NHTSA and EPA determined synergistic impacts for this rulemaking
using EPA's ``lumped parameter'' analysis tool, which EPA described at
length in its March 2008 Staff Technical Report.\594\ The lumped
parameter tool is a spreadsheet model that represents energy
consumption in terms of average performance over the fuel economy test
procedure, rather than explicitly analyzing specific drive cycles. The
tool begins with an apportionment of fuel consumption across several
loss mechanisms and accounts for the average extent to which different
technologies affect these loss mechanisms using estimates of engine,
drivetrain and vehicle characteristics that are averaged over the EPA
fuel economy drive cycle. Results of this analysis were generally
consistent with those of full-scale vehicle simulation modeling
performed in 2007 by Ricardo, Inc.
---------------------------------------------------------------------------

    \594\ EPA Staff Technical Report: Cost and Effectiveness
Estimates of Technologies Used to Reduce Light-duty Vehicle Carbon
Dioxide Emissions; EPA420-R-08-008, March 2008. Available at Docket
No. NHTSA-2009-0059-0027.
---------------------------------------------------------------------------

    For the current rulemaking, NHTSA used the lumped parameter tool as
modified in the MY 2011 CAFE final rule. NHTSA modified the lumped
parameter tool from the version described in the EPA Staff Technical
Report in response to public comments received in that rulemaking. The
modifications included updating the list of technologies and their
associated effectiveness values to match the updated list of
technologies used in the final rule. NHTSA also expanded the list of
synergy pairings based on further consideration of the technologies for
which a competition for losses would be expected. These losses are
described in more detail in Section V of the FRIA.
    NHTSA and EPA incorporate synergistic impacts in their analyses in
slightly different manners. Because NHTSA applies technologies
individually in its modeling analysis, NHTSA incorporates synergistic
effects between pairings of individual technologies. The use of
discrete technology pair incremental synergies is similar to that in
DOE's National Energy Modeling System (NEMS).\595\ Inputs to the Volpe
model incorporate NEMS-identified pairs, as well as additional pairs
from the set of technologies considered in the Volpe model.
---------------------------------------------------------------------------

    \595\ U.S. Department of Energy, Energy Information
Administration, Transportation Sector Module of the National Energy
Modeling System: Model Documentation 2007, May 2007, Washington, DC,
DOE/EIAM070(2007), at 29-30. Available at http://tonto.eia.doe.gov/
ftproot/modeldoc/m070(2007).pdf (last accessed March 15, 2010).
---------------------------------------------------------------------------

    NHTSA notes that synergies that occur within a decision tree are
already addressed within the incremental values assigned and therefore
do not require a synergy pair to address. For example, all engine
technologies take into account incremental synergy factors of preceding
engine technologies, and all transmission technologies take into
account incremental synergy factors of preceding transmission
technologies. These factors are expressed in the fuel consumption
improvement factors in the input files used by the Volpe model.
    For applying incremental synergy factors in separate path
technologies, the Volpe model uses an input table (see the tables in
Chapter 3 of the TSD and in the FRIA) which lists technology pairings
and incremental synergy factors associated with those pairings, most of
which are between engine technologies and transmission/electrification/
hybrid technologies. When a technology is applied to a vehicle by the
Volpe model, all instances of that technology in the incremental
synergy table which match technologies already applied to the vehicle
(either pre-existing or previously applied by the Volpe model) are
summed and applied to the fuel consumption improvement factor of the
technology being applied. Synergies for the strong hybrid technology
fuel consumption reductions are included in the incremental value for
the specific hybrid technology block since the model applies
technologies in the order of the most effectiveness for least cost and
also applies all available electrification and transmission
technologies before applying strong hybrid technologies.
    NHTSA received only one comment regarding synergies, from MEMA, who
commented that NHTSA's Volpe model adequately addressed synergistic
effects. Having received no information to the contrary, NHTSA
finalized the synergy approach and values for the final rule.
d. Where can readers find more detailed information about NHTSA's
technology analysis?
    Much more detailed information is provided in Section V of the
FRIA, and a discussion of how NHTSA and EPA jointly reviewed and
updated technology assumptions for purposes of this final rule is
available in Chapter 3 of the TSD. Additionally, all of NHTSA's model
input and output files are now public and available for the reader's
review and consideration. The technology input files can be found in
the docket for this final rule, Docket No. NHTSA-2009-0059, and on
NHTSA's

Web site. And finally, because much of NHTSA's technology analysis for
purposes of this final rule builds on the work that was done for the MY
2011 final rule, we refer readers to that document as well for
background information concerning how NHTSA's methodology for
technology application analysis has evolved over the past several
rulemakings, both in response to comments and as a result of the
agency's growing experience with this type of analysis.\596\
---------------------------------------------------------------------------

    \596\ 74 FR 14233-308 (Mar. 30, 2009).
    \597\ The $21 value is for CO2 emissions in 2010, which rises to
$45/ton in 2050, at an average discount rate of 3 percent.
---------------------------------------------------------------------------

3. How did NHTSA develop its economic assumptions?
    NHTSA's analysis of alternative CAFE standards for the model years
covered by this rulemaking relies on a range of forecast variables,
economic assumptions, and parameter values. This section describes the
sources of these forecasts, the rationale underlying each assumption,
and the agency's choices of specific parameter values. These economic
values play a significant role in determining the benefits of
alternative CAFE standards, as they have for the last several CAFE
rulemakings. Under those alternatives where standards would be
established by reference to their costs and benefits, these economic
values also affect the levels of the CAFE standards themselves. Some of
these variables have more important effects on the level of CAFE
standards and the benefits from requiring alternative increases in fuel
economy than do others.
    In reviewing these variables and the agency's estimates of their
values for purposes of this final rule, NHTSA reconsidered previous
comments it had received and comments received to the NPRM, as well as
reviewed newly available literature. As a consequence, the agency
elected to revise some of its economic assumptions and parameter
estimates from previous rulemakings at the NPRM stage, while retaining
others. Some of the most important changes, which are discussed in
greater detail below, as well as in Chapter 4 of the Joint TSD and in
Chapter VIII of the FRIA, include significant revisions to the markup
factors for technology costs; reducing the rebound effect from 15 to 10
percent; and revising the value of reducing CO2 emissions
based on recent interagency efforts to develop estimates of this value
for government-wide use. The comments the agency received and its
responses are discussed in detail below, as well as in the TSD and
FRIA. For the reader's reference, Table IV.C.3-1 below summarizes the
values used to calculate the economic benefits from each alternative.

        Table IV.C.3-1--Economic Values for Benefits Computations
                                 [2007$]
------------------------------------------------------------------------

------------------------------------------------------------------------
Fuel Economy Rebound Effect.............  10%
``Gap'' between test and on-road MPG....  20%
Value of refueling time per ($ per        $24.64
 vehicle-hour).
Average percentage of tank refilled per   55%
 refueling.
Percent of drivers refueling in response  100%
 to low fuel level.
Annual growth in average vehicle use....  1.15%
Fuel Prices (2012-50 average, $/gallon)   ..............................
    Retail gasoline price...............  $3.66
    Pre-tax gasoline price..............  $3.29
Economic Benefits from Reducing Oil       ..............................
 Imports ($/gallon)
    ``Monopsony'' Component.............  $0.00
    Price Shock Component...............  $0.17
    Military Security Component.........  $0.00
                                         -------------------------------
        Total Economic Costs ($/gallon).  $0.17
Emission Damage Costs (2020, $/ton or $/  ..............................
 metric ton)
    Carbon monoxide.....................  $0
    Volatile organic compounds (VOC)....  $1,300
    Nitrogen oxides (NOx)--vehicle use..  $5,300
    Nitrogen oxides (NOx)--fuel           $5,100
     production and distribution.
    Particulate matter (PM2.5)--vehicle   $290,000
     use.
    Particulate matter (PM2.5)--fuel      $240,000
     production and distribution.
    Sulfur dioxide (SO2)................  $31,000
    Carbon dioxide (CO2)................  $21 \597\
Annual Increase in CO2 Damage Cost......  Varies by year.
External Costs from Additional            ..............................
 Automobile Use ($/vehicle-mile)
    Congestion..........................  $0.054
    Accidents...........................  $0.023
    Noise...............................  $0.001
                                         -------------------------------
        Total External Costs............  $0.078
External Costs from Additional Light      ..............................
 Truck Use ($/vehicle-mile)
    Congestion..........................  $0.048
    Accidents...........................  $0.026
    Noise...............................  $0.001
                                         -------------------------------
        Total External Costs............  $0.075
Discount Rate Applied to Future Benefits  3%, 7%
------------------------------------------------------------------------

a. Costs of Fuel Economy-Improving Technologies
    NHTSA and EPA previously developed detailed estimates of the costs
of applying fuel economy-improving technologies to vehicle models for
use in analyzing the impacts of alternative standards considered in the
proposed rulemaking, including varying cost estimates for applying
certain fuel economy technologies to vehicles of different sizes and
body styles. These estimates were modified for purposes of this
analysis as a result of extensive consultations among engineers from
NHTSA, EPA, and the Volpe Center. Building on NHTSA's estimates
developed for the MY 2011 CAFE final rule and EPA's Advanced Notice of
Proposed Rulemaking, which relied on EPA's 2008 Staff Technical Report,
the two agencies took a fresh look at technology cost and effectiveness
values and incorporated FEV tear-down study results for purposes of
this joint final rule under the National Program.
    While NHTSA generally found that much of the cost information used
in the MY 2011 final rule and EPA's 2008 Staff Report was consistent to
a great extent, the agencies, in reconsidering information from many
sources, revised the component costs of several major technologies
including: turbocharging/downsizing, mild and strong hybrids, diesels,
SGDI, and Valve Train Lift Technologies for purposes of the NPRM. In
addition, based on FEV tear-down studies, the costs for turbocharging/
downsizing, 6-, 7-, 8-speed automatic transmissions, and dual clutch
transmissions were revised for this final rule.
    The technology cost estimates used in this analysis are intended to
represent manufacturers' direct costs for high-volume production of
vehicles with these technologies and sufficient experience with their
application so that all remaining cost reductions due to ``learning
curve'' effects have been fully realized. However, NHTSA recognizes
that manufacturers' actual costs for employing these technologies
include additional outlays for accompanying design or engineering
changes to models that use them, development and testing of prototype
versions, recalibrating engine operating parameters, and integrating
the technology with other attributes of the vehicle. Manufacturers'
indirect costs for employing these technologies also include expenses
for product development and integration, modifying assembly processes
and training assembly workers to install them, increased expenses for
operation and maintaining assembly lines, higher initial warranty costs
for new technologies, any added expenses for selling and distributing
vehicles that use these technologies, and manufacturer and dealer
profit.
    In previous CAFE rulemakings and in NHTSA's safety rulemakings, the
agency has accounted for these additional costs by using a Retail Price
Equivalent (RPE) multiplier of 1.5. For purposes of this rulemaking,
based on recent work by EPA, NHTSA has applied indirect cost
multipliers ranging from 1.11 to 1.64 to the estimates of vehicle
manufacturers' direct costs for producing or acquiring each technology
to improve fuel economy.\598\ These multipliers vary with the
complexity of each technology and the time frame over which costs are
estimated. More complex technologies are associated with higher
multipliers because of the larger increases in manufacturers' indirect
costs for developing, producing (or procuring), and deploying these
more complex technologies. The appropriate multipliers decline over
time for technologies of all complexity levels, since increased
familiarity and experience with their application is assumed to reduce
manufacturers' indirect costs for employing them.
---------------------------------------------------------------------------

    \598\ NHTSA notes that in addition to the technology cost
analysis employing this ``ICM'' approach, the FRIA contains a
sensitivity analysis using a technology cost multiplier of 1.5.
---------------------------------------------------------------------------

