include only the
  SC-CO2 impacts at that value.

    The agencies note that this proposal accounts for other regulations
that have been finalized. Until regulations are finalized, there is no
assurance they will be implemented and thus any potential provisions of
those potential regulations are uncertain. The agencies note that NHTSA
has started the rulemaking process for regulations that involve
technologies that could potentially affect medium- and heavy-duty fuel
consumption (e.g. vehicle speed

limiters, etc.). If any such rulemakings are finalized prior to this
rulemaking becoming final, this rulemaking will take those regulations
into account.

L. Employment Impacts

    Executive Order 13563 (January 18, 2011) directs federal agencies
to consider regulatory impacts on, among other criteria, job
creation.\755\ According to the Executive Order ``Our regulatory system
must protect public health, welfare, safety, and our environment while
promoting economic growth, innovation, competitiveness, and job
creation. It must be based on the best available science.'' Analysis of
employment impacts of a regulation is not part of a standard benefit-
cost analysis (except to the extent that labor costs contribute to
costs). Employment impacts of federal rules are of general interest,
however, and have been particularly so, historically, in the auto
sector during periods of challenging labor market conditions. For this
reason, we are describing the connections of these proposed standards
to employment in the regulated sector, the motor vehicle manufacturing
sector, as well as the motor vehicle body and trailer and motor vehicle
parts manufacturing sectors.
---------------------------------------------------------------------------

    \755\ Available at http://www.whitehouse.gov/sites/default/files/omb/inforeg/eo12866/eo13563_01182011.pdf.
---------------------------------------------------------------------------

    The overall effect of the proposed rules on motor vehicle sector
employment depends on the relative magnitude of output and substitution
effects, described below. Because we do not have quantitative estimates
of the output effect, and only a partial estimate of the substitution
effect, we cannot reach a quantitative estimate of the overall
employment effects of the proposed rules on motor vehicle sector
employment or even whether the total effect will be positive or
negative.
    According to the U.S. Bureau of Labor Statistics, in 2014, about
850,000 people in the U.S. were employed in the Motor Vehicle and Parts
Manufacturing Sector (NAICS 3361, 3362, and 3363),\756\ the directly
regulated sector. The employment effects of these proposed rules are
expected to expand beyond the regulated sector. Though some of the
parts used to achieve the proposed standards are likely to be built by
motor vehicle manufacturers (including trailer manufacturers)
themselves, the motor vehicle parts manufacturing sector also plays a
significant role in providing those parts, and will also be affected by
changes in vehicle sales. Changes in truck sales, discussed in Section
IX.F. (2), could also affect employment for truck and trailer vendors.
As discussed in Section IX.C., this proposed rule is expected to reduce
the amount of fuel these vehicles use, and thus affect the petroleum
refinery and supply industries as well. Finally, since the net
reduction in cost associated with these proposed rules is expected to
lead to lower transportation and shipping costs, in a competitive
market a substantial portion of those cost savings will be passed along
to consumers, who then will have additional discretionary income (how
much of the cost is passed along to consumers depends on market
structure and the relative price elasticities). The proposed rules are
not expected to have any notable inflationary or recessionary effect.
---------------------------------------------------------------------------

    \756\ U.S. Department of Labor, Bureau of Labor Statistics.
``Automotive Industry; Employment, Earnings, and Hours.'' http://www.bls.gov/iag/tgs/iagauto.htm, accessed 8/18/14.
---------------------------------------------------------------------------

    The employment effects of environmental regulation are difficult to
disentangle from other economic changes and business decisions that
affect employment, over time and across regions and industries. In
light of these difficulties, we lean on economic theory to provide a
constructive framework for approaching these assessments and for better
understanding the inherent complexities in such assessments.
Neoclassical microeconomic theory describes how profit-maximizing firms
adjust their use of productive inputs in response to changes in their
economic conditions.\757\ Berman and Bui (2001, pp. 274-75) model two
components that drive changes in firm-level labor demand: Output
effects and substitution effects.\758\ Regulation can affect the
profit-maximizing quantity of output by changing the marginal cost of
production. If regulation causes marginal cost to increase, it will
place upward pressure on output prices, leading to a decrease in the
quantity demanded, and resulting in a decrease in production. The
output effect describes how, holding labor intensity constant, a
decrease in production causes a decrease in labor demand. As noted by
Berman and Bui, although many assume that regulation increases marginal
cost, it need not be the case. A regulation could induce a firm to
upgrade to less polluting and more efficient equipment that lowers
marginal production costs, or it may induce use of technologies that
may prove popular with buyers or provide positive network externalities
(see Section IX. A. for discussion of this effect). In such a case,
output could increase.
---------------------------------------------------------------------------

    \757\ See Layard, P.R.G., and A.A. Walters (1978), Microeconomic
Theory (McGraw-Hill, Inc.), Chapter 9 (Docket ID EPA-HQ-OAR-2014-
0827), a standard microeconomic theory textbook treatment, for a
discussion.
    \758\ Berman, E. and L.T.M. Bui (2001). ``Environmental
Regulation and Labor Demand: Evidence from the South Coast Air
Basin.'' Journal of Public Economics 79(2): 265-295 (Docket EPA-HQ-
OAR-2014-0827). The authors also discuss a third component, the
impact of regulation on factor prices, but conclude that this effect
is unlikely to be important for large competitive factor markets,
such as labor and capital. Morgenstern, Pizer and Shih (Morgenstern,
Richard D., William A. Pizer, and Jhih-Shyang Shih (2002). ``Jobs
versus the Environment: An Industry-Level Perspective.'' Journal of
Environmental Economics and Management 43: 412-436) use a similar
model, but they break the employment effect into three parts: (1) A
demand effect; (2) a cost effect; and (3) a factor-shift effect.
---------------------------------------------------------------------------

    The substitution effect describes how, holding output constant,
regulation affects labor intensity of production. Although increased
environmental regulation may increase use of pollution control
equipment and energy to operate that equipment, the impact on labor
demand is ambiguous. For example, equipment inspection requirements,
specialized waste handling, or pollution technologies that alter the
production process may affect the number of workers necessary to
produce a unit of output. Berman and Bui (2001) model the substitution
effect as the effect of regulation on pollution control equipment and
expenditures required by the regulation and the corresponding change in
labor intensity of production.
    In summary, as output and substitution effects may be positive or
negative, theory alone cannot predict the direction of the net effect
of regulation on labor demand at the level of the regulated firm.
Operating within the bounds of standard economic theory, empirical
estimation of net employment effects on regulated firms is possible
when data and methods of sufficient detail and quality are available.
The literature, however, illustrates difficulties with empirical
estimation. For example, studies sometimes rely on confidential plant-
level employment data from the U.S. Census Bureau, possibly combined
with pollution abatement expenditure data that are too dated to be
reliably informative. In addition, the most commonly used empirical
methods do not permit estimation of net effects.
    The conceptual framework described thus far focused on regulatory
effects on plant-level decisions within a regulated industry.
Employment impacts at an individual plant do not necessarily represent
impacts for the sector as a whole. The approach must be modified when
applied at the industry level.
    At the industry level, labor demand is more responsive if: (1) The
price elasticity of demand for the product is high, (2) other factors
of production can