    NHTSA and EPA received far fewer specific comments on technology
cost estimates than in previous CAFE rulemakings, which suggests that
most, although not all, stakeholders generally agreed with the
agencies' assumptions. Several commenters supported the agencies' use
of tear-down studies for developing some of the technology costs,
largely citing the agencies' own reasons in support of that
methodology. Some specific comments were received with regard to hybrid
and other technology costs, to which the agencies are responding
directly in Chapter 3 of the Joint TSD and in the agencies' respective
FRIAs. Generally speaking, however, to the extent that commenters
disagreed with the agencies' cost estimates, often the disagreement
stemmed from assumptions about the technology's maturity, which the
agencies have tried to account for in the analysis. These issues are
discussed further in Chapter 3 of the TSD. Additionally, we note that
technology costs will also be addressed in the upcoming revised NAS
report.
    With regard to the indirect cost multiplier approach, commenters
also generally supported the higher level of specificity provided by
the ICM approach compared to the RPE approach, although some commenters
suggested specific refinements to the measurement of ICMs. For example,
while the automotive dealer organization NADA argued that all dealer
costs of sales should be included in ``dealer profit,'' another
commenter noted expressly that the ICM does not include profits.
Comments from ICCT also argued in favor of revising the ``technology
complexity'' component of the ICM to account for the complexity of
integrating a new technology into a vehicle, rather than for only the
complexity of producing the technology itself. These comments and
others on the ICM are addressed in Chapter 3 of the Joint TSD and in
the agencies' respective FRIAs. NHTSA notes that profits were not
included in the indirect cost estimates of this rule, and also that
NHTSA's sensitivity analysis, presented in Chapter X of the FRIA,
indicates that using the 1.5 RPE multiplier would result in higher
costs compared to today's final rule costs incorporating the ICM
multiplier, although even with those higher costs the 1.5 RPE analysis
still resulted in significant net benefits for the rulemaking as a
whole. NHTSA continues to study this issue and may employ a different
approach in future rulemakings.
b. Potential Opportunity Costs of Improved Fuel Economy
    An important concern is whether achieving the fuel economy
improvements required by alternative CAFE standards might result in
manufacturers compromising the performance, carrying capacity, safety,
or comfort of their vehicle models. To the extent that it does so, the
resulting sacrifice in the value of these attributes to consumers
represents an additional cost of achieving the required improvements in
fuel economy. (This possibility is addressed in detail in Section
IV.G.6.) Although exact dollar values of these attributes to consumers
are difficult to infer, differences in vehicle purchase prices and
buyers' choices among competing models that feature varying
combinations of these characteristics clearly demonstrate that changes
in these attributes affect the utility and economic value that vehicles
offer to potential buyers.\599\
---------------------------------------------------------------------------

    \599\ See, e.g., Kleit A.N., 1990. ``The Effect of Annual
Changes in Automobile Fuel Economy Standards.'' Journal of
Regulatory Economics 2: 151-172 (Docket EPA-HQ-OAR-2009-0472-0015);
Berry, Steven, James Levinsohn, and Ariel Pakes, 1995. ``Automobile
Prices in Market Equilibrium,'' Econometrica 63(4): 841-940 (Docket
NHTSA-2009-0059-0031); McCarthy, Patrick S., 1996. ``Market Price
and Income Elasticities of New Vehicle Demands.'' Review of
Economics and Statistics 78: 543-547 (Docket NHTSA-2009-0059-0039);
and Goldberg, Pinelopi K., 1998. ``The Effects of the Corporate
Average Fuel Efficiency Standards in the U.S.,'' Journal of
Industrial Economics 46(1): 1-33 (Docket EPA-HQ-OAR-2009-0472-0017).

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

    NHTSA and EPA have approached this potential problem by developing
cost estimates for fuel economy-improving technologies that include any
additional manufacturing costs that would be necessary to maintain the
originally planned levels of performance, comfort, carrying capacity,
and safety of any light-duty vehicle model to which those technologies
are applied. In doing so, the agencies followed the precedent
established by the 2002 NAS Report, which estimated ``constant
performance and utility'' costs for fuel economy technologies. NHTSA
has used these as the basis for its continuing efforts to refine the
technology costs it uses to analyze manufacturer's costs for complying
with alternative passenger car and light truck CAFE standards for MYs
2012-2016. Although the agency has revised its estimates of
manufacturers' costs for some technologies significantly for use in
this rulemaking, these revised estimates are still intended to
represent costs that would allow manufacturers to maintain the
performance, carrying capacity, and utility of vehicle models while
improving their fuel economy.
    Although we believe that our cost estimates for fuel economy-
improving technologies include adequate provision for accompanying
outlays that are necessary to prevent any significant degradation in
other attributes that vehicle owners value, it is possible that they do
not include adequate allowance for the necessary efforts by
manufacturers to prevent sacrifices in these attributes on all vehicle
models. If this is the case, the true economic costs of achieving
higher fuel economy should include the opportunity costs to vehicle
owners of any sacrifices in vehicles' performance, carrying capacity,
and utility, and omitting these will cause the agency's estimated
technology costs to underestimate the true economic costs of improving
fuel economy.
    Recognizing this possibility, it would be desirable to estimate
explicitly the changes in vehicle buyers' welfare from the combination
of higher prices for new vehicle models, increases in their fuel
economy, and any accompanying changes in vehicle attributes such as
performance, passenger- and cargo-carrying capacity, or other
dimensions of utility. The net change in buyer's welfare that results
from the combination of these changes would provide a more accurate
estimate of the true economic costs for improving fuel economy.
Although the agency has been unable to develop a procedure for doing so
as part of this rulemaking, Section IV.G.6. below includes a detailed
analysis and discussion of how omitting possible changes in vehicle
attributes other than their prices and fuel economy might affect its
estimates of benefits and costs resulting from the standards this rule
establishes.
c. The On-Road Fuel Economy ``Gap''
    Actual fuel economy levels achieved by light-duty vehicles in on-
road driving fall somewhat short of their levels measured under the
laboratory-like test conditions used by EPA to establish its published
fuel economy ratings for different models. In analyzing the fuel
savings from alternative CAFE standards, NHTSA has previously adjusted
the actual fuel economy performance of each light truck model downward
from its rated value to reflect the expected size of this on-road fuel
economy ``gap.'' On December 27, 2006, EPA adopted changes to its
regulations on fuel economy labeling, which were intended to bring
vehicles' rated fuel economy levels closer to their actual on-road fuel
economy levels.\600\
---------------------------------------------------------------------------

    \600\ 71 FR 77871 (Dec. 27, 2006).
---------------------------------------------------------------------------

    In its Final Rule, EPA estimated that actual on-road fuel economy
for light-duty vehicles averages 20 percent lower than published fuel
economy levels. For example, if the overall EPA fuel economy rating of
a light truck is 20 mpg, the on-road fuel economy actually achieved by
a typical driver of that vehicle is expected to be 16 mpg (20*.80).
NHTSA employed EPA's revised estimate of this on-road fuel economy gap
in its analysis of the fuel savings resulting from alternative CAFE
standards evaluated in the MY 2011 final rule.
    For purposes of this final rule, NHTSA conducted additional
analysis of this issue. The agency used data on the number of passenger
cars and light trucks of each model year that were registered for use
during calendar years 2000 through 2006, average rated fuel economy for
passenger cars and light trucks produced during each model year, and
estimates of average miles driven per year by cars and light trucks of
different ages. These data were combined to develop estimates of the
average fuel economy that the U.S. passenger vehicle fleet would have
achieved from 2000 through 2006 if cars and light trucks of each model
year achieved the same fuel economy levels in actual on-road driving as
they did under test conditions when new.
    NHTSA compared these estimates to the Federal Highway
Administration's (FHWA) published values of actual on-road fuel economy
for passenger cars and light trucks during each of those years.\601\
FHWA's estimates of actual fuel economy for passenger cars averaged 22
percent lower than NHTSA's estimates of its fleet-wide average value
under test conditions over this period, while FHWA's estimates for
light trucks averaged 17 lower than NHTSA's estimates of average light
truck fuel economy under test conditions. These results appear to
confirm that the 20 percent on-road fuel economy discount or gap
represents a reasonable estimate for use in evaluating the fuel savings
likely to result from alternative CAFE standards for MY 2012-2016
vehicles.
---------------------------------------------------------------------------

    \601\ Federal Highway Administration, Highway Statistics, 2000
through 2006 editions, Table VM-1; See http://www.fhwa.dot.gov/
policy/ohpi/hss/hsspubs.cfm (last accessed March 1, 2010).
---------------------------------------------------------------------------

    NHTSA received no comments on this issue in response to the NPRM.
Accordingly, it has not revised its estimate of the on-road fuel
economy gap from the 20 percent figure used previously.
d. Fuel Prices and the Value of Saving Fuel
    Projected future fuel prices are a critical input into the economic
analysis of alternative CAFE standards, because they determine the
value of fuel savings both to new vehicle buyers and to society. NHTSA
relied on the most recent fuel price projections from the U.S. Energy
Information Administration's (EIA) Annual Energy Outlook (AEO) for this
analysis. Specifically, we used the AEO 2010 Early Release (December
2009) Reference Case forecasts of inflation-adjusted (constant-dollar)
retail gasoline and diesel fuel prices, which represent the EIA's most
up-to-date estimate of the most likely course of future prices for
petroleum products.\602\ This forecast is

somewhat lower than the AEO 2009 Reference Case forecast the agency
relied upon in the analysis it conducted for the NPRM. Over the period
from 2010 to 2030, the AEO 2010 Early Release Reference Case forecast
of retail gasoline prices used in this analysis averages $3.18 per
gallon (in 2007 dollars), in contrast to the $3.38 per gallon average
price for that same period forecast in the earlier AEO 2009 Reference
Case and used in the NPRM analysis.
---------------------------------------------------------------------------

    \602\ Energy Information Administration, Annual Energy Outlook
2010 Early Release, Reference Case (December 2009), Table A12.
Available at http://www.eia.doe.gov/oiaf/aeo/pdf/appa.pdf, p. 25
(last accessed March 1, 2010). These forecasts reflect the
provisions of the Energy Independence and Security Act of 2007
(EISA), including the requirement that the combined mpg level of
U.S. cars and light trucks reach 35 miles per gallon by model year
2020. Because this provision would be expected to reduce future U.S.
demand for gasoline and lead to a decline in its future price, there
is some concern about whether the AEO 2010 forecast of fuel prices
partly reflects the increases in CAFE standards considered in this
rule, and thus whether it is suitable for valuing the projected
reductions in fuel use. In response to this concern, the agency
notes that EIA issued a revised version of AEO 2008 in June 2008,
which modified its previous December 2007 Early Release of AEO 2008
to reflect the effects of then recently-passed EISA legislation. The
fuel price forecasts reported in EIA's Revised Release of AEO 2008
differed by less than one cent per gallon throughout the entire
forecast period (2008-2030) from those previously issued as part of
its initial release of AEO 2008. Thus, the agencies are reasonably
confident that the fuel price forecasts presented in AEO 2010 and
used to analyze the value of fuel savings projected to result from
this rule are not unduly affected by the CAFE provisions of EISA.
---------------------------------------------------------------------------

    While NHTSA relied on the forecasts of fuel prices presented in AEO
2008 High Price Case in the MY 2011 final rule, we noted at the time
that we were relying on that estimate primarily because volatility in
the oil market appeared to have overtaken the Reference Case. We also
anticipated that the Reference Case forecasts would be significantly
higher in subsequent editions of AEO, and that in future rulemaking
analyses the agency would be likely to rely on the Reference Case
rather than High Price Case forecasts. In fact, both EIA's AEO 2009
Reference Case and its subsequent AEO 2010 Early Release Reference Case
forecasts project higher retail fuel prices in most future years than
those forecast in the High Price Case from AEO 2008. NHTSA is thus
confident that the AEO 2010 Early Release Reference Case is an
appropriate forecast for projected future fuel prices.
    NHTSA and EPA received relatively few comments on the fuel prices
used in the NPRM analysis, compared to previous CAFE rulemakings. Two
commenters, CARB and NADA, supported the use of AEO's Reference Case
for use in the agencies' analysis, although they disagreed on the
agencies' use of the High and Low Price Cases for sensitivities. Both
commenters emphasized the sensitivity of the market and the agencies'
analysis to higher and lower gas prices, and on that basis, CARB
supported the use of the High and Low Price Cases in sensitivity
analysis but urged the agencies to caveat the ``Reference Case''
results more explicitly. In contrast, NADA argued that the agencies
should not use the High and Low Price Cases, because EIA does not
assign specific probabilities to either of them. Only one commenter,
James Adcock, argued that the agencies should use forecasts of future
fuel prices other than those reported in AEO; Adcock stated that future
fuel prices should be assumed to be higher than current pump prices.
    Measured in constant 2007 dollars, the AEO 2010 Early Release
Reference Case forecast of retail gasoline prices during calendar year
2010 is $2.44 per gallon, and rises gradually to $3.83 by the year 2035
(these values include Federal, State and local taxes). However, the
agency's analysis of the value of fuel savings over the lifetimes of MY
2012-2016 cars and light trucks requires forecasts extending through
calendar year 2050, approximately the last year during which a
significant number of MY 2016 vehicles will remain in service. To
obtain fuel price forecasts for the years 2036 through 2050, the agency
assumes that retail fuel prices will continue to increase after 2035 at
the average annual rates projected for 2025 through 2035 in the AEO
2010 Early Release Reference Case.\603\ This assumption results in a
projected retail price of gasoline that reaches $4.49 in 2007 dollars
during the year 2050.
---------------------------------------------------------------------------