be easily substituted for labor, (3) the supply of other factors is
highly elastic, or (4) labor costs are a large share of total
production costs.\759\ For example, if all firms in an industry are
faced with the same regulatory compliance costs and product demand is
inelastic, then industry output may not change much, and output of
individual firms may change slightly.\760\ In this case, the output
effect may be small, while the substitution effect depends on input
substitutability. Suppose, for example, that new equipment for fuel
efficiency improvements requires labor to install and operate. In this
case, the substitution effect may be positive, and with a small output
effect, the total effect may be positive. As with potential effects for
an individual firm, theory cannot determine the sign or magnitude of
industry-level regulatory effects on labor demand. Determining these
signs and magnitudes requires additional sector-specific empirical
study. For environmental rules, much of the data needed for these
empirical studies is not publicly available, would require significant
time and resources in order to access confidential U.S. Census data for
research, and also would not be necessary for other components of a
typical RIA.
---------------------------------------------------------------------------

    \759\ See Ehrenberg, Ronald G., and Robert S. Smith (2000),
Modern Labor Economics: Theory and Public Policy (Addison Wesley
Longman, Inc.), p. 108.
    \760\ This discussion draws from Berman, E. and L.T.M. Bui
(2001). ``Environmental Regulation and Labor Demand: Evidence from
the South Coast Air Basin.'' Journal of Public Economics 79(2): 265-
295 (Docket EPA-HQ-OAR-2014-0827), p. 293.
---------------------------------------------------------------------------

    In addition to changes to labor demand in the regulated industry,
net employment impacts encompass changes in other related sectors. For
example, the proposed standards are expected to increase demand for
fuel-saving technologies. This increased demand may increase revenue
and employment in the firms providing these technologies. At the same
time, the regulated industry is purchasing the equipment, and these
costs may impact labor demand at regulated firms. Therefore, it is
important to consider the net effect of compliance actions on
employment across multiple sectors or industries.
    If the U.S. economy is at full employment, even a large-scale
environmental regulation is unlikely to have a noticeable impact on
aggregate net employment.\761\ Instead, labor would primarily be
reallocated from one productive use to another, and net national
employment effects from environmental regulation would be small and
transitory (e.g., as workers move from one job to another).\762\
---------------------------------------------------------------------------

    \761\ Full employment is a conceptual target for the economy
where everyone who wants to work and is available to do so at
prevailing wages is actively employed. The unemployment rate at full
employment is not zero.
    \762\ Arrow et al. (1996). ``Benefit-Cost Analysis in
Environmental, Health, and Safety Regulation: A Statement of
Principles.'' American Enterprise Institute, the Annapolis Center,
and Resources for the Future. See discussion on bottom of p. 6. In
practice, distributional impacts on individual workers can be
important, as discussed later in this section.
---------------------------------------------------------------------------

    Affected sectors may experience transitory effects as workers
change jobs. Some workers may retrain or relocate in anticipation of
new requirements or require time to search for new jobs, while
shortages in some sectors or regions could bid up wages to attract
workers. These adjustment costs can lead to local labor disruptions.
Although the net change in the national workforce is expected to be
small, localized reductions in employment may adversely impact
individuals and communities just as localized increases may have
positive impacts.
    If the economy is operating at less than full employment, economic
theory does not clearly indicate the direction or magnitude of the net
impact of environmental regulation on employment; it could cause either
a short-run net increase or short-run net decrease.\763\ An important
research question is how to accommodate unemployment as a structural
feature in economic models. This feature may be important in assessing
large-scale regulatory impacts on employment.\764\
---------------------------------------------------------------------------

    \763\ Schmalensee, Richard, and Robert N. Stavins. ``A Guide to
Economic and Policy Analysis of EPA's Transport Rule.'' White paper
commissioned by Excelon Corporation, March 2011.
    \764\ Klaiber, H. Allen, and V. Kerry Smith (2012). ``Developing
General Equilibrium Benefit Analyses for Social Programs: An
Introduction and Example.'' Journal of Benefit-Cost Analysis 3(2).
---------------------------------------------------------------------------

    Environmental regulation may also affect labor supply. In
particular, pollution and other environmental risks may impact labor
productivity or employees' ability to work.\765\ While the theoretical
framework for analyzing labor supply effects is analogous to that for
labor demand, it is more difficult to study empirically. There is a
small emerging literature described in the next section that uses
detailed labor and environmental data to assess these impacts.
---------------------------------------------------------------------------

    \765\ E.g. Graff Zivin, J., and M. Neidell (2012). ``The Impact
of Pollution on Worker Productivity.'' American Economic Review 102:
3652-3673.
---------------------------------------------------------------------------

    To summarize, economic theory provides a framework for analyzing
the impacts of environmental regulation on employment. The net
employment effect incorporates expected employment changes (both
positive and negative) in the regulated sector and elsewhere. Labor
demand impacts for regulated firms, and also for the regulated
industry, can be decomposed into output and substitution effects which
may be either negative or positive. Estimation of net employment
effects for regulated sectors is possible when data of sufficient
detail and quality are available. Finally, economic theory suggests
that labor supply effects are also possible. In the next section, we
discuss the empirical literature.
(1) Current State of Knowledge Based on the Peer-Reviewed Literature
    In the labor economics literature there is an extensive body of
peer-reviewed empirical work analyzing various aspects of labor demand,
relying on the above theoretical framework.\766\ This work focuses
primarily on the effects of employment policies, e.g. labor taxes,
minimum wage, etc.\767\ In contrast, the peer-reviewed empirical
literature specifically estimating employment effects of environmental
regulations is very limited. Several empirical studies \768\ suggest
that net employment impacts may be zero or slightly positive but small
even in the regulated sector. Other research suggests that more highly
regulated counties may generate fewer jobs than less regulated
ones.\769\ However, since these latter studies compare more regulated
to less regulated counties, they overstate the net national impact of
regulation to the extent that regulation causes plants to locate in one
area of the country rather than another. List et al. (2003) \770\ find

some evidence that this type of geographic relocation may be occurring.
Overall, the peer-reviewed literature does not contain evidence that
environmental regulation has a large impact on net employment (either
negative or positive) in the long run across the whole economy.
---------------------------------------------------------------------------