    \603\ This projection uses the rate of increase in fuel prices
for 2020-2030 rather than that over the complete forecast period
(2009-2030) because there is extreme volatility in the forecasts for
the years 2009 through approximately 2020. Using the average rate of
change over the complete 2009-2030 forecast period would result in
projections of declining fuel prices after 2030.
---------------------------------------------------------------------------

    The value of fuel savings resulting from improved fuel economy to
buyers of light-duty vehicles is determined by the retail price of
fuel, which includes Federal, State, and any local taxes imposed on
fuel sales. The agency has updated the estimates of gasoline taxes it
employed in the NPRM using the recent data on State fuel tax rates;
expressed in 2007 dollars, Federal gasoline taxes are currently $0.178,
while State and local gasoline taxes together average $0.231 per
gallon, for a total tax burden of $0.401 per gallon. Because fuel taxes
represent transfers of resources from fuel buyers to government
agencies, however, rather than real resources that are consumed in the
process of supplying or using fuel, NHTSA deducts their value from
retail fuel prices to determine the true value of fuel savings
resulting from more stringent CAFE standards to the U.S. economy.
    NHTSA follows the assumptions used by EIA in AEO 2010 Early Release
that State and local gasoline taxes will keep pace with inflation in
nominal terms, and thus remain constant when expressed in constant
dollars. In contrast, EIA assumes that Federal gasoline taxes will
remain unchanged in nominal terms, and thus decline throughout the
forecast period when expressed in constant dollars. These differing
assumptions about the likely future behavior of Federal and State/local
fuel taxes are consistent with recent historical experience, which
reflects the fact that Federal as well as most State motor fuel taxes
are specified on a cents-per-gallon rather than an ad valorem basis,
and typically require legislation to change. The projected value of
total taxes is deducted from each future year's forecast of retail
gasoline and diesel prices to determine the economic value of each
gallon of fuel saved during that year as a result of improved fuel
economy. Subtracting fuel taxes from the retail prices forecast in AEO
2010 Early Release results in a projected value for saving gasoline of
$2.04 per gallon during 2010, rising to $3.48 per gallon by the year
2035,and averaging $2.91 over this 25-year period.
    Although the Early Release of AEO 2010 contains only the Reference
Case forecast, EIA includes ``High Price Case'' and ``Low Price Case''
forecasts in each year's complete AEO, which reflect uncertainties
regarding future levels of oil production and demand. For this final
rule, NHTSA has continued to use the most recent ``High Price Case''
and ``Low Price Case'' forecasts available, which are those from AEO
2009. While NHTSA recognizes that these forecasts are not
probabilistic, as NADA commented, we continue to believe that using
them for sensitivity analyses provides valuable information for agency
decision-makers, because it illustrates the sensitivity of the rule's
primary economic benefit resulting from uncertainty about future growth
in world demand for petroleum energy and the strategic behavior of oil
suppliers.
    These alternative scenarios project retail gasoline prices that
range from a low of $2.02 to a high of $5.04 per gallon during 2020,
and from $2.04 to $5.47 per gallon during 2030 (all figures in 2007
dollars). In conjunction with our assumption that fuel taxes will
remain constant in real or inflation-adjusted terms over this period,
these forecasts imply pre-tax values of saving fuel ranging from $1.63
to $4.65 per gallon during 2020, and from $1.66 to $5.09 per gallon in
2030 (again, all figures are in constant 2007 dollars). In conducting
the analysis of uncertainty in benefits and costs from alternative CAFE
standards required by OMB, NHTSA evaluated the sensitivity of its
benefits estimates to these alternative forecasts of future fuel
prices. Detailed

results and discussion of this sensitivity analysis can be found in the
FRIA. Generally, however, this analysis confirmed that as several
commenters suggested, the primary economic benefit resulting from the
rule--the value of fuel savings--is quite sensitive to forecast fuel
prices.
e. Consumer Valuation of Fuel Economy and Payback Period
    In estimating the impacts on vehicle sales that would result from
alternative CAFE standards to potential vehicle buyers, NHTSA assumes,
as in the MY 2011 final rule, that potential vehicle buyers value the
resulting fuel savings over only part of the expected lifetime of the
vehicles they purchase. Specifically, we assume that buyers value fuel
savings over the first five years of a new vehicle's lifetime, and
discount the value of these future fuel savings at a 3 percent annual
rate. The five-year figure represents approximately the current average
term of consumer loans to finance the purchase of new vehicles. We
recognize that the period over which individual buyers finance new
vehicle purchases may not correspond exactly to the time horizons they
apply in valuing fuel savings from higher fuel economy.
    The agency deducts the discounted present value of fuel savings
over the first five years of a vehicle model's lifetime from the
technology costs incurred by its manufacturer to improve that model's
fuel economy to determine the increase in its ``effective price'' to
buyers. The Volpe model uses these estimates of effective costs for
increasing the fuel economy of each vehicle model to identify the order
in which manufacturers would be likely to select models for the
application of fuel economy-improving technologies in order to comply
with stricter standards. The average value of the resulting increase in
effective cost from each manufacturer's simulated compliance strategy
is also used to estimate the impact of alternative standards on its
total sales for future model years.
    One commenter, NADA, supported the agency's assumption of a five-
year period for buyers' valuation of fuel economy, on the basis that
the considerable majority of consumers seek to recoup costs quickly.
However, NADA also encouraged the agencies to ensure that purchaser
finance costs, opportunity costs of vehicle ownership, and increased
maintenance costs were accounted for. Another commenter, James Adcock,
argued that the assumption of a five-year period was irrational,
because it did not account for the fact that first purchasers will be
able to sell a higher-mpg vehicle for more money than a lower-mpg
vehicle.
    In response to these comments, the agency notes that it estimates
the aggregate value to the U.S. economy of fuel savings resulting from
alternative standards--or their ``social'' value--over the entire
expected lifetimes of vehicles manufactured under those standards,
rather than over the shorter 5-year ``payback period'' we assume that
manufacturers employ to represent the preferences of vehicle buyers.
The 5-year payback period is only utilized to identify the likely
sequence of improvements in fuel economy that manufacturers are likely
to make to their different vehicle models. The procedure the agency
uses for calculating lifetime fuel savings is discussed in detail in
the following section, while alternative assumptions about the time
horizon over which potential buyers consider fuel savings in their
vehicle purchasing decisions are analyzed and discussed in detail in
Section IV.G.6 below.
    Valuing fuel savings over vehicles' entire lifetimes in effect
recognizes the gains that future vehicle owners will receive, even if
initial purchasers of higher-mpg models are not able to recover the
entire remaining value of fuel savings when they re-sell those
vehicles. The agency acknowledges, however, that it has not accounted
for any effects of increased financing costs for purchasing vehicles
with higher fuel economy or increased expenses for maintaining them on
benefits to vehicle owners, over either the short-run payback period or
the full lifetimes of vehicles.
f. Vehicle Survival and Use Assumptions
    NHTSA's first step in estimating lifetime fuel consumption by
vehicles produced during a model year is to calculate the number
expected to remain in service during each year following their
production and sale.\604\ This is calculated by multiplying the number
of vehicles originally produced during a model year by the proportion
typically expected to remain in service at their age during each later
year, often referred to as a ``survival rate.''
---------------------------------------------------------------------------

    \604\ Vehicles are defined to be of age 1 during the calendar
year corresponding to the model year in which they are produced;
thus for example, model year 2000 vehicles are considered to be of
age 1 during calendar year 2000, age 2 during calendar year 2001,
and to reach their maximum age of 26 years during calendar year
2025. NHTSA considers the maximum lifetime of vehicles to be the age
after which less than 2 percent of the vehicles originally produced
during a model year remain in service. Applying these conventions to
vehicle registration data indicates that passenger cars have a
maximum age of 26 years, while light trucks have a maximum lifetime
of 36 years. See Lu, S., NHTSA, Regulatory Analysis and Evaluation
Division, ``Vehicle Survivability and Travel Mileage Schedules,''
DOT HS 809 952, 8-11 (January 2006). Available at http://www-
nrd.nhtsa.dot.gov/Pubs/809952.pdf (last accessed March 1, 2010).
---------------------------------------------------------------------------

    As discussed in more detail in Section II.B.3 above and in Chapter
1 of the TSD, to estimate production volumes of passenger cars and
light trucks for individual manufacturers, NHTSA relied on a baseline
market forecast constructed by EPA staff beginning with MY 2008 CAFE
certification data. After constructing a MY 2008 baseline, EPA and
NHTSA used projected car and truck volumes for this period from Energy
Information Administration's (EIA's) Annual Energy Outlook (AEO) 2009
in the NPRM analysis.\605\ For the analysis supporting this final rule,
NHTSA substituted the revised forecasts of total volume reported in
EIA's Annual Energy Outlook 2010 Early Release. However, Annual Energy
Outlook forecasts only total car and light truck sales, rather than
sales at the manufacturer and model-specific level, which the agencies
require in order to estimate the effects new standards will have on
individual manufacturers.\606\
---------------------------------------------------------------------------

    \605\ Available at http://www.eia.doe.gov/oiaf/aeo/index.html
(last accessed March 15, 2010). NHTSA and EPA made the simplifying
assumption that projected sales of cars and light trucks during each
calendar year from 2012 through 2016 represented the likely
production volumes for the corresponding model year. The agency did
not attempt to establish the exact correspondence between projected
sales during individual calendar years and production volumes for
specific model years.
    \606\ Because AEO 2009's ``car'' and ``truck'' classes did not
reflect NHTSA's recent reclassification (in March 2009 for
enforcement beginning MY 2011) of many two wheel drive SUVs from the
nonpassenger (i.e., light truck) fleet to the passenger car fleet,
EPA staff made adjustments to account for such vehicles in the
baseline.
---------------------------------------------------------------------------

    To estimate sales of individual car and light truck models produced
by each manufacturer, EPA purchased data from CSM Worldwide and used
its projections of the number of vehicles of each type (car or truck)
that will be produced and sold by manufacturers in model years 2011
through 2015.\607\ This provided year-by-year estimates of the
percentage of cars and trucks sold by each manufacturer, as well as the
sales percentages accounted for by each vehicle market segment. (The
distributions of car and truck sales by manufacturer and by market
segment for the 2016 model year and beyond were assumed to be the same
as CSM's forecast for the 2015 calendar year.) Normalizing these
percentages to the

total car and light truck sales volumes projected for 2012 through 2016
in AEO 2009 provided manufacturer-specific market share and model-
specific sales estimates for those model years. The volumes were then
scaled to AEO 2010 total volume for each year.
---------------------------------------------------------------------------

    \607\ EPA also considered other sources of similar information,
such as J.D. Powers, and concluded that CSM was better able to
provide forecasts at the requisite level of detail for most of the
model years of interest.
---------------------------------------------------------------------------

    To estimate the number of passenger cars and light trucks
originally produced during model years 2012 through 2016 that will
remain in use during each subsequent year, the agency applied age-
specific survival rates for cars and light trucks to these adjusted
forecasts of passenger car and light truck sales. In 2008, NHTSA
updated its previous estimates of car and light truck survival rates
using the most current registration data for vehicles produced during
recent model years, in order to ensure that they reflected recent
increases in the durability and expected life spans of cars and light
trucks.\608\
---------------------------------------------------------------------------

    \608\ Lu, S., NHTSA, Regulatory Analysis and Evaluation
Division, ``Vehicle Survivability and Travel Mileage Schedules,''
DOT HS 809 952, 8-11 (January 2006). Available at http://www-
nrd.nhtsa.dot.gov/Pubs/809952.pdf (last accessed March 1, 2010).
These updated survival rates suggest that the expected lifetimes of
recent-model passenger cars and light trucks are 13.8 and 14.5
years.
---------------------------------------------------------------------------

    The next step in estimating fuel use is to calculate the total
number of miles that model year 2012-2016 cars and light trucks
remaining in use will be driven each year. To estimate total miles
driven, the number projected to remain in use during each future year
is multiplied by the average number of miles they are expected to be
driven at the age they will reach in that year. The agency estimated
annual usage of cars and light trucks of each age using data from the
Federal Highway Administration's 2001 National Household Transportation
Survey (NHTS).\609\ Because these estimates reflect the historically
low gasoline prices that prevailed at the time the 2001 NHTS was
conducted, however, NHTSA adjusted them to account for the effect on
vehicle use of subsequent increases in fuel prices. Details of this
adjustment are provided in Chapter VIII of the FRIA and Chapter 4 of
the Joint TSD.
---------------------------------------------------------------------------

    \609\ For a description of the Survey, See http://nhts.ornl.gov/
quickStart.shtml (last accessed March 1, 2010).
---------------------------------------------------------------------------