    \766\ See Hamermesh (1993), Labor Demand (Princeton, NJ:
Princeton University Press), Chapter 2 (Docket EPA-HQ-OAR-2014-0827)
for a detailed treatment.
    \767\ See Ehrenberg, Ronald G., and Robert S. Smith (2000),
Modern Labor Economics: Theory and Public Policy (Addison Wesley
Longman, Inc.), Chapter 4 (Docket EPA-HQ-OAR-2014-0827), for a
concise overview.
    \768\ Berman, E. and L.T.M. Bui (2001). ``Environmental
Regulation and Labor Demand: Evidence from the South Coast Air
Basin.'' Journal of Public Economics 79(2): 265-295 (Docket EPA-HQ-
OAR-2014-0827). Morgenstern, Richard D., William A. Pizer, and Jhih-
Shyang Shih. ``Jobs Versus the Environment: An Industry-Level
Perspective.'' Journal of Environmental Economics and Management 43
(2002): 412-436; Gray et al. (2014), and Ferris, Shadbegian and
Wolverton (2014).
    \769\ Greenstone, M. (2002). ``The Impacts of Environmental
Regulations on Industrial Activity: Evidence from the 1970 and 1977
Clean Air Act Amendments and the Census of Manufactures,'' Journal
of Political Economy 110(6): 1175-1219 (Docket EPA-HQ-OAR-2014-
0827); Walker, Reed. (2011). ``Environmental Regulation and Labor
Reallocation.'' American Economic Review: Papers and Proceedings
101(3): 442-447 (Docket EPA-HQ-OAR-2014-0827).
    \770\ List, J.A., D.L. Millimet, P.G. Fredriksson, and W.W.
McHone (2003). ``Effects of Environmental Regulations on
Manufacturing Plant Births: Evidence from a Propensity Score
Matching Estimator.'' The Review of Economics and Statistics 85(4):
944-952 (Docket EPA-HQ-OAR-2014-0827).
---------------------------------------------------------------------------

    Analytic challenges make it very difficult to accurately produce
net employment estimates for the whole economy that would appropriately
capture the way in which costs, compliance spending, and environmental
benefits propagate through the macro-economy. Quantitative estimates
are further complicated by the fact that macroeconomic models often
have very little sectoral detail and usually assume that the economy is
at full employment. EPA is currently in the process of seeking input
from an independent expert panel on modeling economy-wide impacts,
including employment effects. For more information, see: https://federalregister.gov/a/2014-02471.
(2) Employment Impacts in the Motor Vehicle and Parts Manufacturing
Sector
    This section describes changes in employment in the motor vehicle,
trailer, and parts (hence, motor vehicle) manufacturing sectors due to
these proposed rules. We focus on the motor vehicle manufacturing
sector because it is directly regulated, and because it is likely to
bear a substantial share of changes in employment due to these proposed
rules. We include discussion of effects on the parts manufacturing
sector, because the motor vehicle manufacturing sector can either
produce parts internally or buy them from an external supplier, and we
do not have estimates of the likely breakdown of effort between the two
sectors.
    We follow the theoretical structure of Berman and Bui \771\ of the
impacts of regulation in employment in the regulated sectors. In Berman
and Bui's (2001, p. 274-75) theoretical model, as described above, the
change in a firm's labor demand arising from a change in regulation is
decomposed into two main components: Output and substitution
effects.\772\ As the output and substitution effects may be both
positive, both negative, or some combination, standard neoclassical
theory alone does not point to a definitive net effect of regulation on
labor demand at regulated firms.
---------------------------------------------------------------------------

    \771\ Berman, E. and L.T.M. Bui (2001). ``Environmental
Regulation and Labor Demand: Evidence from the South Coast Air
Basin.'' Journal of Public Economics 79(2): 265-295 (Docket EPA-HQ-
OAR2014-0827).
    \772\ The authors also discuss a third component, the impact of
regulation on factor prices, but conclude that this effect is
unlikely to be important for large competitive factor markets, such
as labor and capital. Morgenstern, Pizer and Shih (2002) use a
similar model, but they break the employment effect into three
parts: (1) The demand effect; (2) the cost effect; and (3) the
factor-shift effect. See Morgenstern, Richard D., William A. Pizer,
and Jhih-Shyang Shih. ``Jobs Versus the Environment: An Industry-
Level Perspective.'' Journal of Environmental Economics and
Management 43 (2002): 412-436 (Docket EPA-HQ-OAR-2014-0827).
---------------------------------------------------------------------------

    Following the Berman and Bui framework for the impacts of
regulation on employment in the regulated sector, we consider two
effects for the motor vehicle sector: The output effect and the
substitution effect.
(a) The Output Effect
    If truck or trailer sales increase, then more people will be
required to assemble trucks, trailers, and their components. If truck
or trailer sales decrease, employment associated with these activities
will decrease. The effects of this proposed rulemaking on HD vehicle
sales thus depend on the perceived desirability of the new vehicles. On
one hand, this proposed rulemaking will increase truck and trailer
costs; by itself, this effect would reduce truck and trailer sales. In
addition, while decreases in truck performance would also decrease
sales, this program is not expected to have any negative effect on
truck performance. On the other hand, this proposed rulemaking will
reduce the fuel costs of operating the trucks; by itself, this effect
would increase truck sales, especially if potential buyers have an
expectation of higher fuel prices. The agencies have not made an
estimate of the potential change in truck or trailer sales. However, as
discussed in IX. E., the agencies have estimated an increase in vehicle
miles traveled (i.e., VMT rebound) due to the reduced operating costs
of trucks meeting these proposed standards. Since increased VMT is most
likely to be met with more drivers and more trucks, our projection of
VMT rebound is suggestive of an increase in vehicle sales and truck
driver employment (recognizing that these increases may be partially
offset by a decrease in manufacturing and sales for equipment of other
modes of transportation such as rail cars or barges).
(b) The Substitution Effect
    The output effect, above, measures the effect due to new truck and
trailer sales only. The substitution effect includes the impacts due to
the changes in technologies needed for vehicles to meet the proposed
standards, separate from the effect on output (that is, as though
holding output constant). This effect includes both changes in
employment due to incorporation of abatement technologies and overall
changes in the labor intensity of manufacturing. We present estimates
for this effect to provide a sense of the order of magnitude of
expected impacts on employment, which we expect to be small in the
automotive sector, and to repeat that regulations may have positive as
well as negative effects on employment.
    One way to estimate this effect, given the cost estimates for
complying with the proposed rule, is to use the ratio of workers to
each $1 million of expenditures in that sector. The use of these ratios
has both advantages and limitations. It is often possible to estimate
these ratios for quite specific sectors of the economy: For instance,
it is possible to estimate the average number of workers in the motor
vehicle body and trailer manufacturing sector per $1 million spent in
the sector, rather than use the ratio from another, more aggregated
sector, such as motor vehicle manufacturing. As a result, it is not
necessary to extrapolate employment ratios from possibly unrelated
sectors. On the other hand, these estimates are averages for the
sectors, covering all the activities in those sectors; they may not be
representative of the labor required when expenditures are required on
specific activities, or when manufacturing processes change
sufficiently that labor intensity changes. For instance, the ratio for
the motor vehicle manufacturing sector represents the ratio for all
vehicle manufacturing, not just for emissions reductions associated
with compliance activities. In addition, these estimates do not include
changes in sectors that supply these sectors, such as steel or
electronics producers. They thus may best be viewed as the effects on
employment in the motor vehicle sector due to the changes in
expenditures in that sector, rather than as an assessment of all
employment changes due to these changes in expenditures. In addition,
this approach estimates the effects of increased expenditures while
holding constant the labor intensity of manufacturing; it does not take
into account changes in labor intensity due to changes in the nature of
production. This latter effect could either increase or

decrease the employment impacts estimated here.\773\
---------------------------------------------------------------------------