    Increases in average annual use of cars and light trucks have been
an important source of historical growth in the total number of miles
they are driven each year. To estimate future growth in their average
annual use for purposes of this rulemaking, NHTSA calculated the rate
of growth in the adjusted mileage schedules derived from the 2001 NHTS
necessary for total car and light truck travel to increase at the rate
forecast in the AEO 2010 Early Release Reference Case.\610\ This rate
was calculated to be consistent with future changes in the overall size
and age distributions of the U.S. passenger car and light truck fleets
that result from the agency's forecasts of total car and light truck
sales and updated survival rates. The resulting growth rate in average
annual car and light truck use of 1.15 percent per year was applied to
the mileage figures derived from the 2001 NHTS to estimate annual
mileage during each year of the expected lifetimes of MY 2012-2016 cars
and light trucks.\611\
---------------------------------------------------------------------------

    \610\ This approach differs from that used in the MY 2011 final
rule, where it was assumed that future growth in the total number of
cars and light trucks in use resulting from projected sales of new
vehicles was adequate by itself to account for growth in total
vehicle use, without assuming continuing growth in average vehicle
use.
    \611\ While the adjustment for future fuel prices reduces
average mileage at each age from the values derived from the 2001
NHTS, the adjustment for expected future growth in average vehicle
use increases it. The net effect of these two adjustments is to
increase expected lifetime mileage by about 18 percent significantly
for both passenger cars and about 16 percent for light trucks.
---------------------------------------------------------------------------

    Finally, the agency estimated total fuel consumption by passenger
cars and light trucks remaining in use each year by dividing the total
number of miles surviving vehicles are driven by the fuel economy they
are expected to achieve under each alternative CAFE standard. Each
model year's total lifetime fuel consumption is the sum of fuel use by
the cars or light trucks produced during that model year during each
year of their life spans. In turn, the savings in a model year's
lifetime fuel use that will result from each alternative CAFE standard
is the difference between its lifetime fuel use at the fuel economy
level it attains under the Baseline alternative, and its lifetime fuel
use at the higher fuel economy level it is projected to achieve under
that alternative standard.\612\
---------------------------------------------------------------------------

    \612\ To illustrate these calculations, the agency's adjustment
of the AEO 2009 Revised Reference Case forecast indicates that 9.26
million passenger cars will be produced during 2012, and the
agency's updated survival rates show that 83 percent of these
vehicles, or 7.64 million, are projected to remain in service during
the year 2022, when they will have reached an age of 10 years. At
that age, passenger achieving the fuel economy level they are
projected to achieve under the Baseline alternative are driven an
average of about 800 miles, so surviving model year 2012 passenger
cars will be driven a total of 82.5 billion miles (= 7.64 million
surviving vehicles x 10,800 miles per vehicle) during 2022. Summing
the results of similar calculations for each year of their 26-year
maximum lifetime, model year 2012 passenger cars will be driven a
total of 1,395 billion miles under the Baseline alternative. Under
that alternative, they are projected to achieve a test fuel economy
level of 32.4 mpg, which corresponds to actual on-road fuel economy
of 25.9 mpg (= 32.4 mpg x 80 percent). Thus their lifetime fuel use
under the Baseline alternative is projected to be 53.9 billion
gallons (= 1,395 billion miles divided by 25.9 miles per gallon).
---------------------------------------------------------------------------

    NHTSA and EPA received no comments on their respective NPRMs
indicating that these assumptions should be updated or reconsidered.
Thus the agencies have continued to employ them in the analysis
supporting this final rule.
g. Accounting for the Fuel Economy Rebound Effect
    The fuel economy rebound effect refers to the fraction of fuel
savings expected to result from an increase in vehicle fuel economy--
particularly an increase required by the adoption of higher CAFE
standards--that is offset by additional vehicle use. The increase in
vehicle use occurs because higher fuel economy reduces the fuel cost of
driving, typically the largest single component of the monetary cost of
operating a vehicle, and vehicle owners respond to this reduction in
operating costs by driving slightly more. By lowering the marginal cost
of vehicle use, improved fuel economy may lead to an increase in the
number of miles vehicles are driven each year and over their lifetimes.
Even with their higher fuel economy, this additional driving consumes
some fuel, so the rebound effect reduces the net fuel savings that
result when new CAFE standards require manufacturers to improve fuel
economy.
    The magnitude of the rebound effect is an important determinant of
the actual fuel savings that are likely to result from adopting
stricter CAFE standards. Research on the magnitude of the rebound
effect in light-duty vehicle use dates to the early 1980s, and
generally concludes that a statistically significant rebound effect
occurs when vehicle fuel efficiency improves.\613\ The agency reviewed
studies of the rebound effect it had previously relied upon, considered
more recently published estimates, and developed new estimates of its
magnitude for purposes of the NPRM.\614\ Recent studies provide some
evidence that the rebound effect has been declining over time, and may
decline further over the immediate future if incomes rise faster than
gasoline prices. This result appears

plausible, because the responsiveness of vehicle use to variation in
fuel costs is expected to decline as they account for a smaller
proportion of the total monetary cost of driving, which has been the
case until very recently. At the same time, rising personal incomes
would be expected to reduce the sensitivity of vehicle use to fuel
costs as the time component of driving costs--which is likely to be
related to income levels--accounts for a larger fraction the total cost
of automobile travel.
---------------------------------------------------------------------------

    \613\ Some studies estimate that the long-run rebound effect is
significantly larger than the immediate response to increased fuel
efficiency. Although their estimates of the adjustment period
required for the rebound effect to reach its long-run magnitude
vary, this long-run effect is most appropriate for evaluating the
fuel savings and emissions reductions resulting from stricter
standards that would apply to future model years.
    \614\ For details of the agency's analysis, see Chapter VIII of
the PRIA and Chapter 4 of the draft Joint TSD accompanying this
proposed rule.
---------------------------------------------------------------------------

    NHTSA developed new estimates of the rebound effect by using
national data on light-duty vehicle travel over the period from 1950
through 2006 to estimate various econometric models of the relationship
between vehicle miles-traveled and factors likely to influence it,
including household income, fuel prices, vehicle fuel efficiency, road
supply, the number of vehicles in use, vehicle prices, and other
factors.\615\ The results of NHTSA's analysis are consistent with the
findings from other recent research: the average long-run rebound
effect ranged from 16 percent to 30 percent over the period from 1950
through 2007, while estimates of the rebound effect in 2007 range from
8 percent to 14 percent. Projected values of the rebound effect for the
period from 2010 through 2030, which the agency developed using
forecasts of personal income, fuel prices, and fuel efficiency from AEO
2009's Reference Case, range from 4 percent to 16 percent, depending on
the specific model used to generate them.
---------------------------------------------------------------------------

    \615\ The agency used several different model specifications and
estimation procedures to control for the effect of fuel prices on
fuel efficiency in order to obtain accurate estimates of the rebound
effect.
---------------------------------------------------------------------------

    In light of these results, the agency's judgment is that the
apparent decline over time in the magnitude of the rebound effect
justifies using a value for future analysis that is lower than
historical estimates, which average 15-25 percent. Because the
lifetimes of vehicles affected by the alternative CAFE standards
considered in this rulemaking will extend from 2012 until nearly 2050,
a value that is significantly lower than historical estimates appears
to be appropriate. Thus NHTSA used a 10 percent rebound effect in its
analysis of fuel savings and other benefits from higher CAFE standards
for the NPRM. The agency also sought comment on other alternatives for
estimating the rebound effect, such as whether it would be appropriate
to use the price elasticity of demand for gasoline, or other
alternative approaches, to guide the choice of a value for the rebound
effect.
    NHTSA and EPA received far fewer comments on the rebound effect
than were previously received to CAFE rulemakings. Only one commenter,
NJ DEP, expressly supported the agencies' assumption of 10 percent for
the rebound effect; other commenters (CARB, CBD, ICCT) argued that 10
percent should be the absolute maximum value and that the rebound
effect assumed by the agencies should be lower, and would also be
expected to decline over time. ICCT added that the price elasticity of
gasoline demand could be a useful comparison for the rebound effect,
but should not be used to derive it. Other commenters argued that a
rebound effect either was unlikely to occur (James Hyde), or was
unlikely to produce a uniform increase in use of all vehicles with
improved fuel economy (Missouri DNR). NADA argued, in contrast, that
the agencies had not provided sufficient justification for lowering the
rebound effect to 10 percent from the ``historically justified'' range
of 15 to 30 percent.
    The agency's interpretation of historical and recent evidence on
the magnitude of the rebound effect is that a significant fuel economy
rebound effect exists, and commenters did not provide any additional
data or analysis to justify revising our initial estimates of the
rebound effect. Therefore, the data available at this time do not
justify using a rebound effect below the 10 percent figure employed in
its NPRM analysis. NHTSA believes that projections of a continued
decline in the magnitude of the rebound effect are unrealistic because
they assume the rate at which it declines in response to increasing
incomes remain constant, and in some cases imply that the rebound
effect will become negative in the near future. In addition, the
continued increases in fuel prices used in this analysis will tend to
increase the magnitude of the rebound effect, thus offsetting part of
the effect of rising incomes. As the preceding discussion indicates,
there is a wide range of estimates for both the historical magnitude of
the rebound effect and its projected future value, and there is some
evidence that the magnitude of the rebound effect appears to be
declining over time. Nevertheless, NHTSA requires a single point
estimate for the rebound effect as an input to its analysis, although a
range of estimates can be used to test the sensitivity to uncertainty
about its exact magnitude. For the final rule, NHTSA chose to use 10
percent as its primary estimate of the rebound effect, with a range of
5-15 percent for use in sensitivity testing.
    The 10 percent figure is well below those reported in almost all
previous research, and it is also below most estimates of the
historical and current magnitude of the rebound effect developed by
NHTSA. However, other recent research--particularly that conducted by
Small and Van Dender and by Greene--reports persuasive evidence that
the magnitude of the rebound effect is likely to be declining over
time, and the forecasts developed by NHTSA also suggest that this is
likely to be the case. As a consequence, NHTSA concluded that a value
below the historical estimates reported here is likely to provide a
more reliable estimate of its magnitude during the future period
spanned by NHTSA's analysis of the impacts of this rule. The 10 percent
estimate meets this condition, since it lies below the 15-30 percent
range of estimates for the historical rebound effect reported in most
previous research, and at the upper end of the 5-10 percent range of
estimates for the future rebound effect reported in the recent studies
by Small and Van Dender and by Greene. It also lies within the 3-16
percent range of forecasts of the future magnitude of the rebound
effect developed by NHTSA in its recent research. In summary, the 10
percent value was not derived from a single point estimate from a
particular study, but instead represents a reasonable compromise
between the historical estimates and the projected future estimates.
NHTSA will continue to review this estimate of the rebound effect in
future rulemakings, but the agency has continued to use the 10 percent
rebound effect over the entire future period spanned by the analysis it
conducted for this final rule.
h. Benefits From Increased Vehicle Use
    The increase in vehicle use from the rebound effect provides
additional benefits to their owners, who may make more frequent trips
or travel farther to reach more desirable destinations. This additional
travel provides benefits to drivers and their passengers by improving
their access to social and economic opportunities away from home. As
evidenced by their decisions to make more frequent or longer trips when
improved fuel economy reduces their costs for driving, the benefits
from this additional travel exceed the costs drivers and passengers
incur in making more frequent or longer trips.
    The agency's analysis estimates the economic benefits from
increased rebound-effect driving as the sum of fuel costs drivers incur
plus the consumer surplus they receive from the additional

accessibility it provides.\616\ Because the increase in travel depends
on the extent of improvement in fuel economy, the value of benefits it
provides differs among model years and alternative CAFE standards.
Under even those alternatives that would impose the highest standards,
however, the magnitude of these benefits represents a small fraction of
total benefits. Because no comments addressed this issue of benefits
from increased vehicle use or the procedure used to estimate them, the
agencies have finalized their proposed assumptions for purposes of the
final rule analysis.
---------------------------------------------------------------------------

    \616\ The consumer surplus provided by added travel is estimated
as one-half of the product of the decline in fuel cost per mile and
the resulting increase in the annual number of miles driven.
---------------------------------------------------------------------------

i. The Value of Increased Driving Range
    Improving vehicles' fuel economy may also increase their driving
range before they require refueling. By reducing the frequency with
which drivers typically refuel, and by extending the upper limit of the
range they can travel before requiring refueling, improving fuel
economy thus provides some additional benefits to their owners.\617\
NHTSA re-examined this issue for purposes of this rulemaking, and found
no information in comments or elsewhere that would cause the agency to
revise its previous approach. Since no direct estimates of the value of
extended vehicle range are available, NHTSA calculates directly the
reduction in the annual number of required refueling cycles that
results from improved fuel economy, and applies DOT-recommended values
of travel time savings to convert the resulting time savings to their
economic value.\618\
---------------------------------------------------------------------------