    \773\ As noted above, Morgenstern et al. (2002) separate the
effect of holding output constant into two effects: The cost effect,
which holds labor intensity constant, and the factor shift effect,
which estimates those changes in labor intensity.
---------------------------------------------------------------------------

    Some of the costs of these proposed rules will be spent directly in
the motor vehicle manufacturing sector, but it is also likely that some
of the costs will be spent in the motor vehicle body and trailer and
motor vehicle parts manufacturing sectors. The analysis here draws on
estimates of workers per $1 million of expenditures for each of these
sectors.
    There are several public sources for estimates of employment per $1
million expenditures. The U.S. Bureau of Labor Statistics (BLS)
provides its Employment Requirements Matrix (ERM),\774\ which provides
direct estimates of the employment per $1 million in sales of goods in
202 sectors. The values considered here are for Motor Vehicle
Manufacturing (NAICS 3361), Motor Vehicle Body and Trailer
Manufacturing (NAICS 3362), and Motor Vehicle Parts Manufacturing
(NAICS 3363) for 2012.
---------------------------------------------------------------------------

    \774\ http://www.bls.gov/emp/ep_data_emp_requirements.htm.
---------------------------------------------------------------------------

    The Census Bureau provides the Annual Survey of Manufacturers \775\
(ASM), a subset of the Economic Census, based on a sample of
establishments; though the Census itself is more complete, it is
conducted only every 5 years, while the ASM is annual. Both include
more sectoral detail than the BLS ERM: For instance, while the ERM
includes the Motor Vehicle Manufacturing sector, the ASM and Economic
Census have detail at the 6-digit NAICS code level (e.g., light truck
and utility vehicle manufacturing). While the ERM provides direct
estimates of employees/$1 million in expenditures, the ASM and Economic
Census separately provide number of employees and value of shipments;
the direct employment estimates here are the ratio of those values. At
this time, the Economic Census values for 2012 (the most recent year)
are not fully available; we therefore do not report them, and instead
provide the 2011 ASM results (the most recent available). The values
reported are for Motor Vehicle Manufacturing (NAICS 3361), Light Truck
and Utility Vehicle Manufacturing (NAICS 336112), Heavy Duty Truck
Manufacturing (NAICS 33612), Motor Vehicle Body and Trailer
manufacturing (NAICS 3362), and Motor Vehicle Parts Manufacturing
(NAICS 3363).
---------------------------------------------------------------------------

    \775\ http://www.census.gov/manufacturing/asm/index.html.
---------------------------------------------------------------------------

    Draft RIA Chapter 9.9 provides the details on the values of workers
per $1 million in expenditures for the sectors mentioned above. In
2012$, these range from 0.4 workers per $1 million for light truck &
utility vehicle manufacturing in the ASM, to 2.8 workers per $1 million
in expenditures for Motor Vehicle Body and Trailer Manufacturing in the
ASM. These values are then adjusted to remove the employment effects of
imports through use of a ratio of domestic production to domestic sales
of 0.78.\776\
---------------------------------------------------------------------------

    \776\ To estimate the proportion of domestic production affected
by the change in sales, we use data from Ward's Automotive Group for
total truck production in the U.S. compared to total truck sales in
the U.S. For the period 2004-2013, the proportion is 78 percent
(Docket EPA-HQ-OAR-2014-0827), ranging from 68 percent (2009) to 83
percent (2012) over that time.
---------------------------------------------------------------------------

    Over time, the amount of labor needed in the motor vehicle industry
has changed: Automation and improved methods have led to significant
productivity increases. The BLS ERM, for instance, provided estimates
that, in 1993, 1.33 workers in the Motor Vehicle Manufacturing sector
were needed per $1 million, but only 0.46 workers by 2012 (in
2005$).\777\ Because the ERM is available annually for 1993-2012, we
used these data to estimate productivity improvements over time. We
then used these productivity estimates to project the ERM through 2027,
and to adjust the ASM values for 2011. RIA Chapter <IP_ADDRESS> provides
detail on these calculations.
---------------------------------------------------------------------------

    \777\ http://www.bls.gov/emp/ep_data_emp_requirements.htm; this
analysis used data for sectors 81 (Motor Vehicle Manufacturing), 82
(Motor Vehicle Body and Trailer Manufacturing), and 83 (Motor
Vehicle Parts Manufacturing) from ``Chain-weighted (2005 dollars)
real domestic employment requirements tables.''
---------------------------------------------------------------------------

    Finally, to simplify the presentation and give a range of
estimates, we compared the projected employment among the 3 sectors for
the ERM and ASM, and we provide only the maximum and minimum employment
effects estimated for the ERM and the ASM. We provide the range rather
than a point estimate because of the inherent difficulties in
estimating employment impacts; the range gives an estimate of the
expected magnitude. The ERM estimates in the Motor Vehicle Parts
Manufacturing Sector are consistently the maximum values. The ERM
estimates in the Motor Vehicle Body and Trailer Manufacturing Sector
are the minimum values for all years but 2018-2019, when the ASM values
for Light Truck and Utility Vehicle Manufacturing provide the minimum
values.
    Section 0 of the Preamble discusses the vehicle cost estimates
developed for these proposed rules. The final step in estimating
employment impacts is to multiply costs (in $ millions) by workers per
$1 million in costs, to estimate employment impacts in the regulated
and parts manufacturing sectors. Increased costs of vehicles and parts
would, by itself, and holding labor intensity constant, be expected to
increase employment between 2018 and 2027 from none to a few thousand
jobs each year.
    While we estimate employment impacts, measured in job-years,
beginning with program implementation, some of these employment gains
may occur earlier as motor vehicle manufacturers and parts suppliers
hire staff in anticipation of compliance with the standards. A job-year
is a way to calculate the amount of work needed to complete a specific
task. For example, a job-year is one year of work for one person.

Table IX-37--Employment Effects Due to Increased Costs of Vehicles and Parts (Substitution Effect), in Job-Years
----------------------------------------------------------------------------------------------------------------
                                                                                Maximum employment due
                                                                 Minimum employment due   to substitution effect
                                          Costs (millions of     to substitution effect      (ERM estimates,
                 Year                           2012$)              (ERM estimates,        expenditures in the
                                                                  expenditures in the     Body and Trailer  Mfg
                                                                   Parts Sector \a\)             Sector)
----------------------------------------------------------------------------------------------------------------
2018.................................                      116                        0                      100
2019.................................                      113                        0                      100

2020.................................                      112                        0                      100
2021.................................                    2,173                      300                    2,300
2022.................................                    2,161                      300                    2,200
2023.................................                    2,224                      200                    2,100
2024.................................                    3,455                      300                    3,200
2025.................................                    3,647                      200                    3,200
2026.................................                    3,736                      200                    3,100
2027.................................                    5,309                      200                    4,200
----------------------------------------------------------------------------------------------------------------
Note:
\a\ For 2018 and 2019, the minimum employment effects are associated with the ASM's Light Truck and Utility
  Vehicle Manufacturing sector.