    \617\ If manufacturers respond to improved fuel economy by
reducing the size of fuel tanks to maintain a constant driving
range, the resulting cost saving will presumably be reflected in
lower vehicle sales prices.
    \618\ See Department of Transportation, Guidance Memorandum,
``The Value of Saving Travel Time: Departmental Guidance for
Conducting Economic Evaluations,'' Apr. 9, 1997. http://
ostpxweb.dot.gov/policy/Data/VOT97guid.pdf (last accessed March 1,
2010); update available at http://ostpxweb.dot.gov/policy/Data/
VOTrevision1_2-11-03.pdf (last accessed March 1, 2010).
---------------------------------------------------------------------------

    As an illustration, a typical small light truck model has an
average fuel tank size of approximately 20 gallons. Assuming that
drivers typically refuel when their tanks are 55 percent full (i.e., 11
gallons in reserve), increasing this model's actual on-road fuel
economy from 24 to 25 mpg would extend its driving range from 216 miles
(= 9 gallons x 24 mpg) to 225 miles (= 9 gallons x 25 mpg). Assuming
that it is driven 12,000 miles/year, this reduces the number of times
it needs to be refueled each year from 55.6 (= 12,000 miles per year/
216 miles per refueling) to 53.3 (= 12,000 miles per year/225 miles per
refueling), or by 2.3 refuelings per year.
    Weighted by the nationwide mix of urban and rural driving, personal
and business travel in urban and rural areas, and average vehicle
occupancy for driving trips, the DOT-recommended values of travel time
per vehicle-hour is $24.64 (in 2007 dollars).\619\Assuming that
locating a station and filling up requires a total of five minutes, the
annual value of time saved as a result of less frequent refueling
amounts to $4.72 (calculated as 5/60 x 2.3 x $24.64). This calculation
is repeated for each future year that model year 2012-2016 cars and
light trucks would remain in service. Like fuel savings and other
benefits, the value of this benefit declines over a model year's
lifetime, because a smaller number of vehicles originally produced
during that model year remain in service each year, and those remaining
in service are driven fewer miles.
---------------------------------------------------------------------------

    \619\ The hourly wage rate during 2008 is estimated to average
$25.50 when expressed in 2007 dollars. Personal travel in urban
areas (which represents 94 percent of urban travel) is valued at 50
percent of the hourly wage rate, while business travel (the
remaining 6 percent of urban travel) is valued at 100 percent of the
hourly wage rate. For intercity travel, personal travel (87 percent
of total intercity travel) is valued at 70 percent of the wage rate,
while business travel (13 percent) is valued at 100 percent of the
wage rate. The resulting values of travel time are $12.67 for urban
travel and $17.66 for intercity travel, and must be multiplied by
vehicle occupancy (1.6) to obtain the estimated values of time per
vehicle hour in urban and rural driving. Finally, about 66% of
driving occurs in urban areas, while the remaining 34% takes place
in rural areas, and these percentages are used to calculate a
weighted average of the value of time in all driving.
---------------------------------------------------------------------------

    Although the agencies received no public comments on the procedures
they used to estimate the benefits from less frequent refueling or the
magnitude of those benefits, we note also that the estimated value of
less frequent refueling events is subject to a number of uncertainties
which we discuss in detail in Chapter 4.1.11 of the Joint TSD, and the
actual value could be higher or lower than the value presented here.
Specifically, the analysis makes three assumptions: (a) That
manufacturers will not adjust fuel tank capacities downward (from the
current average of 19.3 gallons) when they improve the fuel economy of
their vehicle models. (b) that the average fuel purchase (55 percent of
fuel tank capacity) is the typical fuel purchase. (c) that 100 percent
of all refueling is demand-based; i.e., that every gallon of fuel which
is saved would reduce the need to return to the refueling station.
NHTSA has planned a new research project which will include a detailed
study of refueling events, and which is expected to improve upon these
assumptions. These assumptions and the upcoming research project are
discussed in detail in Joint TSD Chapter 4.2.10, as well as in Chapter
VIII of NHTSA's FRIA.
j. Added Costs From Congestion, Crashes and Noise
    Increased vehicle use associated with the rebound effect also
contributes to increased traffic congestion, motor vehicle accidents,
and highway noise. NHTSA relies on estimates of per-mile congestion,
accident, and noise costs caused by increased use of automobiles and
light trucks developed by the Federal Highway Administration to
estimate these increased costs.\620\ NHTSA employed these estimates
previously in its analysis accompanying the MY 2011 final rule, and
after reviewing the procedures used by FHWA to develop them and
considering other available estimates of these values, continues to
find them appropriate for use in this final rule. The agency multiplies
FHWA's estimates of per-mile costs by the annual increases in
automobile and light truck use from the rebound effect to yield the
estimated increases in congestion, accident, and noise externality
costs during each future year.
---------------------------------------------------------------------------

    \620\ These estimates were developed by FHWA for use in its 1997
Federal Highway Cost Allocation Study; See http://www.fhwa.dot.gov/
policy/hcas/final/index.htm (last accessed March 1, 2010).
---------------------------------------------------------------------------

    One commenter, Inrix, Inc., stated that ``deeply connected
vehicles,'' i.e., those with built-in computer systems to help drivers
identify alternative routes to avoid congestion, are better able to
avoid congestion than conventional vehicles. The commenter argued that
increased use of these models may be less likely to contribute to
increased congestion, and urged the agencies to consider the impact of
this on their estimates of fuel use and GHG emissions. NHTSA notes that
the number of such vehicles is extremely small at present, and is
likely to remain modest for the model years affected by this rule, and
has thus continued to employ the estimates of congestion costs from
additional rebound-effect vehicle use that it utilized in the NPRM
analysis. The agency recognizes that these vehicles may become
sufficiently common in the future that their effect on the fuel economy
drivers actually experience could become significant, but notes that to
the extent this occurs,

it would be reflected in the gap between test and on-road fuel economy.
NHTSA will continue to monitor the production of such vehicles and
their representation in the vehicle fleet in its future rulemakings.
k. Petroleum Consumption and Import Externalities
    U.S. consumption and imports of petroleum products also impose
costs on the domestic economy that are not reflected in the market
price for crude petroleum, or in the prices paid by consumers of
petroleum products such as gasoline. These costs include (1) higher
prices for petroleum products resulting from the effect of U.S. oil
import demand on the world oil price; (2) the risk of disruptions to
the U.S. economy caused by sudden reductions in the supply of imported
oil to the U.S.; and (3) expenses for maintaining a U.S. military
presence to secure imported oil supplies from unstable regions, and for
maintaining the strategic petroleum reserve (SPR) to cushion against
resulting price increases.\621\
---------------------------------------------------------------------------

    \621\ See, e.g., Bohi, Douglas R. and W. David Montgomery
(1982). Oil Prices, Energy Security, and Import Policy Washington,
DC: Resources for the Future, Johns Hopkins University Press; Bohi,
D.R., and M.A. Toman (1993). ``Energy and Security: Externalities
and Policies,'' Energy Policy 21:1093-1109 (Docket NHTSA-2009-0062-
24); and Toman, M.A. (1993). ``The Economics of Energy Security:
Theory, Evidence, Policy,'' in A.V. Kneese and J.L. Sweeney, eds.
(1993) (Docket NHTSA-2009-0062-23). Handbook of Natural Resource and
Energy Economics, Vol. III. Amsterdam: North-Holland, pp. 1167-1218.
---------------------------------------------------------------------------

    Higher U.S. imports of crude oil or refined petroleum products
increase the magnitude of these external economic costs, thus
increasing the true economic cost of supplying transportation fuels
above their market prices. Conversely, lowering U.S. imports of crude
petroleum or refined fuels by reducing domestic fuel consumption can
reduce these external costs, and any reduction in their total value
that results from improved fuel economy represents an economic benefit
of more stringent CAFE standards, in addition to the value of saving
fuel itself.
    NHTSA has carefully reviewed its assumptions regarding the
appropriate value of these benefits for this final rule. In analyzing
benefits from its recent actions to increase light truck CAFE standards
for model years 2005-07 and 2008-11, NHTSA relied on a 1997 study by
Oak Ridge National Laboratory (ORNL) to estimate the value of reduced
economic externalities from petroleum consumption and imports.\622\
More recently, ORNL updated its estimates of the value of these
externalities, using the analytic framework developed in its original
1997 study in conjunction with recent estimates of the variables and
parameters that determine their value.\623\ The updated ORNL study was
subjected to a detailed peer review comissioned by EPA, and ORNL's
estimates of the value of oil import externalities were subsequently
revised to reflect their comments and recommendations of the peer
reviewers.\624\ Finally, at the request of EPA, ORNL further revised
its 2008 estimates of external costs from U.S. oil imports to reflect
recent changes in the outlook for world petroleum prices, as well as
continuing changes in the structure and characteristics of global
petroleum supply and demand.
---------------------------------------------------------------------------

    \622\ Leiby, Paul N., Donald W. Jones, T. Randall Curlee, and
Russell Lee, Oil Imports: An Assessment of Benefits and Costs, ORNL-
6851, Oak Ridge National Laboratory, November 1, 1997. Available at
http://pzl1.ed.ornl.gov/ORNL6851.pdf (last accessed March 1, 2010).
    \623\ Leiby, Paul N. ``Estimating the Energy Security Benefits
of Reduced U.S. Oil Imports,'' Oak Ridge National Laboratory, ORNL/
TM-2007/028, Revised July 23, 2007. Available at http://
pzl1.ed.ornl.gov/energysecurity.html (click on link below ``Oil
Imports Costs and Benefits'') (last accessed March 1, 2010).
    \624\ Peer Review Report Summary: Estimating the Energy Security
Benefits of Reduced U.S. Oil Imports, ICF, Inc., September 2007.
Available at Docket No. NHTSA-2009-0059-0160.
---------------------------------------------------------------------------

    These most recent revisions increase ORNL's estimates of the
``monopsony premium'' associated with U.S. oil imports, which measures
the increase in payments from U.S. oil purchasers to foreign oil
suppliers beyond the increased purchase price of petroleum itself that
results when increased U.S. import demand raises the world price of
petroleum.\625\ However, the monopsony premium represents a financial
transfer from consumers of petroleum products to oil producers, which
does not entail the consumption of real economic resources. Thus
reducing the magnitude of the monopsony premium produces no savings in
real economic resources globally or domestically, although it does
reduce the value of the financial transfer from U.S. consumers of
petroleum products to foreign suppliers of petroleum. Accordingly,
NHTSA's analysis of the benefits from adopting proposed CAFE standards
for MY 2012-2016 cars and light trucks excluded the reduced value of
monopsony payments by U.S. oil consumers that might result from lower
fuel consumption by these vehicles. The agency sought comment on
whether it would be reasonable to include the reduction in monopsony
payments by U.S. consumers of petroleum products in their estimates of
total economic benefits from reducing U.S. fuel consumption.
---------------------------------------------------------------------------

    \625\ The reduction in payments from U.S. oil purchasers to
domestic petroleum producers is not included as a benefit, since it
represents a transfer that occurs entirely within the U.S. economy.
---------------------------------------------------------------------------

    Commenters from NYU School of Law argued that monopsony payments
should be treated as a distributional effect, not a standard efficiency
benefit. An individual commenter, A.G. Fraas, also supported the
agencies' exclusion of the monopsony benefit, arguing that it
represents a pecuniary externality that should not be considered in
benefit-cost analyses of governmental actions--again, in essence, that
it represents a distributional effect. These comments support the
agency's decision to exclude any reduction in monopsony premium
payments that results from lower U.S. petroleum imports from its
accounting of benefits from reduced fuel consumption. Thus the agency
continues to exclude any reduction in monopsony premium payments from
its estimates of benefits for the stricter CAFE standards this final
rule establishes.
    ORNL's most recently revised estimates of the increase in the
expected costs associated with potential disruptions in U.S. petroleum
imports imply that each gallon of imported fuel or petroleum saved
reduces the expected costs of oil supply disruptions to the U.S.
economy by $0.169 per gallon (in 2007$). In contrast to reduced
monopsony premium payments, the reduction in expected disruption costs
represents a real savings in resources, and thus contributes economic
benefits in addition to the savings in fuel production costs that
result from increasing fuel economy. NHTSA employs this value in its
analysis of the economic benefits from adopting higher CAFE standards
for MY 2012-2016 cars and light trucks.
    A.G. Fraas commented on this proposed rule and felt that that
magnitude of the economic disruption portion of the energy security
benefit may be too high. He cites a recent paper written by Stephen
P.A. Brown and Hillard G. Huntington, entitled ``Estimating U.S. Oil
Security Premiums'' (September 2009). He commented that the Brown and
Huntington premium associated with replacing oil imports by increased
domestic oil production while keeping U.S. oil consumption unchanged
(i.e., ``the cost of displacing a barrel of domestic oil with a barrel
of imported oil'') ranges from $2.17 per barrel in 2015 to $2.37 per
barrel in 2030 (2007$), or $0.052 to $0.056 per gallon.
    In contrast, this rule is not a domestic oil supply initiative, but
is one intended to reduce domestic oil consumption and thereby also to
a significant extent reduce U.S. oil imports. When NHTSA

used the ORNL Energy Security Premium Analysis to calculate the energy
security premium for this rule, it based the energy security premium on
decreased demand for oil and oil products. The agency estimated that
most of the decreased demand for oil and oil products would come from
decreased imports of oil, given the inelasticity of U.S. supply and the
modest estimated change in world oil price. The Brown and Huntington
estimates for this change, considering the disruption component alone,
are much in line with the ORNL estimates. For a reduction in U.S.
consumption that largely leads to a reduction in imports, Brown and
Huntington estimate a midpoint premium of $4.98 per barrel in 2015
rising to $6.82 per barrel by 2030 (2007$). The 2015 disruption premium
estimate has an uncertainty range of $1.10 to $14.35 (2007$). The
corresponding 2030 estimate from ORNL is only about 19 percent higher
($8.12/bbl), with an uncertainty range--$3.90 to $13.04--completely
enclosed by that of Brown and Huntington. Thus, we conclude that the
ORNL disruption security premium estimates for this rule is roughly
consistent with the Brown and Huntington results.
    Commenters from the NYU School of Law agreed that reduced
disruption costs should be counted as a benefit, but stated that the
agencies should disaggregate and exclude any reduction in wealth
transfers that occur during oil shocks from their calculation of this
benefit. NHTSA acknowledges that for consistency with its exclusion of
reductions in monopsony premium payments from the benefits of reduced
fuel consumption and petroleum imports, it may be necessary to exclude
reductions in the wealth transfer component of macroeconomic disruption
costs from the benefits of reducing U.S. petroleum imports. In future
rulemakings, the agency will assess the arguments for excluding the
wealth transfer component of disruption costs from its accounting of
benefits from reducing domestic fuel consumption and U.S. petroleum
imports, and explore whether it is practical to estimate its value
separately and exclude it from the benefits calculations.
    NHTSA's analysis does not include savings in budgetary outlays to
support U.S. military activities among the benefits of higher fuel
economy and the resulting fuel savings.\626\ NHTSA's analysis of
benefits from alternative CAFE standards for MY 2012-2016 also excludes
any cost savings from maintaining a smaller SPR from its estimates of
the external benefits of reducing gasoline consumption and petroleum
imports. This view concurs with that of the recent ORNL study of
economic costs from U.S. oil imports, which concludes that savings in
government outlays for these purposes are unlikely to result from
reductions in consumption of petroleum products and oil imports on the
scale of those resulting from higher CAFE standards.
---------------------------------------------------------------------------

    \626\ However, the agency conducted a sensitivity analysis of
the potential effect of assuming that some reduction military
spending would result from fuel savings and reduced petroleum
imports in order to investigate its impacts on the standards and
fuel savings.
---------------------------------------------------------------------------

    Commenters from the NYU School of Law stated that the agencies were
justified in not including a value for military security, as long as
the agencies incorporate the increased protection value of the SPR into
their calculation of disruption effects. CBD and James Adcock
disagreed, and stated that the agencies should, in fact, include a
value for military security--CBD cited several studies, and Mr. Adcock
presented his own value of $0.275 per gallon. CARB stated simply that
the agencies should include a sensitivity analysis for military
security at $0.15 per gallon, in addition to the $0.05 per gallon
already evaluated. EDF also cited studies claiming a benefit for
increased national security.
    In response to the comments from CBD and Mr. Adcock, NHTSA's
examination of the historical record indicates that while costs for
U.S. military security may vary over time in response to long-term
changes in the level of oil imports into the U.S., these costs are
unlikely to decline in response to the small reductions in U.S. oil
imports (relative to total oil imports) that are typically projected to
result from raising CAFE standards for light-duty vehicles. U.S.
military activities in regions that represent vital sources of oil
imports also serve a broader range of security and foreign policy
objectives than simply protecting oil supplies, and as a consequence
are unlikely to vary significantly in response to the modest changes in
the level of oil imports likely to be prompted by higher CAFE
standards.
    The agency does not find evidence in the historical record that
Congress or the Executive Branch has ever attempted to calibrate U.S.
military expenditures, overall force levels, or specific deployments to
any measure of global oil market activity or U.S. reliance on petroleum
imports, or to any calculation of the projected economic consequences
of hostilities arising in the Persian Gulf. Instead, changes in U.S.
force levels, deployments, and thus military spending in that region
have been largely governed by political events, emerging threats, and
other military and political considerations, rather than by shifts in
U.S. oil consumption or imports. NHTSA thus concludes that the levels
of U.S. military activity and expenditures are likely to remain
unaffected by even relatively large changes in light duty vehicle fuel
consumption, and has continued to exclude any reduction in these
outlays from its estimates of the economic benefits resulting from
lower U.S. fuel consumption and petroleum imports.
    In response to the comments from the NYU School of Law, NHTSA will
explore how it might estimate the contribution of the SPR to reducing
potential macroeconomic costs from oil supply disruptions, although the
agency notes that to some extent the existence of the SPR may already
be reflected in the magnitude of price elasticities of the supplies of
foreign oil available for import to the U.S. However, the agency notes
that the size of the SPR has not appeared to change significantly in
response to historical variation in U.S. petroleum consumption or
imports, suggesting that its effect on the magnitude of potential
macroeconomic costs from disruptions in petroleum imports may be
limited.
    Finally, in response to the comment from EDF, the agency notes that
the value of $0.05 per gallon for the reduction in military security
outlays that is used for sensitivity analysis assumes that the entire
reduction in U.S. petroleum imports resulting from higher CAFE
standards would reflect lower imports from Persian Gulf suppliers, that
the estimate of annual U.S. military costs for securing Persian Gulf
oil supplies reported by Delucchi and Murphy is correct, and that
Congress would reduce half of these outlays in proportion to any
decline in U.S. oil imports from the region. The $0.15 per gallon
estimate recommended by CARB would thus require that U.S. military
outlays to protect Persian Gulf oil supplies are three times as large
as Delucchi and Murphy estimate, or that Congress would reduce military
spending in that region more than in proportion to any reduction in
U.S. petroleum imports originating there. Because it views these
possibilities as unrealistic, NHTSA has continued to use the $0.05
figure in its sensitivity analysis, rather than the higher figure
suggested.
    Based on a detailed analysis of differences in fuel consumption,

petroleum imports, and imports of refined petroleum products among the
Reference Case, High Economic Growth, and Low Economic Growth Scenarios
presented in AEO 2009, NHTSA estimated that approximately 50 percent of
the reduction in fuel consumption resulting from adopting higher CAFE
standards is likely to be reflected in reduced U.S. imports of refined
fuel, while the remaining 50 percent would reduce domestic fuel
refining.\627\ Of this latter figure, 90 percent is anticipated to
reduce U.S. imports of crude petroleum for use as a refinery feedstock,
while the remaining 10 percent is expected to reduce U.S. domestic
production of crude petroleum.\628\ Thus on balance, each 100 gallons
of fuel saved as a consequence of higher CAFE standards is anticipated
to reduce total U.S. imports of crude petroleum or refined fuel by 95
gallons.\629\
---------------------------------------------------------------------------

    \627\ Differences between forecast annual U.S. imports of crude
petroleum and refined products among these three scenarios range
from 24-89 percent of differences in projected annual gasoline and
diesel fuel consumption in the U.S. These differences average 49
percent over the forecast period spanned by AEO 2009.
    \628\ Differences between forecast annual U.S. imports of crude
petroleum among these three scenarios range from 67-97 percent of
differences in total U.S. refining of crude petroleum, and average
85 percent over the forecast period spanned by AEO 2009.
    \629\ This figure is calculated as 50 gallons + 50 gallons*90% =
50 gallons + 45 gallons = 95 gallons.
---------------------------------------------------------------------------

    NHTSA employed this estimate in the analysis presented in the NPRM,
and received no comments on the assumptions or data used to develop it.
Hence the agency has continued to assume that each 100 gallons of fuel
saved as a consequence of the CAFE standards established by this final
rule will reduce total U.S. imports of crude petroleum or refined fuel
by 95 gallons. NHTSA has applied the estimates of economic benefits
from lower U.S. petroleum imports to the resulting estimate of
reductions in imports of crude petroleum and refined fuel.
l. Air Pollutant Emissions
i. Changes in Criteria Air Pollutant Emissions
    Criteria air pollutants emitted by vehicles and during fuel
production include carbon monoxide (CO), hydrocarbon compounds (usually
referred to as ``volatile organic compounds,'' or VOC), nitrogen oxides
(NOX), fine particulate matter (PM2.5), and
sulfur oxides (SOX). While reductions in domestic fuel
refining and distribution that result from lower fuel consumption will
reduce U.S. emissions of these pollutants, additional vehicle use
associated with the rebound effect from higher fuel economy will
increase their emissions. Thus the net effect of stricter CAFE
standards on emissions of each criteria pollutant depends on the
relative magnitudes of its reduced emissions in fuel refining and
distribution, and increases in its emissions from vehicle use. Because
the relationship between emissions in fuel refining and vehicle use is
different for each criteria pollutant, the net effect of fuel savings
from the proposed standards on total emissions of each pollutant is
likely to differ. We note that any benefits in terms of criteria air
pollutant reductions resulting from this rule would not be direct
benefits.
    With the exception of SO2, NHTSA calculated annual
emissions of each criteria pollutant resulting from vehicle use by
multiplying its estimates of car and light truck use during each year
over their expected lifetimes by per-mile emission rates appropriate to
each vehicle type, fuel, model year, and age. These emission rates were
developed by U.S. EPA using its Motor Vehicle Emission Simulator (MOVES
2010).\630\ Emission rates for SO2 were calculated by NHTSA
using average fuel sulfur content estimates supplied by EPA, together
with the assumption that the entire sulfur content of fuel is emitted
in the form of SO2.\631\ Total SO2 emissions
under each alternative CAFE standard were calculated by applying the
resulting emission rates directly to estimated annual gasoline and
diesel fuel use by cars and light trucks.
---------------------------------------------------------------------------

    \630\ The MOVES model assumes that the per-mile rates at which
these pollutants are emitted are determined by EPA regulations and
the effectiveness of catalytic after-treatment of engine exhaust
emissions, and are thus unaffected by changes in car and light truck
fuel economy.
    \631\ These are 30 and 15 parts per million (ppm, measured on a
mass basis) for gasoline and diesel respectively, which produces
emission rates of 0.17 grams of SO2 per gallon of
gasoline and 0.10 grams per gallon of diesel.
---------------------------------------------------------------------------

    As with other impacts, the changes in emissions of criteria air
pollutants resulting from alternative increases in CAFE standards for
MY 2012-2016 cars and light trucks were calculated from the differences
between emissions under each alternative that would increase CAFE
standards, and emissions under the baseline alternative.
    NHTSA estimated the reductions in criteria pollutant emissions from
producing and distributing fuel that would occur under alternative CAFE
standards using emission rates obtained by EPA from Argonne National
Laboratories' Greenhouse Gases and Regulated Emissions in
Transportation (GREET) model.\632\ The GREET model provides separate
estimates of air pollutant emissions that occur in different phases of
fuel production and distribution, including crude oil extraction,
transportation, and storage, fuel refining, and fuel distribution and
storage.\633\ EPA modified the GREET model to change certain
assumptions about emissions during crude petroleum extraction and
transportation, as well as to update its emission rates to reflect
adopted and pending EPA emission standards. NHTSA converted these
emission rates from the mass per fuel energy content basis on which
GREET reports them to mass per gallon of fuel supplied using estimates
of fuel energy content supplied by GREET.
---------------------------------------------------------------------------

    \632\ Argonne National Laboratories, The Greenhouse Gas and
Regulated Emissions from Transportation (GREET) Model, Version 1.8,
June 2007, available at http://www.transportation.anl.gov/modeling_
simulation/GREET/index.html (last accessed March 15, 2010).
    \633\ Emissions that occur during vehicle refueling at retail
gasoline stations (primarily evaporative emissions of volatile
organic compounds, or VOCs) are already accounted for in the
``tailpipe'' emission factors used to estimate the emissions
generated by increased light truck use. GREET estimates emissions in
each phase of gasoline production and distribution in mass per unit
of gasoline energy content; these factors are then converted to mass
per gallon of gasoline using the average energy content of gasoline.
---------------------------------------------------------------------------

    The resulting emission rates were applied to the agency's estimates
of fuel consumption under each alternative CAFE standard to develop
estimates of total emissions of each criteria pollutant during fuel
production and distribution. The assumptions about the effects of
changes in fuel consumption on domestic and imported sources of fuel
supply discussed above were then employed to calculate the effects of
reductions in fuel use from alternative CAFE standards on changes in
imports of refined fuel and domestic refining. NHTSA's analysis assumes
that reductions in imports of refined fuel would reduce criteria
pollutant emissions during fuel storage and distribution only.
Reductions in domestic fuel refining using imported crude oil as a
feedstock are assumed to reduce emissions during fuel refining,
storage, and distribution, because each of these activities would be
reduced. Reduced domestic fuel refining using domestically-produced
crude oil is assumed to reduce emissions during all four phases of fuel
production and distribution.\634\
---------------------------------------------------------------------------

    \634\ In effect, this assumes that the distances crude oil
travels to U.S. refineries are approximately the same regardless of
whether it travels from domestic oilfields or import terminals, and
that the distances that gasoline travels from refineries to retail
stations are approximately the same as those from import terminals
to gasoline stations. We note that while assuming that all changes
in upstream emissions result from a decrease in petroleum production
and transport, our analysis of downstream criteria pollutant impacts
assumes no change in the composition of the gasoline fuel supply.