(c) Summary of Employment Effects in the Motor Vehicle Sector
    The overall effect of these proposed rules on motor vehicle sector
employment depends on the relative magnitude of the output effect and
the substitution effect. Because we do not have quantitative estimates
of the output effect, and only a partial estimate of the substitution
effect, we cannot reach a quantitative estimate of the overall
employment effects of these proposed rules on motor vehicle sector
employment or even whether the total effect will be positive or
negative.
    The proposed standards are not expected to provide incentives for
manufacturers to shift employment between domestic and foreign
production. This is because the proposed standards will apply to
vehicles sold in the U.S. regardless of where they are produced. If
foreign manufacturers already have increased expertise in satisfying
the requirements of the standards, there may be some initial incentive
for foreign production, but the opportunity for domestic manufacturers
to sell in other markets might increase. To the extent that the
requirements of these proposed rules might lead to installation and use
of technologies that other countries may seek now or in the future,
developing this capacity for domestic production now may provide some
additional ability to serve those markets.
(3) Employment Impacts in Other Affected Sectors
(a) Transport and Shipping Sectors
    Although not directly regulated by these proposed rules, employment
effects in the transport and shipping sector are likely to result from
these regulations. If the overall cost of shipping a ton of freight
decreases because of increased fuel efficiency (taking into account the
increase in upfront purchasing costs), in a perfectly competitive
industry some of these costs savings, depending on the relative
elasticities of supply and demand, will be passed along to customers.
With lower prices, demand for shipping would lead to an increase in
demand for truck shipping services (consistent with the VMT rebound
effect analysis) and therefore an increase in employment in the truck
shipping sector. In addition, if the relative cost of shipping freight
via trucks becomes cheaper than shipping by other modes (e.g., rail or
barge), then employment in the truck transport industry is likely to
increase. If the trucking industry is more labor intensive than other
modes, we would expect this effect to lead to an overall increase in
employment in the transport and shipping sectors.778 779
Such a shift would, however, be at the expense of employment in the
sectors that are losing business to trucking. The first effect--a gain
due to lower shipping costs--is likely to lead to a net increase in
employment. The second effect, due to mode-shifting, may increase
employment in trucking, but decrease employment in other shipping
sectors (e.g., rail or barge), with the net effects dependent on the
labor-intensity of the sectors and the volumes.
---------------------------------------------------------------------------

    \778\ American Transportation Research Institute, ``An Analysis
of the Operational Costs of Trucking: 2011 Update.'' See http://www.atri-online.org/research/results/Op_Costs_2011_Update_one_page_summary.pdf.
    \779\ Association of American Railroads, ``All Inclusive Index
and Rail Adjustment Factor.'' June 3, 2011. See http://www.aar.org/
~/media/aar/RailCostIndexes/AAR-RCAF-2011-Q3.ashx.
---------------------------------------------------------------------------

(b) Fuel Suppliers
    In addition to the effects on the trucking industry and related
truck parts sector, these proposed rules will result in reductions in
fuel use that lower GHG emissions. Fuel saving, principally reductions
in liquid fuels such as diesel and gasoline, will affect employment in
the fuel suppliers industry sectors, principally the Petroleum Refinery
sector.
    Section IX. C. of this Preamble provides estimates of the effects
of these proposed standards on expected fuel consumption. While reduced
fuel consumption represents savings for purchasers of fuel, it also
represents a loss in value of output for the petroleum refinery
industry, which will result in reduced sectoral employment. Because
this sector is material-intensive, the employment effect is not
expected to be large.\780\
---------------------------------------------------------------------------

    \780\ In the 2012 BLS ERM cited above, the Petroleum and Coal
Products Manufacturing sector has a ratio of workers per $1 million
of 0.242, lower than all but two of the 181 sectors with non-zero
employment per $1 million.
---------------------------------------------------------------------------

(c) Fuel Savings
    As a result of this proposed rulemaking, it is anticipated that
trucking firms will experience fuel savings. Fuel savings lower the
costs of transportation goods and services. In a competitive market,
some of the fuel savings that initially accrue to trucking firms are
likely to be passed along as lower transportation costs that, in turn,
could result in lower prices for final goods and services. Some of the
savings might also be retained by firms for investments or for
distributions to firm owners. Again, how much accrues to customers
versus firm owners will depend on the relative elasticities of supply
and demand. Regardless, the savings will accrue to some segment of
consumers: Either owners of trucking firms or the general public, and
the

effect will be increased spending by consumers in other sectors of the
economy, creating jobs in a diverse set of sectors, including retail
and service industries.
    As described in Section IX. C. (2) the value of fuel savings from
this proposed rulemaking is projected to be $15.1 billion (2012$) in
2027, according to Table IX-6. If all those savings are spent, the fuel
savings will stimulate increased employment in the economy through
those expenditures. If the fuel savings accrue primarily to firm
owners, they may either reinvest the money or take it as profit.
Reinvesting the money in firm operations could increase employment
directly. If they take the money as profit, to the extent that these
owners are wealthier than the general public, they may spend less of
the savings, and the resulting employment impacts would be smaller than
if the savings went to the public. Thus, while fuel savings are
expected to decrease employment in the refinery sector, they are
expected to increase employment through increased consumer
expenditures.
(4) Summary of Employment Impacts
    The primary employment effects of these rules are expected to be
found throughout several key sectors: Truck and engine manufacturers,
the trucking industry, truck parts manufacturing, fuel production, and
consumers. These rules initially takes effect in model year 2018, a
time period sufficiently far in the future that the unemployment rate
at that time is unknowable. In an economy with full employment, the
primary employment effect of a rulemaking is likely to be to move
employment from one sector to another, rather than to increase or
decrease employment. For that reason, we focus our partial quantitative
analysis on employment in the regulated sector, to examine the impacts
on that sector directly. We discuss the likely direction of other
impacts in the regulated sector as well as in other directly related
sectors, but we do not quantify those impacts, because they are more
difficult to quantify with reasonable accuracy, particularly so far
into the future.
    For the regulated sector, we have not quantified the output effect.
The substitution effect is associated with potential increased
employment from none to a few thousand jobs per year between 2018 and
2027, depending on the share of employment impacts in the affected
sectors (Motor Vehicle Manufacturing, Motor Vehicle Body and Trailer
Manufacturing, and Motor Vehicle Parts Manufacturing). These estimates
do not include potential changes, either greater or less, in labor
intensity of production. As mentioned above, some of these job gains
may occur earlier as auto manufacturers and parts suppliers hire staff
to prepare to comply with the standard.
    Lower prices for shipping are expected to lead to an increase in
demand for truck shipping services and, therefore, an increase in
employment in that sector, though this effect may be offset somewhat by
changes in employment in other shipping sectors. Reduced fuel
production implies less employment in the fuel provision sectors.
Finally, any net cost savings would be expected to be passed along to
some segment of consumers: Either the general public or the owners of
trucking firms, who are expected then to increase employment through
their expenditures. Under conditions of full employment, any changes in
employment levels in the regulated sector due to this program are
mostly expected to be offset by changes in employment in other sectors.

M. Cost of Ownership and Payback Analysis

    This section examines the economic impacts of the Phase 2 proposed
standards from the perspective of buyers, operators, and subsequent
owners of new HD vehicles, first in the aggregate and then at the level
of individual purchasers of different types of vehicles. In each case,
the analysis assumes that HD vehicle manufacturers are able to recover
their costs for improving fuel efficiency--including direct technology
outlays, indirect costs, and normal profits on any additional capital
investments--by charging higher prices to HD vehicle buyers. As
summarized below, HDV buyers in the aggregate would experience
substantial savings in fuel costs that would more than offset higher
initial outlays to buy more fuel-efficient new vehicles.
    Table IX-38 reports aggregate benefits and costs to buyers and
operators of new HD vehicles for the Preferred Alternative using Method
A. The table reports economic impacts on buyers using only the 7
percent discount rate, since that rate is intended to represent the
opportunity cost of capital that HD vehicle buyers and users must
divert from other investment opportunities to purchase more costly
vehicles. As it shows, fuel savings and the other benefits from
increased fuel efficiency--savings from less frequent refueling and
benefits from additional truck use--far outweigh the higher costs to
buyers of new HD vehicles. As a consequence, buyers, operators, and
subsequent owners of HD vehicles subject to the Phase 2 standards are
together projected to experience large economic gains under the
Preferred Alternative. It should be noted that, because the original
buyers may not hold the vehicles for their lifetimes, and because those
who own or operate the vehicles may not pay for the fuel, these
benefits and costs do not necessarily represent benefits and costs to
identifiable individuals.
    As Table IX-38 shows, the agencies have estimated the increased
costs for maintenance of the new technologies that HD vehicle
manufacturers would employ to decrease fuel consumption, and these
costs are included together with those for purchasing more fuel-
efficient vehicles. Manufacturers' efforts to comply with the Phase 2
standards could also result in changes to vehicle performance and
capacity for certain vehicles. For example, reducing the mass of HD
vehicles in order to improve fuel efficiency could be used to improve
their load-carrying capabilities, while some engine technologies and
aerodynamic modifications could reduce payload capacity. The agencies
request comment on possible changes to vehicle performance and load-
carrying capacity as a result of the proposal along with supporting
information.

  Table IX-38--MY 2018-2029 Lifetime Aggregate Impacts of the Preferred
    Alternative on All HD Vehicle Buyers and Operators Using Method A
                [Billions of 2012$, Discounted at 7%] \a\
------------------------------------------------------------------------
                                       Baseline 1a        Baseline 1b
------------------------------------------------------------------------
Vehicle costs.....................               17.1               16.8
Maintenance costs.................                0.6                0.6
                                   -------------------------------------
    Total costs to HD vehicle                    17.7               17.4
     buyers.......................

Fuel savings \b\..................              104.6               99.1
(valued at retail prices).........
Refueling benefits................                1.6                1.5
Increased travel benefits.........                8.4                8.2
                                   -------------------------------------
    Total benefits to HD vehicle                114.7              108.9
     buyers/operators.............
Net benefits to HD vehicle buyers/               97.0               91.5
 operators\ c\....................
------------------------------------------------------------------------
Notes:
\a\ For an explanation of analytical Methods A and B, please see Section
  I.D; for an explanation of the less dynamic baseline, 1a, and more
  dynamic baseline, 1b, please see Section X.A.1.
\b\ Fuel savings includes fuel consumed during additional rebound
  driving.
\c\ Net benefits shown do not include benefits associated with carbon or
  other co-pollutant emission reductions, accidents/congestion/noise
  impacts, energy security, etc.

    Table IX-38 shows aggregate benefits and costs to buyers and
operators of new HD vehicles for the Preferred Alternative using Method
B, again for only the 7 percent discount rate. As it shows, fuel
savings and the other benefits outweigh the higher prices and added
maintenance costs that buyers and operators of new HD vehicles pay, so
they are again expected to experience large economic gains from the
Preferred Alternative. Again, because the original buyers may not hold
the vehicles for their lifetimes, and because those who own or operate
the vehicles may not pay for the fuel, these benefits and costs do not
necessarily represent benefits and costs to identifiable individuals.

  Table IX-39 MY 2018-2029 Lifetime Aggregate Impacts of the Preferred
    Alternative on All HD Vehicle Buyers and Operators Using Method B
                [Billions of 2012$, Discounted at 7%] \a\
------------------------------------------------------------------------
                                                          Baseline 1b
------------------------------------------------------------------------
Vehicle costs........................................               16.6
Maintenance costs....................................                0.6
                                                      ------------------
    Total costs to HD vehicle buyers.................               17.2
Fuel savings \b\ (valued at retail prices)...........              100.1
Refueling benefits...................................                1.6
Increased travel benefits............................                8.2
                                                      ------------------
    Total benefits to HD vehicle buyers/operators....              109.9
Net benefits to HD vehicle buyers/operators \ c\.....               92.7
------------------------------------------------------------------------
Notes:
\a\ For an explanation of analytical Methods A and B, please see Section
  I.D; for an explanation of the less dynamic baseline, 1a, and more
  dynamic baseline, 1b, please see Section X.A.1.
\b\ Fuel savings includes fuel consumed during additional rebound
  driving.
\c\ Net benefits shown do not include benefits associated with carbon or
  other co-pollutant emission reductions, accidents/congestion/noise
  impacts, energy security, etc.

    It is also useful to examine the cost of purchasing and owning a
new vehicle that complies with the Phase 2 standards and its payback
period--the point at which cumulative savings from lower fuel
expenditures outpace increased vehicle costs. For example, a new MY2027
tractor is estimated to cost roughly $11,684 more (on average, or
roughly 12 percent of a typical $100,000 reference case tractor) due to
the addition of new GHG reducing/fuel consumption improving technology.
This new technology would result in lower fuel consumption and,
therefore, reduced fuel expenditures. But how many months or years
would pass before the reduced fuel expenditures would surpass the
increased upfront costs?
    Table IX-40 presents the discounted annual increased vehicle costs
and fuel savings associated with owning a new MY2027 HD pickup or van
using both 3 percent and 7 percent discount rates. Table IX-41 and
Table IX-42 show the same information for a MY2027 vocational vehicle
and a tractor/trailer, respectively. These comparisons include sales
taxes, excise taxes (for vocational and tractor/trailer) and increased
insurance expenditures on the higher value vehicles, as well as
maintenance costs associated with replacement of lower rolling
resistance tires throughout the lifetimes of affected vehicles.
Importantly, the values behind the tables in this payback analysis do
not include rebound miles driven and/or rebound gallons consumed.
Instead, the tables use reference case miles driven combined with
policy case fuel consumption. We detail these input metrics in Chapter
7 of the draft RIA.
    The fuel expenditure column uses retail fuel prices specific to
gasoline and diesel fuel as projected in AEO2014.\781\ This payback
analysis does not include other impacts, such as reduced refueling
events, the value of driving potential rebound miles, or noise,
congestion and accidents. We use retail fuel prices and

exclude these other private and social impacts because the analysis is
intended to focus on those factors that are most important to buyers
when considering a new vehicle purchase, and to include only those
factors that have clear dollar impacts on HD vehicle buyers.
---------------------------------------------------------------------------