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

    Finally, NHTSA calculated the net changes in domestic emissions of
each criteria pollutant by summing the increases in emissions projected
to result from increased vehicle use, and the reductions anticipated to
result from lower domestic fuel refining and distribution.\635\ As
indicated previously, the effect of adopting higher CAFE standards on
total emissions of each criteria pollutant depends on the relative
magnitudes of the resulting reduction in emissions from fuel refining
and distribution, and the increase in emissions from additional vehicle
use. Although these net changes vary significantly among individual
criteria pollutants, the agency projects that on balance, adopting
higher CAFE standards would reduce emissions of all criteria air
pollutants except carbon monoxide (CO).
---------------------------------------------------------------------------

    \635\ All emissions from increased vehicle use are assumed to
occur within the U.S., since CAFE standards would apply only to
vehicles produced for sale in the U.S.
---------------------------------------------------------------------------

    The net changes in domestic emissions of fine particulates
(PM2.5) and its chemical precursors (such as NOX,
SOX, and VOCs) are converted to economic values using
estimates of the reductions in health damage costs per ton of emissions
of each pollutant that is avoided, which were developed and recently
revised by EPA. These savings represent the estimated reductions in the
value of damages to human health resulting from lower atmospheric
concentrations and population exposure to air pollution that occur when
emissions of each pollutant that contributes to atmospheric
PM2.5 concentrations are reduced. The value of reductions in
the risk of premature death due to exposure to fine particulate
pollution (PM2.5) account for a majority of EPA's estimated
values of reducing criteria pollutant emissions, although the value of
avoiding other health impacts is also included in these estimates.
    These values do not include a number of unquantified benefits, such
as reduction in the welfare and environmental impacts of
PM2.5 pollution, or reductions in health and welfare impacts
related to other criteria pollutants (ozone, NO2, and
SO2) and air toxics. EPA estimates different PM-related per-
ton values for reducing emissions from vehicle use than for reductions
in emissions of that occur during fuel production and
distribution.\636\ NHTSA applies these separate values to its estimates
of changes in emissions from vehicle use and fuel production and
distribution to determine the net change in total economic damages from
emissions of these pollutants.
---------------------------------------------------------------------------

    \636\ These reflect differences in the typical geographic
distributions of emissions of each pollutant, their contributions to
ambient PM2.5 concentrations, pollution levels
(predominantly those of PM2.5), and resulting changes in
population exposure.
---------------------------------------------------------------------------

    EPA projects that the per-ton values for reducing emissions of
criteria pollutants from both mobile sources (including motor vehicles)
and stationary sources such as fuel refineries and storage facilities
will increase over time. These projected increases reflect rising
income levels, which are assumed to increase affected individuals'
willingness to pay for reduced exposure to health threats from air
pollution, as well as future population growth, which increases
population exposure to future levels of air pollution.
    NHTSA and EPA received no comments on the procedures they employed
to estimate the reductions in emissions of criteria air pollutants
reported in their respective NPRMs, or on the unit economic values the
agencies applied to those reductions to calculate their total value.
Thus the agencies have continued to employ these procedures and values
in the analysis reported in this final rule. However, the agencies have
made some minor changes in the emission factors used to calculate
changes in emissions resulting from increased vehicle use; these
revisions are detailed in Chapter 4 of the Final Technical Support
Document accompanying this rule.
ii. Reductions in CO2 Emissions
    Emissions of carbon dioxide and other greenhouse gases (GHGs) occur
throughout the process of producing and distributing transportation
fuels, as well as from fuel combustion itself. By reducing the volume
of fuel consumed by passenger cars and light trucks, higher CAFE
standards will reduce GHG emissions generated by fuel use, as well as
throughout the fuel supply cycle. Lowering these emissions is likely to
slow the projected pace and reduce the ultimate extent of future
changes in the global climate, thus reducing future economic damages
that changes in the global climate are expected to cause. By reducing
the probability that climate changes with potentially catastrophic
economic or environmental impacts will occur, lowering GHG emissions
may also result in economic benefits that exceed the resulting
reduction in the expected future economic costs caused by gradual
changes in the earth's climatic systems.
    Quantifying and monetizing benefits from reducing GHG emissions is
thus an important step in estimating the total economic benefits likely
to result from establishing higher CAFE standards. The agency estimated
emissions of CO2 from passenger car and light truck use by
multiplying the number of gallons of each type of fuel (gasoline and
diesel) they are projected to consume under alternative CAFE standards
by the quantity or mass of CO2 emissions released per gallon
of fuel consumed. This calculation assumes that the entire carbon
content of each fuel is converted to CO2 emissions during
the combustion process. Carbon dioxide emissions account for nearly 95
percent of total GHG emissions that result from fuel combustion during
vehicle use.
iii. Economic Value of Reductions in CO2 Emissions
    NHTSA has taken the economic benefits of reducing CO2
emission into account in this rulemaking, both in developing
alternative CAFE standards and in assessing the economic benefits of
each alternative that was considered. Since direct estimates of the
economic benefits from reducing CO2 or other GHG emissions
are generally not reported in published literature on the impacts of
climate change, these benefits are typically assumed to be the ``mirror
image'' of the estimated incremental costs resulting from an increase
in those emissions. Thus the benefits from reducing CO2
emissions are usually measured by the savings in estimated economic
damages that an equivalent increase in emissions would otherwise have
caused.
    The ``social cost of carbon'' (SCC) is intended to be a monetary
measure of the incremental damage resulting from increased carbon
dioxide (CO2) emissions, including losses in agricultural
productivity, the economic damages caused by adverse effects on human
health, property losses and damages resulting from sea level rise, and
changes in the value of ecosystem services. The SCC is usually
expressed in dollars per additional metric ton of CO2
emissions occurring during a specified year, and is higher for more
distant future years because the damages caused by an additional ton of
emissions increase with larger existing concentrations of
CO2 in the earth's atmosphere. Marginal reductions in
CO2 emissions that are projected to result from lower fuel
consumption, refining, and distribution during each future year are
multiplied by the estimated SCC appropriate for that year, which is
used

to represent the value of eliminating each ton of CO2
emissions, to determine the total economic benefit from reduced
emissions during that year. These benefits are then discounted to their
present value as usual, using a discount rate that is consistent with
that used to develop the estimate of the SCC itself.
    The agency's NPRM incorporated the Federal interagency working
group's interim guidance on appropriate SCC values for estimating
economic benefits from reductions in CO2 emissions. NHTSA
specifically asked for comment on the procedures employed by the group
to develop its recommended values, as well as on the reasonableness and
correct interpretation of those values. Comments the agency received
address several different issues, including (1) the interagency group's
procedures for selecting SCC estimates to incorporate in its
recommended values; (2) the appropriateness of the procedures the
agency used to combine and summarize these estimates; (3) the parameter
values and input assumptions used by different researchers to develop
their estimates of the SCC; (4) the choice between global and domestic
estimates of the SCC for use in Federal regulatory analysis, (5) the
discount rates used to derive estimates of the SCC; and (6) the overall
level of the agency's SCC estimates.
NHTSA's Procedures for Selecting SCC Estimates
    Many of the comments NHTSA received concerned the group's
procedures for selecting published estimates and aggregating them to
arrive at its range of recommended values. CARB asked for a clearer
explanation of why mean SCC estimates from only two of the three major
climate models were included in the average values reported in the
interim guidance, and whether the arithmetic mean of reported values is
the appropriate measure of their central tendency. Students from the
University of California at Santa Barbara (UCSB) noted that the
interagency group often selected only a single SCC estimate from
studies reporting multiple estimates or a range of values to include in
developing its summary values, and objected that this procedure caused
the group to understate the degree of uncertainty surrounding its
recommended values.
    Steven Rose also noted that the interagency group's ``filtering''
of published estimates of the SCC on the basis of their vintage and
input assumptions tended to restrict the included estimates to a
relatively narrow band that excluded most potentially catastrophic
climate changes, and thus was not representative of the wide
uncertainty surrounding the ``true'' SCC. If the purpose of
incorporating the SCC into regulatory analysis was effectively to price
CO2 emissions so that emitters would account for climate
damages caused by their actions, he reasoned, then the estimate to be
used should incorporate the wide range of uncertainty surrounding the
magnitude of potential damages.
    Rose also noted that many of the more recent studies reporting
estimates of the SCC were designed to explore the influence of
different factors on the extent and timing of climate damages, rather
than to estimate the SCC specifically, and thus that these more recent
estimates were not necessarily more informative than SCC estimates
reported in some older studies. Rose argued that because there has been
little change in major climate models since about 2001, all estimates
published after that date should be considered in order to expand the
size of the sample represented by average values, rather than limiting
it by including only the most recently-reported estimates.
    James Adcock objected to the interagency group's reliance on Tol's
survey of published estimates of the SCC, since many of the estimates
it included were developed by Tol himself. In contrast, Steven Rose
argued that the Tol survey offered a useful way to summarize and
represent variation among published estimates of the SCC, and thus to
indicate the uncertainty surrounding its true value.
Procedures for Summarizing Published SCC Estimates
    Steven Rose argued that combining SCC estimates generated using
different discount rates was inappropriate, and urged the interagency
group instead to select one or more discount rates and then to average
only SCC estimates developed using the same discount rate. Rose also
noted that the interagency group's explanation of how it applied the
procedure developed by Newell and Pizer to incorporate uncertainty in
the discount rate was inadequately detailed, and in any case it may not
be appropriate for use in combining SCC estimates that were based on
different discount rates. UCS also questioned NHTSA's use of averaging
to combine estimates of the SCC relying on different discount rates, as
well as the agency's equal weighting of upper- and lower-bound SCC
estimates reported in published studies.
    NESCAUM commented that the interagency group's basis for deriving
the $20 SCC estimate from its summary of published values was not
adequately clear, and that the group's guidance should clarify the
origin of this value. NESCAUM also urged the interagency group to
identify a representative range of alternative SCC estimates for use in
assessing benefits from reduced emissions, rather than a single value.
    Ford commented that the interagency group's methodology for
developing an estimate of the SCC was acceptable, but argued that NHTSA
agency should rely on the costs of reducing CO2 emissions in
other sectors of the U.S. economy to evaluate economic benefits from
reducing motor vehicle emission. Ford asserted that this represented a
more reliable estimate of the benefits from reducing emissions than the
potential climate damages avoided by reducing vehicle emissions, since
lowering vehicle emissions reduces the need to control emissions from
other economic sectors.
Parameter Values and Input Assumptions Underlying SCC Estimates
    CARB also noted that some of the wide variation in published SCC
estimates relied upon by the interagency group could be attributed to
authors' differing assumptions about future GHG emissions scenarios and
choices of discount rates. Steven Rose noted that SCC estimates derived
using future emissions scenarios that assumed significant reductions in
emissions were probably inappropriate for use in Federal regulatory
analysis, since Federal regulations must be adopted individually and
are each likely to lead to only marginal reductions in emissions, so it
is unreasonable to assume that their collective effect on future
emissions will be large.
    CARB also emphasized that SCC estimates were not available over the
same range of discount rates for all major climate models, thus making
averages of available results less reliable as indicators of any
central tendency in estimates of the SCC. To remedy this shortcoming,
the Pew Center on Climate Change urged the interagency group to analyze
the sensitivity of SCC estimates to systematic variation in uncertain
model parameters and input scenarios as a means of identifying the
range of uncertainty in the SCC itself, as well as to include a risk
premium in its SCC estimates as a means of compensating for climate
models' omission of potential economic damages from catastrophic
climate changes.
    CBD commented that the interim nature of the interagency group's
guidance made it impossible for decision-makers to determine whether
the agency's proposed CAFE standards