    \781\ U.S. Energy Information Administration, Annual Energy
Outlook 2014, Early Release; Report Number DOE/EIA-0383ER(2014),
December 16, 2013.
---------------------------------------------------------------------------

    As shown, payback would occur in the 3rd year of ownership for HD
pickups and vans (the first year where cumulative net costs turn
negative), in the 5th year for vocational vehicles (at a 3 percent
discount rate, 6th year at a 7 percent discount rate) and early in the
2nd year for tractor/trailers. Note that each table reflects the
average vehicle and reflects proper weighting of fuel consumption/costs
(gasoline vs. diesel). We request comment and supporting data on all
aspects of our payback analysis.

     Table IX-40--Discounted Annual Incremental Expenditures for a MY 2027 HD Pickup or Van Using Method B and Relative to the Less Dynamic Baseline
                                                                       [2012$] \a\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   3% Discount rate                                    7% Discount rate
                                                 -------------------------------------------------------------------------------------------------------
                  Age in years                                                            Cumulative                                          Cumulative
                                                  Vehicle \b\   Maint \c\     Fuel \d\       Net      Vehicle \b\   Maint \c\     Fuel \d\       net
--------------------------------------------------------------------------------------------------------------------------------------------------------
1...............................................       $1,587           $4        -$759         $832       $1,558           $3        -$745         $817
2...............................................           25            3         -734          126           23            3         -694          150
3...............................................           23            3         -714         -561           21            3         -649         -476
4...............................................           22            3         -693       -1,229           19            3         -606       -1,060
5...............................................           20            3         -651       -1,857           17            2         -549       -1,590
6...............................................           19            3         -611       -2,446           15            2         -496       -2,067
7...............................................           18            2         -571       -2,997           14            2         -446       -2,497
8...............................................           16            2         -536       -3,514           12            2         -403       -2,886
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes:
\a\ For an explanation of analytical Methods A and B, please see Section I.D; for an explanation of the less dynamic baseline, 1a, and more dynamic
  baseline, 1b, please see Section X.A.1.
\b\ Includes new technology costs, insurance costs and sales taxes.
\c\ Maintenance costs.
\d\ Uses AEO2014 retail fuel prices.

    Table IX-41--Discounted Annual Incremental Expenditures for a MY 2027 Vocational Vehicle Using Method B and Relative to the Less Dynamic Baseline
                                                                       [2012$] \a\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   3% Discount rate                                    7% Discount rate
                                                 -------------------------------------------------------------------------------------------------------
                  Age in years                                                            Cumulative                                          Cumulative
                                                  Vehicle \b\   Maint \c\     Fuel \d\       Net      Vehicle \b\   Maint \c\     Fuel \d\       net
--------------------------------------------------------------------------------------------------------------------------------------------------------
1...............................................       $3,998          $10        -$965       $3,043       $3,924          $10        -$947       $2,987
2...............................................           63            9         -937        2,178           59            9         -885        2,169
3...............................................           59            9         -914        1,331           53            8         -832        1,399
4...............................................           55            9         -891          504           48            8         -780          675
5...............................................           51            8         -829         -265           43            7         -699           27
6...............................................           48            7         -771         -981           39            6         -625         -554
7...............................................           45            7         -716       -1,645           35            5         -559       -1,073
8...............................................           42            6         -667       -2,264           31            5         -501       -1,538
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes:
\a\ For an explanation of analytical Methods A and B, please see Section I.D; for an explanation of the less dynamic baseline, 1a, and more dynamic
  baseline, 1b, please see Section X.A.1.
\b\ Includes new technology costs, insurance costs, excise and sales taxes.
\c\ Maintenance costs.
\d\ Uses AEO2014 retail fuel prices.

     Table IX-42--Discounted Annual Incremental Expenditures for a MY 2027 Tractor/Trailer Using Method B and Relative to the Less Dynamic Baseline
                                                                       [2012$] \a\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   3% Discount rate                                    7% Discount rate
                                                 -------------------------------------------------------------------------------------------------------
                  Age in years                                                            Cumulative                                          Cumulative
                                                  Vehicle \b\   Maint \c\     Fuel \d\       Net      Vehicle \b\   Maint \c\     Fuel \d\       Net
--------------------------------------------------------------------------------------------------------------------------------------------------------
1...............................................      $15,194          $48     -$14,649         $593      $14,914          $47     -$14,379         $582
2...............................................          238           46      -14,204      -13,327          225           43      -13,421      -12,571
3...............................................          223           44      -13,809      -26,869          203           40      -12,561      -24,889
4...............................................          209           42      -13,416      -40,034          183           37      -11,746      -36,415
5...............................................          195           39      -12,391      -52,191          164           33      -10,443      -46,661
6...............................................          182           35      -11,411      -63,385          148           29       -9,258      -55,743
7...............................................          170           32      -10,511      -73,694          133           25       -8,209      -63,794

8...............................................          158           29       -9,704      -83,211          119           22       -7,295      -70,949
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes:
\a\ For an explanation of analytical Methods A and B, please see Section I.D; for an explanation of the less dynamic baseline, 1a, and more dynamic
  baseline, 1b, please see Section X.A.1.
\b\ Includes new technology costs, insurance costs, excise and sales taxes.
\c\ Maintenance costs.
\d\ Uses AEO2014 retail fuel prices.

N. Safety Impacts

(1) Summary of Supporting HD Vehicle Safety Research
    NHTSA and EPA considered the potential safety impact of
technologies that improve HD vehicle fuel efficiency and GHG emissions
as part of the assessment of regulatory alternatives. The safety
assessment of the technologies in this proposal was informed by two NAS
reports, an analysis of safety effects of HD pickups and vans using
estimates from the DOT report on the effect of mass reduction and
vehicle size on safety, and agency-sponsored safety testing and
research. A summary of the literature and work considered by the
agencies follows.
(2) National Academy of Sciences HD Phase 1 and Phase 2 Reports
    As required by EISA, the National Research Council has conducted
two studies of the technologies and approaches for reducing the fuel
consumption of medium- and heavy-duty vehicles. The first was
documented in a report issued in 2010, ``Technologies and Approaches to
Reducing the Fuel Consumption of Medium- and Heavy-Duty Vehicles''
(``NAS Report''). The second was documented in a report issued in 2014,
``Reducing the Fuel Consumption and Greenhouse Gas Emissions of Medium-
and Heavy-Duty Vehicles, Phase Two-First Report'' (``NAS HD Phase 2
First Report''). While the reports primarily focused on reducing
vehicle fuel consumption and emissions through technology application,
and examined potential regulatory frameworks, both reports additionally
contain findings and recommendations on safety. In developing this
proposal, the agencies carefully considered both of the reports'
findings related to safety. Some of the reports' key findings related
to safety follow.
    NAS commented that idle reduction strategies in actual can be
sophisticated to provide for the safety of the driver in hot and cold
weather.\782\ The agencies considered this comment in our approach for
idle reduction technologies and allow override provisions, as discussed
in Section III. Override is allowed if the external ambient temperature
reaches a level below which or above which the cabin temperature cannot
be maintained within reasonable heat or cold exposure threshold limit
values for the health and safety of the operator (not merely comfort).
NAS commented extensively on the recent emergence of natural gas (NG)
as a viable technology option for commercial vehicles, but alluded to
the existence of uncertainties regarding its safety. The committee
found that while the public crash databases do not contain information
on vehicle fuel type, the existing information indicates that the
crash-related safety risk for NG storage on vehicles does not appear to
be appreciably different from diesel fuel risks. The committee also
found that while there are two existing SAE-recommended practice
standards for NG-powered HD vehicles, the industry could benefit from
best practice directives to minimize crash risks for NG fuel tanks,
such as on shielding to prevent punctures during crashes. As a final
point, NAS stated that manufacturers and operators have a great
incentive to prevent possible NG leakage from a vehicle fuel system
because it would be a significant safety concern and reduce vehicle
range. No recommendations were made for additional Federal safety
regulations for these vehicles. In response, the agencies have reviewed
and discuss the existing NG vehicle standards and best practices cited
by NAS in Section XI.
---------------------------------------------------------------------------

    \782\ Id., p. 33.
---------------------------------------------------------------------------

    In the NAS Committee's Phase 1 report, the Committee commented that
aerodynamic fairings detaching from trucks on the road was a potential
safety issue. However, the Phase 2 interim report stated that
``Anecdotal information gained during the observations of on-road
trailers indicates a few skirts badly damaged or missing from one side.
The skirt manufacturers report no safety concerns (such as side skirts
falling off) and little maintenance needed.''
    The NAS report also identified the link between tire inflation and
condition and vehicle stopping distance and handling, which impacts
overall safety. The committee found that tire pressure monitoring
systems and automatic tire inflation systems are being adopted by
fleets at an increasing rate. However, the committee noted that there
are no standards for performance, display, and system validation. The
committee recommended that NHTSA issue a white paper on the minimum
performance of tire pressure systems from a safety perspective.
    The agencies considered the safety findings in both NAS reports in
developing this proposal and conducted additional research on safety to
further examine information and findings of the reports.
(3) DOT CAFE Model HD Pickup and Van Safety Analysis
    This analysis considered the potential effects on crash safety of
the technologies manufacturers may apply to their HD pickups and vans
to meet each of the regulatory alternatives evaluated. NHTSA research
has shown that vehicle mass reduction affects overall societal
fatalities associated with crashes and, most relevant to this proposal,
that mass reduction in heavier light- and medium-duty vehicles has an
overall beneficial effect on societal fatalities. Reducing the mass of
a heavier vehicle involved in a crash with another vehicle(s) makes it
less likely that there will be fatalities among the occupants of the
other vehicles. In addition to the effects of mass reduction, the
analysis anticipates that the proposed standards, by reducing the

cost of driving HD pickups and vans, would lead to increased travel by
these vehicles and, therefore, more crashes involving these vehicles.
The Method A analysis considers overall impacts from both of these
factors, using a methodology similar to NHTSA's analyses for the MYs
2017-2025 CAFE and GHG emission standards.
    The Method A analysis includes estimates of the extent to which HD
pickups and vans produced during MYs 2014-2030 may be involved in fatal
crashes, considering the mass, survival, and mileage accumulation of
these vehicles, taking into account changes in mass and mileage
accumulation under each regulatory alternative. These calculations make
use of the same coefficients applied to light trucks in the MYs 2017-
2025 CAFE rulemaking analysis. As discussed above, vehicle miles
traveled may increase due to the fuel economy rebound effect, resulting
from improvements in vehicle fuel efficiency and cost of fuel, as well
as the assumed future growth in average vehicle use. Increases in total
lifetime mileage increase exposure to vehicle crashes, including those
that result in fatalities. Consequently, the modeling system computes
total fatalities attributed to vehicle use for vehicles of a given
model year based on safety class and weight threshold. These
calculations also include a term that accounts for the fact that
vehicles involved in future crashes will be certified to more stringent
safety standards than those involved with past crashes upon which the
base rates of involvement in fatal crashes were estimated. Since the
use of mass reducing technology is present within the model, safety
impacts may also be observed whenever a vehicle's base weight
decreases. Thus, in addition to computing total fatalities related to
vehicle use, the modeling system also estimates changes in fatalities
due to reduction in a vehicle's curb weight.
    The total fatalities attributed to vehicle use and vehicle weight
change for vehicles of a given model year are then summed. Lastly,
total fatalities occurring within the industry in a given model year
are accumulated across all vehicles. In addition to using inputs to
estimate the future involvement of modeled vehicles in crashes
involving fatalities, the model also applies inputs defining other
accident-related externalities estimated on a dollar per mile basis.
For vehicles above 4,594 lbs--i.e., the majority of the HD pickup and
van fleet--mass reduction is estimated to reduce the net incidence of
highway fatalities by 0.34 percent per 100 lbs of removed curb weight.
For the few HD pickups and vans below 4,594 lbs, mass reduction is
estimated to increase the net incidence of highway fatalities by 0.52
percent per 100 lbs. Because there are many more HD pickups and vans
above 4,594 lbs than below 4,594 lbs, the overall effect of mass
reduction in the segment is estimated to reduce the incidence of
highway fatalities. The estimated increase in vehicle miles traveled
due to the fuel economy rebound effect is estimated to increase
exposure to vehicle crashes and offset these reductions.
(4) Volpe Research on MD/HD Fuel Efficiency Technologies
    The 2010 National Research Council report ``Technologies and
Approaches to Reducing the Fuel Consumption of Medium- and Heavy-Duty
Vehicles'' recommended that NHTSA perform a thorough safety analysis to
identify and evaluate potential safety issues with fuel efficiency-
improving technologies. The Department of Transportation Volpe Center's
2015 report titled ``Review and Analysis of Potential Safety Impacts
and Regulatory Barriers to Fuel Efficiency Technologies and Alternative
Fuels in Medium- and Heavy-Duty Vehicles'' summarizes research and
analysis findings on potential safety issues associated with both the
diverse alternative fuels (natural gas-CNG and LNG, propane, biodiesel,
and power train electrification), and the specific FE technologies
recently adopted by the MD/HDV fleets.\783\ These include Intelligent
Transportation Systems (ITS) and telematics, speed limiters, idle
reduction devices, tire technologies (single-wide tires, and tire
pressure monitoring systems-TPMS and Automated Tire Inflation Systems-