were sufficiently stringent. CBD also argued that economic models'
exclusion of some potential climate impacts caused them to
underestimate the ``true'' SCC, and that the interagency group's
procedure of averaging published estimates failed to convey important
information about variation in estimates of the SCC to decision makers.
In a related comment, the Pew Center on Climate Change cautioned
against use of the interagency group's interim SCC estimates for
analyzing benefits from NHTSA's final rule, on the grounds that some
older estimates of the SCC surveyed for the interim guidance
implausibly suggested that there could be positive net benefits from
climate change, while more recent research suggests uniformly negative
economic impacts.
    James Adcock presented his own estimate of the value of reducing
CO2 emissions, which he derived by assuming that climate
change would completely eliminate the economic value of all services
provided by the local natural environment within a 50-year time frame.
In addition, Adcock urged that Federal agencies use a consistent
estimate of the SCC in their regulatory analyses, and that this
estimate be updated regularly to reflect new knowledge; he also
asserted that the SCC should be above the per-ton price of
CO2 emissions permits under a cap-and-trade system.
Global vs. Domestic SCC Values
    NADA argued that NHTSA should employ an estimate of the domestic
value of reducing CO2 emissions for purposes of estimating
their aggregate economic benefits, since the agency includes only the
domestic value of benefits stemming from reductions in other
environmental and energy security externalities. In contrast, both the
Pew Center on Climate Change and students from the University of
California at Santa Barbara (UCSB) asserted that a global value of the
SCC was appropriate for use even in analyzing benefits from U.S.
domestic environmental regulations such as CAFE, and Steven Rose added
that it was difficult to identify any proper role for a domestic
estimate of the SCC. James Adcock commented that the agency's
derivation of the fraction of the global SCC it employed (6 percent) to
obtain a domestic value was not clearly explained.
Discount Rates Used To Derive SCC Estimates
    NRDC also cited the effect of positive discount rates on damages
occurring in the distant future, which reduce the present value of
those damages to misleadingly low levels. Similarly, Steven Rose argued
that the interagency group should have used discount rates below the 3
percent lower bound the group selected, and that the discount rate
should also have been allowed to vary over time to account for
uncertainty in its true value. The Pew Center also urged NHTSA to
account explicitly for uncertainty surrounding the correct discount
rate, but did not indicate how the agency should do so.
    CARB echoed the recommendation for including SCC values reflecting
discount rates below 3 percent, since EPA had previously used lower
rates in previously proposed rules to discount benefits that were not
expected to occur until the distant future, and thus to be experienced
mainly by future generations. The New Jersey Department of
Environmental Protection noted that giving nearly equal weight to
future generations would imply a discount rate of less than 3 percent--
probably in the neighborhood of 2 percent--and endorsed the interagency
group's use of the procedure developed by Newell and Pizer to account
for uncertainty surrounding the correct discount rate.
    The Pew Center urged the agency to ignore SCC estimates derived
using discount rates above 5 percent, and instead to use the lowest
possible rates, even including the possibility of negative values.
Similarly, NRDC asserted that both the 3 percent and 5 percent discount
rates selected by the interagency group are inappropriately high, but
did not recommend a specific alternative rate. Students from UCSB
observed that the interagency group's equal weighting of the 3 percent
and 5 percent rates appeared to be inconsistent with the more frequent
use of 3 percent in published estimates of the SCC, as well as with
OMB's guidance that the 3 percent rate was appropriate for discounting
future impacts on consumption. The group urged NHTSA to consider a
wider range of discount rates in its revised estimates of the SCC,
including some below 3 percent. CBD argued that the discount rate
should increase over the future to reflect the potential for
catastrophic climate impacts.
    CBD asserted that because the potential consequences of climate
change are so extreme, that future economic impacts of climate change
should not be discounted (i.e., a 0 percent discount rate should be
used). James Adcock echoed this view.
Overall Level of SCC Estimates
    NRDC argued that the SCC estimate recommended by the interagency
group was likely to be too low, because of most models' omission of
some important climate impacts, particularly including potential
catastrophic impacts resulting from non-incremental changes in climate
conditions. CARB argued that it seemed prudent to include SCC values as
high as $200 per ton, to reflect the possibility of low-probability but
catastrophic changes in the global climate and the resulting economic
damages.
    The New Jersey Department of Environmental Protection pointed out
that SCC estimates reviewed by the IPCC ranged as high as $95/ton, and
that the Stern Report's estimate was $85/ton, suggesting the
possibility that the interagency group may have inappropriately
filtered out the highest estimates of the SCC. Other commenters
including NACAA, NESCAUM, NRDC, and UCS urged NHTSA to employ higher
SCC values than it used in the NPRM analysis, but did not recommend
specific values. CARB urged the agency to use higher values of the SCC
than it employed in its NPRM analysis, and recommended a value of $25/
ton, growing at 2.4 percent annually, or alternatively, a fixed value
of $50/ton.
    Steven Rose cautioned against applying a uniform 3 percent annual
growth rate to all of the provisional SCC estimates recommended by the
interagency group, and noted that the base year where such growth is
assumed to begin should be determined carefully for each estimate.
    Finally, the Institute for Energy Research commented that NHTSA had
probably overstated the reductions in CO2 emissions that
would result from the proposed standards--and thus their economic
value--because of the potential for compensating increases in
emissions, such as those cause by increased retention and use of older,
less fuel-efficient vehicles in the fleet.
    After carefully considering comments received to the NPRM, for
purposes of this final rule, NHTSA has relied on estimates of the SCC
developed by the Federal interagency working group convened for the
specific purpose of developing new estimates to be used by U.S. Federal
agencies in regulatory evaluations. Under Executive Order 12866,
Federal agencies are required, to the extent permitted by law, ``to
assess both the costs and the benefits of the intended regulation and,
recognizing that some costs and benefits are difficult to quantify,
propose or adopt a regulation only upon a reasoned determination that
the benefits of the intended regulation justify its costs.'' The
group's purpose in developing new estimates of the SCC was to allow

Federal agencies to incorporate the social benefits of reducing carbon
dioxide (CO2) emissions into cost-benefit analyses of
regulatory actions that have small, or ``marginal,'' impacts on
cumulative global emissions, as most Federal regulatory actions can be
expected to have.
    The interagency group convened on a regular basis to consider
public comments, explore the technical literature in relevant fields,
and discuss key inputs and assumptions in order to generate SCC
estimates. Agencies that actively participated in the interagency
process included the Environmental Protection Agency and the
Departments of Agriculture, Commerce, Energy, Transportation, and
Treasury. This process was convened by the Council of Economic Advisers
and the Office of Management and Budget, with active participation and
regular input from the Council on Environmental Quality, National
Economic Council, Office of Energy and Climate Change, and Office of
Science and Technology Policy. The main objective of this process was
to develop a range of SCC values using a defensible set of input
assumptions that are grounded in the existing literature. In this way,
key uncertainties and model differences can more transparently and
consistently inform the range of SCC estimates used in the rulemaking
process.
    The interagency group developed its estimates of the SCC estimates
while clearly acknowledging the many uncertainties involved, and with a
clear understanding that they should be updated over time to reflect
increasing knowledge of the science and economics of climate impacts.
Technical experts from numerous agencies met on a regular basis to
consider public comments, explore the technical literature in relevant
fields, and discuss key model inputs and assumptions. The main
objective of this process was to develop a range of SCC values using a
defensible set of input assumptions grounded in the existing scientific
and economic literature. In this way, key uncertainties and model
differences transparently and consistently can inform the range of SCC
estimates used in the rulemaking process.
    The group ultimately selected four SCC values for use in regulatory
analyses. Three values are based on the average SCC from three
integrated assessment models, using discount rates of 2.5, 3, and 5
percent. The fourth value, which represents the 95th percentile SCC
estimate across all three models at a 3 percent discount rate, is
included to represent the possibility of higher-than-expected impacts
from temperature change that lie further out in the tails of the
distribution of SCC estimates. Table IV.C.3-2 summarizes the
interagency group's estimates of the SCC during various future years.
The SCC estimates reported in the table assume that the marginal
damages from increased emissions are constant for small departures from
the baseline emissions path, an approximation that is reasonable for
policies that have effects on emissions that are small relative to
cumulative global carbon dioxide emissions.

                             Table IV.C.3-2--Social Cost of CO2 Emissions, 2010-2050
                                                 [2007 dollars]
----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
            Discount rate                     5%                 3%                2.5%                3%
----------------------------------------------------------------------------------------------------------------
               Source                                   Average of estimates                     95th Percentile
                                                                                estimate
----------------------------------------------------------------------------------------------------------------
2010................................                4.7               21.4               35.1               64.9
2015................................                5.7               23.8               38.4               72.8
2020................................                6.8               26.3               41.7               80.7
2025................................                8.2               29.6               45.9               90.4
2030................................                9.7               32.8               50.0              100.0
2035................................               11.2               36.0               54.2              109.7
2040................................               12.7               39.2               58.4              119.3
2045................................               14.2               42.1               61.7              127.8
2050................................               15.7               44.9               65.0              136.2
----------------------------------------------------------------------------------------------------------------

    As Table IV.C.3-2 shows, the four SCC estimates selected by the
interagency group for use in regulatory analyses are $5, $21, $35, and
$65 (in 2007 dollars) for emissions occurring in the year 2010. The
first three estimates are based on the average SCC across models and
socio-economic and emissions scenarios at the 5, 3, and 2.5 percent
discount rates, respectively. The fourth value is included to represent
the higher-than-expected impacts from temperature change further out in
the tails of the SCC distribution. For this purpose, the group elected
to use the SCC value for the 95th percentile at a 3 percent discount
rate.
    The central value identified by the interagency group is the
average SCC across models at the 3 percent discount rate, or $21 per
metric ton in 2010. To capture the uncertainties involved in regulatory
impact analysis, however, the group emphasized the importance of
considering the full range of estimated SCC values. As the table also
shows, the SCC estimates also rise over time; for example, the central
value increases to $24 per ton of CO2 in 2015 and $26 per
ton of CO2 in 2020.
    The interagency group is committed to updating these estimates as
the science and economic understanding of climate change and its
impacts on society improves over time. Specifically, the group has set
a preliminary goal of revisiting the SCC values within two years or at
such time as substantially updated models become available, and to
continue to support research in this area. U.S. Federal agencies will
periodically review and reconsider estimates of the SCC used for cost-
benefit analyses to reflect increasing knowledge of the science and
economics of climate impacts, as well as improvements in modeling.
    Details of the process used by the interagency group to develop its
SCC estimates, complete results including year-by-year estimates of
each of the four values, and a thorough discussion of their intended
use and limitations is provided in the document Social Cost of Carbon
for Regulatory Impact Analysis Under Executive Order 12866, Interagency
Working Group on Social Cost of Carbon, United States Government,
February 2010.\637\
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    \637\ This document is available in the docket for this
rulemaking (NHTSA-2009-0059).

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m. Discounting Future Benefits and Costs
    Discounting future fuel savings and other benefits is intended to
account for the reduction in their value to society when they are
deferred until some future date, rather than received immediately. The
discount rate expresses the percent decline in the value of these
benefits--as viewed from today's perspective--for each year they are
deferred into the future. In evaluating the benefits from alternative
proposed increases in CAFE standards for MY 2012-2016 passenger cars
and light trucks, NHTSA employed a discount rate of 3 percent per year,
but also presents these benefit and cost estimates at a 7 percent
discount rate.
    While both discount rates are presented, NHTSA believes that 3
percent is the most appropriate rate for discounting future benefits
from increased CAFE standards because most or all of vehicle
manufacturers' costs for complying with higher CAFE standards will
ultimately be reflected in higher sales prices for their new vehicle
models. By increasing sales prices for new cars and light trucks, CAFE
regulations will thus primarily affect vehicle purchases and other
private consumption decisions. Both economic theory and OMB guidance on
discounting indicate that the future benefits and costs of regulations
that mainly affect private consumption should be discounted at
consumers' rate of time preference.\638\
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    \638\ Id.
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